-----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, J4MAJZlq3oIResz6tcEQvUZy0V0FTxYiqEd4vk3JZVsiNGNqDOscpPLGf/elnHEt LXkdKzgDS8d+CYltYOzuJQ== 0000892569-01-000050.txt : 20010326 0000892569-01-000050.hdr.sgml : 20010326 ACCESSION NUMBER: 0000892569-01-000050 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010323 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-K SEC ACT: SEC FILE NUMBER: 000-06272 FILM NUMBER: 1578097 BUSINESS ADDRESS: STREET 1: 9975 TOLEDO WAY CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 9495987500 MAIL ADDRESS: STREET 1: 9975 TOLEDO WAY CITY: IRVINE STATE: CA ZIP: 92618 10-K 1 a70849e10-k.txt FORM 10-K PERIOD END DECEMBER 31, 2000 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, 2000 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. [ ] 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 13, 2001, was approximately $91,639,086. The number of outstanding shares of the Registrant's Common Stock as of March 13, 2001 was 6,089,062. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 14, 2001 (to be filed with the Commission within 120 days of December 31, 2000): Part III, Items 10-13. 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 or contracts for manufacture, 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 products we believe necessary for legal, non-repudiable time stamps electronic business transactions are in development by the Company. 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 synchronization, throughput and quality of service. 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 2 3 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. e-Business The Datum e-Business mission is to build Information Technology (IT) solutions that meet increasing demand for secure and auditable electronic timestamps, synchronized IT business infrastructures and secure information distribution. The Internet is rapidly accelerating the transformation of "paper to bits" for organizations and is creating operational, security, and auditing challenges that have never before arisen. The Company believes that as of today there is no basis for certifiable accurate time within the business world's vast network of computers. The ability to track an electronic transaction's time delivery is important because without the benefit of a secure and auditable time stamp, any transaction or log file has the potential to be questioned. An examination of physical evidence is needed in order to create an audit trail of Who, What, Where and When. In the paper world, a notary, a canceled check, or postage mark accomplished this. In the electronic world, the use of time stamping is widely used in conjunction with applications to tie together the who to the when, but there is no security associated with the time and no audit information with the time-stamp. Most time-stamps are derived from inaccurate and easily manipulated internal clocks on servers and network devices. Until recently, this has not been an issue, but with the rapid adoption of electronic commerce, the security and auditability of the present time-stamping methods is proving weak and inadequate. Trusted Time(TM) is a suite of products that will provide e-Business with a secure and auditable time stamp. Trusted Time enables any electronic transaction or log - from digital signatures to stock purchases to document filings to invoice payments - to have a certifiable, traceable, and verifiable time stamp. End-user organizations or Digital Trust Authorities will be able to deploy a world-class, secure time stamp solution within their IT infrastructure to create a non-repudiable electronic audit trail for time stamps. Trusted Time's security and audit features significantly improve the authenticity, traceability and verification of electronic time stamps. The Trusted Time solution is comprised of Datum's Trusted Master Clocks and Trusted Local Clocks, specialized software and secure network timing devices that will be linked to National Timing Authorities, such as the National Institute of Standards and Technology (NIST) in the U.S, the National Physics Laboratory (NPL) in the United Kingdom, and the Products and Standards Bureau (PSB) in Singapore. 3 4 Electronic transactions and logs now have a complex interdependency on multiple servers and network appliances. This complex environment is generating a need for all IT components participating in electronic business to have their internal clocks synchronized to a world standard time. Fortunately, through established international agreement, this time is available anywhere in the world and is referred to as UTC time or Universal Coordinated Time. Datum's TymServe NTP time-server product has been the pioneer solution for IT synchronization to UTC time. 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 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. 4 5 In addition to telecommunications applications, the Company's timing products help ensure that enterprise computing networks operate in a 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, e-business, 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 that 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. 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. 5 6 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. e-Business Products Trusted Time-- Datum e-Business is developing a suite of products that provides e-businesses with secure and auditable time stamps. Trusted Time enables any electronic transaction - from digital signatures to stock purchases to document filings to invoice payments - to have a certifiable, traceable, and verifiable time stamp. Trusted Time's security and audit features significantly improve the authenticity, traceability and verification of electronic time stamps. The Trusted Time solution is comprised of Datum's Trusted Master Clocks and Trusted Local Clocks, specialized software and secure network timing devices that will be linked to a National Timing Authority, such as the National Institute of Standards and Technology (NIST) in the U.S. Confidential Courier(R)-- Confidential Courier is data encryption software that provides an easy way for organizations to manage and secure their confidential, proprietary, and /or sensitive information. It uses powerful, industry-standard encryption algorithms from RSA to scramble data into ciphertext format, thus rendering it useless if accessed by an unauthorized party. Confidential Courier lets the user drag and drop files to easily create secure information packs - CourierPAKS - for distribution of proprietary information. A single CourierPAK can contain tens of thousands of files and be distributed to an unlimited number of clients. TymServe -- TymServe NTP time servers enable companies to ensure the integrity of e-business operations through computer system and component synchronization. The TymServe network time server meets the rapidly evolving need for precise synchronization in TCP/IP enterprise and LAN networks. It operates as a rack-mounted, stand-alone time serving device providing UTC time within an organization's firewall. Offering a variety of time sources including GPS and dial-up services, as well as high performance crystal or very high performance Rubidium oscillators, ensures systems are always synchronized to standard, UTC time. 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. 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. 6 7 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 offshore oil exploration and accurate placement of offshore oil drilling platforms. The Company also supplies spare and replacement Cesium tubes for a broad segment of the industry. 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 that "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 largely 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. Research and development expenses totaled $15.3 million, $15.2 million and $11.9 million in 2000, 1999 and 1998, respectively. CUSTOMERS A small number of customers accounts 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 33% and 33% of net sales for the years ended December 31, 2000 and 1999, respectively. The Company's five largest customers accounted for approximately 48% and 45% 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 adversely affect the Company's business, results of operations and financial condition. 7 8 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 that can be subject to cancellation, postponement or other types of delays. Much of the Company's sales occur through independent sales representatives and distributors that target the specific markets that 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 25%, 25% and 24% of net sales for the years ended December 31, 2000, 1999 and 1998, 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 the United States and internationally; 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 Frequency Electronics, Inc., and various other quartz oscillator manufacturers. In the wireline market, the Company competes primarily with Symmetricom, Inc., 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 Agilent Technologies, Inc. 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. In the e-Business market, the Company's pioneering efforts do not have defined competitors at this time. There can be no assurance that the Company will be able to compete 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. BACKLOG The Company's backlog of orders was approximately $40.9 million on December 31, 2000, compared to approximately $29.7 million a year earlier. The increase was primarily due to increased demand in both the wireless and wireline markets. The Company considers as backlog all orders that are expected to ship 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. 8 9 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 7% of its sales in 2000 were made either directly to United States government agencies or indirectly to U.S. government agencies through subcontracts as compared to approximately 10% in 1999 and 12% in 1998 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, California; Austin, Texas; Beverly, and Lexington, Massachusetts; and Hofolding, Germany. The Company's Irvine, Austin and Beverly facilities have received ISO 9001 certification. 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 a 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. We rely on a continuous power supply to conduct our business, and California's current energy crisis could disrupt our operations and increase our expenses at our Irvine facility. California is in the midst of an energy crisis that could disrupt our operations and increase our expenses. In the event of an acute power shortage -- that is, when power reserves for the state of California fall below certain critical levels -- California has on some occasions implemented, and may in the future continue to implement, rolling blackouts throughout California. We currently do not have backup generators or alternate sources of power in the event of a blackout, and our current insurance does not provide coverage for any damages we or our customers may suffer as a result of any interruption in our power supply. If blackouts interrupt our power supply, we would be temporarily unable to continue operations at our Irvine facility. Any such interruption in our ability to continue operations at our Irvine facility could damage our reputation, harm our ability to retain existing customers and to obtain new customers, and could result in lost revenue, any of which could substantially harm our business and results of operations. Additionally, an interruption of power could require the testing of new product to be repeated, causing a delay in shipment of up to one week. Datum is currently evaluating sources for backup power. 9 10 Furthermore, the deregulation of the energy industry instituted in 1996 by the California government has caused power prices to increase. Under deregulation, utilities were encouraged to sell their plants, which traditionally had produced most of California's power, to independent energy companies that were expected to compete aggressively on price. Instead, due in part to a shortage of supply, wholesale prices have skyrocketed over the past year. If wholesale prices continue to increase, the operating expenses associated with our facilities located in California will likely increase which would harm our results of operations. 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 its 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 565 employees at December 31, 2000. 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 Chief Executive Officer, 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 noncompetitive agreements. The Company's growth and future success will depend largely 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 occupies a facility located in San Jose, California, consisting of 5,800 square feet of sales and marketing space, under a lease expiring on September 30, 2005. The Company has leased office facilities in Lexington, Massachusetts, consisting of 7,280 square feet, that expires on October 31, 2004. The Company also operates a facility located in Hofolding, Germany, consisting of an 8,600 square foot manufacturing facility, expiring on May 31, 2004. 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, located on approximately nine acres of land. The Company is planning a 20,000 square foot addition to its Beverly facility in 2001 and is contemplating an addition to its Austin plant to meet increased demand in the Cesium standards and wireline markets. The Company believes that its current facilities at its other sites 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 for the next several years 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, 2000. 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 60 President and Chief Executive Officer since April 1998. Prior to joining Datum, Mr. van der Kaay 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 board of directors for RF Micro-Devices and TranSwitch Corporation. Paul E. Baia 48 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 Mr. Baia was General Manager of FTS. From March 1988 to January 1990 he was Director of Operations for FTS. Ilan Havered 45 Vice President, International Sales and Marketing of the Company since May 2000. From May 1996 to May 2000 Mr. Havered was Director of International Sales, responsible for activities in Asia Pacific, Australia and Africa. From April 1995 to May 1996, he was Manager of International Sales. From July 1990 to April 1995 he served as Systems Product Marketing Manager. Robert J. Krist 51 Vice President, Chief Financial Officer, Secretary and Treasurer of the Company since November 2000. From September 1997 to October 2000, Mr. Krist served as Chief Financial Officer at Bridge Medical, Inc., a medical supplies company. From 1991 to 1997 he worked at McGaw, Inc., a medical information technology company, serving as Chief Financial Officer from 1991 to 1994 and as President, Central Admixture Pharmacy Services from 1994 to 1997. Michael J. Patrick 44 Vice President of the Company and President of the Company's Efratom Time and Frequency Products, Inc. subsidiary since October 1999. Mr. Patrick also served as Executive Vice President of Efratom from March 1999 to October 1999, and was Vice President of Operations from May 1998 to March 1999 for Efratom. From 1980 to 1998 he worked at Interstate Electronics where he served as Vice President Operations. John (Jack) R. Rice 56 Vice President of the Company since April 1994 and President of the Company's Austron, Inc. subsidiary since May 1995. Mr. Rice 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.
11 12 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, 2000 1st Quarter........................................ 29 5/16 11 1/2 2nd Quarter........................................ 22 5/8 13 5/8 3rd Quarter........................................ 40 5/16 17 4th Quarter........................................ 34 3/16 19 YEAR ENDED DECEMBER 31, 1999 1st Quarter........................................ 9 6 1/4 2nd Quarter........................................ 12 13/16 6 9/32 3rd Quarter........................................ 11 1/16 6 5/8 4th Quarter........................................ 10 5/16 6 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 13, 2001, there were 316 stockholders of record. 12 13 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, 2000 and 1999 and the related consolidated statements of operations and of cash flows for the three years ended December 31, 2000 and notes thereto appear elsewhere in this Report.
Year Ended December 31, ------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- --------- --------- --------- -------- (In thousands, except per share data) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net Sales $132,239 $ 100,168 $ 101,233 $ 114,092 $ 91,854 Costs and expenses: Cost of goods sold 73,052 60,097 65,172 68,235 56,285 Selling 17,088 14,475 15,003 15,808 12,182 Product development 15,305 15,237 11,903 10,650 7,667 General and administrative(1)(2) 16,438 10,842 9,946 9,479 10,127 -------- --------- --------- --------- -------- Operating income (loss) 10,356 (483) (791) 9,920 5,593 -------- --------- --------- --------- -------- Interest expense 1,673 1,919 2,051 2,085 2,255 Interest income (214) (524) (434) (349) (7) -------- --------- --------- --------- -------- Income (loss) before income taxes 8,897 (1,878) (2,408) 8,184 3,345 Income tax provision (benefit) 3,559 (728) (951) 3,355 1,371 -------- --------- --------- --------- -------- Net income (loss) $ 5,338 $ (1,150) $ (1,457) $ 4,829 $ 1,974 ======== ========= ========= ========= ======== Net income (loss) per share: Basic $ 0.90 $ (0.20) $ (0.27) $ 0.97 $ 0.49 ======== ========= ========= ========= ======== Diluted $ 0.85 $ (0.20) $ (0.27) $ 0.90 $ 0.46 ======== ========= ========= ========= ======== Shares used in per share calculation: Basic 5,949 5,663 5,414 4,973 4,061 ======== ========= ========= ========= ======== Diluted 6,296 5,663 5,414 5,390 4,253 ======== ========= ========= ========= ========
December 31, ------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- --------- --------- --------- -------- CONSOLIDATED BALANCE SHEET DATA: Working capital $ 44,324 $ 42,017 $ 46,089 $ 47,482 $ 26,029 Total assets 95,276 87,782 86,920 85,746 68,688 Long-term debt 1,750 11,671 14,533 17,418 17,318 Stockholders' equity 67,539 58,320 56,978 56,844 34,623
- ------------ (1) Includes $1.5 million, $1.5 million, $1.5 million, $1.5 million and $1.5 million for 2000, 1999, 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. (2) Includes $1.2 million and $0.5 million in 2000 and 1999, respectively, of amortized goodwill relating to the purchase of Digital Delivery on July 29, 1999. 13 14 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, e-business, 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, e-business, satellites and in a variety of other test and measurement and e-business applications. Net sales for the Company were $132.2 million, $100.2 million and $101.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. These amounts represent an increase from 1999 to 2000 of 32.0% and a decrease from 1998 to 1999 of 1.1%. Wireline and wireless telecommunications sales increased 61.3% and 31.8%, respectively, in 2000 due to increased product demand. Wireline telecommunications sales increased by 25.7% in 1999, offset by decreased sales in the cellular and PCS wireless telecommunications markets. 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 33%, 33%, and 34% of net sales for the fiscal years ended December 31, 2000, 1999 and 1998, respectively. Further, the Company's five largest customers, including Lucent, accounted for approximately 48%, 45%, and 52% 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 were approximately $9.6 million in 2000, $9.9 million in 1999 and $12.5 million in 1998, constituting approximately 7.3%, 9.9% and 12.3% of net sales, respectively. These amounts represent decreases of 3.0% from 1999 to 2000 and 20.5% from 1998 to 1999. 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 44.8%, 40.0% and 35.6% in 2000, 1999 and 1998, respectively. The increase from 1999 to 2000 was predominantly in the wireless telecommunication market and was primarily a result of enhanced manufacturing and development efficiencies, improved supply chain management and efficiencies gained from increases in sales. The increase in gross margin from 1998 to 1999 was primarily the result of increased gross margins in the wireline telecommunication, enterprise computing, and satellite markets. A decrease in lower margin sales in the wireless telecommunication market also contributed to the increase in gross margin. 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 Company's rescheduling of customers' orders. 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 was $17.1 million in 2000, $14.5 million in 1999 and $15.0 million in 1998. These amounts represent an increase of 18.1% from 1999 to 2000 and a decrease of 3.5% from 1998 to 1999. As a percent of net sales, these amounts were 12.9%, 14.5% and 14.8% in 2000, 1999 and 1998, respectively. The increase in expense in 2000 was due to the higher volume of net sales. The decreases in 2000 and 1999 as a percentage of net sales were due to the Company's continued efforts to reduce commissions by replacing outside sales representatives with internal sales staff. 14 15 Product Development. Product development expense consists primarily of salary, applied overhead, materials and third-party design services. Product development expense was $15.3 million in 2000, $15.2 million in 1999 and $11.9 million in 1998. These amounts represented increases of 0.4% from 1999 to 2000 and 27.7% from 1998 to 1999. Product development expenditures represented 11.6%, 15.2% and 11.8% of net sales in 2000, 1999 and 1998, respectively. The spending increase in 2000 and 1999 from 1998 reflects the continual emphasis on new product design and enhancement of current products. 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 or 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 were $16.4 million in 2000, $10.8 million in 1999 and $9.9 million in 1998. These amounts represent increases of 51.6% from 1999 to 2000 and 9.0% from 1998 to 1999. As a percentage of net sales, these amounts were 12.4%, 10.8% and 9.8% in 2000, 1999 and 1998, respectively. The increase in 2000 was predominantly caused by increased incentive accruals related to the Company's profitability, twelve months of Digital Delivery expense, including goodwill amortization, in 2000 versus five months expense in 1999, and charges related to management changes and the consolidation of the San Jose and Beverly operations. The 1999 increase included legal and other expenses related to an unsolicited merger proposal and a receivable write-off related to bankruptcy of a telecom customer, both in the fourth quarter of 1999; an accrual for compliance costs related to a previously disclosed environmental issue at a previous Austin facility; and costs related to a potential acquisition no longer pursued. Such expenses include $2.9 million, $2.1 million and $1.5 million for 2000, 1999 and 1998, respectively, of goodwill amortization and increased depreciation resulting from the step-up of the assets purchased in the March 1995 acquisition of Efratom and the July 1999 acquisition of Digital Delivery. Interest, Net. Net interest expense was $1.5 million, $1.4 million and $1.6 million in 2000, 1999 and 1998, respectively. These amounts constitute an increase of 4.6% from 1999 to 2000 and a decrease of 13.7% from 1998 to 1999. The increase in 2000 in net interest expense was a result of lower interest income and the write-off of unamortized debt expense in the second quarter of 2000 in relation to the Company's refinancing of its debt. The decrease in 1999 was primarily the result of the reduced debt level in 1999. 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. Cash provided by operations was approximately $1.8 million in 2000, compared to approximately $5.5 million in 1999, and approximately $6.4 million in 1998. The decrease in cash for the year ended December 31, 2000 was principally due to the Company using its excess cash to pay down debt. Cash generated from net income was offset by increases in accounts receivable and inventory. The increase in cash for the year ended December 31, 1999 primarily resulted from decreased inventory and increased accounts payable balances, offset by an increase in accounts receivable. 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. Capital expenditures were approximately $3.9 million, $2.4 million, and $2.7 million in 2000, 1999, and 1998, respectively. The increase in 2000 was primarily the result of the need to provide manufacturing test equipment for the increased volumes produced in 2000. At December 31, 2000, the Company had working capital of $44.3 million and a current ratio of 2.9:1, compared to working capital of $42.0 million and a current ratio of 3.7:1 at December 31, 1999. The increase in working capital was primarily the result of the increase in accounts receivable of approximately $12.1 million and an increase in inventories of approximately $4.6 million in 2000. This was offset by decreased cash of $7.3 million in 2000, increased accounts payable balances of $2.1 million in 2000, an increase in accrued expense of $2.7 million in 2000 and an advance on the Company's line of credit of $2.0 million as of December 31, 2000. The Company's credit facility includes a $6.0 million term loan maturing June 15, 2002, bearing interest at the rate of 9.15% on the unpaid principal, payable monthly, with the principal repaid in equal installments of $250,000 on the first of every month. In connection with the issuance of promissory notes issued in 1996 that were fully paid off in 2000, the Company issued to The Prudential Insurance Company of America common stock warrants which currently allow for the purchase of 176,303 shares of common stock at an exercise price per share of $11.415. The maturity date of the revolving component of the Company's line of credit with Wells Fargo Bank has been extended to June 15, 2001 in a principal amount not to exceed $10.0 million and bearing interest at Wells Fargo's prime rate or at LIBOR plus 2.25%. Under the Wells Fargo credit facility, 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. At December 31, 2000, the Company was in compliance with all debt covenants. The Company believes that cash, cash equivalents, short-term investments and funds generated from operations will be sufficient to satisfy working capital requirements and capital expenditures in fiscal 2001. 15 16 NEW ACCOUNTING PRONOUNCEMENTS In June 1998 the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133; Accounting for Derivative instruments and Hedging Activities ("SFAS 133"). SFAS 133 is required to be adopted in fiscal years beginning after June 15, 2000 and establishes accounting and reporting standards for derivative instruments and for hedging activities. The Company does not anticipate that the adoption of SFAS 133 will have a material impact on its financial position or results of operations. In December 1999, the Securities and Exchange Commission (the "SEC") released Staff Accounting Bulletin ("SAB") No. 101, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. The Company implemented SAB 101 in the fourth quarter of 2000 retroactive to January 1, 2000. The impact from implementing SAB 101 was not material to the Company's financial position or results of operations. 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. 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. 16 17 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 14, 2001 to be filed with the Commission on or before April 30, 2001. 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 14, 2001 to be filed with the Commission on or before April 30, 2001. 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 14, 2001 to be filed with the Commission on or before April 30, 2001. 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 14, 2001 to be filed with the Commission on or before April 30, 2001. 17 18 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. No reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended December 31, 2000. 18 19 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 23rd day of March, 2001. DATUM INC. By /s/ Erik H. van der Kaay -------------------------------- Erik H. van der Kaay Chief Executive Officer, President and Director POWER OF ATTORNEY The undersigned directors and officers of Datum Inc. constitute and appoint Erik H. van der Kaay and Robert J. Krist, or any of them, 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, CEO, Chairman March 23, 2001 - --------------------------------- (Principal Executive Officer) Erik H. van der Kaay /s/ Robert J. Krist Chief Financial Officer March 23, 2001 - ----------------------------------- (Principal Financial Robert J. Krist and Accounting Officer) /s/ Elizabeth A. Fetter Director March 23, 2001 - ----------------------------------- Elizabeth A. Fetter /s/ G. Tilton Gardner Director March 23, 2001 - ----------------------------------- G. Tilton Gardner /s/ R. David Hoover Director March 23, 2001 - ----------------------------------- R. David Hoover /s/ Louis B. Horwitz Director March 23, 2001 - ----------------------------------- Louis B. Horwitz /s/ Dan L. McGurk Director March 23, 2001 - ----------------------------------- Dan L. McGurk /s/ Michael M. Mann Director March 23, 2001 - ----------------------------------- Michael M. Mann
19 20 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, 2000 and 1999 ......................................................F-2 Consolidated statement of operations for each of the three years in the period ended December 31, 2000 .....................................F-3 Consolidated statement of stockholders' equity for each of the three years in the period ended December 31, 2000...................F-4 Consolidated statement of cash flows for each of the three years in the period ended December 31, 2000 .....................................F-5 Notes to consolidated financial statements............................F-6 Financial Statement Schedules VIII - Valuation and Qualifying Accounts..............................S-1 20 21 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Datum Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 21 present fairly, in all material respects, the financial position of Datum Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 21 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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. /s/ PRICEWATERHOUSECOOPERS LLP - ---------------------------------- Orange County, California February 14, 2001 F-1 22 DATUM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ---------------------- 2000 1999 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 1,017 $ 8,271 Accounts receivable, less allowance for doubtful accounts of $664 and $561 34,988 22,927 Inventories 26,400 21,811 Prepaid expenses 375 495 Deferred income taxes 4,613 3,359 Income tax refund receivable 161 463 -------- -------- Total current assets 67,554 57,326 Land, buildings and equipment, net 14,732 14,759 Excess of purchase price over net assets acquired, net of accumulated amortization of $7,412 and $5,285 12,595 14,722 Other assets 395 975 -------- -------- $ 95,276 $ 87,782 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,777 $ 6,706 Accrued salaries and wages 4,179 2,269 Accrued warranty 2,173 1,635 Other accrued expenses 1,376 1,144 Income taxes payable 1,705 553 Advances on line of credit 2,020 -- Current portion of long-term debt 3,000 3,002 -------- -------- Total current liabilities 23,230 15,309 -------- -------- Long-term debt 1,750 11,671 -------- -------- Postretirement benefits 1,188 1,034 -------- -------- Other long-term liabilities 584 418 -------- -------- Deferred income taxes 985 1,030 -------- -------- Stockholders' equity Preferred stock, par value $.25 per share Authorized - 1,000,000 shares Issued - none -- -- Common stock, par value $.25 per share Authorized - 10,000,000 shares Issued - 6,067,065 shares in 2000 5,854,997 shares in 1999 1,517 1,464 Additional paid-in capital 51,441 47,709 Retained earnings 15,516 10,178 Unamortized stock compensation (127) (309) Accumulated other comprehensive loss (808) (722) -------- -------- Total stockholders' equity 67,539 58,320 -------- -------- $ 95,276 $ 87,782 ======== ========
See notes to consolidated financial statements. F-2 23 DATUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, --------------------------------------- 2000 1999 1998 --------- --------- --------- Net Sales $ 132,239 $ 100,168 $ 101,233 Operating expenses: Cost of sales 73,052 60,097 65,172 Selling 17,088 14,475 15,003 Product development 15,305 15,237 11,903 General and administrative 16,438 10,842 9,946 --------- --------- --------- Operating income (loss) 10,356 (483) (791) --------- --------- --------- Interest expense 1,673 1,919 2,051 Interest income (214) (524) (434) --------- --------- --------- Income (loss) before income taxes 8,897 (1,878) (2,408) Income tax provision (benefit) 3,559 (728) (951) --------- --------- --------- Net income (loss) $ 5,338 $ (1,150) $ (1,457) ========= ========= ========= Net income (loss) per common share: Basic $ 0.90 $ (0.20) $ (0.27) ========= ========= ========= Diluted $ 0.85 $ (0.20) $ (0.27) ========= ========= ========= Shares used in per share calculation: Basic 5,949 5,663 5,414 ========= ========= ========= Diluted 6,296 5,663 5,414 ========= ========= =========
See notes to consolidated financial statements. F-3 24 DATUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL UNAMORTIZED ACCUMULATED -------------------- PAID-IN RETAINED STOCK COMPREHENSIVE SHARES AMOUNT CAPITAL EARNINGS COMPENSATION INCOME (LOSS) TOTAL --------- ------- ---------- -------- ------------ -------------- -------- Balances at December 31, 1997 5,332,860 $ 1,333 $43,231 $ 12,785 $ -- $ (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 income (1,457) (1,457) --------- Total comprehensive income (1,251) --------- ------- ------- -------- ------ ------ -------- Balances at December 31, 1998 5,505,843 1,376 44,941 11,328 (368) (299) 56,978 Issuance of common stock under 401(k) and ESP Plans 114,877 29 796 825 Exercise of stock options 20,000 5 81 86 Income tax benefit from restricted stock issued and stock options exercised 30 30 Amortization of stock compensation 59 59 Acquisition of Digital Delivery 214,277 54 1,861 1,915 Comprehensive income: Cumulative translation adjustment (423) (423) Net income (1,150) (1,150) --------- Total comprehensive income (1,573) --------- ------- ------- -------- ------ ------ -------- Balances at December 31, 1999 5,854,997 1,464 47,709 10,178 (309) (722) 58,320 Issuance of common stock under 401(k) and ESP Plans 54,888 14 1,032 1,046 Exercise of stock options 183,473 46 1,453 1,499 Income tax benefit from restricted stock issued and stock options exercised 1,389 1,389 Amortization of stock compensation 182 182 Stock based compensation 102 102 Cancelled shares from Digital Delivery acquisition (26,293) (7) (244) (251) Comprehensive income: Cumulative translation adjustment (86) (86) Net income 5,338 5,338 -------- Total comprehensive income 5,252 --------- ------- ------- -------- ------ ------ -------- Balances at December 31, 2000 6,067,065 $ 1,517 $51,441 $ 15,516 $ (127) $ (808) $ 67,539 ========= ======= ======= ======== ====== ====== ========
See notes to consolidated financial statements. F-4 25 DATUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------ 2000 1999 1998 -------- -------- -------- Cash flows from operating activities: Net income (loss) $ 5,338 $ (1,150) $ (1,457) -------- -------- -------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 4,459 3,913 3,636 Amortization of goodwill 2,127 1,439 894 Contribution of shares of common stock to the Company's 401(k) plan 747 603 706 Stock based compensation 285 59 44 Income tax benefit from restricted stock issued and stock options exercised 1,389 30 127 Changes in assets and liabilities: Increase in accounts receivable (12,060) (3,585) (4,284) (Increase) decrease in inventories (4,589) 2,743 6,664 (Increase) decrease in prepaid expenses 120 (14) (116) Decrease in income tax refund receivable 302 727 258 Increase in deferred income taxes (1,299) (895) (609) (Increase) decrease in other assets 157 (282) (416) Increase in accounts payable 2,071 1,744 899 Increase (decrease) in accrued expenses 2,669 (235) (297) Increase (decrease) in income taxes payable (237) 234 162 Increase (decrease) in other long-term liabilities 166 (18) 16 Increase in postretirement benefits 154 216 216 -------- -------- -------- Total reconciling items (3,539) 6,679 7,900 -------- -------- -------- Net cash provided (used) by operating activities 1,799 5,529 6,443 -------- -------- -------- Cash flows from investing activities: Proceeds from equipment disposals 56 -- 55 Capital expenditures (3,938) (2,359) (2,699) Payment for acquisition, net of cash acquired -- (2,111) -- Other (39) 16 (3) -------- -------- -------- Net cash used by investing activities (3,921) (4,454) (2,647) -------- -------- -------- Cash flows from financing activities: Proceeds from line of credit 2,020 -- -- Proceeds from long-term debt 6,000 -- -- Payments of long-term debt (16,253) (3,025) (22) Proceeds from exercise of stock options and ESP plan 3,187 337 508 -------- -------- -------- Net cash provided (used) for financing activities (5,046) (2,688) 486 Effect of exchange rate changes on cash and cash equivalents (86) (423) 206 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (7,254) (2,036) 4,488 Cash and cash equivalents at beginning of period 8,271 10,307 5,819 -------- -------- -------- Cash and cash equivalents at end of period $ 1,017 $ 8,271 $ 10,307 ======== ======== ========
See notes to consolidated financial statements. F-5 26 DATUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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 title transfers and risks of ownership are passed to customers. This usually occurs when products are shipped. Revenues from the sale of products in consigned inventory are recognized when a customer uses the product. In cases where customer acceptance clauses are present in a sales arrangement, revenue subject to contractual acceptance clauses is deferred until acceptance occurs. 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 (in thousands): DECEMBER 31, ------------------ 2000 1999 ------- ------ Purchased parts $13,015 $8,720 Work-in-process 7,873 8,082 Finished products 5,512 5,009 ------- ------ $26,400 $21,811 ======= ======= 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 (in thousands):
DECEMBER 31, --------------------- DEPRECIABLE 2000 1999 LIFE ------- ------- -------------- Land $ 2,040 $ 2,040 Buildings 5,435 5,210 30 to 40 years Equipment 23,509 21,974 3 to 10 years Leasehold improvements 1,315 1,185 5 to 10 years ------- ------- 32,299 30,409 Less accumulated depreciation and amortization 17,567 15,650 ------- ------- $14,732 $14,759 ======= =======
Expenditures for maintenance and repairs are charged directly to operations, and betterments and major renewals are capitalized. F-6 27 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 4 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 an 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 for the period is calculated as the change in net deferred tax liabilities and 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 $1.1 million, $1.7 million and $1.8 million in 2000, 1999 and 1998, respectively. Cash paid for income taxes totaled $2.5 million, $0.2 million and $0.3 million in 2000, 1999 and 1998, respectively. Significant non-cash transactions affecting the Company's accounts consisted of tax benefits from the exercise of common stock options of $1.3 million, $0.03 million and $0.1 million in 2000, 1999 and 1998, respectively. Stock Options and Awards: The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25. See the disclosures in accordance with Statement of Financial Accounting Standards No. 123 (FAS 123) in Note E. Net Income Per Share: Net income per share-Basic excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Net income per share-Diluted reflects the potential dilution that could occur if stock warrants or options were exercised. In 1999 and 1998, the Company did not include potential common stock issuances 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 (in thousands, except share data):
YEAR ENDED DECEMBER 31, ----------------------------------------- 2000 1999 1998 ---------- ----------- ----------- Net income (loss) $ 5,338 $ (1,150) $ (1,457) ========== =========== =========== Shares outstanding - Basic 5,948,789 5,663,146 5,414,075 Effect of dilutive securities: Warrants 49,893 -- -- Stock options 297,185 -- -- ---------- ----------- ----------- Shares outstanding - Diluted 6,295,867 5,663,146 5,414,075 ========== =========== =========== Net income (loss) per share - Basic $ 0.90 $ (0.20) $ (0.27) ========== =========== =========== Net income (loss) per share - Diluted $ 0.85 $ (0.20) $ (0.27) ========== =========== ===========
Because the effect would have been anti-dilutive, stock options representing 134,957 and 87,461 shares in 1999 and 1998, respectively, and warrants representing 21,093 shares in 1998 have been excluded from the computation of diluted earnings per share. 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: 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. The only component of comprehensive income other than net income of the Company is currency translation adjustments. 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. Concentration of Credit Risk: A small number of customers accounts for a substantial portion of the Company's net sales, and therefore also represents a substantial amount of receivables at any point in time. As of December 31, 2000, one customer accounted for approximately 15.7% of accounts receivables and four others collectively accounted for approximately 19.9%. The Company performs regular credit evaluations of its customers and has not experienced any significant credit losses. F-7 28 New Accounting Pronouncements: In June 1998 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 is required to be adopted in fiscal years beginning after June 15, 2000 and establishes accounting and reporting standards for derivative instruments and for hedging activities. The Company does not anticipate that the adoption of SFAS 133 will have a material impact on its financial position or results of operations. In December 1999, the Securities and Exchange Commission (the "SEC") released Staff Accounting Bulletin ("SAB") No. 101, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. The Company implemented SAB 101 in the fourth quarter of 2000 retroactive to January 1, 2000. The impact from implementing SAB 101 was not material to the Company's financial position or results of operations. NOTE B -- DEBT Long-term obligations outstanding are as follows (in thousands):
DECEMBER 31, -------------------- 2000 1999 ------- -------- $6,000 term loan, principal due monthly beginning August 1, 2000, to June 15, 2002, with interest payable monthly at 9.15%, secured by all assets $ 4,750 $ -- $6,000 Series A Senior Secured Notes (net of discount of $49), principal due semi-annually beginning March 27, 1999, to September 27, 2000, with interest payable quarterly at 9.07%, secured by all assets -- 2,951 $12,000 Series B Senior Secured Notes (net of discount of $281), principal due semi-annually beginning March 27, 2001, to September 27, 2003, with interest payable quarterly at 10.25%, secured by all assets -- 11,719 Capital equipment leases for machinery and equipment with interest at 11.59% maturing in 2000 -- 3 ------- -------- Total debt 4,750 14,673 Less current portion (3,000) (3,002) ------- -------- Long-term debt, less current portion $ 1,750 $ 11,671 ======= ========
Aggregate maturities of long-term debt before debt discount at December 31, 2000 are as follows (in thousands): 2001 $3,000 2002 1,750 2003 -- 2004 -- 2005 -- ------ Total $4,750 ====== The Company's current two-year revolving line of credit was renewed on June 15, 1999 and amended on July 7, 2000 at an amount not to exceed $10 million. Interest is payable at prime or at LIBOR plus 2.25% (9.5% at December 31, 2000). The line is secured by all assets of the Company. The line had an outstanding balance of $2.0 million at December 31, 2000. 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 at $0.8 million by the Company, have been reflected as debt discount and have been fully amortized as additional interest expense. As a result of the Company's follow-on public offering in 1997 and the acquisition of Digital Delivery in 1999, the warrants were adjusted to allow for the purchase of 176,303 shares of common stock at an adjusted exercise price of $11.415. 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, 2000, the Company was in compliance with all debt covenants. F-8 29 NOTE C -- INCOME TAXES In 2000, 1999, and 1998, pretax income (loss) was attributed to the following jurisdictions (in thousands): 2000 1999 1998 ------ ------- ------- Domestic Operations $8,655 $(2,095) $(2,696) Foreign Operations 242 217 288 ------ ------- ------- Total $8,897 $(1,878) $(2,408) ====== ======= ======= The income tax provision (benefit) comprises the following (in thousands): YEAR ENDED DECEMBER 31, --------------------------- 2000 1999 1998 ------- ----- ----- Provision (benefit) for income taxes: Current: Federal $ 4,020 $(613) $(682) State 729 682 210 Foreign 109 98 130 ------- ----- ----- 4,858 167 (342) ------- ----- ----- Deferred: Federal (1,295) (207) (336) State (4) (688) (273) ------- ----- ----- (1,299) (895) (609) ------- ----- ----- $ 3,559 $(728) $(951) ======= ===== ===== The tax benefits associated with the exercise of non-qualified stock options reduced taxes currently payable as shown above by $1.4 million, $0.03 million and $0.1 million in 2000, 1999 and 1998, 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 (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 2000 1999 1998 -------------------- ------------------ ------------------- Pretax Pretax Pretax Amount Income Amount Income Amount Income ------- ------ ------ ------ ------ ------ Computed expected tax expense (benefit) $ 3,025 34.0% $(640) (34.0%) $(819) (34.0%) State income tax (benefit), net of federal income tax effect 639 7.2% (127) (6.8%) (63) (2.6%) Amortization of excess of purchase price over net assets acquired 443 5.0% 209 11.0% 31 1.2% Foreign earnings taxed at different rates 24 0.3% 22 1.2% 28 1.2% Research and development tax credits (785) (8.8%) (242) (12.9%) (123) (5.1%) Other 213 2.3% 50 2.8% (5) (0.2%) ------- ---- ----- ---- ----- ---- $ 3,559 40.0% $(728) (38.7%) $(951) (39.5%) ======= ==== ===== ==== ===== ====
F-9 30 The primary components of temporary differences that give rise to the Company's net deferred tax assets are as follows (in thousands): DECEMBER 31, ------------------ 2000 1999 ------ ------ Deferred tax assets: Inventory $1,627 $1,522 Accruals and reserves 2,616 2,247 Net operating loss carryovers 9 246 Tax credits 1,572 580 ------ ------ 5,824 4,595 ------ ------ Deferred tax liabilities: Property, plant and equipment 2,162 2,237 Other 34 29 ------ ------ 2,196 2,266 ------ ------ $3,628 $2,329 ====== ====== The Company has a California net operating loss carryover of $103 thousand that begins expiring in 2003. The Company also has federal and California research and development tax credit carryovers of $844 thousand and $728 thousand, respectively. The federal tax credits begin expiring in 2018 and the California tax credits do not expire. 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 for participation 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 (in thousands):
DECEMBER 31, --------------------- 2000 1999 ------- ------- Accumulated post-retirement benefit obligation: Benefit obligation at beginning of year $ 1,427 $ 1,239 Service cost 127 127 Interest cost 86 86 Actuarial gains (59) 5 Expected benefits paid (30) (30) ------- ------- Benefit obligation at end of year 1,551 1,427 Plan assets at fair value -- -- ------- ------- Accumulated post-retirement benefit obligation in excess of plan assets 1,551 1,427 Unrecognized transition obligation (361) (391) Unrecognized net gain (loss) (2) (2) ------- ------- Accrued post-retirement benefit obligation $ 1,188 $ 1,034 ======= =======
F-10 31 Net periodic post-retirement benefit cost includes the following components (in thousands): YEAR ENDED DECEMBER 31, -------------------------- 2000 1999 1998 ---- ---- ---- Service cost $127 $127 $127 Interest cost 86 86 86 Amortization of transition obligation 30 30 30 Amortization of actuarial loss 3 3 3 ---- ---- ---- Net periodic postretirement expense $246 $246 $246 ==== ==== ==== Discount rate 6.75% 6.75% 6.75% ==== ==== ==== For measurement purposes, an 8.5% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2000. 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 healthcare cost trend rate would increase the total of the service and interest cost components by $7 thousand and increase the post-retirement benefit obligation by $32 thousand. A one percent decrease in the assumed trend rate would decrease the total of the service and interest components by $7 thousand and decrease the post-retirement benefit obligation by $27 thousand. 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, 2000 there have been no nonqualified options issued at an exercise price 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 were 250,000 with annual increases of 50,000 on the last day of each calendar year. The stockholders of the Company approved amendments to the Plan, providing for 200,000 additional option shares in March 1995, June 1997, June 1998 and June 2000, 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 of common stock outstanding as of the Company's fiscal year-end. As of December 31, 2000, 1,598,442 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. F-11 32 Stock option activity for years ended December 31, 2000, 1999 and 1998 is as follows: OPTIONS OUTSTANDING ----------------------------- NUMBER WEIGHTED AVERAGE OF SHARES EXERCISE PRICE ---------- ---------------- 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 Granted 316,500 $ 7.18 Exercised (20,000) $ 4.28 Cancelled (89,000) $ 13.89 --------- ------- Outstanding at December 31, 1999 1,029,648 $ 9.99 Granted 373,750 $ 20.70 Exercised (183,473) $ 7.98 Cancelled (90,438) $ 11.70 --------- ------- Outstanding at December 31, 2000 1,129,487 $ 13.72 ========= ======= The number of options exercisable and the related weighted average exercise price were 415,174 shares at $10.86 at December 31, 2000, 409,585 shares at $9.95 at December 31, 1999 and 276,022 shares at $8.16 at December 31, 1998. As of December 31, 2000, 1999 and 1998, there were 226,455, 188,542 and 298,942 shares, respectively, available for grant under the 1994 Incentive Stock Plan. Additional information regarding options outstanding at December 31, 2000 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------------- ---------------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AS OF 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/00 EXERCISE PRICE ---------------- -------------- ------------------- -------------- -------------- -------------- $ 3.75 - $ 7.00 261,212 7.64 $6.51 104,087 $5.87 $ 7.25 - $10.76 283,525 6.69 $10.18 185,775 $10.33 $10.81 - $15.75 232,250 7.65 $14.05 96,250 $14.14 $16.25 - $21.88 302,500 9.27 $21.18 21,562 $20.12 $22.69 - $28.88 50,000 8.88 $24.89 7,500 $24.50 --------------- --------- ---- ------ ------- ------ $ 3.75 - $28.88 1,129,487 7.90 $13.72 415,174 $10.86 =============== ========= ==== ====== ======= ======
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 lesser 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 17,451 in 2000, 35,922 in 1999 and 34,931 in 1998 at a weighted average price of $17.14, $6.16 and $8.31, 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 (in thousands, except share data): YEAR ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ------ ------- ------- Net income (loss) As reported $5,338 $(1,150) $(1,457) ====== ======= ======= Pro forma $3,994 $(2,108) $(2,497) ====== ======= ======= Net income (loss) per share As reported - Diluted $ 0.85 $ (0.20) $ (0.27) ====== ======= ======= Pro forma - Diluted $ 0.63 $ (0.37) $ (0.46) ====== ======= ======= Pro forma information regarding net income (loss) and net earnings (loss) per common share has been estimated at the date of grant using the Black-Scholes option-pricing model based on the following assumptions: F-12 33
EMPLOYEE STOCK OPTIONS EMPLOYEE STOCK PURCHASE PLAN ---------------------------------- ---------------------------------- 2000 1999 1998 2000 1999 1998 ------ ------ ------ ------ ------ ------ Expected life (years) 5 5 5 0.25 0.25 0.25 Expected volatility 82.92% 78.86% 74.84% 89.46% 75.29% 78.72% Risk free interest rate 6.06% 5.55% 4.94% 5.86% 4.67% 4.93% Expected dividend yield 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable and negotiable in a free trading market. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its options. The weighted average estimated fair values of stock options granted during 2000, 1999 and 1998 were $14.42, $4.83 and $8.61 per share, respectively. The weighted average estimated fair values of shares granted under the Employee Stock Purchase Plan during 2000, 1999 and 1998 were $5.65, $1.93 and $2.97 per share, respectively. 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 $0.8 million, $0.6 million and $0.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. Employees vest in increments of 20% for each year of service and are fully vested after 5 years. NOTE G -- SEGMENT AND RELATED INFORMATION The Company has six reportable segments: Irvine, CA, Austin, TX, Beverly, MA, San Jose, CA, Lexington, MA, 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. At the Beverly, MA segment, Cesium standards are produced for the telecommunications test and measurement and satellite markets. The San Jose, CA segment produces product for both the enterprise computing and test and measurement markets. The San Jose, CA segment was successfully combined with the Beverly, MA segment in the fourth quarter of 2000. The Lexington, MA segment produces products for the e-business market. 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 operating income. Segment net sales include sales to external customers and to other Company segments (intersegment sales). Segment operating income does not include corporate expenses, amortization of goodwill, and intersegment profit elimination. Identifiable assets include accounts receivable, inventories, and land, building and equipment and do not include cash, income tax refund receivable and deferred income taxes, prepaid expenses, goodwill and other long-term corporate assets. The 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. F-13 34 The table below presents information about reported segments for the years ended December 31 (in thousands):
IRVINE, AUSTIN, BEVERLY, SAN JOSE, LEXINGTON, HOFOLDING, CA TX MA CA MA GERMANY TOTAL -------- ------- -------- --------- ---------- ---------- -------- 2000 Net sales $ 57,904 $51,511 $ 22,104 $ 10,068 $ 470 $ 6,122 $148,179 Operating income (loss) 11,365 9,768 3,318 (2,162) (2,964) 273 19,598 Identifiable assets 23,927 27,762 16,526 1,101 1,372 3,129 73,817 Capital expenditures 1,209 1,047 572 296 323 36 3,483 1999 Net sales $ 43,277 $31,824 $ 14,901 $ 14,511 $ 130 $ 5,413 $110,056 Operating income (loss) (2,259) 5,081 1,555 363 (504) 380 4,616 Identifiable assets 17,126 19,436 12,260 4,977 206 1,920 55,925 Capital expenditures 601 866 365 326 74 92 2,324 1998 Net sales $ 48,340 $25,309 $ 14,882 $ 14,128 $ -- $ 6,249 $108,908 Operating income (loss) (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
A reconciliation of total segment net sales, operating income, identifiable assets and capital expenditures to total consolidated amounts, for the years ended December 31 is as follows (in thousands):
2000 1999 1998 --------- --------- --------- NET SALES Total segment net sales $ 148,179 $ 110,056 $ 108,908 Elimination of intersegment revenue (15,940) (9,888) (7,675) --------- --------- --------- Consolidated net sales $ 132,239 $ 100,168 $ 101,233 ========= ========= ========= OPERATING INCOME Total operating income for segment sales $ 19,598 $ 4,616 $ 4,359 Corporate expense (5,790) (2,952) (3,242) Amortization of goodwill (2,867) (2,179) (1,634) Intercompany profit (585) 32 (274) --------- --------- --------- Consolidated operating income $ 10,356 $ (483) $ (791) ========= ========= ========= IDENTIFIABLE ASSETS Total segment assets $ 73,817 $ 55,925 $ 55,632 Goodwill 16,016 18,883 16,131 Cash 1,017 8,271 10,307 Income tax receivable and deferred income taxes 4,774 3,822 4,287 Other assets (348) 881 563 --------- --------- --------- Consolidated assets $ 95,276 $ 87,782 $ 86,920 ========= ========= ========= CAPITAL EXPENDITURES Total segment capital expenditures $ 3,483 $ 2,324 $ 2,699 Other additions 455 35 -- --------- --------- --------- Consolidated capital expenditures $ 3,937 $ 2,359 $ 2,699 ========= ========= =========
F-14 35 The following table sets forth the geographical components of international sales for the years ended December 31 (in thousands): INTERNATIONAL SALES 2000 1999 1998 ------- ------- ------- China $ 3,960 $ 1,208 $ 2,782 Brazil 3,736 1,530 649 Canada 3,518 3,209 5,280 Germany 3,406 2,965 3,190 South Korea 2,484 2,974 1,367 Japan 1,379 885 1,981 Other 14,333 11,825 9,108 ------- ------- ------- $32,816 $24,596 $24,357 ======= ======= ======= Sales from one customer of the Company's Irvine, CA segment represented 33%, 33% and 34% of the Company's consolidated net sales in 2000, 1999 and 1998, respectively. NOTE H -- COMMITMENTS Total rental expense for operating leases amounted to $1.7 million, $1.6 million and $1.9 million in 2000, 1999 and 1998, respectively. The future minimum rental commitments under all non-cancelable operating leases, exclusive of property taxes and certain occupancy costs, are as follows (in thousands): 2001 $2,049 2002 1,913 2003 1,784 2004 1,588 2005 1,063 Thereafter 474 ------ Total minimum lease payments $8,871 ====== NOTE I -- ACQUISITION On July 29, 1999, the Company acquired all of the outstanding capital stock of Digital Delivery, Inc. (DDI), a Massachusetts corporation. The Company issued 214,277 shares of its Common Stock and paid $1.5 million in cash. The DDI stockholders will also receive additional consideration based on certain performance criteria through December 31, 2001. The acquisition has been accounted for using the purchase method of accounting. Goodwill of approximately $4.9 million is being amortized over four years using the straight-line method. DDI is a leading provider of secure information and management software. DDI's patented encryption models and leading-edge compression technologies enable organizations to distribute data and conduct electronic commerce securely via the Internet, Intranet, Extranet, CD-ROM and digital versatile disk. The unaudited pro forma combined results of operations of the Company and DDI for the twelve months ended December 31, 1999 and 1998, presuming the acquisition had taken place on January 1, 1998, after giving effect to certain pro forma adjustments, are as follows (In thousands, except per share data): YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 ---------- ----------- Net sales $ 100,523 $ 101,349 ========== =========== Net income (loss) $ (2,335) $ (3,227) ========== =========== Net income (loss) per share: Basic $ (0.40) $ (0.57) ========== =========== Diluted $ (0.40) $ (0.57) ========== =========== The condensed pro forma combined financial information is provided for informational purposes only and does not purport to be indicative of the future results of the Company or what the results of operations would have been had the acquisition been effective on the date indicated. F-15 36 NOTE J -- SUMMARIZED QUARTERLY DATA (UNAUDITED) The following financial information reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results of the interim periods. Summarized quarterly data for the years ended December 31, 2000 and 1999 is as follows (in thousands, except per share data):
QUARTER ENDED ---------------------------------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------- ------- -------- --------- 2000: Net sales $ 28,944 $33,567 $ 36,197 $ 33,531 Gross profit $ 12,222 $15,880 $ 16,421 $ 14,663 Net income $ 328 $ 1,062 $ 2,047 $ 1,900 Net income per share - basic $ 0.06 $ 0.18 $ 0.34 $ 0.32 Net income per share - diluted $ 0.05 $ 0.17 $ 0.32 $ 0.30 1999: Net sales $ 24,552 $24,765 $ 25,017 $ 25,834 Gross profit $ 9,239 $10,630 $ 10,109 $ 10,093 Net income $ (191) $ 222 $ (619) $ (562) Net income per share - basic $ (0.03) $ 0.04 $ (0.11) $ (0.10) Net income per share - diluted $ (0.03) $ 0.04 $ (0.11) $ (0.10)
The interim financial information was reviewed by the Company's independent accountants in accordance with standards established for such reviews. F-16 37 DATUM INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT BALANCE BEGINNING AT END OF DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS PERIOD ----------- ---------- --------- ---------- --------- YEAR ENDED DECEMBER 31, 2000 Allowance for doubtful accounts $ 561 $ 814 $ 711 $ 664 Reserve for inventories 4,157 1,431 2,178 3,410 Accumulated amortization of acquired intangible assets 5,285 2,127 -- 7,412 YEAR ENDED DECEMBER 31, 1999 Allowance for doubtful accounts $ 153 $ 420 $ 12 $ 561 Reserve for inventories 4,536 2,684 3,063 4,157 Accumulated amortization of acquired intangible assets 3,845 1,440 -- 5,285 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
S-1 38 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - --------- ----------- ------------ 2.2 Agreement and Plan of Merger Agreement, dated July 29, 1999, among -- the Registrant, Digital Delivery, Inc., certain stockholders of Digital Delivery and Datum Acquisition Sub, Inc. (incorporated by reference to the Registrant's Current Report on Form 8-K, dated July 29, 1999, as amended). 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 exhibit 1 on Form 8-K dated November 17, 1999). 4.2 Rights Agreement, dated as of November 8, 1999, between the -- Registrant and ChaseMellon Shareholder Services, L.L.C. (incorporated by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A, Registration No. 000-06272). 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). 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).
39 EXHIBIT INDEX (Continued)
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - --------- ----------- ------------ 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). 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.
40 EXHIBIT INDEX (Continued)
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - --------- ----------- ------------ 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. -- (incorporated by reference to the same numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 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). 10.46 Employment Agreement, dated July 29, 1999, between the Company and -- Thomas Mark Hastings (incorporated by reference to the same numbered exhibit to the Registrant's Amended Annual Report on Form 10-K/A for the year ended December 31, 1999). 10.47 Severance Compensation Agreement, dated October 29, 1999, by and -- between the Registrant and Erik van der Kaay (incorporated by reference to the same numbered exhibit to the Registrant's Amended Annual Report on Form 10-K/A for the year ended December 31, 1999). 10.48 Severance Compensation Agreement, dated October 29, 1999, by and -- between the Registrant and David A. Young (incorporated by reference to the same numbered exhibit to the Registrant's Amended Annual Report on Form 10-K/A for the year ended December 31, 1999). 10.49 Severance Compensation Agreement, dated October 29, 1999, by and -- between the Registrant and Paul E. Baia (incorporated by reference to the same numbered exhibit to the Registrant's Amended Annual Report on Form 10-K/A for the year ended December 31, 1999). 10.50 Severance Compensation Agreement, dated October 29, 1999, by and -- between the Registrant and Michael J. Patrick (incorporated by reference to the same numbered exhibit to the Registrant's Amended Annual Report on Form 10-K/A for the year ended December 31, 1999). 10.51 Severance Compensation Agreement, dated October 29, 1999, by and -- between the Registrant and John J. Rice (incorporated by reference to the same numbered exhibit to the Registrant's Amended Annual Report on Form 10-K/A for the year ended December 31, 1999). 10.52 Severance Compensation Agreement, dated October 29, 1999, by and -- between the Registrant and Raymond L. Waguespack (incorporated by reference to the same numbered exhibit to the Registrant's Amended Annual Report on Form 10-K/A for the year ended December 31, 1999). 10.53 Second Amended and Restated Credit Agreement, dated as of July 7, -- 2000, by and between the Registrant and Wells Fargo Bank, National Association (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 10.54 Third Amended and Restated Revolving Line of Credit Note, dated July -- 7, 2000, issued by the Registrant in favor of Wells Fargo Bank, National Association (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 10.55 Term Note dated July 7, 2000, issued by the Registrant in favor of -- Wells Fargo Bank, National Association (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 21 List of Subsidiaries. -- 23.1 Consent of Independent Accountants. --
41 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). 10.46 Employment Agreement, dated July 29, 1999, between the Company and Thomas Mark Hastings (incorporated by reference to the same numbered exhibit to the Registrant's Amended Annual Report on Form 10-K/A for the year ended December 31, 1999). 10.47 Severance Compensation Agreement, dated October 29, 1999, by and between the Registrant and Erik van der Kaay (incorporated by reference to the same numbered exhibit to the Registrant's Amended Annual Report on Form 10-K/A for the year ended December 31, 1999). 10.48 Severance Compensation Agreement, dated October 29, 1999, by and between the Registrant and David A. Young (incorporated by reference to the same numbered exhibit to the Registrant's Amended Annual Report on Form 10-K/A for the year ended December 31, 1999). 10.49 Severance Compensation Agreement, dated October 29, 1999, by and between the Registrant and Paul E. Baia (incorporated by reference to the same numbered exhibit to the Registrant's Amended Annual Report on Form 10-K/A for the year ended December 31, 1999). 10.50 Severance Compensation Agreement, dated October 29, 1999, by and between the Registrant and Michael J. Patrick (incorporated by reference to the same numbered exhibit to the Registrant's Amended Annual Report on Form 10-K/A for the year ended December 31, 1999). 10.51 Severance Compensation Agreement, dated October 29, 1999, by and between the Registrant and John J. Rice (incorporated by reference to the same numbered exhibit to the Registrant's Amended Annual Report on Form 10-K/A for the year ended December 31, 1999). 10.52 Severance Compensation Agreement, dated October 29, 1999, by and between the Registrant and Raymond L. Waguespack (incorporated by reference to the same numbered exhibit to the Registrant's Amended Annual Report on Form 10-K/A for the year ended December 31, 1999). EX-21 2 a70849ex21.txt EXHIBIT 21 1 EXHIBIT 21 DATUM INC. AND SUBSIDIARIES 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 Digital Delivery, Inc. Massachusetts EX-23.1 3 a70849ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 DATUM INC. AND SUBSIDIARIES CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-89721) and on Form S-8 (No. 333-40404) of Datum Inc. of our report dated February 14, 2001 relating to the financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP - --------------------------------- PRICEWATERHOUSECOOPERS LLP Orange County, California March 23, 2001 -----END PRIVACY-ENHANCED MESSAGE-----