-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PoKtdcATjNh7E0eIlUlJq7kNRP214ufxkfxlTAenPopaj7ZF0cDZgOb/rky8CVs1 id6NwevogzkYqNqfM1xqrQ== 0000892569-99-000717.txt : 19990325 0000892569-99-000717.hdr.sgml : 19990325 ACCESSION NUMBER: 0000892569-99-000717 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATUM INC CENTRAL INDEX KEY: 0000027119 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 952512237 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-06272 FILM NUMBER: 99571582 BUSINESS ADDRESS: STREET 1: 9975 TOLEDO WAY CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 714-598-7500 MAIL ADDRESS: STREET 1: 9975 TOLEDO WAY CITY: IRVINE STATE: CA ZIP: 92618 10-K405 1 FORM 10-K405 FOR PERIOD ENDING DECEMBER 31,1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year ended December 31, 1998 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 0-6272 DATUM INC. (Exact name of Registrant as specified in its charter) Delaware 95-2512237 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 9975 Toledo Way, Irvine, California 92618 (Address of principal executive offices) Registrant's telephone number, including area code: (949) 598-7500 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK ------------ (Title of Class) --------------------------- 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. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sales price of the Common Stock as of March 17, 1999, was approximately $36,920,411. The number of outstanding shares of the Registrant's Common Stock as of March 17, 1999 was 5,528,266. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 10, 1999 (to be filed with the Commission within 120 days of December 31, 1998): Part III, Items 10-13. Page 1 of ___ Pages Exhibit Index is Located on Sequential Numbered Page __ of this Report. 2 INTRODUCTORY NOTE This Annual Report on Form 10-K (this "Report") contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and Datum Inc. ("Datum" or the "Company") intends that such forward-looking statements be subject to the safe harbors created thereby. All statements other than statements of historical fact included in this Report, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" regarding: the Company's ability to design, develop, manufacture and market products, the ability of the Company's products to maintain commercial acceptance, the Company's ability to achieve new product commercialization, the anticipated growth of its target markets, its ability to maintain profitability, and other matters are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable at this time, it can give no assurance that such expectations will prove to have been correct. The Company makes no undertaking to correct or update any such statements in the future. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business". 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. PART I Item 1. BUSINESS. GENERAL Datum designs, manufactures and markets a wide variety of high-performance time and frequency products used to synchronize the flow of information in telecommunications networks and in numerous other applications. Utilizing its more than 30 years of experience with time and frequency standards, Datum supplies products that can provide accurate time to within a fraction of one second over 100,000 years. Datum serves the markets for high-precision time and frequency devices in the telecommunications industry which is rapidly expanding as a result of the conversion from analog to digital systems and the expansion of cellular and Personal Communications Services ("PCS") networks. The Company's Efratom subsidiary invented the rubidium oscillator in 1971 and believes it currently supplies approximately 80% of the high-precision, rubidium atomic clocks used in cellular and PCS network base stations in the United States. Datum is a major supplier of extremely precise cesium standards and Global Positioning System ("GPS") receivers that generate or capture time and frequency information for use in wireline telecommunications infrastructures. In addition to providing time and frequency products for telecommunications applications, Datum is a growing supplier of timing products used to ensure the integrity of information transmitted through enterprise computing networks. Datum also manufactures time and frequency devices for satellites, including GPS satellites which utilize the Company's cesium clocks to provide highly accurate timing and navigation information throughout the world. The Company also provides 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. The Company is exploring the developing market for encrypted trusted time. The hardware and software we believe necessary for a market for legal, non-repudiable electronic business transactions to grow is in development by the Company. In Note G to the Consolidated Financial Statements of the Company contained elsewhere in this Report, the Company provides sales and earnings information segmented by geographic location. MARKETS Telecommunications The telecommunications system is comprised of numerous interconnected networks employing many different transmission technologies. The traditional wireline network is itself a series of networks connected through numerous switches that allow voice, data and video traffic to be transmitted to their ultimate destinations. Wireless networks, including cellular and PCS, are also connected to components of the wireline network through switches. In order for the overall telecommunications system, and the various components within that system, to operate efficiently, it is critical that each network be synchronized and operate within extremely narrow frequency tolerances. Accurate and precise time and frequency devices are necessary at all levels of the telecommunications system to ensure proper frequency control and to minimize signal degradation. 2 3 Wireless -- Cellular. Cellular telecommunications networks consist of numerous cells located throughout a service area, each with its own base station connected by wire or microwave radio to the wireline network through a network switch. Originally, cellular networks used analog technology and frequency division multiple access ("FDMA") to fit more channels into existing frequency bands. This requires accurate frequency control at the base station level, which is accomplished through the use of quartz or higher precision rubidium oscillators. In order to improve transmission quality, increase network capacity and expand network coverage, many network operators are converting older networks from analog to digital technology and expanding their digital wireless networks. Currently, the three leading digital technologies are Time Division Multiple Access ("TDMA"), Code Division Multiple Access ("CDMA") and Global System for Mobile Communications ("GSM"). In each of these transmission protocols, calls are segmented, transmitted over a wider spectrum of bandwidth than otherwise available under FDMA and reassembled by the applicable receiver within the network. As a result of the segmentation/reassembling process, signal degradation from improper synchronization is more likely to result in dropped calls and loss of data than would occur in analog networks. Dropped calls and data losses, in turn, require retransmission, thus decreasing network efficiency and capacity. In order to minimize the problems resultant from improper synchronization, many cellular operators utilize highly precise timing equipment located at each base station and its associated network switch. Wireless -- PCS. PCS was developed, in part, to provide an improved quality of wireless service and accommodate the increasing volume of transmissions utilizing wireless networks. PCS systems operate in a manner similar to cellular networks, but at a much higher frequency. As a result, PCS networks require a greater number of lower powered "microcells," located more closely together. As in cellular networks, time and frequency devices are necessary to synchronize the flow of voice and data transmissions. The base station in each PCS microcell and each PCS network switch connected to the wireline network requires one or more stable, reliable timing devices to ensure accurate synchronization. Wireline. The wireline sector of the telecommunications market has experienced increased need for high-accuracy timing and frequency equipment primarily as a result of the upgrading of existing networks from analog to digital and the installation of new wireline networks. The wireline sector currently consists of numerous networks and lines, which are connected by switches that provide a transferring mechanism to route transmissions to their ultimate destinations. In order to transfer voice, data or video traffic from one line or network to another, both lines or segments of the network must operate at the same frequency within a very narrow tolerance. Increased demand for higher capacity, higher speed and more accurate information flow has required the transition of wireline networks from analog to digital systems. Imperfect synchronization in an analog system may result merely in static or delayed communication. The failure to synchronize the components in digital networks, however, may result in the loss of information, requiring re-transmission and thus decreasing network efficiency, and increasing the costs to the network operator. As a result, digital systems have a greater need for accurate synchronization, which is accomplished through the use of precise timing devices located throughout the networks. The wireline sector of the telecommunications market is also growing as operators expand their networks in order to meet the growing demand for telecommunications services. In developing countries, new wireline networks are being installed to provide basic telephony service. In developed countries, increased demand for new services and government deregulation has encouraged the development of expanded networks, particularly in the local exchange and long distance markets. The expansion of wireline networks has led to an increased need for timing devices to synchronize the flow of information and maximize the efficiency of the networks. Enterprise Computing Enterprise computing networks utilize interconnected computers, workstations, peripheral devices and application software to provide the transaction processing and control infrastructure for national and international organizations. Accurate timing of operations throughout a network is essential to ensure the integrity of the data flowing through the network. When information is retrieved from multiple locations and forwarded to a central point for analysis, accurate interpretation of the data may depend on the ability to properly time sequence both the generation and receipt of the data. In order to satisfy these timing requirements, enterprise network operators utilize timing and frequency devices to ensure network synchronization. Traditionally, this function has been accomplished using remote public access time servers as the source of "standard time" and general purpose computers to acquire and distribute time to the network. This approach, however, relinquishes control of network timing to remote time servers and local operators. As a result, inadvertent manipulation of local time servers or their undetected malfunctioning may result in data distortion or loss with adverse consequences. To reduce these risks, many enterprise computing networks now utilize GPS receivers at local computers throughout the network. As each computer in the network operates under Universal Coordinated Time ("UTC"), as received from the GPS satellites, the entire network operates on the same timing. The Company has entered into alliances to develop advanced digital security for transmitting highly sensitive documents across the Internet. We believe these alliances will lead to the development of the ability to provide GPS-based time stamps, referenced to UTS (NIST) that can be encapsulated into transactions and documents in a cryptographically protected manner and transmitted as e-mail, FTP, CD or cassette. 3 4 Satellites The satellite market has experienced recent growth as a result of the increased use of satellites for commercial purposes. Satellites launched for a variety of objectives, including communications, navigation, weather forecasting and astronomy must be able to efficiently transmit data to earth-based receivers, thus requiring precise frequency control at the satellite. GPS satellites are designed to transmit extremely precise timing information and use cesium standards or rubidium oscillators. Other commercial satellite programs that require less precise timing and frequency equipment utilize quartz oscillators due to their lower weight and power consumption. Test and Measurement The test and measurement market represents a broad range of applications of cesium standards, rubidium oscillators, quartz oscillators and GPS receivers. Precise timing equipment is used to ensure the synchronization of multiple data recorders in large field testing applications. Timing equipment also allows for the determination of where an event occurred by comparing the precise times at which the event was recorded at multiple sites. For example, electric utility companies use precision timing devices to locate underground line breaks, thus minimizing costly line inspection. TIME AND FREQUENCY TECHNOLOGY Three sources of timing and frequency information are generally used in telecommunications and commercial applications: cesium standards, rubidium oscillators and quartz oscillators. In addition, GPS receivers capture and process timing information generated by satellite-based cesium and rubidium timing devices. The most stable and accurate timing devices in widespread use are based on the resonance of cesium atoms. Cesium standards operate by energizing a reserve of cesium atoms with microwave energy at a precise frequency. At this frequency, due to the atomic structure of cesium, some of the cesium atoms experience a change in energy state. These "excited" atoms are directed to a collector through the use of focusing magnets, resulting in an increased atomic flow. Since the flow of atoms does not increase unless the cesium atoms are excited at exactly the correct frequency, the detection of the increased atomic flow by the collector indicates that the desired frequency has been obtained. The highly stable frequency is then captured by the standard's electronics package and generated as a series of user outputs. Cesium clocks are used as international primary reference standards and are stable to within a fraction of one second over 100,000 years. Rubidium oscillators combine sophisticated glassware, light detection devices and electronics packages to generate a highly stable frequency output. Rubidium, when energized by a specific radio frequency, will absorb less light. The oscillator's electronics package generates this specific frequency and the light detection device ensures, through monitoring the decreased absorption of light by the rubidium and the use of feedback control loops, that this specific frequency is maintained. This highly stable frequency is then captured by the electronic package and generated as an output signal. Rubidium oscillators provide atomic oscillator stability, somewhat less stable than cesium over long durations, but generally at lower cost and in smaller packages. Quartz oscillators utilize the unique physical properties of quartz crystals. Applying a voltage potential across a properly prepared quartz crystal causes the crystal to vibrate and generate an electric signal with a relatively stable frequency. Quartz oscillators consist of specially prepared synthetic quartz crystals and associated electronics to apply the voltage and generate the frequency signal. Quartz oscillators provide a less stable frequency than rubidium oscillators, but are available at a substantially lower cost. Stable and accurate timing and frequency information is also obtained through the use of GPS receivers, which capture timing information from cesium standards or rubidium oscillators aboard GPS satellites. GPS receivers are typically used in systems integrated with quartz or rubidium oscillators that provide consistent timing output in the event the receiver loses the external satellite-based signal. The Company applies its core understanding of timing and frequency technology and its experience in delivering highly stable and accurate clocking devices to provide a wide range of timing and frequency products for telecommunications, enterprise computing and a variety of other commercial applications. The Company designs, manufactures and markets cesium standards, rubidium oscillators, quartz oscillators and GPS receivers in numerous configurations, depending on the desired application. The Company's products are the result of substantial research and development performed in the areas of atomic physics, electronics engineering and software design. The Company designs 4 5 and manufactures its own physics packages, through which cesium or rubidium is energized as part of the frequency detection and control process. Datum also designs the electronics packages for its products, which are necessary to convert the signal generated by the physics package into highly stable electronic pulses. Datum is a leading supplier of time and frequency products for the overall telecommunications system, for satellite applications, enterprise computing networks, and for a variety of other test and measurement applications. For telecommunications markets, Datum provides rubidium and quartz oscillators that operate as stand-along frequency sources in cellular and PCS base stations and network switches or are combined with the Company's GPS receivers to provide timing information in the event of a loss of signal. In addition, Datum provides time and frequency cesium standards for network switches within wireline networks. The Company also supplies cesium standards for GPS satellites that transmit precise timing information and GPS receivers that receive and process the satellite timing transmissions throughout wireless and wireline networks. In addition to telecommunications applications, the Company's timing products help ensure that enterprise computing networks operate in an synchronized manner. The Company also provides quartz oscillators for a variety of satellite programs and test and measurement products used for a variety of applications, including missile guidance, geographic mapping and electric utility operations. PRODUCTS Datum designs and manufacturers a broad line of time and frequency products for telecommunications systems, enterprise computing networks, satellites and a variety of other test and measurement applications. Datum's products generate highly precise timing and frequency information through the manipulation of cesium or rubidium atoms or quartz crystals, or by capturing cesium or rubidium-based signals from GPS satellite transmissions. Telecommunications Products Wireless-Cellular and PCS Products Cellular and PCS networks require both accurate frequency control and timing information. The Company provides a variety of products to meet these needs. Quartz and Rubidium Clocks -- For analog cellular and GSM applications, the Company provides highly cost-effective quartz oscillator clocking units to synchronize the transmissions of voice and data traffic at the base-station level. For customers requiring a more stable timing source, the Company provides rubidium clocks. GPS Disciplined Clocks -- For digital TDMA and CDMA applications, considerably more stable timing sources are required to maintain the base station's clocking integrity. To meet this need, the Company provides GPS time and frequency receivers which capture cesium or rubidium-based time signals produced by GPS satellites. GPS receivers combine the external cesium or rubidium-based timing signals with internal rubidium or quartz oscillators to provide consistent timing output in the event the receiver loses the external signal. Wireline Products Wireline telecommunications network synchronization systems involve two principal components, a primary frequency reference, to provide an accurate frequency source, and a timing signal generator, to provide control, management and distribution of the timing signals required for network operations. Cesium Beam Primary Reference Sources --Primary Reference Sources ("PRSs") generate the most stable frequency output in general commercial use. PRSs provide cesium-based stability at the central offices of wireline networks for distribution of timing and frequency information to other components within the networks. GPS Primary Reference Receivers -- Primary Reference Receivers ("PRRs") capture and process time and frequency signals from GPS satellites. Integrated rubidium or quartz oscillators back up the external frequency source to maintain timing accuracy during periods of loss of signal. Typically, a PRR would be installed in telecommunications network switches to provide a stable frequency at the network switch level, thereby allowing transmissions to be efficiently processed with minimal degradation or retransmission requirements. Timing Signal Generators -- Distribution of network synchronization information is achieved through timing signals embedded within the flow of network communications which are referenced to the primary frequency source, such as the Company's PRS at the central office, or to a PRR at the network switch level. In the event of the loss of the reference frequency, the Company's timing signal generators can maintain, for extended time periods, switch and network synchronization quality by using internal high-stability rubidium and quartz oscillators as "holdover" clocking sources. 5 6 End Office Primary References -- The Company's End Office Primary References combines a PRR with a timing signal generator in a single cost-effective unit designed for use where fewer telecommunications lines require timing inputs. Enterprise Computing Products The Company's products provide accurate time-stamping of information flowing through enterprise computing networks. GPS Time Servers -- The Company's time servers, which are installed in enterprise computing networks, acquire UTC time from GPS satellite transmissions. Worldwide coverage of GPS provides that all server-equipped sites operate with time data that is uniform to within a few milliseconds, thereby allowing time-sensitive information input at one location to be meaningfully analyzed at any other site in the network. In a typical application of this technology, the Securities Industry Automation Corporation, which supports member firms of the New York Stock Exchange, uses the Company's time servers to accurately time-annotate stock transactions. Computer Time Modules -- The Company's computer time modules acquire time from external sources (such as GPS satellites) to perform a variety of timing functions within the host computer with a high degree of accuracy. The products are physically packaged as computer plug-in units and chip sets and are functionally configured to operate under program control as any other data-bus-linked component of the user's data system. The Company produces modules for IBM PC compatible computers and computers manufactured by Sun Microsystems and Digital Equipment Corporation. The Company also produces modules for VME and VXI bus architectures. The Company markets its computer modules in both fully configured forms and as board products and chipsets for use by original equipment manufacturers ("OEMs") and value-added resellers ("VARs"). Computer time modules are also marketed for use in stand-alone computers and workstations used for test and measurement applications. Satellite Products The Company provides time and frequency products for a variety of satellites used for communications, navigation, television, and military applications. These products are designed around the Company's core technology and are highly durable so as to meet the demanding requirements of space. Cesium Clocks -- The Company's cesium clocks are installed aboard each of the twenty-four GPS satellites now operating in space. Because these satellites have a life expectancy of approximately 7.5 years, it is necessary that additional units be designed to be available as replenishment. The Company is a cesium clock supplier for a series of satellites scheduled to be launched starting in the year 2001. Quartz Clocks -- The Company also produces and markets a broad line of lightweight, highly-stable quartz clocks, particularly suited for space applications. Space qualified versions of these quartz units are aboard satellites used for inter-planetary study, missile tracking and weather monitoring and forecasting, as well as communications and other applications. Test and Measurement Products The Company's timing and frequency technology was initially developed to create instrumentation for defense and aerospace applications. This technology continues to be utilized in test and measurement products for a wide range of scientific and industrial applications, including missile guidance, precise geographic mapping and electric utility operation. Atomic Frequency Sources The Company produces and markets atomic reference frequency sources for a wide variety of commercial and scientific applications. Cesium Frequency Standards -- The Company has developed a broad line of cesium frequency products for numerous applications that require a constant frequency reference. Electric utilities use the Company's cesium frequency standards to set the frequency of electric power. Other uses include master timing stations for telecommunications networks, global navigation, satellite communications, missile guidance, and precise geographic mapping for off-shore oil exploration and accurate placement of off-shore oil drilling platforms. The Company also supplies spare and replacement cesium tubes for a broad segment of the industry. 6 7 Rubidium Oscillators -- In addition to their widespread use in the telecommunications industry, the Company's rubidium oscillators have a number of other specific applications, such as frequency control for television networks, Doppler radar, satellite tracking and guidance and laboratory instrumentation. The Company's rubidium oscillator line includes military qualified models designed for high stability and reliability in adverse environments. The Company's newer models feature lower profiles and are on standard plug-in circuit cards specifically designed for ease of integration. GPS Time and Frequency Receivers The Company's GPS receivers, in addition to their use in telecommunications markets, are used in a wide variety of other applications. Electric utilities use the Company's GPS receivers to determine the exact geographical location of transmission line faults by comparing the times a which the fault is detected at various stations in the power distribution network, eliminating the need to visually search along the right-of-way. Other customers utilize the Company's GPS receivers to distribute highly accurate time to multiple sites in order to synchronize the recording of simultaneous test data, such as during missile testing or astronomical observations. In addition to fully configured GPS receivers, the Company also manufactures board level modules for OEM applications. Time Code Instrumentation Products In addition to the time and frequency standards described above, the Company manufactures and markets a line of products that process or utilize basic time and frequency information for various applications. The time is generated from either an internal or external frequency reference in the form of digital codes tailored to specific applications, usually to time-annotated data recording or transmission. To correspond with the time generating equipment described above, the Company makes devices which "read" the coded time, transmitting it to computers, displays, or other devices where the recording of accurate time is required. Product Development The Company believes that its future success depends in large part on its ability to maintain its technological leadership through enhancements of existing products and development of new products that meet a wide range of customer needs. The Company focuses its research and development efforts on improving the core physics and electronics packages in its time and frequency products. Specifically, the Company is conducting research and development in three areas: developing new time and frequency technologies, improving product manufacturability, and enhancing software functionality. Although the Company maintains an active development program to improve its product offerings, including specific goals of smaller product size and lower unit cost, there can be no assurance such efforts will be successful, that its new products will achieve customer acceptance or that its customers products will achieve market acceptance. Failure to develop, or introduce on a timely basis, new products, or product enhancements that achieve market acceptance could adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products or enhancing its existing products on a timely or cost-effective basis. The Company acquired all the assets of Sigma Tau Standards Corporation, the leading producer of hydrogen maser clocks, the most accurate timing device available. The acquisition allowed the Company to broaden its range of advanced timing solutions. Research and development expenses totaled $11.9 million, $10.7 million and $7.7 million in 1998, 1997 and 1996, respectively. CUSTOMERS A small number of customers account for a substantial portion of the Company's net sales, and the Company expects that a limited number of customers will continue to represent a substantial portion of the Company's net sales for the foreseeable future. The Company's largest customer, Lucent Technologies, Inc. ("Lucent"), accounted for approximately 34% and 38% of net sales for the years ended December 31, 1998 and 1997, respectively. The Company's second largest customer, Motorola, Inc., accounted for less than 10% of net sales in 1998 and 10% of net sales in 1997. Further, the Company's five largest customers accounted for approximately 52% and 58% of net sales during the same period. The Company believes that its major customers continually evaluate whether to purchase time and frequency products from alternate or additional sources. Accordingly, 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 and results of operations. Major customers also have significant leverage and may attempt to change the terms, including pricing, upon which the Company and such customers do business, which could materially 7 8 adversely affect the Company's business, results of operations and financial condition. MARKETING, DISTRIBUTION AND INTERNATIONAL SALES The Company's marketing efforts are focused on establishing and developing long-term relationships with potential customers. Sales cycles for certain of the Company's products, particularly for its larger telecommunications timing systems are lengthy, and can range up to 36 months. Sales are typically made through standard purchase orders which can be subject to cancellation, postponement or other types of delays. The majority of the Company's sales occur through independent sales representatives and distributors that target the specific markets which they serve. Corporate personnel in the United States and Germany provide additional direct sales and marketing support for larger accounts. Export sales of the Company's products were approximately 24%, 19% and 22% of net sales for the years ended December 31, 1998, 1997 and 1996, respectively. The Company expects that international revenues will continue to account for a significant percentage of the Company's total sales for the foreseeable future. As a result, the Company is subject to various risks, which include: economic instability in Asia; a greater difficulty of administering its business globally; compliance with multiple and potentially conflicting regulatory requirements such as export requirements, tariffs and other barriers; differences in intellectual property protections; health and safety requirements; difficulties in staffing and managing foreign operations; longer accounts receivable cycles; currency fluctuations; restrictions against the repatriation of earnings; export control restrictions; overlapping or differing tax structures; political instability and general trade restrictions. There can be no assurance that any of the foregoing factors will not have a material adverse effect on the Company's business, results of operations and financial condition. The Company's foreign sales are generally invoiced in U.S. dollars and, accordingly, the Company does not currently engage in foreign currency hedging transactions. However, as the Company continues to expand its international operations, the Company may be paid in foreign currencies and exposure to losses in foreign currency transactions may increase. The Company may choose to limit such exposure by the purchase of forward foreign exchange contracts or through similar hedging strategies. There can be no assurance that any currency hedging strategy would be successful in avoiding exchange-related losses. In addition, if the relative value of the U.S. dollar in comparison to the currency of the Company's foreign customers should increase, the resulting effective price increase of the Company's products to such foreign customers could result in decreased sales which could have a material adverse impact on the Company's business, results of operations and financial condition. See "Quantitative and Qualitative Disclosures About Market Risk." COMPETITION Intense competition exists among manufacturers of time and frequency products, and the Company believes that competition in the Company's markets from both new and existing competitors will increase in the future. The Company competes principally in several specialized market segments against a limited number of companies, some of which are more established, enjoy higher name recognition and possess far greater financial, technological and marketing resources that the Company. The Company currently competes principally on the basis of the performance and quality of its products, including reliability, as well as on cost and timely manufacture and delivery. While the Company believes that overall it competes favorably with respect to the foregoing elements, there can be no assurance that it will continue to be able to do so. In the cellular and PCS markets, the Company competes primarily with Hewlett-Packard Company ("Hewlett-Packard"), and various other quartz oscillator manufacturers. Hewlett-Packard has recently introduced products with performance characteristics between quartz and rubidium oscillators with prices similar to the Company's rubidium oscillators. In the wireline market, the Company competes primarily with Symmetricom, Inc., Hewlett Packard and Oscilloquartz SA. In the enterprise computing market, the Company competes primarily with Tech-Sym Corp., Odetics, Inc. and True-Time, Inc. In the cesium standards market, the Company competes primarily with Hewlett-Packard and Frequency Electronics, Inc. In the rubidium oscillators market, the Company competes primarily with Frequency Electronics, Inc. In addition, certain companies, such as EG&G, Inc. that currently manufacture products exclusively for use in military applications, could enter commercial markets, and compete directly with the Company. There can be no assurance that the Company will be able to complete successfully in the future against existing or new competitors, that new technologies will not reduce the demand for its products or that it will be able to adapt successfully to changes in the markets served by its products. In addition, there can be no assurance that competitive pressures will not cause the Company to reduce prices, which would negatively affect gross margins and could have a material adverse effect on the Company's results of operations and financial condition. 8 9 BACKLOG The Company's backlog of orders was approximately $20.8 million on December 31, 1998, compared to approximately $34.0 million a year earlier. The decrease was primarily due to a slowdown in the wireless market. The Company considers as backlog all orders that are expected to be shipped to customers within a 6-month period. As part of the Company's close working relationships with its major OEM customers, such customers expect the Company to respond quickly to changes in the volume and delivery schedule of their time and frequency product requirements and to inventory products at the Company's facilities for just-in-time delivery to the OEM customers. Therefore, although contracts with such customers typically specify aggregate volumes of products to be purchased over an extended time period, such contracts also provide that scheduled shipment dates of particular volumes are generally released to the Company only days or a few weeks prior to the required delivery date to the OEM customer. As a result of possible changes in product delivery schedules, cancellations of orders and potential delays in product shipments and orders received for products shipped in the same quarter, the Company's backlog at any particular date may not necessarily be representative of actual sales for any succeeding period. GOVERNMENT CONTRACTS The Company believes that approximately 12% of its sales in 1998 were made either directly to United States government agencies or indirectly to U.S. government agencies through subcontracts as compared to approximately 13% in 1997 and 15% in 1996 for these sales. Because several of the Company's customers are involved in commercial as well as governmental activities, it is difficult to accurately determine the percentage of its business attributable to the U.S. government. Government-related contracts and subcontracts are subject to standard provisions for termination at the convenience of the government. In such event, however, the Company is generally entitled to reimbursement of costs incurred on the basis of work completed plus other amounts specified in each individual contract. These contracts and subcontracts are either fixed price or cost reimbursable contracts. Fixed-price contracts provide fixed compensation for specified work. Under cost reimbursable contracts, the Company agrees to perform specified work in return for reimbursement of costs (to the extent allowable under government regulations) and a specified fee. In general, while the risk of loss is greater under fixed-price contracts than under cost reimbursable contracts, the potential for profit under such contracts is greater than under cost reimbursable contracts. MANUFACTURING The Company manufactures its products at its plants in Irvine and San Jose, California; Austin, Texas; Beverly, Massachusetts; and Hofolding, Germany. The Company's Irvine, Austin and Beverly facilities have received ISO 9001 certification, and the Company intends to seek such certification for its San Jose facility. The manufacturing process involves the assembly of numerous individual components by technically oriented production personnel. The parts and materials used by the Company consist primarily of printed circuit boards, fabricated housings, relays, and small electric circuit components, such as integrated circuits, semiconductors, resistors and capacitors. The Company also manufactures the physics packages for its cesium and rubidium oscillators. The Company manufactures products to fill firm orders and to meet forecasts received from its major customers. In some cases, as a result of customer requirements and the long manufacturing process of certain of the Company's products, the Company maintains up to four weeks of forecasted amounts in finished goods inventory and up to an additional eight weeks of forecasted amounts in work-in-process inventory. The Company currently procures various components from single-sources due to unique component designs as well as certain quality and performance requirements. If single-sourced components were to become unavailable or were to become unavailable on terms satisfactory to the Company, the Company would be required to purchase comparable components from other sources. If for any reason the Company could not obtain comparable replacement components from other sources in an timely manner, the Company's business, results of operations and financial condition could be adversely affected. In addition, many of the Company's suppliers require long lead-times to deliver requested quantities of components. If the Company were unable to obtain sufficient quantities of components used in the manufacture of its time or frequency products, resulting delays or reductions in product shipments could occur and could have a material adverse effect on the Company's business, result of operations and financial condition. Due to rapid changes in semiconductor and other technology, on occasion one or more of the electronic components used in the Company's products have become unavailable, resulting in unanticipated redesign and related delays in shipments. There can be no assurance that the Company will not experience similar delays in the future, the occurrence of which could have a material adverse effect on the Company's business, financial condition and results of operations. 9 10 INTELLECTUAL PROPERTY RIGHTS The Company seeks to protect certain key technologies through U.S. and foreign patents and by maintaining such technologies as trade secrets. The Company has licenses under various other patents. While the Company believes that its patents and licenses have value, it does not regard any such patents or licenses as essential to its business or to the maintenance of its competitive position. Accordingly, the Company does not have any material patent protection on its technology. To the extent that it depends on proprietary information it primarily relies on the protections afforded to trade secrets. There can be no assurance that others will not independently develop or otherwise acquire equivalent technology or that the Company can maintain such technology as trade secrets. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as the laws of the United States. The failure of the Company to protect its intellectual property rights could have a material adverse effect on the business, operating results and financial condition. From time to time the Company has received communications from third parties asserting that features of certain of its products may infringe upon the intellectual property rights of such third parties. Although the Company makes reasonable efforts to ensure that its products do not violate the intellectual property rights of others, there can be no assurance that patent or other intellectual property infringement claims will not be asserted against the Company in the future. Although patent and intellectual property disputes may be settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and there can be no assurance that necessary licenses would be available to the Company on satisfactory terms or at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent the Company from manufacturing and selling certain of its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, should the Company decide to, or be forced to, litigate such claims, such litigation could be expensive and time consuming, could divert management's attention from other matters and could have a material adverse effect on the Company's business, operating results and financial condition, regardless of the outcome of the litigation. EMPLOYEES The Company had 553 employees at December 31, 1998. None of the Company employees are represented by a union. The Company believes its relations with its employees are good. The Company's success depends upon the continued services of its key management personnel. The Company and Erik van der Kaay, its President and a Director, have entered into an employment agreement with an indefinite term. The Company's other key personnel, including technical personnel, would be difficult to replace and are not parties to employment or noncompetition agreements. The Company's growth and future success will depend in large part upon its ability to attract and retain additional highly qualified engineering, sales and marketing personnel. In certain of the Company's locations, the Company has experienced difficulty in attracting and retaining highly qualified technical personnel. The loss of technical personnel who become known and trusted by customers of the Company can have an adverse impact on the Company's relationships with such customers. Delay in adding appropriately trained personnel can lead to program delays, higher product costs, and customer dissatisfaction. Item 2. PROPERTIES The Company's Irvine, California, manufacturing and executive office facilities occupy an aggregate of 109,000 square feet in two sites under leases, each expiring July 31, 2005. The Company also operates at a facility located in San Jose, California, consisting of a 21,800 square foot engineering and manufacturing building, under a lease expiring on February 28, 2001. The Company also operates a facility located in Hofolding, Germany, consisting of an 8,600 square foot manufacturing facility, under a lease expiring in June 1999. The Company is currently negotiating to renew this lease. The Company owns its facility in Beverly, Massachusetts, comprised of a 32,000 square foot building located on approximately four acres of land. The Company also owns its facility in Austin, Texas, comprised of a 50,000 square foot building, of which 9,000 square feet are leased to an unaffiliated third party, located on approximately nine acres of land. The Company believes that its current facilities are adequate for its present level of operations. 10 11 Item 3. LEGAL PROCEEDINGS In late 1996, the Company received notice of potential environmental contamination from the owner of premises in Austin, Texas that had previously been occupied by Austron, Inc., the Company's wireline operation ("Austron"), prior to the Company's acquisition of Austron in 1988. Although Austron had remediated the site pursuant to then-existing environmental regulations in connection with vacating the site in 1983, the applicable environmental regulations were modified after 1983, providing the basis for the property owner's claim that the soil at the site contains the same contaminants that were the focus of Austron's previous remediation efforts. In compliance with current law, the Company has established the extent of the site contamination, which contamination extends to adjoining properties owned by third parties. The Company believes that it will continue to incur monitoring costs in connection with the site contamination and may be subject to claims from adjoining landowners in addition to the claim for remediation discussed above, and the amount of such costs and the extent of the Company's exposure to such claims cannot be determined at this time. Although there can be no assurance that the remediation efforts, the property owners' claims or any related governmental action will not singly or in the aggregate have a material adverse effect on the Company's business, financial condition and results of operations, the Company does not believe the aggregated potential liability will have such an effect. The Company is also a party to ordinary disputes arising in the normal course of business. The Company does not believe that the outcome of these matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended December 31, 1998. Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of the executive officers of the Registrant:
Name Age Positions and Offices with the Registrant ---- --- ----------------------------------------- Erik H. van der Kaay 58 President and Chief Executive Officer since April 1998. Prior to joining Datum, he served as Allen Telecom's Executive Vice President from 1997 to 1998 and a variety of senior positions from 1990 to 1997. He was President and Chief Executive Officer of Millitech Corporation from 1988 to 1990. He currently serves on the Boards of RF Micro-Devices and TranSwitch Corporation. Louis B. Horwitz 71 Chairman of the Board of Directors of the Company since October 1976 and a director of the Company since May 1975. President and Chief Executive Officer from 1976 to 1998. Prior to joining the Company, He was an independent management consultant and an Executive Vice President of Xerox Data Systems, a manufacturer of computers. D. Ronald Duren 56 Vice President of the Company since April 1998. Prior to joining the Company, he was with Telecom Solutions serving as their President and Chief Operating Officer from August 1990 to April 1997, as Vice President of Sales from August 1988 to August 1990, and as Director of Marketing and Sales from July 1986 to August 1988. From 1983 through July 1986, he served as Vice President, Telco Sales for Granger Associates. Previously, Mr. Duren served in various management positions with AT&T for seventeen years. Paul Baia 46 Vice President of the Company since January 1996 and President of its Frequency Time Systems subsidiary since January 1996. From January 1990 to January 1996 he was General Manager of FTS. From March 1988 to January 1990 he was Director of Operations for FTS.
11 12 John (Jack) R. Rice 54 Vice President of the Company since April 1994 and President of the Company's Austron, Inc. subsidiary since May 1995. He also served as President of the Company's Efratom Time & Frequency Products, Inc. subsidiary from April 1998 to March 1999. From April 1994 to May 1995 he was General Sales Manager of the Company. From 1987 to 1994, he served as Director of North American Sales and of OEM Sales for Emulex Corporation, a computer hardware manufacturing company. David C. Robinson 58 Vice President of the Company and President of the Company's Bancomm-Timing Division since March 1994. From February 1986 to March 1994, he served as General Manager of the Bancomm Division. Mr. Robinson became President of Bancomm Corporation in 1984, which he served as Vice President of Marketing since May 1978. Raymond L. Waguespack 67 Vice President of the Company since 1989 and Secretary of the Company from October 1993 to July 1994 and Vice President, International Sales since April 1996. He has been President of the Company's Timing Division since October 1993. From April 1993 to September 1993, he served as International Sales and Marketing Manager of the Timing Division. From September 1989 to March 1993, Mr. Waguespack served as President of TCXO Enterprises, formerly Spectrum Technology, Inc., a former subsidiary of the Company, which manufactured quartz oscillators. David A. Young 55 Vice President, Chief Financial Officer, Secretary and Treasurer of the Company since July 1994. From January 1993 to July 1994, he served as Executive Vice President and Chief Executive Officer of Blower-Dempsay Corporation, a paper and chemical company. From July 1990 to March 1992, he served as Vice President Finance and Administration, Chief Financial Officer and Secretary of Alpha Microsystems, a computer company.
12 13 PART II Item 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS. Shares of the Company's common stock are traded on The Nasdaq Stock Market under the symbol "DATM". The following table sets forth the range of high and low closing sales price per share of common stock of the Company as reported on The Nasdaq Stock Market for each quarter of the two most recent fiscal years:
HIGH LOW ---- --- YEAR ENDED DECEMBER 31, 1998 1st Quarter................................................... 18-1/2 12 2nd Quarter................................................... 18-1/8 13 3rd Quarter................................................... 18-1/8 6-1/4 4th Quarter................................................... 9-3/4 5-5/16 YEAR ENDED DECEMBER 31, 1997 1st Quarter................................................... 24-1/2 13-3/4 2nd Quarter................................................... 32-5/8 14-1/8 3rd Quarter................................................... 49-1/2 30 4th Quarter................................................... 40-1/8 12
It is the policy of the Company to retain earnings to finance the future growth and development of its business. Therefore, the Company does not anticipate paying cash dividends on its common stock in the foreseeable future. In addition, the Company's existing credit arrangements restrict the Company from paying cash dividends. At March 17, 1999, there were 372 stockholders of record. 13 14 Item 6. SELECTED FINANCIAL DATA The following selected consolidated financial data has been derived from the financial statements of the Company audited by PricewaterhouseCoopers LLP, independent accountants. The consolidated balance sheet at December 31, 1998 and 1997 and the related consolidated statements of operations and of cash flows for the three years ended December 31, 1998 and notes thereto appear elsewhere in this Report.
Year Ended December 31, -------------------------------------------------------------------- 1998 1997 1996 1995(1) 1994 --------- --------- --------- --------- --------- (In thousands, except share and per share data) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net Sales ............................... $101,233 $114,092 $ 91,854 $ 67,257 $ 30,897 Costs and expenses: Cost of goods sold.................... 65,172 68,235 56,285 40,010 17,491 Selling............................... 15,003 15,808 12,182 9,836 5,206 Product development................... 11,903 10,650 7,667 7,087 2,494 General and administrative (2)........ 9,946 9,479 10,127 8,460 3,934 --------- --------- --------- --------- --------- Operating income (loss)............... (791) 9,920 5,593 1,864 1,772 --------- --------- --------- --------- --------- Interest expense...................... 2,051 2,085 2,255 1,667 241 Interest income....................... (434) (349) (7) (17) (15) --------- --------- --------- --------- --------- Income (loss) before income taxes........... (2,408) 8,184 3,345 214 1,546 Income tax provision (benefit).............. (951) 3,355 1,371 154 610 --------- --------- --------- --------- --------- Net income (loss)........................... $ (1,457) $ 4,829 $ 1,974 $ 60 $ 936 ========= ========= ========= ========= ========= Net income (loss) per share: Basic ............................... $ (.27) $ .97 $ .49 $ .02 $ .36 ========= ========= ========= ========= ========= Diluted............................... $ (.27) $ .90 $ .46 $ .02 $ .34 ========= ========= ========= ========= ========= Shares used in per share calculation: Basic ............................... 5,414,075 4,973,228 4,061,014 3,713,710 2,628,721 ========= ========= ========= ========= ========= Diluted............................... 5,414,075 5,389,862 4,253,019 3,954,307 2,732,812 ========= ========= ========= ========= =========
December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- CONSOLIDATED BALANCE SHEET DATA: Working capital............................. $ 46,089 $ 47,482 $ 26,029 $ 12,310 $ 8,684 Total assets 86,920 85,746 68,688 66,137 24,578 Long-term debt.............................. 14,533 17,418 17,318 7,938 50 Stockholders' equity........................ 56,978 56,844 34,623 31,313 16,883 ========= ========= ========= ========= =========
- ----------------- (1) In March 1995, the Company acquired Efratom Time and Frequency Products, Inc. and Datum GmbH (formerly Efratom Elektronik GmbH). As a result of the acquisition, the Company experienced an increase in all categories of sales and expenses. (2) Includes $1.5 million, $1.5 million, $1.5 million and $1.1 million for 1998, 1997, 1996 and 1995, respectively, of amortized goodwill and increased depreciation resulting from the step-up of the assets purchased in the March 1995 acquisition of Efratom. 14 15 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with "Selected Consolidated Financial Data" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this report. OVERVIEW Datum designs, manufactures and markets a wide variety of high-performance time and frequency products used to synchronize the flow of information in telecommunications networks. The Company is also a leading supplier of precise timing products for enterprise computing networks and a wide variety of space, scientific and industrial test and measurement applications. RESULTS OF OPERATIONS The Company has experienced, and expects to continue to experience, fluctuations in sales and operating results on an annual and quarterly basis. As a result, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful, and that such comparisons cannot be relied upon as indicators of future performance. A significant component of these fluctuations may result from rescheduling of orders by the Company's major customers. Due to these and other unanticipated factors, it is likely that in some future quarters the Company's operating results may be below the expectations of public market analysts or investors. Net Sales. The Company's net sales are derived primarily from the sale of time and frequency products for use in telecommunications networks, enterprise computing networks, satellites and in a variety of other test and measurement applications. Net sales for the Company decreased by 11.3% from $114.1 million in 1997 to $101.2 million in 1998. Continued softness in the cellular and PCS wireless telecommunications market throughout 1998 accounted for the reduction. However, it was partially offset by the growth of nearly 40% in the Company's wireline telecommunications sales. The Company's net sales increased 24.2% from $91.9 million in 1996 to $114.1 million in 1997. This increase was primarily the result of increased sales into each of the Company's principal markets. In particular, net sales were positively impacted as a result of increased sales of rubidium oscillators into the cellular and PCS wireless telecommunications markets. The Company's sales in the enterprise computing market also showed significant growth in 1997 over 1996, largely due to increased international business. A small number of customers account for a substantial portion of the Company's net sales, and the Company expects that a limited number of customers will continue to represent a substantial portion of the Company's net sales for the foreseeable future. The Company's largest customer, Lucent Technology, accounted for approximately 34%, 38%, and 36% of net sales for the fiscal years ended December 31, 1998, 1997 and 1996, respectively. Further, the Company's five largest customers, including Lucent, accounted for approximately 52%, 58%, and 53% of net sales during the same periods. The reduction in orders by, or loss of any major customer could adversely affect the Company's business, financial condition and results of operations. Direct and indirect sales to the United States government decreased 16.6% from $15.1 million in 1997 to $12.6 million in 1998, constituting approximately 13.2% and 12.4% of net sales. Direct and indirect sales to the United States government increased 8.6% from $13.9 million in 1996 to $15.1 million in 1997, constituting approximately 15.1% and 13.2% of net sales, respectively. Government-related contracts and subcontracts are subject to standard provisions for termination at the convenience of the government. In such event, however, the Company is generally entitled to reimbursement of costs incurred on the basis of work completed plus other amounts specified in each individual contract. Gross Margins. Gross margins are derived from net sales and cost of goods sold, which consists primarily of raw materials, labor, overhead and warranty costs. Gross margins were 35.6% and 40.2% in 1998 and 1997, respectively. The decrease in gross margin in 1998 was primarily the result of decreased sales in the wireless telecommunications market and continual price pressures on these products. Gross margins were 40.2% and 38.7% in 1997 and 1996, respectively. The increase in gross margins in 1997 was primarily the result of an increased percentage of the Company's net sales in wireless telecommunications products, along with productivity improvements. Gross margins were adversely affected in each year as a result of Lucent accounting for an increased percentage of the Company's net sales and price reductions on certain products purchased by Lucent pursuant to the terms of the supply agreement with the Company. Gross margins can be adversely affected by a number of factors, including pricing pressure from the Company's customers and the difficulty of reducing fixed expenses in connection with the rescheduling of customers' orders. 15 16 Selling Expense. Selling expense consists primarily of salaries and other expenses of its sales and marketing personnel, along with sales commissions paid to the Company's third-party representatives and distributors. Selling expense as a percentage of net sales was 14.8% and 13.9% in 1998 and 1997, respectively. Selling expense decreased by 5.1% to $15.0 million in 1998 from $15.8 million in 1997, primarily from the reduction in commissions on decreased net sales. Selling expense as a percentage of net sales was 13.9% and 13.3% in 1997 and 1996, respectively. The increase in selling expense resulted from increased commissions and increased costs in 1997 for international sales. Selling expense increased by 29.8% from $12.2 million in 1996 to $15.8 million in 1997, primarily as a result of increased net sales and the creation of the Company's international sales division in 1996. Product Development. Product development expense consists primarily of salary, applied overhead, materials and third-party design services. Product development expense increased 11.8% from $10.7 million in 1997 to $11.8 million in 1998, representing 9.3% and 11.8% respectively. The dollar increase reflects the continual emphasis on new product design and enhancement of current products. Product development expense increased 38.9% from $7.7 million in 1996 to $10.7 million in 1997, representing 8.3% and 9.3% of net sales, respectively. The dollar increase resulted from the commencement of development programs in 1997 to improve certain products through new chip designs and software development. Although the Company maintains an active development program to improve its product offerings, there can be no assurance that such efforts will be successful, that its new products will be developed on a timely basis and will achieve customer acceptance. Failure to develop, or introduce on a timely basis, new products or product enhancements that achieve market acceptance could adversely affect the Company's business, operating results and financial condition. General and Administrative. General and administrative expense consists primarily of salaries and other expenses for management, finance, accounting and human resources, as well as amortization of goodwill and depreciation charges. General and administrative expenses increased by 4.9% from $9.5 million to $9.9 million in 1998, and increased as a percentage of net sales from 8.3% in 1997 to 9.8% in 1998. Hiring and moving costs along with overlapping transition salaries for two CEO's accounted for the increased costs in 1998. General and administrative expense decreased by 6.4% from $10.1 million in 1996 to $9.5 million in 1997, and decreased as a percentage of net sales from 11.0% in 1996 to 8.3% in 1997. Such expenses include $2.1 million, $2.1 million and $1.5 million for 1998, 1997 and 1996, respectively, of amortized goodwill and increased depreciation resulting from the step-up of the assets purchased in the March 1995 acquisition of Efratom. Interest, Net. Interest decreased 5.9% from $1.7 million in 1997 to $ 1.6 million in 1998, as a result of increased cash investment balances in 1998. Interest decreased 26.0% from $2.3 million in 1996 to $1.7 million in 1997, primarily as a result of the reduction of debt with proceeds from the follow-on offering completed April 2, 1997 of approximately one million shares at $15 per share. LIQUIDITY AND CAPITAL RESOURCES The Company finances its operations primarily through a combination of cash provided from operations, a commercial bank line of credit and long-term debt. In addition, on April 2, 1997, the Company completed a follow-on public offering of 1,035,000 shares of its common stock, raising net proceeds of approximately $14.2 million. Cash provided by operations of approximately $6.4 million in 1998, compared to cash used for operating activities of approximately $4.9 million in 1997, and cash provided by operations of approximately $6.7 million in 1996. The increase in cash for the year ended December 31, 1998, was primarily the result of a decrease in inventory offset by a net loss for the year. Cash flows in 1997 were adversely affected by increasing inventories due to lower than planned revenues. The increase in cash provided by operations for the year ended December 31, 1996 was primarily the result of increased profitability and a decrease in inventory. Capital expenditures were approximately $2.7 million, $4.5 million, and $2.7 million in 1998, 1997, and 1996, respectively. The decrease from 1998 to 1997 was primarily the result of the larger than average expenditures of 1997 and the lower than planned sales of 1998. The increase from 1996 to 1997 was primarily the result of the need to provide manufacturing test equipment for the increased volumes produced in 1997. At December 31, 1998, the Company had working capital of $46.1 million and a current ratio of 4.6:1, compared to working capital of $48.4 million and a current ratio of 6.3:1, at December 31, 1997. The decrease in working capital is primarily 16 17 the result of the decrease in inventories of approximately $6.7 million in 1998, offset by an increase in cash of approximately $4.5 million. The Company's credit facility includes: (i) $6.0 million of Series A Senior Secured promissory notes maturing September 27, 2000, bearing interest at the rate of 9.07% on the unpaid principal, payable quarterly, with the principal repaid in equal installments of $1.5 million on March 27 and September 27 of each year, commencing March 27, 1999; and (ii) $12.0 million of Series B Senior Secured promissory notes maturing September 27, 2003, bearing interest at the rate of 10.25% on the unpaid principal, payable quarterly, with the principal repaid in equal installments of $2.0 million on March 27 and September 27 of each year, commencing March 27, 2001. In addition, in connection with the issuance of these promissory notes, the Company issued to The Prudential Insurance Company of America ("Prudential") common stock warrants for the purchase of 175,000 shares of common stock at an exercise price per share of $11.50. The maturity date of the revolving component of the Company's line of credit with Wells Fargo Bank has been extended to June 15, 1999 in a principal amount not to exceed $10.0 million and bearing interest at Wells Fargo's prime rate or at LIBOR plus 2.75%. Under both the Wells Fargo credit facility and the Prudential promissory notes, the Company is required to maintain certain financial ratios, limit other indebtedness and may not pay dividends. Other restrictions include limitations on the amounts of leases and capital expenditures that may be incurred. The Company currently is in compliance or has received waivers on all such covenants and restrictions. FORWARD-LOOKING STATEMENTS All statements other than statements of historical fact included in this Report, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" regarding the Company's strategies, plans, objectives and expectations, the Company's exposure to quarterly fluctuations, the Company's future capital needs, the anticipated growth of its target markets and other matters are forward-looking statements. 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. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are set forth in this Section as well as in "Business." 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. READINESS FOR YEAR 2000 The Company is aware that some significant portion of existing electronic equipment, including computers, software and embedded technology, was not designed to correctly process dates after December 31, 1999. These systems store dates as having two digit, rather than four digit years, which could potentially cause erroneous data results for program failures in the year 2000. The Company is currently assessing the impact of such Year 2000 (Y2K) issues on the Company's internal computer systems, non-computer systems, and products as well as on the Company's vendors, service providers, and significant customers. Internally, the Company has developed a plan to inventory critical systems at each of its five operating locations and develop solutions, with further contingency plans where possible. The Company has identified two of its five information systems locations as not Y2K compliant. While the Company could upgrade these two locations without incurring material expense, the Company has instead decided to implement a Company-wide enterprise information system, which is scheduled for completion in September 1999. The new system is expected to improve information systems operating performance and will be fully Y2K compliant. The Company has not identified any other significant areas of non-compliance in internal computer systems or non-computer systems, or products. The Company has reviewed its products and does not expect to incur any material expense related to product non-compliance. The Company believes additional, though immaterial, revenue may be realized if customers decide to upgrade their older products. The Company believes the greatest risk of significant adverse effects on the Company relates to third party failure to appropriately address their Y2K non-compliance. Y2K failures in key suppliers' systems, or their respective suppliers' or customers' systems, could effect their ability to supply material or services to the Company, and therefore affect the Company's ability to produce and ship products. Y2K failures at the Company's significant customers, including the United States government, could effect such customers' ability to order, accept and pay for the Company's products. External Y2K failures could therefore have a material adverse effect on the Company's revenues and financial condition. The Company is in the process of securing letters of compliance from those vendors and service providers that are critical to the operations of the Company. The 17 18 Company plans to secure alternative suppliers for those who cannot assure the Company of their Y2K readiness. The Company also plans to survey its significant customers regarding their plans to identify and address Y2K issues. The Company has already been assured by its two largest customers, Lucent and Motorola, that they expect to be Y2K compliant. External Y2K risks will be addressed as the survey of key customers and suppliers is completed. Although the Company expects cooperation from the suppliers and customers it is surveying, the Company also relies on services such as telephones and utilities, whose Y2K compliance is outside of the Company's control. Therefore, the Company may be unable to accurately assess the Y2K readiness of third parties, and the impact of such third party non-compliance on the Company's operations. The Company plans to continue to identify, assess and to resolve all material Y2K issues by the end of 1999. The Company is developing contingency plans to address significant internal and external Y2K issues as they are identified. These contingency plans are expected to be complete by the end of 1999. The Y2K problem involves pervasive complex interrelationships, both internal and external to the Company. As a result, no assurance can be given that the Company will identify and successfully resolve all Y2K issues. The Company has not incurred any material expense to date in addressing Y2K issues. Although the Company has not completed its assessment of Y2K readiness, the Company believes no material expenses will be incurred in the future. READINESS FOR GPS WEEK ROLLOVER All current Global Positioning system (GPS) satellites, which are operated by the United States government, report time in the form of a GPS week number and a time offset. The week number is accumulated in a 10 bit counter with a range of 0 to 1023. The counter began at 0 on January 6, 1980, and is scheduled to roll from 1023 back to 0 on August 21, 1999. This rollover may cause equipment to erroneously interpret dates causing satellite positions to be miscalculated producing inaccurate data. The Company has identified its products that are non-compliant. The Company's liability is limited to those products considered under warranty. The Company does not expect to incur any material expense in upgrading these products. For products not considered under warranty, the Company expects to realize additional revenue, although not material, in upgrading these older non-compliant products. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is primarily exposed to market risks that relate to changes in foreign currency fluctuations. The Company's foreign sales are generally invoiced in U.S. dollars, and the Company does not presently enter into foreign currency forward exchange contracts. The Company generally does not enter into derivative financial instrument transactions for speculative purposes. Additional information for this item is contained under the captions "Disclosures About Fair Value of Financial Instruments" and "Foreign Currency Translation" in Note A, "Description of the Company and Summary of Significant Accounting Policies" in Notes to the Consolidated Financial Statements set forth elsewhere in this Report. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements and report of independent accountants thereon are filed with this Annual Report on Form 10-K as shown on the Index to Consolidated Financial Statements covered by Report of Independent Accountants. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 18 19 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT There is hereby incorporated by reference the information appearing under the captions "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" from the Company's definitive proxy statement for the Annual Meeting of the Stockholders to be held June 10, 1999 to be filed with the Commission on or before April 30, 1999. Information as to the Company's executive officers is included in Item 4A of Part I of this Annual Report on Form 10-K. Item 11. EXECUTIVE COMPENSATION There is hereby incorporated by reference information appearing under the caption "Executive Compensation" from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held June 10, 1999 to be filed with the Commission on or before April 30, 1999. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There is hereby incorporated by reference the information appearing under the caption "Security Ownership of Certain Beneficial Owners and Management" from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held June 10, 1999 to be filed with the Commission on or before April 30, 1999. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There is hereby incorporated by reference the information appearing under the caption "Executive Compensation" from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held June 10, 1999 to be filed with the Commission on or before April 30, 1999. 19 20 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: (1) Financial Statements The list of financial statements contained in the accompanying Index to Consolidated Financial Statements covered by Report of Independent Accountants is herein incorporated by reference. (2) Financial Statement Schedules The list of financial statement schedules contained in the accompanying Index to Consolidated Financial Statements covered by Report of Independent Accountants is herein incorporated by reference. All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits The list of exhibits on the accompanying Exhibit Index is herein incorporated by reference. (b) Reports on Form 8-K. The Company filed no Current Reports on Form 8-K during the last quarter of the period covered by this Report. 20 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, at Irvine, California this 24th day of March, 1999. DATUM INC. By /s/ Erik H. van der Kaay ------------------------------ Erik H. van der Kaay President and Director POWER OF ATTORNEY The undersigned directors and officers of Datum Inc. constitutes and appoints as their true and lawful attorney and agent with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto: and we do hereby ratify and confirm all that said attorney and agent, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ Erik H. van der Kaay President and Director March 24, 1999 - ------------------------------------ (Principal Executive Officer) Erik H. van der Kaay /s/ David A. Young Chief Financial Officer March 24, 1999 - ----------------------------------- (Principal Financial and Accounting Officer) David A. Young /s/ Louis B. Horwitz Director and Chairman March 24, 1999 - ----------------------------------- Louis B. Horwitz /s/ G. Tilton Gardner Director March 24, 1999 - ----------------------------------- G. Tilton Gardner /s/ Dan L. McGurk Director March 24, 1999 - ----------------------------------- Dan L. McGurk /s/ Edward A. Money Director March 24, 1999 - ----------------------------------- Edward A. Money /s/ Michael M. Mann Director March 24, 1999 - ----------------------------------- Michael M. Mann /s/ R. David Hoover Director March 24, 1999 - ----------------------------------- R. David Hoover
21 22 DATUM INC. AND SUBSIDIARIES Index To Consolidated Financial Statements Covered By Report of Independent Accountants Item 14(a)(1) and (2)
Page references --------------- Form 10-K ---- The information under the following captions, is included herein: Financial Statements Report of independent accountants..................................................F-1 Consolidated balance sheet at December 31, 1998 and 1997 .............................................................F-2 Consolidated statement of operations for each of the three years in the period ended December 31, 1998 ..................................................F-3 Consolidated statement of stockholders' equity for each of the three years in the period ended December 31, 1998..........................................................F-4 Consolidated statement of cash flows for each of the three years in the period ended December 31, 1998 ..................................................F-5 Notes to consolidated financial statements.........................................F-6 Financial Statement Schedules VIII - Valuation and Qualifying Accounts...........................................S-1
22 23 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Datum Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Datum Inc. and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Costa Mesa, California February 25, 1999 F-1 24 DATUM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ---------------------- 1997 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 10,307 $ 5,819 Accounts receivable, less allowance for doubtful accounts of $153 and $71 19,327 15,043 Inventories 24,555 31,219 Prepaid expenses 479 363 Deferred income taxes 3,056 2,648 Income tax refund receivable 1,190 1,321 -------- -------- Total current assets 58,914 56,413 Land, buildings and equipment, net 16,048 16,791 Excess of purchase price over net assets acquired, net of accumulated amortization of $3,845 and $2,951 11,231 12,126 Other assets 727 416 -------- -------- $ 86,920 $ 85,746 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,241 $ 3,343 Accrued salaries and wages 2,485 3,298 Accrued warranty 1,498 990 Other accrued expenses 1,287 1,277 Income taxes payable 289 -- Current portion of long-term debt 3,025 23 -------- -------- Total current liabilities 12,825 8,931 -------- -------- Long-term debt 14,533 17,418 -------- -------- Post-retirement benefits 818 602 -------- -------- Other long-term liabilities 144 128 -------- -------- Deferred income taxes 1,622 1,823 -------- -------- Stockholders' equity: Preferred stock, par value $.25 per share Authorized - 1,000,000 shares Issued - none Common stock, par value $.25 per share Authorized - 10,000,000 shares Issued - 5,505,843 shares in 1998 and 5,332,860 shares in 1997 1,376 1,333 Additional paid-in capital 44,941 43,231 Retained earnings 11,328 12,785 Unamortized stock compensation (368) -- Accumulated other comprehensive income (299) (505) -------- -------- Total stockholders' equity 56,978 56,844 -------- -------- Commitments (Notes C and H) $ 86,920 $ 85,746 ======== ========
See Notes to Consolidated Financial Statements F-2 25 DATUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Net sales............................. $ 101,233 $ 114,092 $ 91,854 ----------- ----------- ----------- Costs and expenses: Cost of goods sold.................. 65,172 68,235 56,285 Selling............................. 15,003 15,808 12,182 Product development................. 11,903 10,650 7,667 General and administrative.......... 9,946 9,479 10,127 Interest expense.................... 2,051 2,085 2,255 Interest income..................... (434) (349) (7) ----------- ----------- ----------- 103,641 105,908 88,509 ----------- ----------- ----------- Income (loss) before income taxes.... (2,408) 8,184 3,345 Income tax provision (benefit)........ (951) 3,355 1,371 ----------- ----------- ----------- Net income (loss)..................... $ (1,457) $ 4,829 $ 1,974 =========== =========== =========== Net income (loss) per share: Basic............................... $ (.27) $ .97 $ .49 =========== =========== =========== Diluted............................. $ (.27) $ .90 $ .46 =========== =========== =========== Shares used in per share calculation: Basic............................... 5,414,075 4,973,228 4,061,014 =========== =========== =========== Diluted............................. 5,414,075 5,389,862 4,253,019 =========== =========== ===========
See Notes to Consolidated Financial Statements F-3 26 DATUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED COMMON STOCK ADDITIONAL UNAMORTIZED OTHER -------------------- PAID-IN RETAINED STOCK COMPREHENSIVE SHARES AMOUNT CAPITAL EARNINGS COMPENSATION INCOME TOTAL ------ ------ ------- -------- ------------ ------ ----- Balances at December 31, 1995 ......... 4,018,968 $ 1,005 $ 5,982 $24,418 $ (92) $ 31,313 Issuance of common stock under 401(k) plan ........................ 44,610 11 453 464 Exercise of stock options ........... 27,713 7 189 196 Issuance of common stock warrants ... 785 785 Comprehensive income: Cumulative translation adjustment . (109) (109) Net income ........................ 1,974 1,974 ------- Total comprehensive income .......... 1,865 --------- ------- ------- ------- ------- ----- ------- Balances at December 31, 1996 ......... 4,091,291 1,023 7,956 25,845 -- (201) 34,623 Issuance of common stock under 401(k) and ESP plans ............... 31,744 7 688 695 Exercise of stock options ........... 174,825 44 1,155 1,199 Income tax benefit from stock options exercised .................. 1,646 1,646 Issuance of common stock, net of costs incurred ..................... 1,035,000 259 13,897 14,156 Comprehensive income: Cumulative translation adjustment . (304) (304) Net income ........................ 4,829 4,829 ------- Total comprehensive income .......... 4,515 --------- ------- ------- ------- ------- ----- ------- Balances at December 31, 1997 ......... 5,332,860 1,333 12,785 43,231 -- (505) 56,844 Issuance of common stock under 401(k) and ESP plans ............... 100,733 25 970 995 Exercise of stock options ........... 42,250 11 208 219 Income tax benefit from restricted stock issued and stock options exercised .......................... 127 127 Issuance of restricted stock ........ 30,000 7 405 $ (412) -- Amortization of stock compensation .. 44 44 Comprehensive income: Cumulative translation adjustment . 206 206 Net loss .......................... (1,457) (1,457) ------- Total comprehensive income .......... (1,222) --------- ------- ------- ------- ------- ----- ------- Balances at December 31, 1998 ......... 5,505,843 $ 1,376 $11,328 $44,941 $ (368) $(299) $56,978 ========= ======= ======= ======= ======= ===== =======
See Notes to Consolidated Financial Statements F-4 27 DATUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 -------- -------- -------- Cash flows from operating activities: Net income (loss) .......................................... $ (1,457) $ 4,829 $ 1,974 -------- -------- -------- Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization ......................... 3,636 3,152 3,040 Amortization of goodwill .............................. 894 894 894 Contribution of shares of common stock to the Company's 401(k) plan ........................................ 706 628 464 Amortization of stock compensation .................... 44 -- -- Changes in assets and liabilities: (Increase) decrease in accounts receivable .............. (4,284) 1,773 (3,178) (Increase) decrease in inventories ...................... 6,664 (11,949) 891 (Increase) decrease in prepaid expenses ................. (116) 62 (225) Decrease in income tax refund receivable ................ 258 -- 109 (Increase) decrease in deferred income taxes ............ (609) 187 (175) Increase in other assets ................................ (416) (26) (491) Increase (decrease) in accounts payable ................. 899 (4,199) 2,387 Increase (decrease) in accrued expenses ................. (297) 320 (89) Increase (decrease) in income taxes payable ............. 289 (724) 944 Increase (decrease) in other long-term liabilities ...... 16 (30) 40 Increase in post-retirement benefits .................... 216 156 156 -------- -------- -------- Total reconciling items .................................... 7,900 (9,756) 4,767 -------- -------- -------- Net cash provided by (used for) operating activities ....... 6,443 (4,927) 6,741 -------- -------- -------- Cash flows from investing activities: Book value of equipment disposals .......................... 55 50 98 Capital expenditures ....................................... (2,699) (4,494) (2,685) Payment for acquisition .................................... -- (1,270) -- Other ...................................................... 203 (292) (99) -------- -------- -------- Net cash used in investing activities ...................... (2,441) (6,006) (2,686) -------- -------- -------- Cash flows from financing activities: Reductions of line of credit ............................... -- (21) (10,442) Proceeds from long-term debt and notes payable ............. -- -- 17,736 Repayment of long-term debt and notes payable .............. (22) (38) (11,528) Proceeds from issuance of common stock ..................... -- 14,156 -- Proceeds from exercise of stock options and ESP plans ...... 508 1,266 196 Proceeds from issuance of common stock warrants ............ -- -- 785 -------- -------- -------- Net cash provided by (used for) financing activities ....... 486 15,363 (3,253) -------- -------- -------- Net increase in cash and cash equivalents .................... 4,488 4,430 802 Cash and cash equivalents at beginning of year ............... 5,819 1,389 587 -------- -------- -------- Cash and cash equivalents at end of year ..................... $ 10,307 $ 5,819 $ 1,389 ======== ======== ========
See Notes to Consolidated Financial Statements F-5 28 DATUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE A - DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of the Company: Datum designs, manufactures and markets a wide variety of high-performance time and frequency products used to synchronize the flow of information in telecommunications networks. The Company is also a leading supplier of precise timing products for enterprise computing networks and a wide variety of space, scientific and industrial test and measurement applications. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany transactions and accounts have been eliminated. Revenue Recognition: Most revenues are recorded when products are shipped. However, in 1997, a major customer enacted a consignment inventory policy requiring finished goods to be kept at the customer's location. Revenues from the sale of these products in consigned inventory are recognized when the customer uses the product. 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 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 revenues and expenses during the respective reporting periods. Actual results could differ from those estimates. Inventory Valuation: Inventories are stated at lower of cost or market; cost is determined on a first-in, first-out basis. Inventories comprise the following:
DECEMBER 31, ------------------------ 1998 1997 ------- ------- Purchased parts ....... $ 7,156 $10,523 Work-in-process ....... 10,524 12,833 Finished products ..... 6,875 7,863 ------- ------- $24,555 $31,219 ======= =======
Land, Buildings and Equipment: Land, buildings and equipment, which are recorded at cost and depreciated where appropriate by the straight-line method, consist of the following:
DECEMBER 31, ------------------------ DEPRECIABLE 1998 1997 LIFE ------- ------- -------------- Land ............................ $ 2,040 $ 2,040 Buildings ....................... 5,060 4,564 30 to 40 years Equipment ....................... 20,450 19,306 3 to 10 years Leasehold improvements .......... 1,149 1,013 5 to 10 years ------- ------- 28,699 26,923 Less accumulated depreciation and amortization .................. 12,651 10,132 ------- ------- $16,048 $16,791 ======= =======
Expenditures for maintenance and repairs are charged directly to income, and betterments and major renewals are capitalized. F-6 29 Excess of Purchase Price Over Fair Value of Net Assets of Businesses Acquired: The excess of the purchase price of businesses or assets acquired over the fair value of the net assets ("goodwill") is amortized over varying periods ranging from 15 to 40 years. At each balance sheet date, the Company reviews the recoverability of long-lived assets and certain intangible assets, including goodwill. In the event the sum of expected undiscounted future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. Income Taxes: The Company uses the liability method of accounting for income taxes. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is calculated as the change in net deferred liabilities or assets. Consolidated Statement of Cash Flows: For purposes of the consolidated statement of cash flows, cash equivalents include highly liquid investments, with an original maturity of less than three months. Cash paid for interest totaled $1,805, $ 2,019 and $2,109 in 1998, 1997 and 1996, respectively. Cash paid for income taxes totaled $315, $3,935 and $580 in 1998, 1997 and 1996, respectively. Significant non-cash transactions affecting the Company's accounts consisted of tax benefits from the exercise of common stock options of $127 and $1,646 in 1998 and 1997, respectively. Stock Options and Awards: The Company accounts for employee stock-based compensation in accordance with Accounting Principles Bulletin No. 25. See the disclosures in accordance with Statement of Financial Accounting Standards No. 123 (FAS 123) in Note F. Net Income Per Share: Effective in the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128). FAS 128 requires dual presentation of Net income per share-Basic and Net income per share-Diluted. 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 reported period. Net income per share-Diluted reflects the potential dilution that could occur if stock options were exercised. In 1998, the Company did not include potential common stock in the calculation of Net income per share -- Diluted as such inclusion would have an anti-dilutive effect. Net income per share is calculated as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Net income (loss) ................... $ (1,457) $ 4,829 $ 1,974 ========== ========== ========== Shares outstanding - Basic .......... 5,414,075 4,973,228 4,061,014 Effect of dilutive securities: Warrants ........................ -- 89,200 2,846 Stock options .................. -- 327,434 189,159 ---------- ---------- ---------- Shares outstanding - Diluted ........ 5,414,075 5,389,862 4,253,019 ========== ========== ========== Net income (loss) per share - Basic . $ (.27) $ .97 $ .49 ========== ========== ========== Net income (loss) per share - Diluted $ (.27) $ .90 $ .46 ========== ========== ==========
Disclosures About Fair Value of Financial Instruments: The carrying values of cash, cash equivalents, accounts receivable, accrued liabilities and notes payable approximate their fair values because of the short maturity of these instruments. The carrying value of long-term debt approximates its fair value. Comprehensive Income. In 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive Income." FAS 130 establishes standards for the reporting and displaying of comprehensive income and its components. The adoption of FAS 130 did not affect the results of operations or financial position but did affect the disclosure of comprehensive income in the statement of stockholders' equity. Comprehensive income is defined as a change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Foreign Currency Translation: Assets and liabilities of the Company's German subsidiary are translated at current exchange rates, while revenue and expenses are translated at average rates prevailing during the year. Translation adjustments are reported in other comprehensive income. Reclassifications: Certain reclassifications have been made to the consolidated financial statements for prior years to conform to the 1998 presentation. F-7 30 Post-retirement Benefits: In 1998, the Company adopted Statement of Financial Accounting Standards No. 132 (FAS 132), "Employers' Disclosures about Pensions and Other Post-retirement Benefits." FAS 132 revises disclosures about other post-retirement benefit plans. The adoption of FAS 132 did not affect the results of operations or financial position but did affect the disclosure of post-retirement benefit information (Note D). Segment and Related Information: In 1998, the Company adopted Statement of Financial Accounting Standards No. 131 (FAS 131), "Disclosures about Segments of an Enterprise and Related Information." FAS 131 supersedes FAS 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. FAS 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of FAS 131 did not affect results of operations or financial position but did affect the disclosure of segment information (Note G). F-8 31 NOTE B - DEBT Long-term obligations outstanding are as follows:
DECEMBER 31, ------------------------ 1998 1997 ------- ------- $6,000 Series A Senior Secured Notes (net of discount of $157), principal due semi-annually beginning March 27, 1999, to September 27, 2000, with interest payable quarterly at 9.07%, secured by all assets...................................................... $5,843 $ 5,797 $12,000 Series B Senior Secured Notes (net of discount of $313), principal due semi-annually beginning March 27, 2001, to September 27, 2003, with interest payable quarterly at 10.25%, secured by all assets...................................................... 11,687 11,593 Capital equipment leases for various machinery and equipment with interest at 10.26% to 11.59% maturing at various dates..................... 28 51 ------- ------- Total debt................................................................... 17,558 17,441 Less current portion....................................................... (3,025) (23) ------- ------- Long-term debt, less current portion......................................... $14,533 $17,418 ======= =======
Aggregate maturities of long-term debt before debt discount at December 31, 1998 are as follows: 1999................................ $3,025 2000................................ 3,002 2001................................ 4,001 2002................................ 4,000 2003................................ 4,000 ------- Total..................... $18,028 =======
The Company's current two-year revolving line of credit has been extended to June 15, 1999 at an amount not to exceed $10,000. Interest is payable at prime or at LIBOR plus 2.75% (7.75% at December 31, 1998). The line is secured by all assets of the Company. No amounts were outstanding under this line at December 31, 1998 and 1997. The Company issued common stock warrants in connection with the Series A and Series B Senior Secured Notes allowing for the purchase of up to 175,000 shares of common stock at an exercise price of $11.50 per share. The common stock warrants, which were valued by the Company at $785, have been reflected as debt discount and amortized as additional interest expense. The value of the common stock warrants is included in additional paid-in capital. The current credit agreements impose operating and financial restrictions on the Company, including a requirement to maintain certain financial ratios and a certain profitability level. Such restrictions affect, and in some respects limit or prohibit, among other things, the ability of the Company to incur additional indebtedness, repay certain indebtedness prior to its stated maturity, create liens, engage in mergers and acquisitions, transfer assets, make certain capital expenditures and pay dividends. At December 31, 1998, the Company was not in compliance with the line of credit agreement due to a financial ratio covenant related to profitability level. The Company has received a waiver for the non-compliance. F-9 32 NOTE C -INCOME TAXES The income tax provision (benefit) comprises the following:
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 ----- ------ ------ Provision (benefit) for income taxes: Current: Federal............................ $(682) $2,587 $1,081 State.............................. 210 537 445 Foreign............................ 130 44 20 ----- ------ ------ (342) 3,168 1,546 ----- ------ ------ Deferred: Federal............................ (336) 223 (155) State.............................. (273) (36) (20) ----- ------ ------ (609) 187 (175) ----- ------ ------ $(951) $3,355 $1,371 ===== ====== ======
The tax benefits associated with the exercise of non-qualified stock options reduced taxes currently payable as shown above by $127 and $1,646 in 1998 and 1997, respectively. Such benefit was credited to additional paid in capital. The income tax provision (benefit) differs from the amount computed by applying the statutory federal income tax rate to income (loss) before taxes as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1998 1997 1996 ------------------ ------------------ ------------------ Pretax Pretax Pretax Amount Income Amount Income Amount Income ------ ------ ------ ------ ------ ------ Computed expected tax expense (benefit) .. $ (819) (34.0%) $ 2,809 35.0% $ 1,171 35.0% State income tax (benefit), net of federal income tax effect ...................... (63) (2.6%) 326 4.0% 272 8.1% Amortization of excess of purchase price over net assets acquired ............... 31 1.2% 27 .3% 31 1.0% Foreign earnings taxed at different rates .................................. 28 1.2% (12) (.2%) 20 .6% Research and development tax credits ..... (123) (5.1%) (150) (1.8%) (204) (6.1%) Other .................................... (5) (0.2%) 355 4.3% 81 2.4% ------- ---- ------- ---- ------- ---- $ (951) (39.5%) $ 3,355 41.0% $ 1,371 41.0% ======= ===== ======= ==== ======= ====
The primary components of temporary differences which give rise to the Company's net deferred tax asset are as follows:
DECEMBER 31, ----------------------- 1998 1997 ------ ------ Deferred tax assets: Inventory........................................ $2,018 $1,887 Accruals and reserves............................ 1,698 1,022 ------ ------ 3,716 2,909 ------ ------ Deferred tax liabilities: Property, plant and equipment.................... 2,235 2,037 Other............................................ 47 47 ------ ------ 2,282 2,084 ------ ------ $1,434 $ 825 ====== ======
F-10 33 3 NOTE D - POST-RETIREMENT BENEFITS Post-retirement benefits are recognized over the employee's service period based on the expected costs of providing such benefits to the employee and the employee's beneficiaries after retirement. The Company elected to recognize the transition obligation over a 20-year period. The Company's post-retirement benefit program comprises two plans, the life insurance plan and the health care plan. Any permanent full-time employee is eligible upon retirement after age 62 and with 12 years of service. The health care plan is a contributory plan. The following sets forth the Company's post-retirement program's status reconciled with amounts reported in the consolidated balance sheet:
DECEMBER 31, -------------------- 1998 1997 ------- ------- Accumulated post-retirement benefit obligation: Benefit obligation at beginning of year ......... $ 1,248 $ 1,160 Service cost ................................. 127 71 Interest cost ................................ 86 70 Actuarial gains .............................. (192) (8) Expected benefits paid ....................... (30) (45) ------- ------- Benefit obligation at end of year ............... 1,239 1,248 Plan assets at fair value ....................... -- -- ------- ------- Accumulated post-retirement benefit obligation in excess of plan assets ........................ 1,239 1,248 Unrecognized transition obligation .............. (422) (453) Unrecognized net gain (loss) .................... 1 (193) ------- ------- Accrued post-retirement benefit obligation ...... $ 818 $ 602 ======= =======
Net periodic post-retirement benefit cost includes the following components:
YEAR ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ---- ---- ---- Service cost ........................ $127 $ 71 $ 71 Interest cost ....................... 86 70 71 Amortization of transition obligation 30 31 30 Amortization of actuarial loss ...... 3 -- -- ---- ---- ---- Net periodic postretirement expense . $246 $172 $172 ==== ==== ==== Discount rate ....................... 6.75% 7.00% 7.00% ==== ==== ====
For measurement purposes, an 8.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 4.75% for 2007 and remain at that level thereafter. The effect of one percentage point increase in the assumed health care cost trend rate would increase the total of the service and interest cost components by $7 and increase the post-retirement benefit obligation by $32. A one percent decrease in the assumed trend rate would decrease the total of the service and interest components by $7 and decrease the post-retirement benefit obligation by $27. F-11 34 NOTE E - COMMON STOCK RESERVED In June 1994, the stockholders of the Company approved the 1994 Incentive Stock Plan. This plan provides for the granting of incentive or nonqualified options or restricted shares of the Company's common stock to the Company's officers, directors and employees and also to consultants, business associates and others with important business relationships with the Company. The exercise price of the shares covered by each nonqualified option granted and purchase price of restricted shares is determined by the Administrator. The exercise price of common stock covered by each incentive option cannot be less than the fair market value of such shares on the date of grant. As of December 31, 1998 there have been no nonqualified options issued less than the market value on the date of grant and there have been no incentive options granted. Generally, options vest in 25% increments over four years and have a 10-year term. The initial shares available under the Plan for issuance was 250,000 with annual increases of 50,000 on the last day of each calendar year. The stockholders of the Company approved amendments of the Plan, providing for 200,000 additional option shares in March 1995, June 1997, and June 1998, to be reserved for issuance thereunder. In June 1998, the stockholders also approved an amendment to change the annual increase from 50,000 to 2% of the number of shares outstanding as of the Company's fiscal year end. As of December 31, 1998, 1,160,117 shares have been reserved for the Plan. This plan replaced the prior stock plan and Restricted Stock Award Plan that expired in 1994. The stock option activity includes the cancellation of options for 170,750 shares in November 1998 and the corresponding grant of new options for 170,750 shares in November 1998 at an exercise price of $10.76, an amount greater than the fair market value on the date the new options were granted. This option repricing was made available to employees only and excluded directors and officers. The new options vest in annual installments of 25%, 25% and 50% from the date of grant and expire 10 years from the date of grant. The stock option activity also includes 30,000 shares of restricted stock awarded in April 1998. These shares were issued with a purchase price less than the market value of shares on the date of grant. The shares vest over seven years with provisions to accelerate vesting if certain financial milestones are met. Stock option activity for years ended December 31, 1998, 1997 and 1996 is as follows:
OPTIONS OUTSTANDING --------------------------- NUMBER WEIGHTED AVERAGE OF SHARES EXERCISE PRICE --------- ---------------- Outstanding at December 31, 1995 511,312 $ 6.79 Granted 132,500 $ 10.17 Exercised (27,713) $ 4.55 Cancelled (41,625) $ 9.73 -------- --------- Outstanding at December 31, 1996 574,474 $ 7.64 Granted 170,750 $ 21.82 Exercised (174,825) $ 6.86 Cancelled (14,376) $ 17.88 -------- --------- Outstanding at December 31, 1997 556,023 $ 11.84 Granted 564,250 $ 12.36 Exercised (72,250) $ 3.03 Cancelled (225,875) $ 17.73 -------- --------- Outstanding at December 31, 1998 822,148 $ 11.35 ======== =========
The number of options exercisable and the related weighted average exercise price were 276,022 shares at $8.16 at December 31, 1998, 197,693 shares at $6.17 at December 31, 1997 and 241,939 shares at $5.43 at December 31, 1996. As of December 31, 1998, 1997 and 1996, there were 298,942, 327,200 and 233,575 shares, respectively, available for grant under the 1994 Incentive Stock Plan. F-12 35 Additional information regarding options outstanding at December 31, 1998 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------------- ---------------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AS OF 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/98 EXERCISE PRICE - --------------- -------------- ---------------- -------------- -------------- -------------- $ 3.00 - $ 5.13 148,023 4.86 $ 4.54 148,023 $ 4.54 $ 6.63 - $10.75 185,875 7.06 $10.22 97,062 $10.41 $10.76 - $10.76 170,750 9.85 $10.76 0 $ 0.00 $13.13 - $13.88 211,500 9.19 $13.79 3,000 $13.16 $14.50 - $16.25 48,500 8.51 $15.65 13,000 $15.58 $21.00 - $27.38 57,500 8.21 $21.69 14,937 $21.91 ------- ------- $ 3.00 - $27.38 822,148 7.96 $11.35 276,022 $ 8.16 ======= =======
In June 1997, the stockholders of the Company approved the Employee Stock Purchase Plan ("the Purchase Plan"), which authorized the Company to issue and reserve for the Purchase Plan, or purchase up to an aggregate of 250,000 shares of common stock in open market transactions for the benefit of participating employees during the term of the Purchase Plan. The purchase price per share for which shares of common stock are purchased in an offering period under the Purchase Plan is the lessor of 90% of the fair market value of a share of common stock on the grant date or 90% of the fair market value of a share of common stock on the purchase date. Shares issued under the Plan were 34,931 in 1988 and 5,244 shares in 1997 at a weighted average price of $8.31 and $12.88, respectively. Had compensation cost been determined on the basis of fair value pursuant to FAS 123 net income (loss) and net income (loss) per share would have been as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 ------- ------ ------ Net income (loss) As reported $(1,457) $4,829 $1,974 ======= ====== ====== Pro forma $(2,497) $4,330 $1,824 ======= ====== ====== Net income (loss) per share As reported - Diluted $ (.27) $ .90 $ .46 ======= ====== ====== Pro forma - Diluted $ (.46) $ .80 $ .43 ======= ====== ======
The fair value of each option grant is estimated on the date of grant using the Black-Scholes model with the following assumptions used for grants during both periods: risk free interest rates of 4.94% in 1998, 6.37% in 1997 and 5.97% in 1996, expected volatility of 79% in 1998, 77% in 1997 and 48% in 1996, and an expected option life of 5 years and no expected dividends in 1998, 1997 and 1996. NOTE F - SAVINGS AND RETIREMENT PLAN Effective July 1, 1984, the Company adopted a savings and retirement plan which covers all eligible employees. The plan provides for matching by the Company of 100% of the first 3% of employee deferral. Employer matching contributions are made in the form of shares of the Company's common stock. Total retirement expense under the Plan amounted to $728, $741 and $497 for the years ended December 31, 1998, 1997 and 1996, respectively. Employees vest in increments of 20% for each year of service and are fully vested after 5 years. F-13 36 NOTE G - SEGMENT AND RELATED INFORMATION The Company has five reportable segments: Irvine, CA, Austin, TX, Beverly, MA, San Jose, CA and Hofolding, Germany. The Irvine, CA segment produces product primarily for the wireless telecommunication market. At the Austin, TX segment, products are primarily produced for the wireline telecommunication market. The San Jose, CA segment produces product for both the enterprise computing and test and measurement markets. At the Beverly, MA segment, cesium standards are produced for both test and measurement and satellite markets. The Hofolding, Germany segment produces product for the wireless and wireline telecommunications and test and measurement markets. The accounting policies for the segments are the same as those described in the "Summary of Significant Accounting Policies." The Company evaluates the performance of its segments and allocates resources to them based on earnings before interest and taxes (EBIT). Segment net sales includes sales to external customers and to other Company segments (intersegment sales). Segment EBIT does not include corporate expenses, amortization of goodwill, and intersegment profit elimination. Identifiable assets include accounts receivable, inventories, and land, building and equipment and does not include cash, income tax refund receivable and deferred income taxes, prepaid expenses, goodwill and other long-term corporate assets. The Company accounts for intersegment sales and transfers at terms that allow a reasonable profit to the seller. The Company's reportable segments are strategic business units that offer different product and services. They are managed separately because each business utilizes different technology and requires different marketing strategies. All of the businesses were acquired as a unit, and the management teams at the time of the acquisitions were retained. The table below presents information about reported segments for the years ended December 31:
IRVINE, AUSTIN, BEVERLY, SAN JOSE, HOLFOLDING, CA TX MA CA GERMANY TOTAL ------- ------- -------- --------- ----------- -------- 1998 Net sales $ 48,339 $ 25,309 $ 14,882 $ 14,128 $ 6,249 $108,908 EBIT (2,565) 5,083 1,117 188 536 4,359 Identifiable assets 22,722 14,765 9,867 6,027 2,251 55,632 Capital expenditures 1,177 538 772 115 97 2,699 1997 Net sales $ 65,934 $ 18,586 $ 12,016 $ 20,863 $ 4,275 $121,674 EBIT 9,398 1,525 669 2,532 205 14,329 Identifiable assets 32,032 10,225 7,192 6,339 1,972 57,760 Capital expenditures 3,420 351 286 313 44 4,414 1996 Net sales $ 50,656 $ 17,705 $ 8,986 $ 14,827 $ 4,358 $ 96,532 EBIT 4,822 3,178 995 1,176 104 10,275 Identifiable assets 21,703 7,717 7,601 6,234 1,959 45,214 Capital expenditures 1,778 210 263 256 40 2,547
A reconciliation of total segment net sales, EBIT, identifiable assets and capital expenditures to total consolidated amounts, for the years ended December 31 is as follows: F-14 37
1998 1997 1996 --------- --------- --------- NET SALES Total segment net sales ............. $ 108,908 $ 121,674 $ 96,532 Elimination of intersegment revenue . (7,675) (7,582) (4,678) --------- --------- --------- Consolidated net sales .......... $ 101,233 $ 114,092 $ 91,854 ========= ========= ========= EBIT Total EBIT for segment sales ........ $ 4,359 $ 14,329 $ 10,275 Corporate expense ................... (3,242) (2,705) (2,878) Amortization of goodwill ............ (1,634) (1,634) (1,704) Intercompany profit ................. (274) (69) (100) Interest, net ....................... (1,617) (1,737) (2,248) --------- --------- --------- Consolidated EBIT ............... $ (2,408) $ 8,184 $ 3,345 ========= ========= ========= IDENTIFIABLE ASSETS Total segment assets ................ $ 55,632 $ 57,760 $ 45,214 Goodwill ............................ 16,131 17,764 19,400 Cash ................................ 10,307 5,819 1,389 Income tax receivable and deferred income taxes ........... 4,287 3,969 2,007 Other assets ........................ 563 435 678 --------- --------- --------- Consolidated assets ............. $ 86,920 $ 85,747 $ 68,688 ========= ========= ========= CAPITAL EXPENDITURES Total segment capital expenditures .. $ 2,699 $ 4,414 $ 2,547 Other additions ..................... -- 80 138 --------- --------- --------- Consolidated capital expenditures $ 2,699 $ 4,494 $ 2,685 ========= ========= =========
International sales were $24,357, $21,745 and $20,151 in 1998, 1997 and 1996, respectively. The following table sets forth the geographical components of international sales for the years ended December 31:
INTERNATIONAL SALES 1998 1997 1996 ------- ------- ------- Canada....... $ 5,280 $ 2,320 $ 1,491 Germany...... 3,190 1,738 2,304 China ....... 2,782 45 464 France....... 2,418 1,257 853 Other ....... 10,687 16,385 15,039 ------- ------- ------- $24,357 $21,745 $20,151 ======= ======= =======
Sales from one customer of the Company's Irvine, CA segment represented 34%, 38% and 36% of the Company's consolidated net sales in 1998, 1997 and 1996, respectively. In addition, one customer of the Company's Irvine, CA segment represented 10% of the Company's consolidated net sales in 1997. F-15 38 NOTE H - COMMITMENTS Total rental expense for operating leases amounted to $1,866, $1,454 and $1,735 in 1998, 1997 and 1996, respectively. The future minimum rental commitments under all non-cancelable operating leases, exclusive of property taxes and certain occupancy costs, are as follows: 1999 ........................... $1,425 2000 ........................... 1,493 2001 ........................... 1,365 2002 ........................... 1,264 2003 ........................... 1,233 Thereafter ..................... 1,738 ------ Total minimum lease payments $8,518 ======
F-16 39 DATUM INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT BALANCE BEGINNING OTHER AT END OF DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS ACQUISITIONS DEDUCTIONS* PERIOD ----------- --------- --------- ---------- ------------ ----------- --------- YEAR ENDED DECEMBER 31, 1998 Allowance for doubtful accounts............ $ 71 $ 119 $ 37 $ 153 Reserve for inventories.................... 3,737 2,275 1,476 4,536 Accumulated amortization of acquired intangible assets...................... 2,951 894 3,845 YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts............ 107 70 106 71 Reserve for inventories.................... 2,084 2,394 741 3,737 Accumulated amortization of acquired intangible assets...................... 2,056 895 2,951 YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts............ 68 121 36 $46 107 Reserve for inventories.................... 1,952 1,309 1,177 2,084 Accumulated amortization of acquired intangible assets...................... 1,162 894 2,056
* Aacom note payments received. S-1 40 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ ----------- ------------ 2.1 Purchase Agreement dated as of October 20, 1994 by and among Ball Corporation, Efratom Holding, Inc. and the Registrant (incorporated by reference to Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). -- 3.1 Certificate of Incorporation of Datum Inc., a Delaware corporation, as amended to date (incorporated by reference to the same numbered exhibit on Form 10-Q for the quarter ended June 30, 1996). -- 3.2 Bylaws of Datum Inc. as amended to date (incorporated by reference to the same numbered exhibit on Form 10-K for the year ended December 31, 1994). -- 10.4 1984 Stock Option Plan, as amended to date (incorporated by reference to Registrant's Registration Statements on Form S-8, Registration No.'s 2-96564, 33-10035 and 33-41709). -- 10.10 Form of Indemnification Agreement dated May 27, 1987 as entered into with certain directors and officers of Registrant (incorporated by reference to same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). -- 10.19 Savings and Retirement Plan, as amended to date (incorporated by reference to same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). -- 10.21 Consulting Agreement dated October 9, 1992 with Louis B. Horwitz (incorporated by reference to same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). -- 10.21.1 First Amendment to Consulting Agreement, dated as of March 1, 1996, between Louis B. Horwitz and the Registrant (incorporated by reference to the same numbered exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). -- 10.29 1994 Stock Incentive Plan (incorporated by reference to Registrant's Registration Statement on Form S-8, Registration No. 33-79772). -- 10.29.1 Amendment to 1994 Stock Incentive Plan, effective March 17, 1995. (incorporated by reference to the same numbered exhibit on Form 10-K for the year ended December 31, 1994). --
41
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ ----------- ------------ 10.29.2 Second Amendment to 1994 Stock Incentive Plan, effective June 5, 1997 (incorporated by reference to Registrant's Registration Statement on Form S-8, Registration No. 33-79772). -- 10.30.5 Amended and Restated Credit Agreement dated as of September 27, 1996, by and between the Registrant and Wells Fargo Bank, N.A. (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). -- 10.32 Lease Agreement dated September 15, 1986 by and between The Irvine Company and Efratom Division, Ball Corporation, for Efratom Time and Frequency Products, Inc.'s facility at 3 Parker, Irvine, California. (incorporated by reference to the same numbered exhibit on Form 10-K for the year ended December 31, 1994). -- 10.32.1 First Amendment to Lease dated March 15, 1995 by and between The Irvine Company and Efratom Division, Ball Corporation for Lease Agreement dated September 15, 1986 (Exhibit 10.32) (incorporated by reference to the same numbered exhibit on Form 10-K for the year ended December 31, 1994). -- 10.32.2 Amendment to Leases dated May 11, 1995 between the Irvine Company and the Registrant (incorporated by reference to the same numbered exhibit on Form 10-Q for the quarter ended June 30, 1995). -- 10.32.4 Second Amendment to Lease dated May 11, 1995 for 3 Parker (incorporated by reference to the same numbered exhibit on Form 10-Q for the quarter ended June 30, 1995). -- 10.34 Industrial Lease dated May 11, 1995 between the Irvine Company and the Registrant (incorporated by reference to the same numbered exhibit to the Registrant's Form 10-Q for the quarter ended June 30, 1995). -- 10.35 Lease Agreement dated January 4, 1996, by and between Berg & Berg Developers and the Registrant relating to Registrant's Facility at 6781 Via Del Oro, San Jose, California (incorporated by reference to the same numbered exhibit to the Registrant's Form 10-K for the year ended December 31, 1995. -- 10.36 Note and Warrant Purchase Agreement, dated as of September 27, 1996, by and between The Prudential Insurance Company of America and the Registrant (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. --
42
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ ----------- ------------ 10.37 Common Stock Purchase Warrant, dated September 27, 1996 (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). -- 10.38 Series A Senior Secured Notes, dated September 27, 1996, in favor of The Prudential Insurance Company of America (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). -- 10.39 Series B Senior Secured Notes, dated September 27, 1996, in favor of The Prudential Insurance Company of America (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). -- 10.41 Employee Stock Purchase Plan (incorporated by reference to registrant proxy statement for its Annual Meeting of Stockholders on June 5, 1997, filed with the commission on May 1, 1997). -- 10.42 Employee Agreement, dated March 27, 1998, between the Company and Erik H. van der Kaay (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). -- 10.43 Non-qualified stock option agreement, dated April 6, 1998, between the Company and Erik H. van der Kaay (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. -- 10.44 Restricted stock grant agreement, dated April 6, 1998, between the Company and Erik H. van der Kaay (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. -- 10.45 Agreement with Lucent Technologies Inc., signed July 2, 1998. (Portions of this Exhibit are omitted and were filed separately with the Secretary of the Commission pursuant to the Company's application requesting confidential treatment under Rule 406 of the Securities Act of 1933.) -- 21 List of Subsidiaries -- 23 Consent of Independent Accountants -- 27.4 Financial Data Schedule Year Ended 1998 --
43 DATUM INC. FORM 10-K - ITEM 14(a)(3) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10.4 1984 Stock Option Plan, as amended to date (incorporated by reference to Registrant's Registration Statements on Form S-8 Registration numbers 2-96564, 33-10035 and 33-41709). 10.10 Form of Indemnification Agreement dated May 27, 1987 as entered into with certain directors and officers of Registrant (incorporated by reference to same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). 10.21 Consulting Agreement dated October 9, 1992 with Louis B. Horwitz (incorporated by reference to same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 10.21.1 First Amendment to Consulting Agreement, dated as of March 1, 1996, between Louis B. Horwitz and the Registrant (incorporated by reference to the same numbered exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.29 1994 Stock Incentive Plan (incorporated by reference to Registrant's Registration Statement on Form S-8, Registration No. 33-79772). 10.29.1 Amendment to 1994 Stock Incentive Plan, effective March 16, 1995 (incorporated by reference to the same numbered exhibit to Registrant's Form 10-K for the year ended December 31, 1994). 10.29.2 Second Amendment to 1994 Stock Incentive Plan, effective June 5, 1997 (incorporated by reference to Registrant's Registration Statement on Form S-8, Registration No. 33-79772). 10.41 Employee Stock Purchase Plan (incorporated by reference to registrant proxy statement for its Annual Meeting of Stockholders on June 5, 1997, filed with the commission on May 1, 1997). 10.42 Employment Agreement, dated March 27, 1998, between the Company and Erik H. van der Kaay (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 10.43 Non-qualified stock option agreement, dated April 6, 1998, between the Company and Erik H. van der Kaay (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.44 Restricted stock grant agreement, dated April 6, 1998, between the Company and Erik H. van der Kaay (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
EX-10.45 2 AGREEMENT WITH LUCENT TECHNOLOGIES, INC 1 EXHIBIT 10.45 H011980069 1 20 [Confidential treatment is being sought for certain portions of this exhibit, as indicated by a "[*]" symbol and footnoted as "omitted pursuant to Rule 24b-2" or "column data omitted pursuant to Rule 24b-2." Such omitted portions have been filed with the Securities and Exchange Commission.] DATUM INC EFRATOM TIMING AND FREQUENCY PRODUCTS 3 PARKER IRVINE, CA 92718 LUCENT TECHNOLOGIES INC. DATUM, INC. MATERIAL Such quantities of Reference Frequency and Timing Generators of Supplier's manufacture, identified in the PRICE Clause, as may be ordered by Company during the period of May 1, 1998 through April 30, 2001. PRICE As set forth in Attachment A to this Agreement PAYMENT TERMS Non Dock-to-Shop Orders NET 30 Days NET 45 Days - Effective 7/1/1999 NET 60 Days - Effective 7/1/2000 Dock-to-Shop Orders For Dock-To-Shop items shown in Attachment A and beginning on the date indicated, payment terms from consumption will be net average of 15 days. Supplier shall not invoice Company. Supplier shall be ERS (Evaluated Receipts Settlement) compliant. 2 BLANKET PURCHASE ORDERS AND SPOT PURCHASE ORDERS This clause applies to orders other than for consigned material or dock-to-shop material. Company's orders under this Agreement shall be either: A) Blanket Purchase Orders which will cover a specific period of time as identified on the purchase order. The quantity of material specified in such orders is Company's forecasted usage for the specified period. The forecast is not a commitment. Company's commitment is for the number of units ordered by Company by releases (the "Release") defined as Company's required dock date with specific quantity, subject to the clause "Termination of Blanket Purchase Orders and Spot Purchase Orders". Each release shall specify the number of units to be shipped by Supplier and the shipment schedule (the "Release Schedule"). Supplier agrees to ship in accordance with the Release schedule; or B) Spot Purchase Orders which will require a one time shipment of a specified number of units of the material. Supplier agrees to ship in accordance with such Spot Purchase Orders. BANKRUPTCY AND TERMINATION FOR FINANCIAL INSECURITY - Either party may terminate this Agreement by notice in writing: 1) if the other party makes an assignment for the benefit of creditors (other than solely an assignment of moneys due); or 2) if the other party evidences an inability to pay debts as they become due, unless adequate assurance of such ability to pay is provided within thirty (30) days of such notice. If a proceeding is commenced under any provision of the United States Bankruptcy Code, voluntary or involuntary, by or against either party, and this Agreement has not been terminated, the non-debtor party may file a request with the bankruptcy court to have the court set a date within sixty (60) days after the commencement of the case, by which the debtor party will assume or reject this Agreement, and the debtor party shall cooperate and take whatever steps necessary to assume or reject the Agreement by such date. BAR CODE SHIPPING AND RECEIVING LABELS - Supplier shall at its sole expense place Company's specified bar code labels on all shipping packages and containers for the material shipped under this Agreement. Such bar code labels and the placement thereof shall meet the "Shipping & Receiving Bar Code Label Standard AT&T 801-001-105," Issue 3 (a copy of which Supplier has in its possession). Company may change such specification upon written notice to Supplier and Supplier shall comply with such changes at a reasonably and mutually agreed upon schedule. BEST PRICE - If, at any time during the term of this Agreement, Supplier should sell to any customer other than to affiliates or subsidiaries of Supplier, services at least equal or similar in quality at a price lower than that in effect hereunder, Company shall pay the lower price on all services which are performed during the period when such lower price is in effect. Upon ten (10) days written notice, Company, or Company's authorized representatives, may audit Suppliers' applicable books and records for the purpose of verifying Supplier's compliance with this provision. 3 BUFFER STOCK - DOCK TO SHOP Supplier agrees to keep, at Supplier's expense, buffer stock for each DTS item listed Attachment A, within fifty (50) miles of Columbus, Ohio; and with 24 hour accessibility for Company, until such time that: (a) Supplier's service performance meet's Company's service performance as defined in the clause "SERVICE" for a period of six (6) months; or (b) until such time as Supplier locates within one hundred-fifty (150) miles of Columbus, Ohio. Buffer Stock equals two (2) times the delivery interval as mutually agreed upon by Supplier and Company. If Supplier fails to meet the required service performance for a period of two (2) consecutive months; or more than four (4) non-consecutive months within a twelve (12) month period, Company reserves the right to re-institute Buffer Stock requirement. Company also reserves the right to audit the buffer stock. CONTINUING AVAILABILITY - Supplier agrees to offer for sale to Company, during the term of this Agreement and for at least one year after the expiration of this Agreement, MATERIAL conforming to the Technical Specifications set forth in this Agreement. Supplier further agrees to offer for sale to Company, during the term of this Agreement and until five (5) years after the expiration of this Agreement, functionally equivalent maintenance, replacement, and repair parts ("Parts") for the material covered by this Agreement at the price set forth in Supplier's then current agreement with Company for said Parts or, if no such agreement exists, at a price agreed upon by Company and Supplier. If the parties fail to agree on a price, the price shall be a reasonably competitive price for said Parts at the time for delivery. These Parts shall be warranted as set forth in the WARRANTY clause. In the event Supplier fails to supply such Parts or Supplier is unable to obtain another source of supply for Company, then such failure or inability shall be considered noncompliance with this clause and Supplier shall, without obligation of or charge to Company, provide Company with the technical information or any other rights required so that Company can manufacture, have manufactured, or obtain such Parts from other sources. The technical information includes, by example, and not by way of limitation: (a) manufacturing drawings and specifications of raw materials and components comprising such Parts, (b) manufacturing drawings and specifications covering special tooling and the operation thereof, (c) a detailed list of all commercially available Parts and components purchased by Supplier on the open market disclosing the Part number, name and location of the supplier and price lists for the purchase thereof, and (d) one complete copy of the source code used in the preparation of any software licensed or otherwise acquired by Company from Supplier under this Agreement. Company shall use such technical information only to supply its customers with "Parts" and shall have no other right to use the technical information. CONSIGNMENT - For Consignment items mutually agreed upon between Company and Supplier, and designated as such on Attachment A, and when a Company order states that the order is for consignment and states reasonable quantities and reasonable delivery dates for shipment of material to one or more specified Company destinations ("Consignment Sites"), Supplier shall deliver such material on consignment to Company. Such material shall be known as "Consigned Material." (1) Consigned Material - Per Company's Specifications as listed in the clause SPECIFICATIONS OR DRAWINGS, copies of which Supplier has in his possession, as it may be amended from time to time with Supplier's written approval. (2) Consignment Site - 6200 E. Broad St, Columbus, Ohio, 43213; and 450 Clark Dr. Mt Olive, N.J. 07828. If this site is not controlled by Company, arrangements for such storage shall be made between Company and the entity which controls this site. 4 (3) Identification - Consigned Material shall be shipped in segregated lots of segregated lots as agreed to and listed on Attachment A, each such lot to bear a Lot Identification Number serially numbered by Supplier continuously beginning with the first shipment and ending with the last shipment made under this Agreement. The Lot Identification Number for each lot shall be associated with all documentation regarding shipping, withdrawal from consignment, and invoicing. (4) Consigned Material Storage - Upon receipt of each shipment of Consigned Material, Company shall cause it to be placed in segregated storage ("Consigned Material Storage") at the Consignment Site in unbroken lots partitioned or marked in such a way that the Consigned Material may be readily distinguished from other inventory by physical inspection. Supplier may physically inspect Consigned Material in Consigned Material Storage at mutually agreeable times not more often than six (6) times per year during normal business hours. (5) Blanket Consignment Order and Weekly Demand Report - A consignment order will cover a twelve month period (the "Blanket Consignment Order"). The quantity of material specified in this Blanket Consignment Order is Company's annual forecasted usage. Each week Company shall also furnish to Supplier a Weekly Demand Report which sets forth a fifty-two (52) week rolling forecast, the number of units received the previous week, the number of units withdrawn by Company the previous week, and the balance of Consigned Material in Consigned Material Storage. The forecasts are not commitments. Company's commitment is for the number of units withdrawn by Company from Consigned Material Storage plus the authorized stock set forth in the subsection entitled "Authorized Stock", subject to the subsection below entitled "Termination". (6) Authorized Stock - Supplier shall review the Weekly Demand Report and adjust Consigned Material Storage stocks and Supplier's work in process as set forth herein. Supplier shall manufacture and ship enough material into Consigned Material Storage so that Consigned Material Storage contains between a minimum of the first two (2) weeks forecast and a maximum of the first four (4) weeks forecast for such part numbers based on the most current Weekly Demand Report. (7) Title and Risk of Loss - Upon receipt at the Consignment Site of a particular lot of Consigned Material for Consigned Material Storage risk of loss of such lot shall pass to Company. Upon withdrawal of such lot by Company from Consigned Material Storage, title to such lot shall pass to Company and sale of that lot shall be deemed to occur. (8) Withdrawal from Consigned Material Storage - Company may withdraw or cause to be withdrawn Consigned Material from Consigned Material Storage in whole lots only, at any time and from time to time, breaking a lot only after its withdrawal. Company shall keep or cause to be kept records and report to Supplier the quantities withdrawn by Lot Identification Number, and the balance of Consigned Material in Consigned Material Storage. Supplier's invoices for the Consigned Material shall be based upon such withdrawal reports. All invoices for material withdrawn from consignment shall be dated as of the first day of the week following withdrawal. Supplier shall regularly replace quantities withdrawn to maintain mutually agreed stock support levels as indicated on the applicable orders. (9) Shipping Information - Promptly after each shipment of Consigned Material under this Agreement, Supplier shall furnish to Company and, if Company so requests, to a designated party at the Consignment Site, a written report setting forth at least the following: (a) Company's Order Number; (b) Consignment Destination; (c) Origin Location; (d) Name of Carrier and Truck Number or Railcar Number; (e) Lot Identification Number of each lot; (f) Net weight of each lot; and (g) Description and Quantity of Material in each lot. (10) Personal Property Taxes - Supplier shall be responsible for the reporting and payment of personal property taxes, if any, on such Consigned Material Storage by Company. (11) Transportation Loss and Damage or Hidden Manufacturing Defects. As to loss of or damage to Consigned Material which is reasonably apparent upon delivery from a carrier, Company shall cause the following to be done: 5 (a) at time of the delivery, mark delivery receipt with appropriate exceptions describing the damage before signing; and (b) at the time of delivery, request the carrier to either inspect the loss or damage and forward to Supplier a signed exception report outlining the extent of loss or damage, or issue a written waiver of inspection and forward it to Supplier; and (c) within ten days after delivery, inspect the damaged material and notify Supplier whether Company will (i) accept it at a mutually agreed lower price reflecting the transportation damage (if Supplier had the risk of loss) or the manufacturing defect, or (ii) reject it. Rejected lots shall be set aside by Company pending disposition by Supplier as soon as reasonably possible but no later than sixty days following delivery, after which time any such damaged Consigned Material remaining undisposed of shall be deemed to be abandoned and Company may dispose of it as it sees fit without any obligation to Supplier. As to concealed transportation damage or hidden manufacturing defects in material, if after withdrawal of Consigned Material from Consigned Material Storage, Company discovers concealed transportation damage or defective material, Company shall notify Supplier within five days of such discovery, take reasonable steps to preserve evidence of how such damage occurred and take all actions provided for in subparagraph (c) above. Where Consigned Material Storage is located on premises other than Company premises, Company shall direct the owner of such other premises to comply with the procedure set forth in this clause. (12) Termination - Company may at any time, and without cause terminate any or all Blanket Consignment Orders, in whole or in part, upon written notice to Supplier. Upon receipt of such notice, Supplier shall immediately stop work as specified in the notice to Supplier. Company's liability to Supplier with respect to such termination shall be limited to: (1) the purchase price for all material withdrawn by Company from Consigned Material Storage through the termination date; (2) the purchase price for finished material not to exceed the maximum stock level for the eight (8) most recent Weekly Demand Reports issued just prior to the effective date of termination (such finished material shall include material in transit to Company and units already in Consigned Material Storage as Authorized Stock); (3) Supplier's manufacturing costs for work in process not to exceed the next eight (8) weeks beyond the maximum Authorized Stock based on the highest demand shown in the last eight (8) Weekly Demand Report; and(4) Supplier's purchase price of raw material as specified in Attachment A (and not usable in Supplier's other operations or salable to Supplier's other customers). If requested, Supplier agrees to substantiate the manufacturing costs for work in process and the purchase price of the raw material with proof satisfactory to Company. Upon such termination, the parties shall meet promptly to determine the finished material, work in process and raw material for which Company is responsible as set forth above. Supplier shall ship the finished material (to the extent not already in transit or in Consigned Material Storage) and raw materials to Company pursuant to shipping schedules agreed upon by the parties. Raw materials as defined here may reside at Supplier's facility or with Supplier's subcontractors. As to work in process, Supplier shall, at Company's option, ship it to Company pursuant to shipping schedules agreed upon by the parties or scrap it. DEFAULT - In the event Supplier shall be in breach or default of any of the terms, conditions, or covenants of this Agreement or any purchase order and such breach or default shall continue for a period of thirty (30) days after the giving of written notice to Supplier thereof by Company, then in addition to all other rights and remedies which Company may have at law or equity or otherwise, Company shall have the 6 right to cancel this Agreement and/or purchase orders placed by Company without any charge to or obligation or liability of Company. DEMAND PULL PROCEDURES - (A) For Demand Pull items mutually agreed upon between Company and Supplier, Company shall issue an annual order during the term of this Agreement which will state Company's estimated annual usage for such material (the "EAU order"). Each week Company shall provide Supplier with a fifty-two (52) week forecast for each such item of Demand Pull material (the "Forecast"). Such Forecast may also contain Company's authorization to Supplier to ship, within twenty-four hours of Supplier's receipt of the Forecast, the quantity designated in the column entitled "Supplier Action." Supplier shall reference the EAU order number on its shipping and invoicing documents. Said EAU order and Forecast shall be for planning purposes only and, except to the extent set forth in paragraph D below, shall not be deemed a commitment to purchase the amount set forth in the EAU order or Forecast. (B) Supplier shall maintain (1) an inventory of Supplier inspected finished Demand Pull material equivalent to the amount specified on Attachment A of the then current Forecast and (2) Demand Pull work in process and raw materials in the aggregate sufficient to manufacture such Demand Pull material equivalent to the amount specified on Attachment A of the then current Forecast. (C) Supplier shall review the weekly Forecast and make adjustments to Supplier's inspected inventory, work in process and raw materials and components based upon increases/decreases in the Forecast. (D) Company's commitment for the Demand Pull material shall be limited to: (1) the quantities set forth in the "Supplier Action" column of the Forecast and (2) the inspected inventory, work in process and raw materials as set forth in paragraph B above. Company's liability for the items in this Paragraph D(2) shall be limited to: (a) For inspected inventory (not usable in Supplier's other operations or salable to Supplier's other customers): the unit prices set forth in this Agreement; (b) For raw materials: Supplier's purchase price of such raw materials (that cannot be returned or are not usable in Supplier's other operations or salable to Supplier's other customers); (c) For work in process: the actual costs incurred by Supplier in procuring and manufacturing Demand Pull material (not usable in Supplier's other operations or salable to Supplier's other customers); less (d) Any salvage value thereof. If requested, Supplier agrees to substantiate such costs with proof satisfactory to Company. (E) Termination - Company may at any time, and without cause, terminate any or all EAU orders, in whole or in part, upon written notification to Supplier. Upon receipt of such notice, Supplier shall immediately stop work as specified in the notice to Supplier. Company's liability to Supplier with respect to such termination shall be limited to the commitments set forth in paragraph D above. Upon such termination, the parties shall meet promptly to determine the inspected, finished Demand Pull material, work in process and raw material for which Company is responsible as set forth above. Supplier shall ship the inspected finished Demand Pull material (to the extent not already in transit) and raw materials to Company pursuant to shipping schedules agreed upon by the parties. As to the work in process, Supplier shall, at Company's option, ship it to Company pursuant to shipping schedules agreed upon by the parties or scrap it. 7 DISTRIBUTION RIGHTS - Supplier agrees that it will not sell or offer for sale anywhere in the world products which are the same or essentially the same in external appearance and/or placement of external controls as products described in the clause MATERIAL of this Agreement. Nothing in this clause shall restrict Supplier from selling or offering for sale any assembly, subassembly, or component of the product which Supplier has manufactured pursuant to its own design specifications or at its own expense. Nothing in this clause shall be deemed to be in contradiction with the rights of Company as stated in the clause NONEXCLUSIVE MARKET RIGHTS. DOCK-TO-SHOP WITH PAY-ON-CONSUMPTION (DTS-POC) For Dock-to-Shop with Pay-On-Consumption (DTS) items mutually agreed upon between Company and Supplier, and as designated in Attachment A; Company shall issue an annual order during the term of this Agreement which will state Company's estimated annual usage for such Material (the "EAU order"). Such EAU order will include the statement "DTS" which indicates these items are covered by the clause dock-to-shop with pay-on-consumption in the referenced governing contract. A) Forecast Each week, Company shall provide Supplier with a fifty-two (52) week forecast for each such item of DTS-POC material (the "Forecast"). Said EAU order and forecast shall be for planning purposes only and except to the extent set forth in paragraph E below, shall not be deemed a commitment to purchase the amount set forth in the EAU order or forecast. Supplier shall review the weekly forecast and make adjustments to Supplier's inspected inventory, work in process and raw material and components based upon increases/decreases in the forecast. B) Replenishment Request/Delivery Request Company will send replenishment requests for dock-to-shop material to Supplier on pre-determined days and times at the frequency shown in Attachment A. Company will work with Supplier to determine specific schedule for transmitting replenishment requests to Supplier, which will be documented in writing by Company and provided to Supplier. This replenishment request will be transmitted electronically or in writing and will include the following: Comcode Number, Part Description, Purchase Order Number, Quantity Requested, Due Date and Time, Deliver-to address, Shop Floor Delivery Location, and Request ID (unique # specific to a comcode, shop location and due date). There may be more than one Request ID for a specific comcode number on the replenishment request to Supplier. Supplier must provide a single point-of-contact and a back-up person to coordinate the dock-to-shop replenishment requests. This person is required to verify that replenishment requests are received at processed on the pre-determined days and times. If replenishment request is not received in a timely manner, Supplier must notify Company contact to determine requirements. C) Supplier Pack and Ship Company's replenishment request shall be authorization for Supplier to ship the quantities of Material designated. Supplier must label each requested lot with a 3S Barcode label meeting the specification "Shipping and Receiving Barcode Label Standard", Lucent Technologies 801-001-105 and containing the Dock-to-Shop Request ID and the Shop Floor Delivery Location. In addition, a hot pink "DTS" (Supplier's design) label must be applied to each lot next to the 3S Barcode label. 8 Supplier shall ship the quantity of Material designated in replenishment request via the transportation arrangement specified by Company in writing prior to DTS-POC start date. This transportation arrangement will include the carrier(s) to be used as well as the material pick-up schedule at the Supplier's dock and the delivery schedule to Company's dock. Supplier must include a packing slip with each lot. The words "Packing Slip" followed by the packing slip number should be clearly printed on each slip. Company shall notify Supplier in writing if it is determined at a later date that including a packing slip with each lot is no longer a requirement. Supplier must transmit an EDI Advance Ship Notice, which must include the PRO (freight bill) number to Company at the time of shipping. D) Payment Process At the end of the consumption consolidation interval (the last Friday of Company's fiscal month) Company will transmit a summary of the usage information in writing or electronically to Supplier detailing the lots for each DTS-POC item that have been consumed over that interval. Company will then transmit payment to Supplier net 15 days. Supplier shall not invoice Company. E) Purchase Commitment Company's commitment for dock-to-shop with pay-on-consumption material shall be limited to: 1)those quantities consumed by the Company and 2)Supplier inspected finished DTS-POC material, DTS-POC work in process and raw material as identified in Attachment A. Company's liability for the items this paragraph E shall be limited to: (a) For inspected inventory (not usable in Supplier's other operations or salable to Supplier's other customers): the unit prices set forth in this Agreement; (b) For raw materials: Supplier's purchase price of such raw materials (that cannot be returned or are not usable in Supplier's other operations or salable to Supplier's other customers); (c) For work in process: the actual costs incurred by Supplier in procuring and manufacturing DTS material (not usable in Supplier's other operations or salable to Supplier's other customers); less (d) Any salvage value thereof If requested, Supplier agrees to substantiate such costs with proof satisfactory to Company. F) Title and Risk of Loss If an order is issued pursuant to this Agreement and specified as Dock-to-Shop with Pay-On-Consumption; Supplier shall retain title until such time as Company commences to consume material on Company's premises. Risk of loss passes at Supplier's dock, provided Supplier uses Company designated carrier. G) Termination of Replenishment Requests Company may at any time terminate without cause any or all commodity part Replenishment Requests placed by it hereunder at no charge prior to title passing. 9 H) Termination Company may at any time, and without cause, terminate any or all EAU orders, in whole or in part, upon written notification to Supplier. Upon receipt of such notice, Supplier shall immediately stop work as specified in the notice to Supplier. Company's liability to Supplier with respect to such termination shall be limited to: The commitments set forth in paragraph E above. Upon such termination, the parties shall meet promptly to determine the inspected, finished DTS-POC Pull material, work in process and raw material for which Company is responsible as set forth above. Supplier shall ship the inspected finished DTS-POC material (to the extent not already in transit) and raw materials to Company pursuant to shipping schedules agreed upon by the parties. As to the work in process, Supplier shall, at Company's option, ship it to Company pursuant to shipping schedules agreed upon by the parties or scrap it. I) Personal Property Taxes Supplier shall be responsible for the reporting and payment of personal property taxes, if any, on such Dock-to-Shop material storage by Company. Supplier agrees to provide material specified as DTS-POC according to the terms specified in this clause beginning on the date specified in Attachment or upon a mutually agreed upon date by both Supplier and Company. DUTY DRAWBACK - Company reserves the right to claim duty drawback on all purchases from Supplier and Supplier shall cooperate by providing the necessary Certificates of Delivery or, in instances where the imported merchandise received further processing, shall furnish Certificates of Manufacture and Delivery on all articles and merchandise which may be subject to drawback. EDI (ELECTRONIC DATA INTERCHANGE) Upon execution of this Agreement, Supplier shall submit an action plan detailing their plans to become fully functional on EDI, ERS, ASN (Advance Ship Notice), and ASN with Barcoding within three (3) months. The Supplier is also required to become fully functional to the EDI and Barcoding specifications for DTS within this three (3) month period. The Supplier's action plan should follow Company's "How to Get Started on Electronic Procurement Communications with Lucent" for basic EDI; "Barcoding with Lucent Technologies - How to Get Started" for basic barcoding; and the specifications for DTS EDI transactions and outlined in "Lucent Technologies, Inc. - Electronic Data Interchange Planning Guide". The above referenced manuals have been provided previously to Supplier. The Supplier's action plan should contain a point of contact for EDI related matters. EPIDEMIC CONDITION - If during the term of this Agreement and for one year after the last shipment date of material under this Agreement Company notifies Supplier that material shows evidence of an Epidemic Condition as defined below, Supplier shall prepare and propose a Corrective Action Plan ("CAP") with respect to such material within five (5) working days of such notification, addressing implementation and procedure milestones for remedying such Epidemic Condition(s). An extension of this time-frame is permissible upon mutual written agreement of the parties. Upon notification of the Epidemic Condition to Supplier, Company shall have the right to postpone all or part of the shipments of unshipped material, by giving written notice of such postponement to Supplier, pending correction of the Epidemic Condition. Such postponement shall temporarily relieve Supplier of its shipment liability and Company of its shipment acceptance liability. Should Supplier not agree to the existence of an Epidemic Condition or should Company not agree to the CAP, then Company shall have the right to suspend all or part of its unshipped orders without liability to Company until such time as a mutually acceptable solution is reached. 10 An Epidemic Condition will be considered to exist when one or more of the following conditions occur: (1) Failure reports or statistical samplings show that four (4) percent or more of material installed or four (4) percent or more of material shipped during any two consecutive months, or four (4) percent or more of the material tracked by Company's quality engineering organization contain a potential safety hazard (such as personal injury or death, fire, explosion, toxic emissions, etc.), or exhibit a highly objectionable symptom (such as emissions of smoke, loud noises, deformation of housing) or other disconcerting symptoms of this type. (2) Reliability plots of relevant data indicate that the material has actual Mean Time Between Failures (MTBF) of less than 80% of the MTBF stipulated in the Technical Specification. The MTBF parameter of material is defined as the total operating or power-on time of any population under observation ("T"), in hours, divided by the total number of critical failures ("n") that have occurred during the observed period. A critical failure is defined as a failure to operate per the requirements of the Technical Specification. The total operating time of a population is the summation of operating time of individual units in that population. MTBF is expressed as MTBF = T/n. An Epidemic Condition shall exist when data derived from populations being tracked confirms the condition with 80% confidence. (3) Material Dead on Arrival (DOA) failures exceed the Epidemic DOA failure rate which is defined as 1.2 x DOA specified in the article of this Agreement entitled PRODUCT CONFORMANCE REVIEW. Only major functional and visual/mechanical/appearance defects are considered for determining an Epidemic Condition. Material may be either sampled or, at Company's option, 100% audited at Company warehouses, factories or Company's customers' locations. If material is sampled, the data must have 80% or better statistical confidence. For the purpose of this Agreement, functional DOA shall be defined as any material that during the test, installation or upon its first use fails to operate as expected or specified. Visual/mechanical/appearance DOA is defined as any material containing one or more major defects that would make the material unfit for use or installation. An Epidemic Condition shall not include failures due to customer misapplication, utilization of parts not approved by Supplier, or chain failures induced by internally or externally integrated subassemblies. In the event that Supplier develops a remedy for the defect(s) that caused the Epidemic Condition and Company agrees in writing that the remedy is acceptable, Supplier shall: (a) incorporate the remedy in the affected material in accordance with Company's instructions; (b) ship all subsequent material incorporating the required modification correcting the defect(s) at no additional charge to Company; and (c) repair and/or replace material that caused the Epidemic Condition. In the event that Company incurs costs due to such repair and/or replacement, including but not limited to labor and shipping costs, Supplier shall reimburse Company for such costs. Supplier shall bear risk of in-transit loss and damage for such repaired and/or replaced material. Supplier and Company shall mutually agree in writing as to the remedy's implementation schedule. Supplier shall use its best efforts to implement the remedy in accordance with the agreed-upon schedule. If Supplier is unable to develop a mutually agreeable remedy, or does not adequately take into account the business interests of Company, as reasonably agreed by the parties, Company may (1) develop and implement such remedy and, in such case, implementation costs and risk of in- transit loss and damage shall be allocated between the parties as set forth in this clause, and/or (2) cancel postponed orders without liability and return all material affected by such Epidemic Condition for full refund, payable by Supplier within thirty (30) days after receipt of returned material (with risk of loss or in-transit damage borne by Supplier) and/or (3) terminate this Agreement without further liability. 11 FREIGHT ON BOARD Freight Collect-Irvine, CA. FREIGHT CLASSIFICATION - Material purchased under this Agreement shall be shipped to Company or Company's customers subject to freight charges appropriate for goods classified as 77.5. ISO 9000 - Supplier recognizes that Company's Wireless Business Unit is an ISO 9000 registered Supplier of goods and services, and that in order for Company to be so registered, Supplier must comply with and hereby agrees to comply with the provisions of this clause. Therefore, under this Agreement, Supplier shall have the portion of Supplier's quality system that applies to the material and services covered under this Agreement registered to the then current and applicable ISO 9000 series. Supplier shall, prior to or upon execution of this Agreement, provide Company a copy of the appropriate certificate(s) of registration issued by such third party accredited registrar(s). Since Supplier is currently an ISO 9000 registered manufacturer, Supplier agrees to maintain the standards necessary for re-qualification; and to notify Company immediately if registration is not maintained. LATE DELIVERY *DTS* In addition to any other remedies Company may have for Supplier's late delivery, if Supplier fails to deliver fully conforming material within the Supplier Interval specified in this Agreement, or by the acknowledged earlier delivery date in an order placed pursuant to this Agreement, Company may, at its option, establish a new delivery date for Supplier or cancel this Agreement or order. If Company establishes a revised delivery date and Supplier fails to deliver fully conforming material by that date, Company may cancel this Agreement or order. Cancellations made pursuant to this clause shall be negotiated. LATE DELIVERY - In addition to any other remedies Company may have for Supplier's late delivery, if Supplier fails to deliver fully conforming material within the supplier interval specified in this Agreement, or by the acknowledged earlier delivery date in an order placed pursuant to this Agreement, Company may, at its option, establish a new delivery date for Supplier or cancel this Agreement or order. If Company establishes a revised delivery date and Supplier fails to deliver fully conforming material by that date, Company may cancel this Agreement or order. Cancellations pursuant to this clause shall be negotiated. LIMITED AVAILABILITY MATERIAL - Supplier shall provide Company at least one year's prior written notice that any material covered by this Agreement is recommended as a candidate to be limited availability material. Company shall, within thirty (30) days after receipt of Supplier's written notice, provide Supplier a written response indicating Company's approval or disapproval of the limited availability status of such material based on such material's impact on Company's business, including but not limited to Company's obligations to its customers. If Company does not approve of the material being placed on limited availability status, the parties shall negotiate in good faith to determine the final disposition for such material. If the parties agree that a type of material will become a limited availability material (a "Limited Availability Material"), Supplier shall accept Company's orders for such Limited Availability Material ( the "Limited Availability Date") under the terms and conditions of this Agreement, including but not limited to the price and Lead Time set forth in this Agreement. For orders placed after the Limited Availability Date, the parties shall negotiate price and Lead Time for such Limited Availability Material at the time Company 12 places an order for such material. Other than price and Lead Time, the other terms and conditions of this Agreement shall apply to such material. The limited availability of a material does not mean that the material will not be available for purchase by company, rather it means only that prices and lead times are subject to negotiation by the parties, as set forth above. If the parties are unable to agree on a price or lead time for the Limited Availability Material, Company shall have the right to do any or all of the following: (a) for any Limited Availability Material which Company has committed to purchase under this Agreement, purchase comparable products to such Limited Availability Material from a third party supplier or manufacture it internally; (b) license the Technology (at a reasonable royalty and such other reasonable terms to be agreed to by the parties) and use any other information it possesses or controls which is required to manufacture or to have manufactured the Limited Availability material (such license or use shall be limited to the manufacture of such Limited Availability Material); or (c) reacquire any or all tooling or equipment which is dedicated exclusively to the production of the Limited Availability Material free of any encumbrances or subordination. Such reacquisition of tooling or equipment shall be for its then fair market value. Supplier will cooperate fully in such reacquisition. MANUFACTURED DISCONTINUED MATERIAL - Supplier shall provide Company at least one year's written notice that any material covered by this Agreement is to be manufactured discontinued and Supplier shall accept Company's orders for such material during the term of this Agreement or for twelve (12) months following Supplier's notice, whichever is longer. Prices and delivery intervals for such material shall be those set forth in this Agreement. MARKING - All material furnished under this Agreement shall be marked for identification purposes in accordance with the specifications set forth in this Agreement and as follows: (a) with Supplier model/serial number; and (b) with month and year of manufacture. In addition, Supplier agrees to add any other identification which might be requested by Company such as but not limited to distinctive marks conforming to Company's Serialization Plan. Charges, if any, for such additional identification marking shall be as agreed upon by Supplier and Company. This clause does not reduce or modify Supplier's obligations under the clause IDENTIFICATION. NEW AND CHANGED METHODS, PROCESSES, AND EQUIPMENT - Supplier agrees to keep abreast of major developments in Supplier's industry and to promptly advise Company of any developments which might affect the production of any material under this Agreement. If during the term of this Agreement Supplier's costs are reduced by using improvements from the: (1) adoption of new production methods, processes, techniques, or materials, or (2) use of additional, new, or different equipment or facilities, Prices shall be reduced by agreement of the parties to fairly reflect such reduction. NONEXCLUSIVE MARKET RIGHTS - It is expressly understood and agreed that this Agreement neither grants to Supplier an exclusive right or privilege to sell to Company any or all material or services of the type described in this Agreement which Company may require, nor requires the purchase of any material or services from Supplier by Company. It is, therefore, understood that Company may contract with other manufacturers and suppliers for the procurement of comparable material or services. In addition, Company shall at its sole discretion, decide the extent to which Company will market, advertise, 13 promote, support, or otherwise assist in further offerings of the material or services. OPTION TO EXTEND - Company shall have the right to extend the period specified in the clause MATERIAL for up to twenty four (24) months by giving Supplier at least thirty (30) days prior written notice. Within ten (10) days of the date of Company's notice to extend the period, Supplier shall notify Company in writing whether Supplier proposes to revise the price(s) under this Agreement. If the parties fail to agree on the revised price(s) within twenty (20) days after the date of Supplier's notice, Company's notice of extension shall be considered withdrawn and prices for outstanding orders or orders placed during the term of this Agreement shall not be revised. OZONE DEPLETING CHEMICALS - Supplier hereby warrants that it is aware of international agreements and pending legislation in several nations, including the United States, which would limit, ban and/or tax importation of any product containing, or produced using ozone depleting chemicals ("ODCs"), including chloroflurocarbons, halons and certain chlorinated solvents. Supplier hereby warrants that the material furnished to Company will conform to all applicable requirements established pursuant to such agreements, legislation and regulations, and the material furnished to Company will be able to be imported and used lawfully (and without additional taxes associated with ODCs not reported to Company by Supplier as set forth in this clause) under all such agreements, legislation and requirements. Supplier also warrants that it is currently reducing, or if Supplier is not the manufacturer of the material, is currently causing the manufacturing vendor to reduce and will, in an expeditious manner, eliminate, or, as applicable, have its manufacturing vendor eliminate the use of ODCs in the manufacture of the material. If the material furnished by Supplier under this Agreement is manufactured outside the United States, Supplier shall, upon execution of this Agreement, and at any time that new products are added to this Agreement or changes are made to the material furnished under this Agreement, complete, sign and return to Company the attached ODC Content Certification. The ODC Content Certification must be signed by Supplier's facility manager, corporate officer or his delegate. The term "ODC content" on the ODC Content Certification means the total pounds of ODC used directly in the manufacture of each unit of material. This includes all ODCs used in the manufacturing and assembly operations for the material plus all ODCs used by Supplier's vendors and any other vendors in producing components or other products incorporated into the material sold to Company. Supplier is responsible to obtain information on the ODC content of all components and other products acquired to manufacture the material and to incorporate such information into the total ODC content reported to Company; provided however, that Supplier should not include in the ODC content those components or other products which are manufactured in the United States. Supplier hereby warrants to Company that all information furnished by Supplier on the ODC Content Certification is complete and accurate and that Company may rely on such information for any purpose, including but not limited to providing reports to government agencies or otherwise complying with applicable laws. Supplier shall cooperate with Company in responding to any inquiry concerning the use of ODCs to manufacture the material or components thereof and to execute without additional charge any documents reasonably required to certify the absence or quantity of ODCs used to manufacture the material or components thereof. PACKING Material purchased, repaired, replaced or refurbished under this Agreement shall be packed by Supplier at no additional charge in containers which meet the specifications set forth in PKG-91NJ1045 Issue 5 and any other individual product packaging specifications and as may be changed from time to time by company, attached hereto and incorporated herein as Attachment A. 14 PACKAGING SPECIFICATION-INCOMING DTS ITEMS A) Company will specify the package quantities (lot sizes) to be delivered by the Supplier. B) All disposable packaging provided by the Supplier is to be readily recyclable. C) Company reserves the right to specify a request in the mode of transportation or packaging if Company experiences continued receipt of damaged material. D) Company reserves the right to request a change in the packaging format during the term of the Agreement. PROCESS CERTIFICATION Company has the right to review, inspect, and evaluate Supplier's parts and supplies and Supplier's sources for parts and supplies. Company has the right to specify types of parts used in manufacture and/or repair of Material and/or Suppliers of these parts. If this impacts previously agreed to unit prices, such prices shall be negotiated and mutually agreed to. All changes to parts, supplies, and sources must be approved in writing by Company, which approval shall not be unreasonably delayed or withheld. In regard to Supplier's manufacturing processes, Company also reserves the right to perform periodic quality surveys, evaluations, and approvals, including, but not limited to, analysis of each manufacturing or assembly position for acceptability of procedures, equipment calibration, and operator performance, as well as evaluation of quality control/quality assurance and data collection and analysis procedures. Supplier shall conduct appropriate incoming inspection of components in accordance with its standard practices approved by Company and any specific requirements of Company. Such practices may be modified from time to time to address specific conditions as requested by Company. Any increases or decreases to price resulting from such modifications shall be mutually agreed upon. PRODUCT CONFORMANCE REVIEW/SUPPLIER QUALITY ISSUES (SQI) All material is subject to Product Conformance Review ("Review") prior to shipment. Supplier may ship material without a Review but Company may perform such Review prior to shipment by giving Supplier notice to that effect, in which event Supplier shall notify Company's Quality Organization when material is ready for such Review. Supplier will provide, without charge, any production testing facilities and personnel required to perform or assist in the Review. Delivery of nonconforming material to Company shall result in the issuance of an SQI (Supplier Quality Issue) to the Supplier. Upon receipt of an SQI, Supplier may be required to 100% inspect the next one, two or three shipments (number of shipments to be inspected is based upon the Supplier rating and is stipulated in the SQI notification letter) for the defect specified in the SQI. The Supplier shall notify Company of each inspection, by including a Certificate of Inspection (COI)stating the product has been 100% inspected against the specifications. The Certificate of Inspection shall be attached or typed on the packing slip. A written response outlining the corrective action to an SQI is required within twenty (20) days of receipt. If the defect as stated on the SQI is found in a certified inspected shipment, Supplier will be required, at Company's option, to pay Company or agent to 100% inspect the next three (3) lots. Within thirty (30) of signing of this Agreement, Supplier shall identify to Company, a single point of contact for resolution of SQIs, including telephone number, fax number and address. 15 PRICE REVISION - Either party may initiate a revision of prices under this Agreement by giving written notice to the other at least ninety (90) days prior to the proposed effective date thereof. Such revision shall be based on changes in Supplier's costs and shall be determined by mutual agreement of the parties. Supplier shall substantiate such changes in cost with documentation satisfactory to Company, including, but not limited to, a list of purchased material and purchased services showing quantities and cost each, and direct labor hours for each operation. If the parties fail to agree upon revised prices by the proposed effective date, Company shall have the right to terminate outstanding orders with respect to all unshipped material other than quantities theretofore manufactured, which quantities shall not be affected by the proposed price revision, and no further orders will be placed against this Agreement. REGISTRATION AND RADIATION STANDARDS - When material furnished under this Agreement is subject to Part 68, Part 15 or any part of the Federal Communications Commission's Rules and Regulations, as may be amended from time to time, (hereinafter "FCC Rules"), Supplier warrants that such material complies with the registration, certification, type acceptance and/or verification standards of the FCC Rules including, but not limited to, all labeling, customer instruction requirements, and the suppression of radiation to specified levels. Supplier shall also establish periodic ongoing compliance retesting and follow a Quality Control program, submitted to Company, to assure that material shipped complies with the applicable FCC Rules. In addition, should material which is subject to Part 15 of the FCC Rules, during use generate harmful interference to radio communications, Supplier shall provide to Company information relating to methods of suppressing such interference and pay the cost of suppressing such interference or, at the option of Company, accept return of the material and refund to Company the price paid for the material less a reasonable amount for depreciation, if applicable. Nothing in this clause shall be deemed to diminish or otherwise limit Supplier's obligations under the WARRANTY clause or any other clause of this Agreement. REPAIR PROCEDURES - Company or Distributor shall furnish the following information on the Repair Order which will accompany material returned to Supplier for repair: (a) Company's name and complete address; (b) name(s) and telephone number(s) of the Company's employee(s) or its customer ("Customer") to contact in case of questions about the material to be repaired; (c) Company or Customer ship-to address for return of repaired material if different from (a); (d) a complete list of material returned; (e) the nature of the defect or failure if known; and (f) whether or not returned material is in warranty. Supplier shall promptly provide a written notice to Company with the name(s) and telephone number(s) of the individual(s) to be contacted concerning any questions that may arise concerning repair, and if required, specify any special packing of material which might be necessary to provide adequate in-transit protection from transportation damage. A Customer shall be instructed to furnish the following information to Supplier which should accompany material returned to Supplier for repair: (a) Customer name and complete address; (b) Customer telephone number; (c) sales receipt; and (d) the nature of the defect or failure, if known. In the event a sales receipt does not accompany the material returned by a Customer, then the date of manufacture will be used to determine the warranty effective period. Material repaired by Supplier shall have the repair completion date stenciled on the bottom of the base of the material or otherwise identified in a permanent manner at a readily visible location on the material as mutually agreed upon. Repaired material returned to Supplier by Company shall be returned to Company, unless otherwise specified, with the Repair Order describing the repairs which have been made. When repaired or replaced material is returned by Supplier directly to a Customer and such material was originally returned to Supplier by Company, then Supplier shall at the time of shipment provide to Company, a copy of the Repair Order form describing the repairs which have been made. 16 All invoices to Company originated by Supplier for repair services must be clearly identified as such, and must contain: (1) a reference to Customer's request for repair service; (2) a detailed description of repairs made by Supplier and the need therefore; and (3) an itemized listing of parts and labor charges, if any. The provisions of the SHIPPING clause, other than provisions relating to transportation charges with respect to material repaired under warranty, shall apply to Supplier's return to Company of repaired material. All invoices to Customer originated by Supplier for repair services must be clearly identified as such, and must contain: (1) a reference to Customer's request for repair service; (2) a detailed description of repairs made by Supplier and the need therefore; and (3) an itemized listing of parts and labor charges, if any. REPAIRS NOT COVERED UNDER WARRANTY - In addition to repairs provided for in the WARRANTY clause, Supplier agrees to provide repair service to Company or its customers ("Customer") on all material ordered under this Agreement during the term of this Agreement and until five (5) years after the expiration of this Agreement. In the absence of an agreement, Supplier shall maintain the repair interval as close to the Thirty (30) days repair interval currently provided under this Agreement. Further, Supplier will maintain repair charges close to the current repair prices provided in this Agreement. In the absence of an agreement, Company retains the right to negotiate repair intervals and repair charges should the need arise. Material to be repaired under this clause must be returned to a location designated by Supplier. Unless otherwise mutually agreed upon, Supplier shall ship the repaired material which meets the specifications set forth in this Agreement to the appropriate Company or Customer location as shown on the Repair Order form within thirty (30) days of receipt of the material. If at any time Supplier is unable to meet the meet the thirty (30) day repair interval, Supplier shall immediately notify Company or Customer and establish a mutually agreed upon shipment date for the repaired material. If material is returned to Supplier for repair as provided for in this clause, and is determined to be beyond repair, Supplier shall so notify Company or the Customer. When Company is involved and if requested by Company, Supplier will sell to Company a replacement at the current contract price, or, if no such contract exists, at Supplier's then current price for the material. Replacement and repaired material shall be warranted as set forth in the WARRANTY clause. It is expressly understood and agreed that this Agreement does not grant Supplier an exclusive privilege to repair any or all of the material purchased under this Agreement for which Company may require repair, and Company may perform the repairs or contract with others for these services. In addition, Supplier authorizes Company and any qualified repairer with whom Company may contract to perform repairs on all material purchased under this Agreement. All transportation costs of an in-transit risk of loss and damage to material returned to Supplier for repair under this clause will be borne by Company or Customer and all transportation costs and risk of in-transit loss and damage associated with the return of such repaired material will be borne by Supplier. Supplier agrees to notify Company or Customer and obtain their approval, if repair services will exceed fifty (50) % of replacement cost of new material, prior to performing any repair services. Supplier will invoice all Customers for repair services hereunder Cash on Delivery (COD) unless other arrangements are mutually agreed upon. Invoices to Company for repair services hereunder will be paid in accordance with the TERMS OF PAYMENT clause. RETURN GOODS MATERIAL Company may return Material that was either (1) never shipped by Company; or (2) never installed by Company (hereafter referred to as RGM). Such RGM will be returned to Supplier for repair, upgrade or 17 refurbishment. Supplier shall, within seven (7) days receipt of any such Material, evaluate the extent of reconditioning required to upgrade and re-warrant Material and provide a written cost estimate for such RGM services to Company. If Company accepts Supplier's cost estimate then Company shall issue a purchase order for the completion by Supplier of RGN services. RGM MATERIAL returned by Supplier shall be warranted as set forth in the WARRANTY CLAUSE. Any invoice originated by Supplier for RGM repair services must by clearly identified as such, and must contain: (1) a reference to Company's purchase order for these (RGM) services, and (2) a description of repairs made by Supplier. Further, the provisions of the INVOICING and SHIPPING clauses, other than provisions relating to transportation charges with respect to MATERIAL repaired under warranty, shall apply to Supplier's return to Company of repaired MATERIAL. SPECIFICATIONS OR DRAWINGS - Technical Specification No. WP-92066 Iss. 2.3 dated 4/22/98, and KS-24019 Iss. 2.1 dated 10/14/96; copies of which are in Suppliers possession, and as may be changed from time to time with Supplier's written approval; are hereby made a part of this Agreement. Any proposed changes to the Technical Specifications shall require written approval of Company. Supplier shall provide Company with at least sixty (60) days prior written notice of any change proposed to be made by Supplier in the MATERIAL furnished pursuant to Technical Specifications. If Company, in its sole discretion, does not agree to the change proposed by Supplier, then in addition to all other rights and remedies at law or equity or otherwise, and without any cost to or liability or obligation of Company, Company shall have the right to terminate this Agreement and to terminate any or all purchase orders for MATERIAL affected by such change. Supplier agrees to continue to Supply MATERIAL to Company pursuant to the Technical Specifications for the term of the Agreement. If Supplier is unable to continue to thus supply or discontinues manufacture of MATERIAL, Company shall be entitled to one (1) years advance notice. SECTION HEADINGS The headings of the clauses in this Agreement are inserted for convenience only and are not intended to affect the meaning or interpretation of this Agreement. SERVICE Company intends to monitor the delivery performance of each Supplier via special performance reports. It should be noted that Company shall interpret delivery to the carrier at the designated time as outlined in DTS-POC; or arrival at the final destination at the specified time to Company's dock in the event premium transportation is utilized. Company's requirement is that Supplier will maintain an average percent received to required date of 100% all DTS and Consignment items; and 95% for all other parts; as shown in the monthly rating provided to Supplier by Company. Supplier is expected to make every reasonable effort to deliver material in accordance with Company's required delivery schedule as contained in Company's orders, and as the delivery schedule may be subsequently modified by Company. Supplier is also expected to communicate to Company any foreseeable change to Supplier's acknowledged delivery schedule. Supplier's compliance with the foregoing expectations will not relieve Supplier of the minimum service requirements established in the preceding paragraph. 18 If Supplier advises Company that it will be unable to meet acknowledged delivery dates, and Company elects to call for expedited shipments, Supplier is responsible for any premium transportation costs required to deliver the requested material to Company by the Due Date indicated on the replenishment request. SUPPLIER COMMITMENT DOCK TO SHOP Supplier shall maintain an inventory of finished Dock-to-Shop Material equivalent to weeks specified in Attachment A for the then current forecast. A minimum amount of finished goods shall be kept on Company premises. This minimum amount will be specified by the Supply Line Engineer for each comcode and will not exceed the Supplier's finished goods inventory requirement as stated above. Supplier shall also maintain work in process and/or raw material and components in the aggregate sufficient to manufacture such Dock-to-Shop Material equivalent to the weeks specified in Attachment A, for the current forecast. Supplier shall provide status reports to Company of current inventory levels at Company's request. In addition to the above obligations, in a given four (4) week period, Supplier commits to providing an additional amount of material, if necessary, equal to 25% of the total of weeks 1-4 of the then current forecast. Also, given a four (4) week notice, Supplier shall deliver a sustained increase of up to 25% of the average weekly demand of the then current forecast. Supplier shall deliver any additional amount of material over and above the then current forecast provided that Supplier is given at least eight (8) weeks notice up to the capacity of 1000 Rubidium Oscillators per week; that includes the ability to produce 750 RFTG & RFTGm products in any combination. Capacity increase above these amounts requires a minimum of four (4) months notification. TERMINATION Company may terminate this Agreement in whole or part by giving Supplier at least sixty (60) days prior written notice. Prices for any work remaining with Supplier under this Agreement terminated in part may be adjusted to fairly reflect Supplier's costs resulting from work withdrawn. Upon termination, Company shall pay Supplier all amounts due for services and material provided by Supplier to Company under this Agreement up to and including the effective date of termination. Such payment shall constitute a full and complete discharge of Company's obligations under this Agreement. TERMINATION OF PURCHASE ORDER - Company may at any time terminate any or all purchase orders placed by Company under this Agreement. Unless otherwise specified in this Agreement, Company's liability to Supplier with respect to such terminated purchase order or orders shall be limited to: (1) Supplier's purchase price of all components for the material (not usable in Supplier's other operations or salable to Supplier's other customers), plus (2) the actual costs incurred by Supplier in procuring and manufacturing material (not usable in Supplier's other operations or salable to Supplier's other customers) in process at the date of the notice of termination; less (3) any salvage value thereof. However, no such termination charges shall be payable if within sixty (60) days after notice of termination material equivalent in kind to that being terminated is ordered by Company from Supplier. If requested, Supplier agrees to substantiate such costs with proof satisfactory to Company. TRAINING - If requested by Company, Supplier will, without charge to Company: (a) provide instructors and the necessary instructional material of Supplier's standard format to train Company's personnel in the installation, planning and practices, operation, maintenance, and repair of material furnished under this Agreement with these classes to be conducted at reasonable intervals at locations 19 agreed upon by Supplier and Company; or, at the option of Company (b) provide to Company training modules or manuals and any necessary assistance, covering those areas of interest outlined in (a) of this clause, sufficient in detail, format, and quantity to allow Company to develop and conduct a training program. YEAR 2000 WARRANTY - With respect to all Material, Equipment, Services and Software provided to Company under this Agreement, Supplier warrants to Company and its customers that: (i) the operation of such deliverables on or after January 1, 2000, without limitation as to date, shall in no way be different from their operation prior to that date; and (ii) such deliverables will be able to process, store, record and present data containing dates in the Year 2000, and thereafter without limitation as to date, in the same manner as data containing dates prior to the Year 2000. Supplier further warrants that to the extent its internal systems impact its relationship with Company, such systems also comply with the foregoing warranties. Upon request by Company, Supplier agrees to: (i) provide written certification of the foregoing warranties to Company and its customers; and (ii) allow Company to reasonably verify compliance with these warranties subject to the terms of the "Audits" provision of this Agreement. WARRANTY-EXTENDED In addition to the warranty in this Agreement, Supplier warrants to Company and Company's customers that the material furnished will perform properly for a period of three (3) years following acceptance by Company. Additionally, Part 407658269 will be warranted four (4) years from the date of manufacture. WORK DONE BY OTHERS If any part of the Work is dependent upon work done by others, Supplier shall inspect, and promptly report to Company's Representative any defect that renders such other work unsuitable for Supplier's proper performance. Supplier's silence shall constitute approval of such other work as fit, proper and suitable for Supplier's performance of the Work IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. AGREED: Datum Inc. Lucent Technologies Inc. By: [SIG] By: [SIG] ------------------------- ------------------------- Title: President and CEO Title: GPO VP ------------------------- ------------------------- Date: July 2, 1998 Date: June 24, 1998 ------------------------- ------------------------- 20 Contract H011980069 ATTACHMENT "A"
Comcode Description Price/Ea. Consignment/ Finished Work in [*] Demand-Pull/ Goods Process (A) Dock-to-Shop (Weeks) (Weeks) - ------- ------------ --------- ------------ -------- ----------- 407575638 WP-92066 L13 [*] Consignment 2 Through 5 6 Through 12 407575646 WP-92066 L14 [*] Consignment 2 Through 5 6 Through 12 407575653 WP-92066 L15 [*] Consignment 2 Through 5 6 Through 12 407549724 WP-92066 L11 [*] Demand Pull 2 Through 5 6 Through 12 407549732 WP-92066 L12 [*] Demand Pull 2 Through 5 6 Through 12 407232156 WP-92066 L9 [*] Consignment 2 Through 5 6 Through 12 407232164 WP-92066 L10 [*] Consignment 2 Through 5 6 Through 12 407658269[*] KS-24019 L1B [*] Consignment 2 Through 5 6 Through 12 407530039 KS-24019 L102A [*] Demand Pull 2 Through 5 6 Through 12 407658244 KS-24019 L104B [*] Demand Pull 2 Through 5 6 Through 12 407530021 KS-24019 L4A [*] Consignment 2 Through 5 6 Through 12 407530062 KS-24019 L105A [*] Consignment 2 Through 5 6 Through 12 407530088 KS-24019 L106A [*] Consignment 2 Through 5 6 Through 12 407870005 KS-24019 L5 [*] Consignment 2 Through 5 6 Through 12 407921386 KS-24019 L6 [*] Consignment 2 Through 5 6 Through 12 RFTGmill 407575638 WP-92066 L13 [*] Consignment 2 Through 5 6 Through 12 407575646 WP-92066 L14 [*] Consignment 2 Through 5 6 Through 12 407575653 WP-92066 L15 [*] Consignment 2 Through 5 6 Through 12 407549724 WP-92066 L11 [*] Demand Pull 2 Through 5 6 Through 12 407549732 WP-92066 L12 [*] Demand Pull 2 Through 5 6 Through 12 407232156 WP-92066 L9 [*] Consignment 2 Through 5 6 Through 12 407232164 WP-92066 L10 [*] Consignment 2 Through 5 6 Through 12 407658269 KS-24019 L1B [*] Consignment 2 Through 5 6 Through 12 407530039 KS-24019 L102A [*] Demand Pull 2 Through 5 6 Through 12 407658244 KS-24019 L104B [*] Demand Pull 2 Through 5 6 Through 12 407530021 KS-24019 L4A [*] Consignment 2 Through 5 6 Through 12 407530062 KS-24019 L105A [*] Consignment 2 Through 5 6 Through 12 407530088 KS-24019 L106A [*] Consignment 2 Through 5 6 Through 12 407870005 KS-24019 L5 [*] Consignment 2 Through 5 6 Through 12 407921386 KS-24019 L6 [*] Consignment 2 Through 5 6 Through 12 RFTGmill 407575638 WP-92066 L13 [*] Consignment 2 Through 5 6 Through 12 407575646 WP-92066 L14 [*] Consignment 2 Through 5 6 Through 12 407575653 WP-92066 L15 [*] Consignment 2 Through 5 6 Through 12 407549724 WP-92066 L11 [*] Demand Pull 2 Through 5 6 Through 12 407549732 WP-92066 L12 [*] Demand Pull 2 Through 5 6 Through 12 407232156 WP-92066 L9 [*] Consignment 2 Through 5 6 Through 12 407232164 WP-92066 L10 [*] Consignment 2 Through 5 6 Through 12 407658269 KS-24019 L1B [*] Consignment 2 Through 5 6 Through 12 407530039 KS-24019 L102A [*] Demand Pull 2 Through 5 6 Through 12 407658244 KS-24019 L104B [*] Demand Pull 2 Through 5 6 Through 12 407530021 KS-24019 L4A [*] Consignment 2 Through 5 6 Through 12 407530062 KS-24019 L105A [*] Consignment 2 Through 5 6 Through 12 407530088 KS-24019 L106A [*] Consignment 2 Through 5 6 Through 12 407870005 KS-24019 L5 [*] Consignment 2 Through 5 6 Through 12 407921386 KS-24019 L6 [*] Consignment 2 Through 5 6 Through 12 RFTGmill
- ------------------ (A) Raw Material - In addition to Finished Goods and Work in Process; Company will Commit to purchase a total of 1000 Rubidium Physics packages in the event of Termination [*] Omitted pursuant to Rule 24b-2. 21 Contract H011980069 ATTACHMENT B Current Replacement Datum Next Datum Comcode Product Engineering Replacement Engineering * Prototypes Product Prototypes Complete by Complete by - ------- ----------- --------------- ----------- ----------- 407575646 [*] October 1, 1998 None Scheduled Not Applicable 407575653 [*] October 1, 1998 None Scheduled Not Applicable 407575638 [*] October 1, 1998 None Scheduled Not Applicable 407549724 [*] October 1, 1998 None Scheduled Not Applicable 407549732 [*] October 1, 1998 None Scheduled Not Applicable 407232156 [*] Complete 1997 RFG-m-X October 1, 1998 407232164 [*] Complete 1997 RFG-m-X October 1, 1998 407530039 [*] May 1, 1998 RFTG-m-XX February 1, 1999 407658244 [*] May 1, 1998 RFTG-m-XX February 1, 1999 407530021 [*] August 1, 1998 RFTG-m-XX February 1, 1999 407530062 [*] August 1, 1998 RFTG-m-XX February 1, 1999 407530088 [*] August 1, 1998 RFTG-m-XX February 1, 1999 407870005 [*] August 1, 1998 RFTG-m-XX February 1, 1999 - ------------------ [*] Column data omitted pursuant to Rule 24b-2. 22 ASSIGNMENT - Supplier shall not assign any right or interest under this Agreement (excepting solely for moneys due or to become due) without the prior written consent of Company. Supplier shall be responsible to Company for all Work performed by Supplier's subcontractor(s) at any tier. CHOICE OF LAW - This Agreement and all transactions under it shall be governed by the laws of the State of New Jersey excluding its choice of laws rules and excluding the Convention for the International Sale of Goods. Supplier agrees to submit to the jurisdiction of any court wherein an action is commenced against Company based on a claim for which Supplier has agreed to indemnify Company under this Agreement. COMPLIANCE WITH LAWS - Supplier and all persons furnished by Supplier shall comply at their own expense with all applicable laws, ordinances, regulations and codes, including the identification and procurement of required permits, certificates, licenses, insurance, approvals and inspections in performance under this Agreement. ENTIRE AGREEMENT - This Agreement shall incorporate the typed or written provisions on Company's orders issued pursuant to this Agreement and shall constitute the entire agreement between the parties with respect to the subject matter of this Agreement and the order(s) and shall not be modified or rescinded, except by a writing signed by Supplier and Company. Printed provisions on the reverse side of Company's orders (except as specified otherwise in this Agreement) and all provisions on Supplier's forms shall be deemed deleted. Estimates or forecasts furnished by Company shall not constitute commitments. The provisions of this Agreement supersede all contemporaneous oral agreements and all prior oral and written communications and understandings of the parties with respect to the subject matter of this Agreement. FORCE MAJEURE - Neither party shall be held responsible for any delay or failure in performance of any part of this Agreement to the extent such delay or failure is caused by fire, flood, strike, civil, governmental or military authority, act of God, or other similar causes beyond its control and without the fault or negligence of the delayed or nonperforming party or its subcontractors. Supplier's liability for loss or damage to Company's material in Supplier's possession or control shall not be modified by this clause. When a party's delay or non-performance continues for a period of at least fifteen (15) days, the other party may terminate, at no charge, this Agreement or an order under the Agreement. HEAVY METALS AND/OR CFC IN PACKAGING - Supplier warrants to Company that no lead, cadmium, mercury or hexavalent chromium have been intentionally added to any packaging or packaging component (as defined under applicable laws) to be provided to Company under this Agreement and that packaging materials were not manufactured using and do not contain chlorofluorocarbons. Supplier further warrants to Company that the sum of the concentration levels of lead, cadmium, mercury and hexavalent chromium in the package or packaging component provided to Company under this Agreement does not exceed 100 parts per million. Upon request, Supplier shall provide to Company Certificates of Compliance certifying that the packaging and/or packaging components provided under this Agreement are in compliance with the requirements set forth above in this clause. IDENTIFICATION - Supplier shall not, without Company's prior written consent, engage in publicity related to this Agreement, or make public use of any Identification in any circumstances related to this Agreement. "Identification" means any semblance of any trade name, trademark, service mark, insignia, symbol, logo, or any other designation or drawing of Lucent Technologies, AT&T Corp., or their affiliates. Supplier shall remove or obliterate any Identification prior to any use or disposition of any material rejected or not purchased by Company. IMPLEADER - Supplier shall not implead or bring an action against Company based on any claim by any person for personal injury or death to an employee of Company for which Company has previously paid or is obligated to pay worker's compensation benefits to such employee or claimant and for which such employee or claimant could not otherwise bring legal action against Company. INDEMNITY - At Company's request, Supplier agrees to indemnify, defend and hold harmless Company, its affiliates, customers, employees, successors and assigns (all referred to as "Company") from and against any losses, damages, claims, fines, penalties and expenses (including reasonable attorney's fees) that arise out of or result from: (1) injuries or death to persons or damage to property, including theft, in any way arising out of or caused or alleged to have been caused by the Work or services performed by, or material provided by Supplier or persons furnished by Supplier; (2) assertions under Workers' Compensation or similar acts made by persons furnished by Supplier; or (3) any failure of Supplier to perform its obligations under this Agreement. 23 INFRINGEMENT - Supplier shall indemnify and save harmless Company, its affiliates and their customers, officers, directors, and employees (all referred to in this clause as "Company") from and against any losses, damages, liabilities, fines, penalties, and expenses (including reasonable attorneys' fees) that arise out of or result from any and all claims (1) of infringement of any patent, copyright, trademark or trade secret right, or other intellectual property right, private right, or any other proprietary or personal interest, and (2) related by circumstances to the existence of this Agreement or performance under or in contemplation of it (an Infringement Claim). If the Infringement Claim arises solely from Supplier's adherence to Company's written instructions regarding services or tangible or intangible goods provided by Supplier (items) and if the Items are not (1) commercial items available on the open market or the same as such items, or (2) items of Supplier's designated origin, design or selection, Company shall indemnify Supplier. Company or Supplier (at Company's request) shall defend or settle, at its own expense any demand, action or suit on any Infringement Claim for which it is indemnitor under the preceding provisions and each shall timely notify the other of any assertion against it of any Infringement Claim and shall cooperate in good faith with the other to facilitate the defense of any such Claim INSURANCE - Supplier shall maintain and cause Supplier's subcontractors to maintain during the term of this Agreement: (1) Workers' Compensation insurance as prescribed by the law of the state or nation in which the Work is performed; (2) employer's liability insurance with limits of at least $500,000 for each occurrence; (3) automobile liability insurance if the use of motor vehicles is required, with limits of at least $1,000,000 combined single limit for bodily injury and property damage per occurrence; (4) Commercial General Liability ("CGL") insurance, ISO 1988 or later occurrence form of insurance, including Blanket Contractual Liability and Broad Form Property Damage, with limits of at least $1,000,000 combined single limit for bodily injury and property damage per occurrence; and (5) if the furnishing to Company (by sale or otherwise) or material or construction services is involved, CGL insurance endorsed to include products liability and completed operations coverage in the amount of $5,000,000 per occurrence. All CGL and automobile liability insurance shall designate Lucent Technologies Inc., its affiliates, and its directors, officers and employees (all referred to as "Company") as additional insured. All such insurance must be primary and non-contributory and required to respond and pay prior to any other insurance or self-insurance available. Any other coverage available to Company shall apply on an excess basis. Supplier agrees that Supplier, Supplier's insurer(s) and anyone claiming by, through, under or in Supplier's behalf shall have no claim, right of action or right of subrogation against Company and its customers based on any loss or liability insured against under the foregoing insurance. Supplier and Supplier's subcontractors shall furnish prior to the start of Work certificates or adequate proof of the foregoing insurance, including if specifically requested by Company, endorsements and policies. Company shall be notified in writing at least thirty (30) days prior to cancellation of or any change in the policy. Insurance companies providing coverage under this Agreement must be rated by A-M Best with at least an A-rating. INVOICING FOR GOODS - Supplier shall: (1) render original invoice, or as otherwise specified in this Agreement, showing Agreement and order number, through routing and weight; (2) render separate invoices for each shipment within twenty-four (24) hours after shipment; and (3) mail invoices with copies of bills of lading and shipping notices to the address shown on this Agreement or order. If prepayment of transportation charges is authorized, Supplier shall include the transportation charges from the FOB point to the destination as a separate item on the invoice stating the name of the carrier used. MEDIATION - If a dispute relates to this Agreement, or its breach, and the parties have not been successful in resolving such dispute through negotiation, the parties agree to attempt to resolve the dispute through mediation by submitting the dispute to a sole mediator selected by the parties or, at any time at the option of a party, to mediation by the American Arbitration Association ("AAA"). Each party shall bear its own expenses and an equal share of the expenses of the mediator and the fees of the AAA. All defenses based on passage of time shall be suspended pending the termination of the mediation. Nothing in this clause shall be construed to preclude any party from seeking injunctive relief in order to protect its rights pending mediation. PAYMENT TERMS - Invoices shall be paid in accordance with the terms in this Agreement, and due dates for payment shall be computed form the date of receipt of invoices by the Company. RIGHT OF ENTRY - Each party shall have the right to enter the premises of the other party during normal business hours with respect to the performance of this Agreement including an inspection or a Quality Review, subject to all plant rules and regulations, clearances, security regulations and procedures as applicable. Each party shall provide safe and proper facilities for such purposes. 24 SHIPPING - Supplier shall: (1) ship the material covered by this Agreement or order complete unless instructed otherwise; (2) ship to the destination designated in the Agreement or order; (3) ship according to routing instructions given by Company; (4) place the Agreement and order number on all subordinate documents; (5) enclose a packing memorandum with each shipment and, when more than one package is shipped, identify the package containing the memorandum; and (6) mark the Agreement and order number on all packages and shipping papers. Adequate protective packing shall be furnished at no additional charge. Shipping and routing instructions may be furnished or altered by Company without a writing. If Supplier does not comply with the terms of the FOB clause of this Agreement or order or with Company's shipping or routing instructions, Supplier authorizes Company to deduct from any invoice of Supplier (or to charge back to Supplier), any increased costs incurred by Company as a result of Supplier's noncompliance. SOFTWARE LICENSE GRANT - Except as stated otherwise in this order, Company shall have a world-wide, non-exclusive, royalty-free, perpetual, transferable license to use, reproduce and sublicense all software furnished to Company by Supplier under this Agreement. Company will not reverse compile or disassemble the software, nor will Company reproduce the software for the purpose of furnishing it to others. SUPPLIER'S INFORMATION - Supplier shall not provide under, or have provided in contemplation of, this Agreement any idea, data, program, technical, business or other intangible information, however conveyed, or any document, print, tape, disc, semiconductor memory or other information-conveying tangible article, unless Supplier has the right to do so, and Supplier shall not view any of the foregoing as confidential or proprietary. SURVIVAL OF OBLIGATIONS - The obligations of the parties under this Agreement, which by their nature would continue beyond the termination, cancellation or expiration of this Agreement, shall survive termination, cancellation or expiration of this Agreement. TAXES - Company shall reimburse Supplier only for the following tax payments with respect to transactions under this Agreement unless Company advises Supplier that an exemption applies: state and local sales and use taxes, as applicable. Taxes payable by Company shall be billed as separate items on Supplier's invoices and shall not be included in Supplier's prices. Company shall have the right to have Supplier contest any such taxes that Company deems improperly levied at Company's expense and subject to Company's direction and control. TITLE AND RISK OF LOSS - Title and risk of loss and damage to material purchased by Company under this Agreement shall vest in Company when the material has been delivered at the FOB point. If this Agreement or an order issued pursuant to this Agreement calls for additional services to be performed after delivery, Supplier shall retain title and risk of loss and damage to the material until the additional services have been performed. If Supplier is authorized to invoice Company for material upon shipment or prior to the performance of additional services, title to material shall vest in Company upon payment of the invoice, but risk of loss and damage shall pass to Company when the additional services have been performed. USE OF INFORMATION - Supplier shall view as Company's property any idea, data, program, technical, business or other intangible information, however conveyed, and any document, print, tape, disc, tool, or other tangible information-conveying or performance-aiding article owned or controlled by Company, and provided to, or acquired by, Supplier under or in contemplation of this Agreement (Information). Supplier shall, at no charge to Company, and as Company directs, destroy or surrender to Company promptly as its request any such article or any copy of such Information. Supplier shall keep Information confidential and use it only in performing under this Agreement and obligate its employees, subcontractors and others working for it to do so, provided that the foregoing shall not apply to information previously known to Supplier free of obligation, or made public through no fault imputable to Supplier. WARRANTY - Supplier warrants to Company and its customers that material furnished will be new, merchantable, free from defects in design, material and workmanship and will conform to and perform in accordance with the specifications, drawings and samples. These warranties extend to the future performance of the material and shall continue for the longer of (a) the warranty period applicable to Company's sales to its customers of the material or of products which incorporate the material, (b) one year after the material is accepted by Company or (c) such greater period as may be specified elsewhere in this Agreement. Supplier also warrants to Company and its customers that services will be performed in a first class, workmanlike manner. If material furnished contains manufacturers' warranties, Supplier hereby assigns such warranties to Company and its customers. All warranties shall survive inspection, acceptance and payment. Material or services not meeting the warranties will be, at Company's option, returned for or subject to refund, repaired, replaced or reperformed by Supplier at no cost to Company or its customers and with transportation costs and risk of loss and damage in transit borne by Supplier. Repaired and replacement material shall be warranted as set forth above in this clause. EX-21 3 LIST OF SUBSIDIARIES 1 DATUM INC. AND SUBSIDIARIES EXHIBIT 21 LIST OF SUBSIDIARIES
State or Other Jurisdiction of Name Incorporation ---- ------------- Frequency and Time Systems, Inc. Delaware Austron, Inc. Texas Efratom Time & Frequency Products, Inc. Colorado Datum GmbH Germany
EX-23 4 CONSENT OF INDPENDENT ACCOUNTANTS 1 DATUM INC. AND SUBSIDIARIES EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-96564, 33-10035, 33-41709, 33-79772 and 333-46365) of Datum Inc. of our report dated February 25, 1999 appearing on page F-1 of this Annual Report on Form 10-K. We also consent to the application of such report to the Financial Statement Schedule for the three years ended December 31, 1998 listed under Item 14(a) of this Annual Report on Form 10-K when such schedule is read in conjunction with the financial statements referred to in our report. The audit referred to in such report also included this schedule. /s/ PRICEWATERHOUSECOOPERS LLP - ------------------------------------------ PRICEWATERHOUSECOOPERS LLP Costa Mesa, California March 22, 1999 EX-27.4 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 10,307 0 19,327 153 24,555 58,914 28,699 12,651 86,920 12,825 14,533 0 0 1,376 55,602 86,920 101,233 101,233 65,172 103,641 0 0 1,617 (2,408) (951) (1,457) 0 0 0 (1,457) (.27) (.27)
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