-----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, SwVjQokC2Z4CrtbqRa2wWK4Gag348LVeCtKHcwmYQXm+L9S/mmeSuF0Ux5crPGiK cIBjjyWrAPt76b5tCqrQDA== 0000892569-97-000766.txt : 19970327 0000892569-97-000766.hdr.sgml : 19970327 ACCESSION NUMBER: 0000892569-97-000766 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19970326 SROS: NASD 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: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-22177 FILM NUMBER: 97563908 BUSINESS ADDRESS: STREET 1: 1363 SO STATE COLLEGE BLVD CITY: ANAHEIM STATE: CA ZIP: 92806 BUSINESS PHONE: 7143808880 MAIL ADDRESS: STREET 1: 9975 TOLEDO WAY CITY: IRVINE STATE: CA ZIP: 92618 S-2/A 1 AMENDMENT #2 TO FORM S-2 AS FILED ON 3/26/97 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 26, 1997 REGISTRATION NO. 333-22177 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ DATUM INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-2512237 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 9975 TOLEDO WAY, IRVINE, CALIFORNIA 92618-1819 (714) 380-8880 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------ LOUIS B. HORWITZ PRESIDENT AND CHIEF EXECUTIVE OFFICER DATUM INC. 9975 TOLEDO WAY, IRVINE, CALIFORNIA 92618-1819 (714) 380-8880 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) Copies to: LAWRENCE B. COHN, ESQ. BROOKS STOUGH, ESQ. MICHAEL H. MULROY, ESQ. CARLA S. NEWELL, ESQ. RYAN E. DAVIS, ESQ. MARK P. LONG, ESQ. STRADLING, YOCCA, CARLSON & RAUTH, WILLIAM A. HOLMES, ESQ. A PROFESSIONAL CORPORATION GUNDERSON DETTMER STOUGH 660 NEWPORT CENTER DRIVE, SUITE 1600 VILLENEUVE FRANKLIN & HACHIGIAN, LLP NEWPORT BEACH, CALIFORNIA 92660 155 CONSTITUTION DRIVE PHONE: (714) 725-4000 MENLO PARK, CALIFORNIA 94025 FAX: (714) 725-4100 PHONE: (415) 321-2400 FAX: (415) 321-2800
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ] If the Registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ] ------------------------ CALCULATION OF REGISTRATION FEE ============================================================================================================ TITLE OF EACH AMOUNT PROPOSED PROPOSED AMOUNT OF CLASS OF SECURITIES TO BE MAXIMUM MAXIMUM REGISTRATION TO BE REGISTERED REGISTERED(1) OFFERING PRICE AGGREGATE FEE PER SHARE(2) OFFERING PRICE(1)(2) - ------------------------------------------------------------------------------------------------------------ Common Stock ($.25 par value)............... 2,820,695 $19.125 $53,945,792 $16,347.21 shares ============================================================================================================
(1) Includes 367,917 shares of Common Stock which may be purchased by the Underwriters to cover over-allotments, if any. (2) Estimated pursuant to Rule 457 solely for the purpose of calculating the registration fee. Of the $16,347.21 registration fee, $15,847.35 has been previously paid by the Registrant. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MARCH 26, 1997 PROSPECTUS 2,452,778 SHARES [DATUM INC. LOGO] COMMON STOCK Of the 2,452,778 shares of Common Stock offered hereby, 1,000,000 shares are being sold by Datum Inc. ("Datum" or the "Company") and 1,452,778 shares are being sold by the Selling Stockholders. The Company will not receive any proceeds from the sale of shares of Common Stock by the Selling Stockholders. See "Principal and Selling Stockholders." The Company's Common Stock is traded on the Nasdaq National Market under the symbol "DATM." On March 25, 1997, the last reported sale price of the Common Stock was $16.375 per share. See "Price Range of Common Stock." ------------------ THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS," COMMENCING ON PAGE 5. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================================= PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS - ------------------------------------------------------------------------------------------------- Per Share................ $ $ $ $ - ------------------------------------------------------------------------------------------------- Total(3)................. $ $ $ $ =================================================================================================
(1) See "Underwriting" for indemnification arrangements with the several Underwriters. (2) Before deducting expenses payable by the Company estimated at $500,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to an aggregate of 367,917 additional shares of Common Stock, solely to cover over-allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are offered by the several Underwriters, subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that certificates for such shares will be made available for delivery on or about , 1997, at the office of the agent of Hambrecht & Quist LLC in New York, New York. HAMBRECHT & QUIST OPPENHEIMER & CO., INC. VAN KASPER & COMPANY , 1997 3 - -------------------------------------------------------------------------------- DATUM PRODUCTS IN GLOBAL TELECOMMUNICATIONS [SCHEMATIC DRAWING OF A FULLY INTEGRATED TELECOMMUNICATIONS NETWORK WITH WIRELESS AND WIRELINE SEGMENTS, SHOWING COMPANY'S TIME SYNCHRONIZATION DEVICES AT WIRELESS BASE STATION, WIRELESS NETWORK SWITCHES, GPS SATELLITES, ETC.] PRECISE TIME AND FREQUENCY CONTROL IS REQUIRED TO MAINTAIN THE INTEGRITY OF VOICE, DATA AND VIDEO TRAFFIC THROUGHOUT THE TELECOMMUNICATIONS SYSTEM. DATUM DESIGNS, MANUFACTURES AND MARKETS A WIDE RANGE OF HIGHLY STABLE AND ACCURATE TIME AND FREQUENCY PRODUCTS FOR UTILIZATION IN WIRELESS AND WIRELINE TELECOMMUNICATIONS APPLICATIONS, AS DEPICTED ABOVE. - -------------------------------------------------------------------------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." 4 PROSPECTUS SUMMARY This Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve risks and uncertainties, such as statements of the Company's strategies, plans, objectives, expectations and intentions. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The cautionary statements made in this Propsectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted herein, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." 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 and in numerous other applications. Utilizing its more than 28 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 PCS networks. The Company invented the rubidium oscillator in 1971 and believes it currently supplies more than 80% of the high-precision, rubidium atomic clocks used in cellular and PCS network base stations. Datum is a major supplier of extremely precise cesium standards and 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 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. Finally, the Company 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. Customers for the Company's telecommunications products include Lucent Technologies, Inc. ("Lucent"), Motorola Corporation ("Motorola"), Hyundai Electronics Industries Co., MCI Communications, Inc., Symmetricom, Inc., AT&T Wireless Services, Inc. and telephone companies in Mexico, Australia, South Korea and Spain. Customers for the Company's other products include LM Ericsson Telephone Co., Hughes Information Systems, Inc., Boeing North American, Inc., TRW, Inc., Lockheed Martin Corporation and Northrop Grumman Corp., and various U.S. government agencies and contractors. The Company applies its core understanding of time and frequency technology and its experience in manufacturing highly stable and accurate clocking devices to provide a wide range of products for telecommunications, enterprise computing and a variety of other commercial applications. The Company's strategy is to enhance its position as a leading, worldwide supplier of a broad range of time and frequency products and to capitalize on its core competencies in the technology of rubidium and cesium atomic clocks and GPS satellite signal processing. Key aspects of this strategy include: (i) targeting high-growth sectors of the telecommunications markets, (ii) offering a broad range of uniquely tailored products, (iii) maintaining technological leadership in rubidium and cesium atomic clock technology and GPS satellite signal processing, (iv) expanding relationships with leading OEMs, (v) increasing international sales and (vi) pursuing strategic acquisitions and alliances. The Company was incorporated in California in 1959 and reincorporated in Delaware in 1987. Unless the context otherwise requires, the terms "Datum" and the "Company" refer to Datum Inc. and its wholly-owned subsidiaries. The Company maintains its executive offices at 9975 Toledo Way, Irvine, California 92618-1819, and its telephone number is (714) 380-8880. 3 5 THE OFFERING Common Stock Offered by the Company.......... 1,000,000 shares Common Stock Offered by the Selling Stockholders............................... 1,452,778 shares Common Stock to be Outstanding After the Offering................................... 5,266,291 shares(1) Use of Proceeds.............................. General corporate purposes, including working capital Nasdaq National Market Symbol................ DATM
SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1996 1995(2) 1994 1993 1992 --------- --------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Net sales............................... $ 91,854 $ 67,257 $ 30,897 $ 24,593 $ 27,340 Operating income (loss)................. 5,593 1,864 1,772 298 (962) Loss on discontinued operations......... 1,750 Net income (loss)....................... $ 1,974 $ 60 $ 936 $ 72 $ (2,207) Net income (loss) per share............. $ .46 $ .02 $ .34 $ .03 $ (.89) Weighted average number of shares outstanding.......................... 4,253,019 3,954,307 2,732,812 2,558,356 2,488,829
DECEMBER 31, 1996 -------------------------- ACTUAL AS ADJUSTED(3) ------- -------------- BALANCE SHEET DATA: Working capital................................................ $26,029 $ 43,057 Total assets................................................... 68,688 85,716 Total long-term debt........................................... 17,318 17,318 Total stockholders' equity..................................... 34,623 51,651
- --------------- (1) Excludes 574,474 shares subject to options outstanding as of December 31, 1996 under the Company's 1984 Stock Option Plan and 1994 Stock Incentive Plan at a weighted average exercise price of $7.51 per share. (2) In March 1995, the Company acquired Efratom Time and Frequency Products, Inc. and Efratom Elektronik GmbH. As a result of the acquisition, the Company experienced an increase in all categories of sales and expenses. (3) Adjusted to reflect the sale of the shares of Common Stock offered by the Company hereby and the application of the net proceeds therefrom at an assumed public offering price of $16.375 per share and the exercise by the Prudential Insurance Company of America of a warrant for 175,000 shares of common stock at $11.50 per share. See "Use of Proceeds" and "Capitalization." 4 6 RISK FACTORS The following Risk Factors should be considered carefully, in addition to the other information in this Prospectus, before purchasing shares of the Common Stock offered hereby: RISKS ASSOCIATED WITH THE COMPANY'S DEPENDENCE ON SMALL NUMBER OF CUSTOMERS. A small number of customers account for a substantial portion of the Company's net sales, and the Company expects that a limited number of customers will continue to represent a substantial portion of the Company's net sales for the foreseeable future. The Company's largest customer, Lucent, accounted for approximately 36% and 30% of net sales for the years ended December 31, 1996 and 1995, respectively. Further, the Company's five largest customers, including Lucent, accounted for approximately 53% and 46% of net sales during the same periods. See "Business -- Customers." Risk of Delay or Loss of Orders; Negotiating Leverage. 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 of orders could have a material adverse effect on the Company's business, results of operations and financial condition. 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. Under the terms of the Company's supply agreement with Lucent, the Company has agreed to price reductions at specified times, most recently on January 1, 1997. In addition, many of the Company's customers, including Lucent, are original equipment manufacturers ("OEMs") for telecommunications service providers. As OEMs are pressured to reduce prices by service providers, the Company may be required to contractually commit to price reductions for its products before it knows how, or if, cost reductions can be obtained. If the Company is unable to achieve such cost reductions, the Company's gross margins could decline and such decline could have a material adverse effect on the Company's business, financial condition and results of operations. Also, several of the Company's larger customers, including Lucent and Motorola, require the Company to continue investing in statistical quality control programs to measure, maintain, and improve quality standards. The costs related to such programs may adversely affect the Company's ability to deliver product within cost expectations, in turn affecting the Company's business, financial condition and results of operations. Discrepancies Between Forecasted Orders and Actual Shipments. While the Company receives periodic order forecasts from its major customers, certain of these customers have no obligation to purchase the forecasted amounts. As a result of fluctuating market demand for major customers' equipment and such customers' attempts to minimize inventory, the Company has experienced and expects to continue experiencing rescheduling of shipments, creating discrepancies between forecasted orders and actual shipments. Such discrepancies have in the past resulted in significant increases in inventory and necessitated significant reductions in the Company's production staff. Specifically, Lucent operates its factories under a "just-in-time" system of inventory control to operate with a minimum of in-plant inventory. As a result, Lucent may from time to time require many of its vendors, including the Company, to delay delivery of product. The Company's contract with Lucent requires the Company to maintain significant work-in-progress and finished goods inventory to meet forecasted orders. To the extent Lucent or any of the Company's major customers do not purchase forecasted amounts, the Company could have excess levels of inventory and production staff. Such an excess of inventory or employees will increase the Company's expenses and the amount of the Company's resources invested in working capital, will reduce the Company's cash flow and may increase the risk of product obsolescence, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the manufacturing process of many of the Company's products requires significant post-manufacture aging time. As a result, it is difficult for the Company to increase production of many of its products on short notice. The inability of the Company to satisfy customer orders could have a material adverse effect on the 5 7 Company's relationships and future business with its customers. See "-- Potential Fluctuations in Quarterly Operating Results" and "-- Volatility of Stock Price." POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has experienced, and expects to continue to experience, fluctuations in sales and operating results from quarter to quarter. As a result, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful, and that such comparisons cannot be relied upon as indicators of future performance. In addition, there can be no assurance that the Company will maintain its current profitability in the future. A significant component of such quarterly fluctuations results from rescheduling of orders by the Company's major customers, in some cases due in part to the customers' attempts to minimize inventories. Other factors that could cause the Company's sales and operating results to vary significantly from period to period include: contractual price reductions on products sold to certain major customers; the time, availability and sale of new products; changes in the mix of products having differing gross margins; variations in manufacturing capacities, efficiencies and costs; the availability and cost of components; warranty expenses; and variations in product development and other operating expenses. In addition, the Company has experienced seasonality resulting in increased sales in its fourth quarter which the Company believes is due to increased year-end spending by its OEM customers and a higher level of sales activity in connection with year-end sales quotas. Accordingly, sales and net income for the first quarter of 1997 may reflect little or no growth from the fourth quarter of 1996. In addition, the sales cycles for many of the Company's products are often lengthy and unpredictable, and can range up to 36 months. Further, there can be no assurance that the Company will be successful in closing large transactions on a timely basis or at all. Accordingly, the timing of these transactions could cause additional variability in the Company's quarterly operating results. The Company's quarterly results of operations are also influenced by competitive factors, including pricing and availability of the Company's and competing time and frequency products. A large portion of the Company's expenses are fixed and difficult to reduce in a short period of time. If net sales do not meet the Company's expectations, the Company's fixed expenses would exacerbate the effect of such net sales shortfall on net income. Furthermore, announcements by the Company or its competitors regarding new products and technologies could cause customers to defer purchases of the Company's products. Order deferrals by the Company's customers, delays in the Company's introduction of new products and longer than anticipated sales cycles for the Company's products have in the past adversely affected the Company's quarterly results of operations. Due to all of the foregoing factors, as well as other unanticipated factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts or investors. In such event, the price of the Company's Common Stock may be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON WIRELESS TELECOMMUNICATIONS MARKETS. The Company derives a substantial portion of its net sales from the sale of cesium standards, rubidium oscillators and related systems for wireless communications networks, and the future success of the Company depends to a considerable extent upon the continued growth and increased availability of cellular and other wireless communications services in the United States and internationally. There can be no assurance that either subscriber use or the implementation of wireless communications services will continue to grow, or that such factors will create demand for the Company's products. The Company believes that continued growth in the use of wireless communications services depends on significant reductions in infrastructure capital equipment cost per subscriber and corresponding reductions in wireless service pricing. While the Federal Communications Commission ("FCC") has recently adopted regulations requiring local phone companies to reduce the rates charged to cellular carriers for connection to their wireline networks, it is anticipated that wireless service rates will remain higher than rates charged for traditional wireline service, which may reduce the demand for wireless services and the Company's products. The growth in the implementation of 6 8 wireless communications services is also dependent upon both developed countries allowing continued deployment of new networks and developing countries deploying wireless communications networks as opposed to, or in addition to, constructing wireline infrastructures. See "-- Risks Associated with Government Regulations." Several of the Company's major customers, including Lucent, are suppliers to the emerging PCS market. The initial deployment of PCS networks has only recently begun, and there can be no assurance that the PCS market will grow at the anticipated rate or at all. The Company believes that many of the Company's customers for PCS network timing equipment are uncertain as to the rate of new sales in their markets. As a result of uncertainties in this market, the Company anticipates that customer orders, if any, will be unpredictable in size and frequency. Furthermore, even if the PCS market does experience future growth, there can be no assurance that the Company's products will be widely utilized in PCS networks. In addition, some of the Company's major customers are developing wireless networks utilizing CDMA technology. In the event that such technology does not gain widespread acceptance or the PCS market is dominated by a competing technology, the Company's customers may have reduced demand for the Company's products, which would materially adversely affect the Company's business, financial condition and results of operations. See "Business -- Markets." RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT DEVELOPMENT. The telecommunications and enterprise computing markets, as well as the other markets for the Company's products, are characterized by rapidly changing technology, evolving industry standards and new product introductions and enhancements. Sales of the Company's time and frequency products depend in part on the continuing development and deployment of emerging telecommunications services and on such services requiring precise time and frequency control. There can be no assurance that new developments in telecommunications technology or the introduction of new communications protocols will not reduce the demand for precise timing products in the Company's markets. The Company is dependent to a significant extent upon its ability to enhance its existing products and to develop and introduce innovative new products on a timely basis that gain market acceptance. In addition, the Company is aware of other research and product development being undertaken by other companies and by academic institutions to further evolve smaller, lighter and less costly atomic clocks. For example, in 1995, Westinghouse Electric Corp. announced a research and development program for a miniature atomic clock which it claimed would be smaller and lighter than the Company's comparable products, at a lower cost. There can be no assurance that such product, or any other time and frequency product incorporating new technology, if and when available, will not be commercially successful and materially adversely affect the Company's results of operations. The Company's products compete with alternative technologies being introduced in the time and frequency markets. For example, the Company's rubidium oscillators compete primarily with less stable, lower-cost alternatives, such as GPS-disciplined quartz oscillators offered by other suppliers as well as by the Company. In the event that third parties were able to develop more stable quartz oscillators, competitive with the Company's rubidium oscillators, the Company's business, financial condition and results of operations could be materially adversely affected. Hewlett-Packard Company ("Hewlett-Packard") has developed and currently markets a software enhanced quartz oscillator with performance characteristics between a traditional quartz oscillator and the Company's rubidium oscillator, at a similar price. In the event that Hewlett-Packard improves the performance of its product or decreases its price, the Company's business, financial condition and results of operations could be materially adversely affected. Although the Company maintains an active development program to improve its product offerings, there can be no assurance that such efforts will be successful, that its new products will be developed on a timely basis and will achieve customer acceptance 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 materially adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will 7 9 be successful in selecting, developing, manufacturing and marketing new products or enhancing its existing products on a timely or cost-effective basis. See "Business -- Product Research and Development." 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 than the Company. The Company currently competes principally on the basis of the performance and quality of its products, including reliability, as well as on price and timely manufacture and delivery. In the cellular and PCS markets, the Company competes primarily with Hewlett-Packard and various other quartz oscillator manufacturers. In the wireline market, the Company competes primarily with Symmetricom, Inc., Hewlett-Packard and Oscilloquartz SA. In the enterprise computing market, the Company competes primarily with Tech-Sym Corp., Odetics, Inc. and True-Time, Inc. In the cesium standards market, the Company competes primarily with Hewlett-Packard and Frequency Electronics, Inc. In the rubidium oscillators market, the Company competes primarily with Frequency Electronics, Inc. In addition, certain companies, such as EG&G, Inc., that currently manufacture products exclusively for use in military applications, could enter commercial markets, and compete directly with the Company. There can be no assurance that the Company will be able to 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. See "Business -- Competition." DEPENDENCE ON KEY PERSONNEL; ANTICIPATED RETIREMENT OF CHIEF EXECUTIVE OFFICER. The Company's success depends upon the continued services of its key management personnel. The Company's key personnel, including technical personnel, would be difficult to replace and are not parties to employment or noncompetition agreements. The Company's growth and future success will depend in large part upon its ability to attract and retain additional highly qualified engineering, sales and marketing personnel. In certain of the Company's locations, the Company has experienced difficulty in attracting and retaining highly qualified technical personnel. The loss of technical personnel who become known and trusted by customers of the Company can have an adverse impact on the Company's relationships with such customers. Delay in adding appropriately trained personnel can lead to program delays, higher product costs, and customer dissatisfaction. It is anticipated that Louis B. Horwitz, the Company's President and Chief Executive Officer, and Chairman of the Company's Board of Directors, will retire in the near future. While the Company is currently conducting a search for a new President and Chief Executive Officer, there can be no assurance that the Company will be able to retain a suitable successor in a timely manner. See "Management." MANAGEMENT OF GROWTH; ABILITY TO TIMELY SATISFY ORDERS. The Company has experienced a period of significant growth and has recently expanded the scope of its operations and the number of employees in many of its functional areas. The Company's ability to manage any future growth and compete effectively will require it to enhance its operational, financial and management systems, and to expand its facilities and manufacturing capacity. For example, as a result of increases in orders beyond its customers' previously forecasted amounts, the Company is currently experiencing difficulty manufacturing and testing certain products quickly 8 10 enough to fill orders and is currently behind on certain of its delivery schedules. To meet current and anticipated demand, the Company must increase the rate at which it manufactures these products and there can be no assurance that the Company will be able to successfully increase its manufacturing rate in a timely manner. Although the Company is not aware of any order reductions as a result of these delays, such delays, if they continue or recur, increase the risk that customers will reduce or cancel orders and seek to meet all or a portion of their needs from the Company's competitors. Rapid and substantial manufacturing expansion could strain the Company's quality control, delivery and customer support systems if the capability of such systems is not improved and expanded. The Company will be required to increase staffing and other expenses as well as its expenditures on capital equipment and leasehold improvements in order to meet increased demands of its customers and to enter new markets. In particular, the Company must carefully manage production and inventory levels to meet increasing product demand, fluctuating customer orders and new product introductions. Inaccuracies in demand forecasts can quickly result in either insufficient or excessive inventories and disproportionate overhead expenses. The failure of the Company to manage effectively any future growth could have a material adverse effect on the Company's business, operating results and financial condition. See "Business -- Manufacturing" and "-- Backlog." CONSUMMATION AND INTEGRATION OF FUTURE ACQUISITIONS. The Company plans to continue growing through strategic acquisitions of complementary products, technologies and businesses. Successful implementation of this strategy will be dependent upon the Company's ability to identify and acquire suitable acquisition candidates and manage and integrate the operations of such acquisitions. Competition for acquisition candidates is intensifying within the telecommunications industry and may result in the inflation of purchase prices which exceed the Company's financial capability or could otherwise inhibit its acquisition program or adversely affect the Company's business, financial condition and operating results. In addition, the consummation of any such acquisitions would be subject to the consent of the Company's lenders. There can be no assurance that the Company will be able to identify and acquire suitable additional candidates. Furthermore, even if additional acquisitions are consummated, there can be no assurance that the Company will be successful in managing and integrating such acquisitions. In addition, growth through acquisitions will place additional demands on the Company's management and resources. RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS. In 1996, 1995 and 1994, international revenues accounted for approximately 22%, 19% and 24%, respectively, of the Company's net sales. The Company expects that international revenues will continue to account for a significant percentage of the Company's net sales for the foreseeable future. Factors Affecting International Markets. As a result of conducting business internationally, the Company is subject to various risks, which include: 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 and economic 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. There also can be no assurance that foreign markets for the Company's products will not develop more slowly than currently anticipated. Foreign countries may decide not to construct wireless or wireline communications systems, place moratoriums on building base stations or terminate or delay construction of such systems for a variety of reasons, including environmental issues, economic downturns, the availability of favorable pricing for other communications services or the availability and cost of related equipment. Any such action by foreign countries would reduce the market for the Company's 9 11 products, which would materially adversely affect the Company's business, results of operations and financial condition. See "Business -- Marketing, Distribution and International Sales." Risks Associated with Currency Fluctuations. 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. NEED FOR ADDITIONAL CAPITAL. The Company requires substantial working capital to fund its business, particularly to finance inventories and accounts receivable and for capital expenditures. The Company believes that the net proceeds from this offering, together with existing cash balances, funds expected to be generated from operations and available credit facilities will be adequate to fund its operations for at least the next 12 months. There can be no assurance, however, that the Company will not require additional debt or equity financing during such period or thereafter. Further, there can be no assurance that additional financing, if required, will be available to the Company on acceptable terms, if at all. If adequate funds are not available, the Company may be required to delay, scale back or eliminate its research and development or manufacturing programs or obtain funds through arrangements with partners or others that may require the Company to relinquish rights to certain of its technologies or potential products or other assets. Accordingly, the inability to obtain or difficulty in obtaining such financing could have a material adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." LACK OF SIGNIFICANT PATENT PROTECTION; INFRINGEMENT RISKS. Although the Company has patent protection on certain aspects of its technology, it relies primarily on trade secrets, copyrights and contractual provisions to protect its proprietary rights. There can be no assurance that these protections will be adequate to protect its proprietary rights, that others will not independently develop or otherwise acquire equivalent or superior technology or that the Company can maintain such technology as trade secrets. There also can be no assurance that any patents the Company possesses will not be invalidated, circumvented or challenged. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as the laws of the United States. The failure of the Company to protect its intellectual property rights could have a material adverse effect on the Company's business, operating results and financial condition. 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 or could otherwise have a material adverse effect on the 10 12 Company's business, operating results and financial condition, regardless of the outcome of the litigation. See "Business -- Intellectual Property Rights." DEPENDENCE ON COMPONENT AVAILABILITY AND KEY SUPPLIERS. 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 materially 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, results 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. See "Business -- Manufacturing." RISKS ASSOCIATED WITH GOVERNMENT REGULATIONS. The Company's business is subject to various U.S. federal and state laws, regulations, agency actions, court decisions as well as international laws and regulations. Environmental Regulations; Notice of Environmental Claim. The Company is subject to a variety of local, state, federal and international government regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture the Company's products. The failure to comply with current or future regulations could result in the imposition of substantial fines on the Company, suspension of production, alteration of its manufacturing processes or cessation of operations. Corrective action could require the Company to undertake expensive remediation efforts or to incur substantial other expenses. Any failure by the Company to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject the Company to significant liabilities, including joint and several liability under certain statutes. The imposition of such liabilities could materially adversely affect the Company's business, results of operations and financial condition. In addition, the installation of base stations by wireless service providers or the expansion of wireline networks may be delayed or restricted by various environmental regulations, land use restrictions and zoning ordinances. Any such delay or restriction could have a material adverse effect on the Company's business, results of operations and financial condition. In late 1996, the Company received notice from the owner of premises in Austin, Texas that had previously been occupied by Austron, Inc., the Company's wireline operation, prior to the Company's acquisition of Austron in 1988. The property owner claims, among other things, that the soil at the site contains the same contaminants as were previously remediated by Austron in connection with its vacating the site in 1983. The Company is in the early stages of evaluating the situation. The Company believes that it will incur some costs in connection with such claim and the amount of such costs cannot be determined at this time. Although there can be no assurance that the property owner's claims or any related governmental action will not have a material adverse effect on the Company's business, financial condition and results of operations, the Company believes that it will not have any such effect. See "Business -- Legal Proceedings." 11 13 Government Regulation of Communications Industry. Wireless transmissions and emissions, and certain equipment used in connection therewith, are regulated in the United States and internationally. The enactment by federal, state, local or foreign governments of new laws or regulations or a change in the interpretation of existing regulations could adversely affect the market for the Company's products. There can be no assurance that the current trend toward deregulation and regulatory developments favorable to the promotion of new and expanded wireless and wireline services will continue or that other future regulatory changes will have a positive impact on the Company. The increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards for such products, generally following extensive investigation and deliberation over competing technologies. The delays inherent in this governmental approval process have in the past caused, and may in the future cause, the cancellation, postponement or rescheduling of the installation of communications systems by the Company's customers. These delays could have a material adverse effect on the Company's business, results of operations and financial condition. U.S. GOVERNMENT BUSINESS. The Company's business with the U.S. government, both direct and indirect through other government contractors, accounted for approximately 15%, 22% and 32% of net sales for 1996, 1995 and 1994, respectively. This business is subject to various risks, including unpredictable reductions in funds available for the Company's projects and contract termination at the convenience of the government. A significant portion of the Company's U.S. government business is also subject to reduction or termination due to government policy changes, such as reductions in military defense spending. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Government Contracts." VOLATILITY OF STOCK PRICE. The trading price of the Company's Common Stock has been, and in the future could be, subject to wide fluctuations in response to variations in quarterly operating results of the Company and its customers and competitors, the gain or loss of significant contracts, changes in management, announcements of technological innovations or new product developments by the Company or its competitors, changes in analysts' estimates of the Company's financial performance, changes in telecommunications industry standards, legislative or regulatory changes, general industry trends, worldwide economic and financial conditions and other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations, which have particularly affected the market price for many high technology companies and which have often been unrelated to the operating performance of these companies. These broad market fluctuations and other factors may adversely affect the market price of the Company's Common Stock. See "Price Range of Common Stock." POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company's Restated Certificate of Incorporation, as amended (the "Restated Certificate"), provides for a Board of Directors with staggered terms, which may discourage or prevent certain types of transactions involving an actual or potential change in control of the Company, including transactions in which the stockholders might otherwise receive a premium for their shares over then current market prices. In addition, pursuant to the Restated Certificate, the Board of Directors is authorized to approve the issuance of shares of currently undesignated Preferred Stock, to determine the price, powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed on any unissued series of that Preferred Stock, and to fix the number of shares constituting any such series and the designation of such series, without any vote or future action by the stockholders. The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to the rights of the Common Stock. Certain provisions of Delaware law applicable to the Company could have the effect of delaying, deferring or preventing a change in control of the 12 14 Company. It is possible that the staggered board, undesignated Preferred Stock and the Delaware law may have the effect of delaying, deferring or preventing a change in control of the Company, may discourage bids for the Company's Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of the Common Stock. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS. This Prospectus includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical fact included in this Prospectus, including, without limitation, the statements under "Prospectus Summary," "Risk Factors," "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 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 future operating results; 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 these "Risk Factors," as well as elsewhere in this Prospectus. 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. 13 15 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by the Company hereby, assuming a public offering price of $16.375 per share, after deducting underwriting discounts and commissions and estimated offering expenses, are estimated to be approximately $17,028,000 ($22,736,000 if the over-allotment option is exercised in full). The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. The Company intends to use the proceeds of the offering for general corporate purposes, including working capital. In addition, the Company may use a portion of such proceeds for acquisitions of complementary products, technologies or businesses, although there are currently no commitments or agreements with respect to any material acquisition. Any such acquisition would require approval of the Company's lenders. PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the Nasdaq National Market ("NNM") under the symbol "DATM." The following table sets forth for the periods indicated the range of high ask and low bid prices for the Common Stock.
HIGH LOW ---- ---- YEAR ENDED DECEMBER 31, 1995 1st Quarter.......................................................... $12 1/8 $ 8 1/2 2nd Quarter.......................................................... 16 1/4 10 1/4 3rd Quarter.......................................................... 19 1/8 10 3/8 4th Quarter.......................................................... 12 7/8 8 1/4 YEAR ENDED DECEMBER 31, 1996 1st Quarter.......................................................... 11 3/8 8 3/8 2nd Quarter.......................................................... 15 3/4 8 7/8 3rd Quarter.......................................................... 12 1/8 7 1/4 4th Quarter.......................................................... 17 5/8 10 3/8 YEAR ENDING DECEMBER 31, 1997 1st Quarter (through March 25, 1997)................................. 24 1/2 15
On March 25, 1997, the last reported closing price of the Common Stock on the NNM was $16.375 per share. As of March 25, 1997, the Company had 405 holders of record of Common Stock. DIVIDEND POLICY 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. 14 16 CAPITALIZATION The following table sets forth the capitalization of the Company as of December 31, 1996, and as adjusted to reflect the sale of 1,000,000 shares of Common Stock offered by the Company hereby and the exercise of a warrant to purchase 175,000 shares of Common Stock at an exercise price of $11.50 per share by one of the Selling Stockholders, assuming a public offering price of $16.375 per share, after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company, and the application of the estimated net proceeds therefrom.
DECEMBER 31, 1996 ----------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Current portion of long-term debt...................................... $ 41 $ 41 ======= ======= Long-term debt, excluding current portion.............................. $17,318 $17,318 ------- ------- Stockholders' equity: Preferred Stock, 1,000,000 shares authorized, no shares issued or outstanding...................................................... -- -- Common Stock, 10,000,000 shares authorized, 4,091,291 shares issued and outstanding(1)(2); 5,266,291 shares issued and outstanding as adjusted(1)....................................... 1,023 1,317 Additional paid-in capital........................................ 25,845 42,579 Retained earnings................................................. 7,956 7,956 Cumulative translation adjustment................................. (201) (201) ------- ------- Total stockholders' equity...................................... 34,623 51,651 ------- ------- Total capitalization....................................... $51,941 $68,969 ======= =======
- --------------- (1) Excludes 574,474 shares subject to options outstanding as of December 31, 1996 under the Company's 1984 Stock Option Plan and 1994 Stock Incentive Plan at a weighted average exercise price of $7.51 per share. (2) Excludes 175,000 shares issuable upon exercise of a warrant with an exercise price of $11.50 per share held by The Prudential Insurance Company of America (the "Prudential Warrant"). 15 17 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data has been derived from the financial statements of the Company audited by Price Waterhouse LLP, independent accountants. The consolidated balance sheet at December 31, 1996 and 1995 and the related consolidated statements of operations and of cash flows for the three years ended December 31, 1996 and notes thereto appear elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1996 1995(1) 1994 1993 1992 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales .............................. $ 91,854 $ 67,257 $ 30,897 $ 24,593 $ 27,340 Costs and expenses: Cost of goods sold................... 56,285 40,010 17,491 14,663 17,704 Selling ............................. 12,182 9,836 5,206 4,461 4,561 Product development.................. 7,667 7,087 2,494 1,877 1,819 General and administrative(2)........ 10,127 8,460 3,934 3,294 4,218 --------- --------- --------- --------- --------- Operating income (loss).............. 5,593 1,864 1,772 298 (962) --------- --------- --------- --------- --------- Loss on discontinued operations......................... 1,750 Interest expense..................... 2,255 1,667 241 209 294 Interest income ..................... (7) (17) (15) (7) (4) --------- --------- --------- --------- --------- Income (loss) before income taxes....... 3,345 214 1,546 96 (3,002) Income tax provision (benefit).......... 1,371 154 610 24 (795) --------- --------- --------- --------- --------- Net income (loss)....................... $ 1,974 $ 60 $ 936 $ 72 $ (2,207) ========= ========= ========= ========= ========= Net income (loss) per share............. $ .46 $ .02 $ .34 $ .03 $ (.89) ========= ========= ========= ========= ========= Weighted average number of shares outstanding.......................... 4,253,019 3,954,307 2,732,812 2,558,356 2,488,829
DECEMBER 31, --------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- CONSOLIDATED BALANCE SHEET DATA: Working capital......................... $ 26,029 $ 12,310 $ 8,684 $ 7,299 $ 6,261 Total assets............................ 68,688 66,137 24,578 23,185 23,877 Long-term debt.......................... 17,318 7,938 50 70 307 Stockholders' equity.................... 34,623 31,313 16,883 15,639 15,325
- --------------- (1) In March 1995, the Company acquired Efratom Time and Frequency Products, Inc. and Efratom Elektronik GmbH. As a result of the acquisition, the Company experienced an increase in all categories of sales and expenses. (2) Includes $1.5 million and $1.1 million for 1996 and 1995, respectively, of amortized goodwill and increased depreciation resulting from the step-up of the assets purchased in the March 1995 acquisition of Efratom. 16 18 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 Prospectus. Except for the historical information contained herein, the discussion in this Prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that involve risks and uncertainties, such as statements of the Company's strategies, plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include those discussed in "Risk Factors," as well as those discussed elsewhere herein. OVERVIEW Datum designs, manufactures and markets a wide variety of high-performance time and frequency products used to synchronize the flow of information in telecommunications networks. The Company is also a leading supplier of precise timing products for enterprise computing networks and a wide variety of space, scientific and industrial test and measurement applications. The Company was formed in 1959 and has grown its operations through acquisitions and internal product development. In 1983, the Company acquired its cesium standards operation and, in the process, commenced its evolution from a company primarily supplying timing equipment for military applications to a manufacturer of a broad range of time and frequency products for telecommunications and other applications. In 1986, the Company acquired the business that is now enterprise computing and in 1988, it acquired its current wireline business. In March 1995, the Company acquired Efratom Time and Frequency Products, Inc. and Efratom Elektronik GmbH (collectively "Efratom"), the inventor and leading manufacturer of rubidium oscillators used in cellular and PCS networks. As a result of its acquisition of Efratom, the Company now manufactures each class of time and frequency products in wide-spread commercial use: cesium standards, rubidium oscillators, quartz oscillators and GPS timing receivers. The Company serves the markets for high-precision time and frequency devices in the telecommunications industry which is rapidly expanding as a result of the conversion of analog to digital systems. The Company believes it currently supplies more than 80% of the rubidium atomic clocks used in cellular and PCS network base stations. The Company also provides extremely stable cesium standards and GPS receivers that generate and capture timing and frequency products for use in wireline telecommunications networks. In addition to providing time and frequency standards for telecommunications applications, the Company is a growing supplier of timing products used to ensure the integrity of information transmitted through enterprise computing networks. The Company also manufactures frequency sources for satellites, including GPS satellites that utilize the Company's cesium clocks to provide highly accurate timing and navigation information throughout the world. Finally, the Company 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. 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, accounted for approximately 36% and 30% of net sales for the fiscal years ended December 31, 1996 and 1995. Further, the Company's five largest customers, including Lucent, accounted for approximately 53% and 46% of net sales during the same periods. For a more detailed discussion of the risks associated with the Company's concentrated customer base, see "Risk Factors -- Risks Associated with the Company's Dependence on Small Number of Customers." 17 19 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of the Company's net sales. These percentages are derived from the Company's financial statements included elsewhere in this Prospectus.
PERCENTAGE OF NET SALES ----------------------------- YEAR ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 ----- ----- ----- Net sales............................................... 100.0% 100.0% 100.0% ----- ----- ----- Costs and expenses Cost of goods sold................................. 61.3 59.5 56.6 Selling............................................ 13.3 14.6 16.8 Product development................................ 8.3 10.5 8.1 General and administrative......................... 11.0 12.6 12.7 Interest, net...................................... 2.5 2.5 0.8 ----- ----- ----- Income before income taxes.............................. 3.6 0.3 5.0 Income tax provision.................................... 1.5 0.2 2.0 ----- ----- ----- Net income.............................................. 2.1% 0.1% 3.0% ===== ===== =====
Years Ended December 31, 1996 and December 31, 1995 Introductory Note. Results of operations of the Company in 1995 include only 41 weeks of operations of Efratom which was acquired in March 1995. Due to the acquisition, the Company experienced significant increases (in absolute terms) in net sales, cost of goods sold, selling expense, product development expense, and general and administrative expense, in the year ended December 31, 1996 from the year ended December 31, 1995. Net Sales. The Company's net sales are derived primarily from the sale of time and frequency products for use in telecommunications networks, enterprise computing networks, satellites and in a variety of other test and measurement applications. The Company's net sales increased 36.6% from $67.3 million in 1995 to $91.9 million in 1996. This increase was primarily the result of the acquisition of Efratom and increased sales into each of the Company's principal markets. In particular, net sales were positively impacted as a result of increased sales of rubidium oscillators into the cellular and PCS wireless telecommunications markets. The Company's sales in the wireline network market also showed significant growth, largely due to increased international sales. See "Risk Factors -- Risks of Doing Business in International Markets." Direct and indirect sales to the United States government decreased 6.5% from $14.8 million in 1995 to $13.9 million in 1996, constituting approximately 22% and 15% of net sales, respectively. Government-related contracts and subcontracts are subject to standard provisions for termination at the convenience of the government. In such event, however, the Company is generally entitled to reimbursement of costs incurred on the basis of work completed plus other amounts specified in each individual contract. The Company anticipates that its risks of contract termination for convenience will decrease as it continues to concentrate its selling efforts in other sectors of the economy. See "Risk Factors -- U.S. Government Business." 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 40.5% and 38.7% in 1995 and 1996, respectively. The decrease in gross margins in 1996 was primarily the result of Lucent accounting for an increased percentage of the Company's net sales and price reductions on certain products purchased by Lucent pursuant to the terms of its supply agreement with the Company. The decrease was partially offset by increased margins on certain of the Company's other product lines. Gross margins can be adversely affected by a number of factors, including pricing pressure from the 18 20 Company's customers and the difficulty of reducing fixed expenses in connection with the rescheduling of customer orders. See "Risk Factors -- Risks Associated with the Company's Dependence on Small Number of Customers," and "-- Potential Fluctuations in Quarterly Operating Results." Selling Expense. Selling expense consists primarily of sales commissions paid to the Company's third-party representatives and distributors and salaries and other expenses for its sales and marketing personnel. Selling expense as a percentage of net sales was 14.6% and 13.3% in 1995 and 1996, respectively. The decrease in selling expense as a percentage of net sales between 1995 and 1996 resulted from increased sales to Lucent and other OEM customers which involve substantially lower commission rates. Selling expense increased by 23.9% from $9.8 million in 1995 to $12.2 million in 1996, primarily as a result of increased net sales and the creation of the Company's international sales division in 1996. Product Development. Product development expense consists primarily of salary, applied overhead, materials and third-party design services. Product development expense increased 8.2% from $7.1 million in 1995 to $7.7 million in 1996, and decreased as a percentage of net sales from 10.5% in 1995 to 8.3% in 1996. The dollar increase resulted from the commencement of development programs in 1996 to improve certain products through new chip designs and software development. The Company believes that these and other product development projects will result in increased expenses as a percentage of net sales in 1997. Failure to develop, or introduce on a timely basis, new products or product enhancements that achieve market acceptance could materially adversely affect the Company's business, financial condition and results of operations. See "Risk Factors -- Rapid Technological Change; New Product Development." 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 expense increased by 19.7% from $8.5 million in 1995 to $10.1 million in 1996, and decreased as a percentage of net sales from 12.6% in 1995 to 11.0% in 1996. Includes $1.5 million and $1.1 million for 1996 and 1995, respectively, of amortized goodwill and increased depreciation resulting from the step-up of the assets purchased in the March 1995 acquisition of Efratom. In addition, 1995 general and administrative expense was adversely affected by employee relocation, termination costs and moving expenses relating to the Company's 1995 consolidation of its timing and GPS receiver product lines. Interest, Net. Interest expense increased 35.3% from $1.7 million in 1995 to $2.2 million in 1996, primarily as a result of a full year of interest in 1996 versus a partial year of interest in 1995 associated with indebtedness incurred in connection with the acquisition of Efratom in March 1995. Years Ended December 31, 1995 and December 31, 1994 Introductory Note. As a result of its March 1995 acquisition of Efratom, the Company experienced significant increases (in absolute terms) in net sales, cost of goods sold, selling expense, product development expense and general and administrative expense in the year ended December 31, 1995 from the year ended December 31, 1994. Net Sales. Net sales increased by 118% from $30.9 million in 1994 to $67.3 million in 1995, primarily as a result of the Company's acquisition of Efratom. Not including the acquisition-related increase, net sales increased by $200 thousand. Direct and indirect sales to the United States government increased by 47.5% from $10.0 million in 1994 to $14.8 million in 1995, primarily as a result of the acquisition. Gross Margins. Gross margins were 43.4% and 40.5% in 1994 and 1995, respectively. Gross margins were adversely affected in 1995 as a result of inventory valuation adjustments and, to a lesser extent, by the addition of wireless telecommunication products in connection with the acquisition of Efratom. Selling Expense. Selling expense as a percentage of net sales was 16.8% and 14.6% in 1994 and 1995, respectively. The decrease was primarily the result of the acquisition of Efratom and the related increase in sales to large OEMs, which sales have lower commission-related expenses. 19 21 Product Development. Product development expense as a percentage of net sales was 8.1% and 10.5% in 1994 and 1995, respectively, resulting from Efratom's higher research and development costs, as a percentage of net sales. General and Administrative. General and administrative expense as a percentage of net sales was 12.7% and 12.6% in 1994 and 1995, respectively. The decrease was primarily the result of net sales growing faster than general and administrative expenses. Interest, Net. Interest expense increased from $241 thousand in 1994 to $1.7 million in 1995, as a result of increased indebtedness incurred in connection with the acquisition of Efratom in 1995. SELECTED QUARTERLY RESULTS OF OPERATIONS The following tables present unaudited quarterly financial information for each quarter since the acquisition of Efratom. The information has been prepared by the Company on a basis consistent with the Company's audited consolidated financial statements appearing elsewhere in this Prospectus and includes all necessary adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of the unaudited quarterly results when read in conjunction with the audited consolidated financial statements of the Company and the notes thereto appearing elsewhere in this Prospectus. These operating results are not necessarily indicative of results that may be expected for any subsequent periods.
QUARTER ENDED --------------------------------------------------------------------------- DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, 1996 1996 1996 1996 1995 1995 1995 -------- --------- -------- -------- -------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales........................ $ 27,497 $ 24,507 $ 20,248 $ 19,602 $ 21,965 $ 18,607 $ 16,853 -------- -------- -------- -------- -------- -------- -------- Costs and expenses Cost of goods sold............. 17,103 15,203 12,268 11,711 13,962 11,215 9,283 Selling........................ 3,592 2,944 2,946 2,700 3,008 2,709 2,523 Product development............ 1,857 1,895 1,882 2,033 1,894 1,963 2,288 General and administrative..... 2,664 2,843 2,319 2,301 3,243 2,010 1,995 Interest, net.................. 600 523 576 549 534 473 517 -------- -------- -------- -------- -------- -------- -------- 25,816 23,408 19,991 19,294 22,641 18,370 16,606 -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes.......................... 1,681 1,099 257 308 (676) 237 247 ======== ======== ======== ======== ======== ======== ======== Net income (loss)................ $ 992 $ 649 $ 151 $ 182 $ (465) $ 140 $ 145 ======== ======== ======== ======== ======== ======== ======== Net income (loss) per share...... $ .23 $ .15 $ .04 $ .04 $ (.12) $ .03 $ .03 ======== ======== ======== ======== ======== ======== ========
AS A PERCENTAGE OF NET SALES --------------------------------------------------------------------------- Net sales........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- ----- ----- Costs and expenses Cost of goods sold............. 62.2 62.0 60.6 59.7 63.6 60.3 55.1 Selling........................ 13.1 12.0 14.5 13.8 13.7 14.6 15.0 Product development............ 6.8 7.7 9.3 10.4 8.6 10.5 13.6 General and administrative..... 9.7 11.6 11.5 11.7 14.8 10.8 11.8 Interest, net.................. 2.1 2.2 2.8 2.8 2.4 2.5 3.0 ----- ----- ----- ----- ----- ----- ----- 93.9 95.5 98.7 98.4 103.1 98.7 98.5 ===== ===== ===== ===== ===== ===== ===== Income (loss) before income taxes.......................... 6.1 4.5 1.3 1.6 (3.1) 1.3 1.5 ===== ===== ===== ===== ===== ===== ===== Net income (loss)................ 3.6% 2.6% 0.7% 0.9% (2.1)% 0.8% 0.9% ===== ===== ===== ===== ===== ===== =====
Net Sales. Net sales grew substantially over the seven-quarter period, with significant quarter-to-quarter fluctuations. In the third and fourth quarters of 1996, Lucent, the Company's largest customer, 20 22 substantially increased its orders due to the expanded deployment of cellular and PCS systems. Recently, the Company has experienced seasonality resulting in increased sales in its fourth quarter which the Company believes is due to increased year-end spending by its OEM customers and a higher level of sales activity in connection with year-end sales quotas. Accordingly, the Company expects that its sales and net income for the first quarter of 1997 may reflect little or no growth from the fourth quarter of 1996. Gross Margins. Gross margins have declined slightly over the seven-quarter period. Gross margins have declined as a result of increased sales to Lucent which have lower margins due to contractual commitments. In addition, gross margins decreased in the fourth quarter of 1995 as a result of inventory writedowns in that quarter related to the consolidation of the Company's timing and GPS receiver product lines. General and Administrative. General and administrative expense remained relatively stable as a percentage of sales over the seven-quarter period, except for the fourth fiscal quarter of 1995 in which expenses were incurred for the combination of the timing and GPS receiver product lines. One-time costs associated with combining these product lines created a loss in this quarter. The Company has experienced, and expects to continue to experience, fluctuations in sales and operating results from quarter to quarter. As a result, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful, and that such comparisons cannot be relied upon as indicators of future performance. In addition, there can be no assurance that the Company will maintain its current profitability in the future. A significant component of such quarterly fluctuations results from rescheduling of orders by the Company's major customers, in some cases due in part to the customers' attempts to minimize inventories. Other factors that could cause the Company's sales and operating results to vary significantly from period to period include: contractual price reductions on products sold to certain major customers; the time, availability and sale of new products; changes in the mix of products having differing gross margins; variations in manufacturing capacities, efficiencies and costs; the availability and cost of components; warranty expenses; and variations in product development and other operating expenses. In addition, the Company has experienced seasonality resulting in increased sales in its fourth quarter which the Company believes is due to increased year-end spending by its OEM customers and a higher level of sales activity in connection with year-end sales quotas. In addition, the sales cycles for many of the Company's products are often lengthy and unpredictable, and can take up to 36 months. Further, there can be no assurance that the Company will be successful in closing large transactions on a timely basis or at all. Accordingly, the timing of these transactions could cause additional variability in the Company's quarterly operating results. The Company's quarterly results of operations are also influenced by competitive factors, including pricing and availability of the Company's and competing time and frequency products. A large portion of the Company's expenses are fixed and difficult to reduce in a short period of time. If net sales do not meet the Company's expectations, the Company's fixed expenses would exacerbate the effect of such net sales shortfall. Furthermore, announcements by the Company or its competitors regarding new products and technologies could cause customers to defer purchases of the Company's products. Order deferrals by the Company's customers, delays in the Company's introduction of new products and longer than anticipated sales cycles for the Company's products have in the past materially adversely affected the Company's quarterly results of operations. Due to the foregoing factors, as well as other unanticipated factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts or investors. In such event, the price of the Company's Common Stock may be materially adversely affected. See "Risk Factors -- Potential Fluctuations in Quarterly Operating Results." 21 23 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 $6.7 million in 1996, compared to cash used for operations of approximately $140 thousand in 1995 and cash provided by operations of approximately $372 thousand in 1994. Cash flows in 1995 were adversely affected by greater working capital needs in connection with the acquisition of Efratom. The increase in cash provided by operations in the year ended December 31, 1996 was primarily the result of increased profitability and a decrease in inventory values. Capital expenditures were approximately $2.7 million, $2.9 million and $766 thousand in 1996, 1995 and 1994, respectively. The increase from 1994 to 1995 was primarily the result of the Efratom acquisition. At December 31, 1996, the Company had working capital of $26.0 million and a current ratio of 2.9:1, compared to working capital of $12.3 million and a current ratio of 1.5:1 at December 31, 1995. The increase in working capital is primarily due to the long-term financing arrangements completed by the Company on September 27, 1996, in which the Company converted its debt to $18.0 million of long-term debt instruments provided by The Prudential Insurance Company of America ("Prudential"). This credit facility consists of: (i) $6.0 million of Series A senior secured promissory notes to mature September 27, 2000, bearing interest at the rate of 9.07% on the unpaid principal, payable quarterly, with the principal re-paid in equal installments of $1.5 million on March 27 and September 27 of each year, commencing March 27, 1999, and (ii) $12.0 million of Series B senior secured promissory notes to mature September 27, 2003, bearing interest at the rate of 10.25% on the unpaid principal, payable quarterly, with the principal re-paid in equal installments of $2.0 million on March 27 and September 27 of each year, commencing March 27, 2001. In addition, the Company issued to Prudential common stock warrants for the purchase of 175,000 shares of common stock at an exercise price per share of $11.50. Under the Company's line of credit with Wells Fargo Bank, the Company has a two-year revolving line of credit not to exceed the principal amount of $12.0 million bearing interest at the Bank's prime rate or at LIBOR plus 2.75%. The Wells Fargo credit facility and the Prudential credit facility provide the Company with an aggregate borrowing capacity of $30 million. Under both agreements, the Company is required to maintain certain financial ratios, limit other indebtedness and may not pay dividends. Other restrictions include limitations on the amounts of leases and capital expenditures that may be incurred. The Company currently is in compliance with all such covenants and restrictions. The Company believes that its existing cash balances, funds expected to be generated from operations, borrowings under its credit facilities and the anticipated proceeds of this offering will provide the Company with sufficient funds to finance its operations for at least the next 12 months. There can be no assurance, however, that the Company will not require additional debt or equity financing during such period or thereafter. Further, there can be no assurance that additional financing, if required, will be available to the Company on acceptable terms, if at all. See "Risk Factors -- Need for Additional Capital." 22 24 BUSINESS GENERAL Datum designs, manufactures and markets a wide variety of high-performance time and frequency products used to synchronize the flow of information in telecommunications networks and in numerous other applications. Utilizing its more than 28 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 PCS networks. The Company invented the rubidium oscillator in 1971 and believes it currently supplies more than 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 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 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. Finally, the Company 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. MARKETS Telecommunications The telecommunications system is comprised of numerous interconnected networks employing many different transmission technologies. The traditional wireline network is itself a series of networks connected through numerous switches that allow voice, data and video traffic to be transmitted to their ultimate destinations. Wireless networks, including cellular and PCS, are also connected to components of the wireline network through switches. In order for the overall telecommunications system, and the various components within that system, to operate efficiently, it is critical that each network be synchronized and operate within extremely narrow frequency tolerances. Accurate and precise time and frequency devices are necessary at all levels of the telecommunications system to ensure proper frequency control and to minimize signal degradation. Wireless -- Cellular. Cellular communication services have become an integral part of the telecommunications market. According to sources cited by the Personal Communications Industry Association ("PCIA"), the total number of cellular subscribers in the United States was approximately 44 million at the end of 1996, an increase of 31% over the year-end 1995 figure. PCIA reports that the number of cellular subscribers in the United States is projected to reach 80 million by the end of the year 2000. In addition to growth in the United States, many developing countries, such as those in Latin America and Asia, are building cellular networks. According to the PCIA, current global subscriber growth is estimated to be 70% per year. The total number of global cellular and PCS subscribers is projected to reach 362 million by the year 2001, according to MTA-EMCI. Cellular telecommunications networks consist of numerous cells located throughout a service area, each with its own base station connected by wire or microwave radio to the wireline network through a network switch. Originally, cellular networks used analog technology and frequency division multiple access ("FDMA") to fit more channels into existing frequency bands. This requires accurate frequency control at the base station level, which is accomplished through the use of quartz or higher precision rubidium oscillators. In order to improve transmission quality, increase network capacity and expand network coverage, many network operators are converting older networks from analog to digital technology and expanding their digital wireless networks. Currently, the three leading digital technologies are Time Division Multiple Access ("TDMA"), Code Division Multiple Access 23 25 ("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. The Personal Communications Services market is projected to experience rapid growth. As reported by PCIA, it is estimated that the number of PCS subscribers will grow from approximately 349,000 in 1996 to 18.5 million in the year 2001. To meet this subscriber demand, PCS service providers have purchased PCS frequency licenses covering markets throughout the United States for an aggregate purchase price of approximately $20 billion. 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 require one or more stable, reliable, timing devices to ensure accurate synchronization. Wireline. The wireline sector of the telecommunications market has experienced increased need for high-accuracy timing and frequency equipment primarily as a result of the upgrading of existing networks from analog to digital and the installation of new wireline networks. The wireline sector currently consists of numerous networks and lines, which are connected by switches that provide a transferring mechanism to route transmissions to their ultimate destinations. In order to transfer voice, data or video traffic from one line or network to another, both lines or segments of the network must operate at the same frequency within a very narrow tolerance. Increased demand for higher capacity, higher speed and more accurate information flow has required the transition of wireline networks from analog to digital systems. Imperfect synchronization in an analog system may result merely in static or delayed communication. The failure to synchronize the components in digital networks, however, may result in the loss of information, requiring re-transmission and thus decreasing network efficiency, and increasing the costs to the network operator. As a result, digital systems have a greater need for accurate synchronization which is accomplished through the use of precise timing devices located throughout the networks. The wireline sector of the telecommunications market is also growing as operators expand their networks in order to meet the growing demand for telecommunications services. In developing countries, new wireline networks are being installed to provide basic telephony service. In developed countries, increased demand for new services and government deregulation has encouraged the development of expanded networks, particularly in the local exchange and long distance markets. The expansion of wireline networks has led to an increased need for timing devices to synchronize the flow of information and maximize the efficiency of the networks. Enterprise Computing Enterprise computing networks utilize interconnected computers, workstations, peripheral devices and application software to provide the transaction processing and control infrastructure for national and international organizations. Accurate timing of operations throughout a network is essential to ensure the integrity of the data flowing through the network. When information is retrieved from multiple locations and forwarded to a central point for analysis, accurate interpretation of the data may depend on the ability to properly time sequence both the generation and receipt of the data. 24 26 In order to satisfy these timing requirements, enterprise network operators utilize timing and frequency devices to ensure network synchronization. Traditionally, this function has been accomplished using remote public access time servers as the source of "standard time" and general purpose computers to acquire and distribute time to the network. This approach, however, relinquishes control of network timing to remote time servers and local operators. As a result, inadvertent manipulation of local time servers or their undetected malfunctioning may result in data distortion or loss with adverse consequences. To reduce these risks, many enterprise computing networks now utilize GPS receivers at local computers throughout the network. As each computer in the network operates under Universal Coordinated Time ("UTC"), as received from the GPS satellites, the entire network operates on the same timing. Satellites The satellite market has experienced recent growth as a result of the increased use of satellites for commercial purposes. Satellites launched for a variety of objectives, including communications, navigation, weather forecasting and astronomy must be able to efficiently transmit data to earth-based receivers, thus requiring precise frequency control at the satellite. GPS satellites are designed to transmit extremely precise timing information and use cesium standards or rubidium oscillators. Other commercial satellite programs that require less precise timing and frequency equipment utilize quartz oscillators due to their lower weight and power consumption. Test and Measurement The test and measurement market represents a broad range of applications of cesium standards, rubidium oscillators, quartz oscillators and GPS receivers. Precise timing equipment is used to ensure the synchronization of multiple data recorders in large field testing applications. Timing equipment also allows for the determination of where an event occurred by comparing the precise times at which the event was recorded at multiple sites. For example, electric utility companies use precision timing devices to locate underground line breaks, thus minimizing costly line inspection. TIME AND FREQUENCY TECHNOLOGY Three sources of timing and frequency information are generally used in telecommunications and commercial applications: cesium standards, rubidium oscillators and quartz oscillators. In addition, GPS receivers capture and process timing information generated by satellite-based cesium and rubidium timing devices. The most stable and accurate timing devices in widespread use are based on the resonance of cesium atoms. Cesium standards operate by energizing a reserve of cesium atoms with microwave energy at a precise frequency. At this frequency, due to the atomic structure of cesium, some of the cesium atoms experience a change in energy state. These "excited" atoms are directed to a collector through the use of focusing magnets, resulting in an increased atomic flow. Since the flow of atoms does not increase unless the cesium atoms are excited at exactly the correct frequency, the detection of the increased atomic flow by the collector indicates that the desired frequency has been obtained. The highly stable frequency is then captured by the standard's electronics package and generated as a series of user outputs. Cesium clocks are used as international primary reference standards and are stable to within a fraction of one second over 100,000 years. Rubidium oscillators combine sophisticated glassware, light detection devices and electronics packages to generate a highly stable frequency output. Rubidium, when energized by a specific radio frequency, will absorb less light. The oscillator's electronics package generates this specific frequency and the light detection device ensures, through monitoring the decreased absorption of light by the rubidium and the use of feedback control loops, that this specific frequency is maintained. This highly stable frequency is then captured by the electronics package and generated as an output signal. 25 27 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 DATUM SOLUTION 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 time 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. Through more than 28 years of experience with time and frequency products, Datum has developed substantial expertise in each of the critical components of cesium and rubidium atomic clocks. 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. The Company has developed the ability to manufacture sophisticated time and frequency devices in a standard, repeatable manner, allowing for large-scale production and product reliability. The Company believes it is able to tailor its products quickly and cost-effectively in response to changing customer needs across the various markets it serves. 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-alone 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 which transmit precise timing information and GPS receivers that receive and process the satellite timing transmissions throughout wireless and wireline networks. In addition to telecommunications applications, the Company's timing products help ensure that enterprise computing networks operate in 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. STRATEGY The Company's strategy is to enhance its position as a leading, worldwide supplier of a broad range of precision time synchronization products and high-stability frequency standards. The Company's goal is to capitalize on its core competencies in cesium standards, rubidium oscillators, quartz 26 28 oscillators and GPS receivers to provide a wide variety of products with a broad range of applications. The key elements of this strategy are to: Target High-Growth Telecommunications Markets. The Company focuses its efforts on selected segments of the telecommunications markets which are projected to have high growth rates. The Company has identified the worldwide growth of cellular systems and the deployment of PCS as significant opportunities for sales of timing and frequency products. The Company will also continue to serve the increasing needs for timing and frequency devices in wireline networks resulting from the migration from analog to digital technology and the build-out of new wireline infrastructures both domestically and internationally. Offer Broad Range of Uniquely Tailored Products. The Company intends to capitalize on its experience in designing and manufacturing timing and frequency devices for installation in various segments of the telecommunications system, enterprise computing networks, satellites and in a variety of other test and measurement applications. The Company believes that its experience in supplying products for a variety of applications represents a competitive advantage and enables it to provide uniquely tailored products for evolving customer needs in a cost-effective manner. Maintain Technological Leadership. The Company conducts an active research and development program to remain at the forefront of timing and frequency technology utilizing atomic clocks and GPS satellite transmissions. The Company believes that it is a technological leader in the areas of new product development, current product enhancement, volume manufacturing and software design. Expand Relationships with Leading OEMs. The Company intends to continue to develop relationships with leading OEMs of telecommunications and other equipment utilizing time and frequency products. The Company believes that its ability to satisfy a variety of an OEM's timing and frequency product requirements will help the Company expand relationships with OEMs. Increase International Sales. The Company intends to pursue expanding opportunities in markets outside the United States. The Company currently has customers in Latin America, Asia and Europe and will continue to seek sales of timing and frequency products globally. The Company has recently established an international sales organization and intends to expand its German operation as a European base for marketing, customer-driven engineering and after-sale service. Continue Strategic Acquisitions. The Company intends to continue pursuing strategic acquisitions and alliances to enhance its market position through the acquisition of companies or lines of business that complement its existing business. PRODUCTS Datum designs and manufactures a broad line of time and frequency products for telecommunications systems, enterprise computing networks, satellites and a variety of other test and measurement applications. Datum's products generate highly precise timing and frequency information through the manipulation of cesium or rubidium atoms or quartz crystals, or by capturing cesium or rubidium- based signals from GPS satellite transmissions. 27 29 REPRESENTATIVE DATUM PRODUCTS PRODUCTS APPLICATIONS PRICE PER UNIT - ----------------------------------------------------------------------------------------------------- TELECOMMUNICATIONS WIRELESS -- CELLULAR AND PCS Quartz and Rubidium Clocks Timing and frequency control for $2,000 to $5,000 cellular and PCS basic stations GPS Disciplined Clocks Timing and frequency control for $3,000 to $6,000 cellular and PCS base stations WIRELINE Cesium Beam Primary Reference Master frequency references for $40,000 to $48,000 Sources telecommunications central offices GPS Primary Reference Receivers Derivation of master frequency $8,000 to $18,000 reference for network timing from Universal Coordinated Time (UTC) Timing Signal Generators Generation and distribution of $20,000 to $35,000 synchronization timing for telecommunications networks End Office Primary References Combination of Primary Reference $10,000 to $20,000 Receiver and Timing Signal Generator - ----------------------------------------------------------------------------------------------------- ENTERPRISE COMPUTING GPS Time Servers Local on-site timing source to ensure $3,000 to $10,000 uniform timing across widely-distributed data networks Computer Time Modules Microcomputer plug-in time servers for $1,000 to $4,000 bus-linked data networks - ----------------------------------------------------------------------------------------------------- SATELLITE Cesium Clocks Satellite-borne primary frequency $200,000 to $300,000 sources Quartz Clocks Space qualified frequency sources $15,000 to $75,000 - ----------------------------------------------------------------------------------------------------- TEST AND MEASUREMENT Atomic Frequency Sources Cesium and rubidium-based sources at $2,000 to $60,000 differing levels of stability and cost GPS Time/Frequency Receivers UTC-derived frequency and clocking $3,000 to $10,000 reference for broad spectrum of engineering and commercial applications Time Code Instrumentation Generators, translators, tape search $2,000 to $8,000 and video data insertion equipment for military, industrial and scientific time logging applications - -----------------------------------------------------------------------------------------------------
28 30 TELECOMMUNICATIONS PRODUCTS The Company offers a broad range of time and frequency products for the telecommunications industry. Wireless -- Cellular and PCS Products Cellular and PCS networks require both accurate frequency control and timing information. The Company provides a variety of products to meet these needs. Quartz and Rubidium Clocks -- For analog cellular and GSM applications, the Company provides highly cost-effective quartz oscillator clocking units to synchronize the transmissions of voice and data traffic at the base-station level. For customers requiring a more stable timing source, the Company provides rubidium clocks. GPS Disciplined Clocks -- For digital TDMA and CDMA applications, considerably more stable timing sources are required to maintain the base station's clocking integrity. To meet this need, the Company provides GPS time and frequency receivers which capture cesium or rubidium-based time signals produced by GPS satellites. GPS receivers combine the external cesium or rubidium-based timing signals with internal rubidium or quartz oscillators to provide consistent timing output in the event the receiver loses the external signal. Wireline Products Wireline telecommunications network synchronization systems involve two principal components, a primary frequency reference, to provide an accurate frequency source, and a timing signal generator, to provide control, management and distribution of the timing signals required for network operations. Cesium Beam Primary Reference Sources -- Primary Reference Sources ("PRSs") generate the most stable frequency output in general commercial use. PRSs provide cesium-based stability at the central offices of wireline networks for distribution of timing and frequency information to other components within the networks. GPS Primary Reference Receivers -- Primary Reference Receivers ("PRRs") capture and process time and frequency signals from GPS satellites. Integrated rubidium or quartz oscillators back up the external frequency source to maintain timing accuracy during periods of loss of signal. Typically, a PRR would be installed in telecommunications network switches to provide a stable frequency at the network switch level, thereby allowing transmissions to be efficiently processed with minimal signal 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. 29 31 GPS Time Servers -- The Company's time servers, which are installed in enterprise computing networks, acquire UTC time from GPS satellite transmissions. Worldwide coverage of GPS provides that all server-equipped sites operate with time data that is uniform to within a few milliseconds, thereby allowing time-sensitive information input at one location to be meaningfully analyzed at any other site in the network. In a typical application of this technology, the Securities Industry Automation Corporation, which supports member firms of the New York Stock Exchange, uses the Company's time servers to accurately time-annotate stock transactions. Computer Time Modules -- The Company's computer time modules acquire time from external sources (such as GPS satellites) to perform a variety of timing functions within the host computer with a high degree of accuracy. The products are physically packaged as computer plug-in units and chip sets and are functionally configured to operate under program control as any other data-bus-linked component of the user's data system. The Company produces modules for IBM PC compatible computers and computers manufactured by Sun Microsystems and Digital Equipment Corporation. The Company also produces modules for VME and VXI bus architectures. The Company markets its computer modules in both fully configured forms and as board products and chipsets for use by original equipment manufacturers ("OEMs") and value-added resellers ("VARs"). Computer time modules are also marketed for use in stand-alone computers and workstations used for test and measurement applications. SATELLITE PRODUCTS The Company provides time and frequency products for a variety of satellites used for communications, navigation, television, and military applications. These products are designed around the Company's core technology and are highly durable so as to meet the demanding requirements of space. Cesium Clocks -- The Company's cesium clocks are installed aboard each of the twenty-four GPS satellites now operating in space. Because these satellites have a life expectancy of approximately 7.5 years, it is necessary that additional units be designed to be available as replenishment. As a result, the Company has recently been selected as a cesium clock supplier for a series of satellites, for launch starting approximately in the year 2001. Quartz Clocks -- The Company also produces and markets a broad line of lightweight, highly-stable quartz clocks, particularly suited for space applications. Space qualified versions of these quartz units are aboard satellites used for inter-planetary study, missile tracking and weather monitoring and forecasting, as well as communications and other applications. TEST AND MEASUREMENT PRODUCTS The Company's timing and frequency technology was initially developed to create instrumentation for defense and aerospace applications. This technology continues to be utilized in test and measurement products for a wide range of scientific and industrial applications, including missile guidance, precise geographic mapping and electric utility operation. Atomic Frequency Sources The Company produces and markets atomic reference frequency sources for a wide variety of commercial and scientific applications. Cesium Frequency Standards -- The Company has developed a broad line of cesium frequency products for numerous applications that require a constant frequency reference. Electric utilities use the Company's cesium frequency standards to set the frequency of electric power. Other uses include master timing stations for telecommunications networks, global navigation, satellite communications, missile guidance, and precise geographic mapping for off-shore oil exploration and accurate placement 30 32 of off-shore 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 wide-spread 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 at 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. A major portion of this product line is a family of instruments that derive time from either an internal or external frequency reference. The time is generated in the form of digital codes tailored to specific applications, usually to time-annotate data recording or transmission. To correspond with the time generating equipment described above, the Company makes devices which "read" the coded time, transmitting it to computers, displays, or other devices where the recording of accurate time is required. PRODUCT RESEARCH AND DEVELOPMENT The Company believes that its future success depends in large part on its ability to maintain its technological leadership through enhancements of existing products and development of new products that meet a wide range of customer needs. The Company focuses its research and development efforts on improving the core physics and electronics packages in its time and frequency products. Specifically, the Company is conducting research and development in three areas: developing new time and frequency technologies, improving product manufacturability, and enhancing software functionality. - Developing New Timing and Frequency Technologies. The Company regularly investigates new technologies, including the use of other atomic elements, and new techniques to manipulate currently used elements, to generate precise frequencies in a cost-effective manner. The Company also seeks to develop improved wireless and wireline clocking products, new approaches to enterprise computing and lower cost, higher performing GPS receivers. The Company also seeks to increase its technology base through acquisitions and licensing. For example, the Company recently entered into a letter of intent to acquire the assets of a small manufacturer of hydrogen masers, which provide an extremely stable frequency source over short periods of time in controlled environments. - Improving Product Manufacturability. The Company continually seeks to reduce its production costs across its range of products through the increased use of surface-mount technology, product redesign and other measures to take advantage of lower-cost components. 31 33 - Enhancing Software Functionality. The Company maintains an active software design program focused on integrating application and customer specific software into its time and frequency products. The Company seeks to utilize software to more cost-effectively tailor its products for evolving customer requirements, such as the demand for remote access network management. 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. See "Risk Factors -- Rapid Technological Change; New Product Development." Research and development expenses totalled $7.7 million, $7.1 million and $2.5 million in 1996, 1995 and 1994, respectively. CUSTOMERS The following is a list of the Company's leading customers by market during the year ended December 31, 1996.
- --------------------------------------------------------------------------------- MARKETS CUSTOMERS - --------------------------------------------------------------------------------- Telecommunications AT&T Wireless Service, Inc. Hyundai Electronics Industries Co. Lucent Technologies, Inc MCI Communications, Inc. Motorola Corporation Symmetricom, Inc. - --------------------------------------------------------------------------------- Enterprise Computing Harris Corporation Hughes Information Systems, Inc. LM Ericsson Telephone Co. Sandia National Laboratory Scientific Devices, Inc. - --------------------------------------------------------------------------------- Satellites Boeing North American Motorola Corporation Naval Research Labs TRW, Inc. - --------------------------------------------------------------------------------- Test and Measurement Allied Signal, Inc. Harris Corporation Lockheed Martin Corporation Northrop Grumman Corp. Raytheon Co. - ---------------------------------------------------------------------------------
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, accounted for approximately 36% and 30% of net sales for the years ended December 31, 1996 and 1995, respectively. Further, the Company's five largest customers accounted for approximately 53% 32 34 and 46% 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. See "Risk Factors -- Risks Associated with the Company's Dependence on Small Number of Customers." MARKETING, DISTRIBUTION AND INTERNATIONAL SALES The Company's marketing efforts are focused on establishing and developing long-term relationships with potential customers. Sales cycles for certain of the Company's products, particularly for its larger telecommunications timing systems are lengthy, and can range up to 36 months. Sales are typically made through standard purchase orders which can be subject to cancellation, postponement or other types of delays. The majority of the Company's sales occur through independent sales representatives and distributors that target the specific markets which they serve. Corporate personnel in the United States and Germany provide additional direct sales and marketing support for larger accounts. International sales of the Company's products were approximately 22%, 19% and 24% of net sales for the years ended December 31, 1996, 1995 and 1994, 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: 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 and economic 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 "Risk Factors -- Risks of Doing Business in International Markets." 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 than 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 33 35 Company believes that overall it competes favorably with respect to the foregoing elements, there can be no assurance that it will continue to be able to do so. In the cellular and PCS markets, the Company competes primarily with Hewlett-Packard, and various other quartz oscillator manufacturers. Hewlett-Packard has recently introduced products with performance characteristics between quartz and rubidium oscillators with prices similar to the Company's rubidium oscillators. In the wireline market, the Company competes primarily with Symmetricom, Inc., Hewlett-Packard and Oscilloquartz SA. In the enterprise computing market, the Company competes primarily with Tech-Sym Corp. Odetics, Inc. and True-Time, Inc. In the cesium standards market, the Company competes primarily with Hewlett-Packard and Frequency Electronics, Inc. In the rubidium oscillators market, the Company competes primarily with Frequency Electronics, Inc. In addition, certain companies, such as EG&G, Inc. that currently manufacture products exclusively for use in military applications, could enter commercial markets, and compete directly with the Company. There can be no assurance that the Company will be able to 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. See "Risk Factors -- Competition." BACKLOG The Company's backlog of orders was approximately $38.8 million on December 31, 1996, compared to approximately $33.5 million a year earlier. The Company considers as backlog all orders that are expected to be shipped to customers (other than Lucent) within a 12-month period and scheduled shipments to Lucent within a 90-day period. As part of the Company's close working relationships with its major OEM customers, such customers expect the Company to respond quickly to changes in the volume and delivery schedule of their time and frequency product requirements and to inventory products at the Company's facilities for just-in-time delivery to the OEM customers. Therefore, although contracts with such customers typically specify aggregate volumes of products to be purchased over an extended time period, such contracts also provide that scheduled shipment dates of particular volumes are generally released to the Company only days or a few weeks prior to the required delivery date to the OEM customer. See "Risk Factors -- Potential Fluctuations in Quarterly Operating Results." 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 Approximately 15% of the Company's sales in 1996 were made either directly to United States government agencies or indirectly to U.S. government agencies through subcontracts as compared to approximately 22% in 1995 and 32% in 1994 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 34 36 profit under such contracts is greater than under cost reimbursable contracts. See "Risk Factors -- U.S. Government Business." MANUFACTURING The Company manufactures its products at its plants in Irvine and San Jose, California, Austin, Texas, Beverly, Massachusetts, and Hofolding, Germany. The Company's Irvine, Austin and Beverly facilities have received ISO 9001 certification, and the Company is in the process of seeking such certification for its San Jose facility. The manufacturing process involves the assembly of numerous individual components by technically oriented production personnel. The parts and materials used by the Company consist primarily of printed circuit boards, fabricated housings, relays, and small electric circuit components, such as integrated circuits, semiconductors, resistors and capacitors. The Company also manufactures the physics packages for its cesium and rubidium oscillators. The Company manufactures products to fill firm orders and to meet forecasts received from its major customers. In some cases, as a result of customer requirements and the long manufacturing process of certain of the Company's products, the Company maintains up to four weeks of forecasted amounts in finished goods inventory and up to an additional eight weeks of forecasted amounts in work-in-process inventory. As a result of increases in orders beyond its customers' previously forecasted amounts, the Company is currently experiencing difficulty manufacturing and testing certain products quickly enough to fill orders and is currently behind on certain of its delivery schedules. To meet current and anticipated demand, the Company must increase the rate at which it manufactures these products and there can be no assurance that the Company will be able to successfully increase its manufacturing rate in a timely manner. Although the Company is not aware of any order reductions as a result of these delays, such delays, if they continue or recur, increase the risk that customers will reduce or cancel orders and seek to meet all or a portion of their needs from the Company's competitors. Rapid and substantial manufacturing expansion could strain the Company's quality control, delivery and customer support systems if the capability of such systems is not improved and expanded. See "Risk Factors -- Management of Growth; Ability to Timely Satisfy Orders." 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, results 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. See "Risk Factors -- Dependence on Component Availability and Key Suppliers." 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 35 37 trade secrets. There can be no assurance that others will not independently develop or otherwise acquire equivalent technology or that the Company can maintain such technology as trade secrets. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as the laws of the United States. The failure of the Company to protect its intellectual property rights could have a material adverse effect on the business, operating results and financial condition. 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. See "Risk Factors -- Lack of Significant Patent Protection; Infringement Risks." PROPERTIES The Company's Irvine, California, manufacturing and executive office facilities occupy an aggregate of 109,000 square feet in two sites under leases, each expiring July 31, 2005. The Company also operates at a facility located in San Jose, California, consisting of an 21,800 square foot engineering and manufacturing building, under a lease expiring on February 28, 2001. The Company also operates a facility located in Hofolding, Germany, consisting of an 8,600 square foot manufacturing facility, under a lease expiring in June 1999. The Company owns its facility in Beverly, Massachusetts, comprised of a 32,000 square foot building located on approximately four acres of land. The Company also owns its facility in Austin, Texas, comprised of a 50,000 square foot building, of which 9,000 square feet are leased to an unaffiliated third party, located on approximately nine acres of land. The Company believes that its current facilities are adequate for its present level of operations. EMPLOYEES The Company had 634 employees at December 31, 1996. None of the Company employees are represented by a union. The Company believes its relations with its employees are good. LEGAL PROCEEDINGS In late 1996, the Company received notice from the owner of premises in Austin, Texas that had previously been occupied by Austron, Inc., the Company's wireline operation, prior to the Company's acquisition of Austron in 1988. The property owner claims, among other things, that the soil at the site contains the same contaminants as were previously remediated by Austron in connection with its vacating the site in 1983. At the completion of the remediation in 1983, the site was certified as being in compliance with the then applicable environmental regulations. The Company is in the early stages of evaluating the situation. The Company believes that it will incur some costs in connection with such claim and the amount of such costs cannot be determined at this time. Although there can be no assurance that the property owner's claims or any related governmental action will not have a material adverse effect on the Company's business, financial condition and results of operations, the Company does not believe it will have such effect. See "Risk Factors -- Risks Associated with Government Regulations; Environmental Regulations; Notice of Environmental Claim." 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. 36 38 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Executive officers and directors of the Company, and their ages as of February 15, 1997, are as follows:
NAME AGE POSITION - ----------------------------------------- ---- ------------------------------------------ Louis B. Horwitz......................... 69 Chief Executive Officer, President and Chairman of the Board of Directors Heinz Badura............................. 59 Vice President and President, Efratom Time and Frequency, Inc. Paul E. Baia............................. 44 Vice President and President, Frequency and Time Systems, Inc. Robert F. Ellis.......................... 57 Vice President, Telecommunications Sales Division John (Jack) R. Rice...................... 52 Vice President and President, Austron, Inc. David C. Robinson........................ 55 Vice President and President, Bancomm/Timing Division Raymond L. Waguespack.................... 65 Vice President, International Sales David A. Young........................... 52 Vice President, Chief Financial Officer, Secretary and Treasurer G. Tilton Gardner(1)(2).................. 61 Director Donovan B. Hicks(2)...................... 59 Director R. David Hoover.......................... 51 Director Michael M. Mann(1)....................... 57 Director Dan L. McGurk(1)(2)...................... 70 Director Edward A. Money(1)....................... 66 Director Thomas J. O'Rourke(2).................... 73 Director
- --------------- (1) Member of Audit Committee (2) Member of Compensation Committee Louis B. Horwitz has been the President and Chairman of the Board of Directors of the Company since October 1976 and a director of the Company since May 1975. Prior to joining the Company, Mr. Horwitz was an independent management consultant and an Executive Vice President of Xerox Data Systems, a manufacturer of computers. Mr. Horwitz is currently a director of Newport Corporation, a manufacturer of electro-optical components. It is anticipated that Mr. Horwitz will retire as Chief Executive Officer and President in the near future and continue for a period as Chairman of the Board. Heinz Badura has been Vice President of the Company and President of the Company's Efratom subsidiary, Efratom Time and Frequency, Inc., since August 1995. From 1973 to 1995, he held a variety of positions at Efratom, most recently, Vice President. Paul E. Baia has been Vice President of the Company and President of its Frequency and Time Systems, Inc. subsidiary since January 1996. From January 1990 to January 1996, he served as General Manager of Frequency and Time Systems, Inc. Robert F. Ellis has been Vice President of the Company since November 1988 and has led its Telecommunications Sales Division since May 1995. From November 1988 to May 1995 he served as President of the Company's subsidiary, Austron, Inc. From 1975 to November 1988, Mr. Ellis served as Senior Vice President of Austron, Inc. John (Jack) R. Rice has been Vice President and General Sales Manager of the Company since April 1994 and has been President of the Company's Austron, Inc. subsidiary since May 1995. From 37 39 April 1994 to May 1995 he was General Sales Manager of the Company. From 1987 to 1994, he served as Director of North American Sales and of OEM Sales for Emulex Corporation, a computer hardware manufacturing company. David C. Robinson has been Vice President of the Company and President of the Company's Bancomm Division since March 1994. From February 1986 to March 1994, he served as General Manager of the Bancomm Division. Mr. Robinson became President of Bancomm Corporation in 1984, where he served as Vice President of Marketing since May 1978. Raymond L. Waguespack has been Vice President of the Company since 1989, served as Secretary of the Company from October 1993 to July 1994 and served as President, International Sales Division since April 1996. He has been President of the Company's Timing Division from October 1993 to April 1996. From April 1993 to September 1993, he served as International Sales and Marketing Manager of the Timing Division. From September 1989 to March 1993, Mr. Waguespack served as President of TCXO Enterprises, formerly Spectrum Technology, Inc., a former subsidiary of the Company, that manufactured quartz oscillators. David A. Young has been Vice President, Chief Financial Officer, Secretary and Treasurer of the Company since July 1994. From January 1993 to July 1994, he served as Executive Vice President and Chief Executive Officer of Blower-Dempsay Corporation, a paper and chemical company. From July 1990 to March 1992, he served as Vice President Finance and Administration, Chief Financial Officer and Secretary of Alpha Microsystems, a computer company. G. Tilton Gardner has been a director of the Company since 1976. Mr. Gardner is currently Executive Vice President of Van Kasper & Company, an investment banking firm that is acting as a representative of the underwriters in this offering. From 1965 until 1988, he was associated with Morgan, Olmstead, Kennedy & Gardner Incorporated, an investment banking firm, serving as Chief Executive Officer and Chairman of the Board from 1976. In 1988, that company was combined with Wedbush Securities to form Wedbush Morgan Securities, for which Mr. Gardner served as Executive Vice President until February 1993. Donovan B. Hicks has been a director of the Company since March 1995. Mr. Hicks was Group Vice President of the Ball Aerospace and Communications Group of Ball Corporation from 1981 to 1996. Mr. Hicks was appointed to the Board of Directors of the Company in connection with the Company's acquisition of Efratom Time and Frequency Products, Inc. and Efratom Elektronik GmbH from Efratom Holding, Inc., a wholly owned subsidiary of Ball Corporation, pursuant to the terms of the Stockholder's Agreement, dated March 17, 1995, between the Company and Efratom Holding, Inc. Mr. Hicks is currently the Managing Partner of Cygnus Enterprise Development LLC. Upon closing of this offering, Efratom Holding, Inc. will no longer be entitled to designate a director. R. David Hoover has been a director of the Company since March 1995. Mr. Hoover is currently Executive Vice President and Chief Financial Officer of Ball Corporation. From 1988 to 1992, he was Vice President and Treasurer of Ball Corporation. Mr. Hoover is currently a director of American National Bank, a national banking association. Mr. Hoover was appointed to the Board of Directors of the Company in connection with the Company's acquisition of Efratom Time and Frequency Products, Inc. and Efratom Elektronik GmbH from Efratom Holding, Inc., a wholly owned subsidiary of Ball Corporation, pursuant to the terms of the Stockholder's Agreement, dated March 1995, between the Company and Efratom Holding, Inc. Upon closing of this offering, Efratom Holding, Inc. will no longer be entitled to designate a director. Michael M. Mann has been a director of the Company since May 1989. He has been a director and President of the Blue Marble Development Group, Inc., an international corporate development and consulting group, since its formation in 1988. Mr. Mann is also currently serving as Chairman of the Board of Management Technology, Inc., a developer of management systems software, and as a director of Safeguard Health Enterprises, a corporation engaged in providing dental and vision plans. Mr. Mann also provides consulting services to state and federal governmental agencies and multi- 38 40 national corporations and has served as a member of the Army Science Board. From mid-1987 to 1988, Mr. Mann was a senior consultant and director of Aerospace Industries Centre with Arthur D. Little Inc., an international consulting firm. Dan L. McGurk has been a director of the Company since May 1977. He has been a private investor and consultant since 1970. Mr. McGurk is Treasurer and Chairman of the Board of Southland Title Corporation. Prior to 1970, he was President of Xerox Data Systems, a manufacturer of computers, and from May 1976 to January 1977 he served as Associate Director of the Office of Management and Budget, Executive Office of the President of the United States. He is currently a director of Bowmar Instruments Corporation, a manufacturer of electrical and electro-mechanical parts, and Newport Corporation, a manufacturer of electro-optical components. Edward A. Money has been a director of the Company since May 1980. He has been President of The Edward A. Money Corporation, a company supplying specialty automotive parts, since February 1982. He was Vice President-Finance, Treasurer and Secretary of the Company from February 1977 to February 1982. Thomas J. O'Rourke has been a director of the Company since May 1979. He is currently President and Chairman of the Board of O'Rourke Investment Corp., an investment company. He was a General Partner of Hambrecht and Quist Venture Partners, a venture capital firm, from January 1985 to April 1988. From 1966 to 1985, he was the President and Chairman of the Board of Tymshare, Inc., a computer services company. The Company's executive officers are appointed by the Board of Directors and serve at the Board's discretion. There are no family relationships among the directors and executive officers of the Company. BOARD OF DIRECTORS The Company's Certificate of Incorporation provides for the Board of Directors to be divided into three classes, with staggered three-year terms. As a result, only one class of directors is elected at each annual meeting of stockholders of the Company, with the other classes continuing for the remainder of their respective three-year terms. The classification of the Board of Directors may make it more difficult for the Company's existing stockholders to replace the Board of Directors as well for another party to obtain control of the Company by replacing the Board of Directors. See "Description of Capital Stock -- Delaware Law and Certain Charter Provisions" and "Risk Factors -- Potential Effect of Anti-Takeover Provisions." The Board of Directors has an Audit Committee and a Compensation Committee. The principal duties of the Audit Committee are (1) to recommend to the Board of Directors the selection of the Company's independent accountants, (2) to discuss and review with the Company's independent accountants the audit plan, auditor's report and management letter and the Company's accounting policies and (3) to review the accounting procedures and internal control procedures recommended by the Company's independent accountants. The principal duties of the Compensation Committee are (1) to administer and approve the annual compensation rates of all officers and key employees of the Company, (2) to administer the incentive compensation, stock award, stock option and other compensation plans of the Company and (3) to make recommendations to the Board in connection with such plans. Each member of the Board of Directors receives $1,000 per month for service as a director. In addition, each nonemployee member of the Board of Directors receives $500 for each meeting of the Board of Directors attended by that director and $250 for each meeting of a committee of the Board attended, other than committee meetings held in conjunction with meetings of the Board of Directors. In addition, under the Company's 1994 Stock Incentive Plan, each incumbent director who is not an employee of the Company is automatically granted a non-qualified option to purchase 2,000 shares of the Company's Common Stock on the first business day of each calendar year. Such options (i) have an 39 41 exercise price equal to the fair market value of the Common Stock on the date of grant, (ii) vest in full one year from the date of grant and (iii) have a ten year term. Mr. Hoover and Mr. Hicks, who were appointed to the Board of Directors pursuant to the Stockholder's Agreement between the Company and Efratom Holding, Inc., have agreed to waive their fees and stock options as directors. EXECUTIVE COMPENSATION The following table sets forth summary information concerning compensation paid to the Company's Chief Executive Officer and the four other executive officers who earned salary and bonus for fiscal year 1996 in excess of $100,000 for services rendered to the Company in all capacities during the three fiscal years ended December 31, 1996, 1995 and 1994 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL ------------ COMPENSATION SECURITIES ------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(2) - --------------------------------------------- ----- -------- -------- ------------ ------------------ Louis B. Horwitz(1).......................... 1996 246,038 203,000 40,000 4,043 President and Chairman 1995 221,827 75,000 -0- 5,006 of the Board 1994 210,848 110,000 25,000 5,005 Heinz Badura................................. 1996 146,827 45,000 5,000 3,811 Vice President of Datum Inc. 1995 89,893 50,000 15,000 2,247 and President of Efratom Time 1994 -- -- -- -- & Frequency, Inc. Robert F. Ellis.............................. 1996 139,583 25,000 -0- 3,490 Vice President of Datum Inc. 1995 130,535 20,000 3,750 3,263 1994 117,910 100,000 8,750 2,948 John (Jack) R. Rice.......................... 1996 150,999 100,000 5,000 2,792 Vice President of Datum Inc. 1995 161,040 30,000 -0- 2,452 and President of Austron, Inc. 1994 81,979 20,000 15,000 1,477 David A. Young............................... 1996 129,615 50,000 5,000 4,017 Vice President 1995 119,615 30,000 -0- 3,490 and Chief Financial Officer of Datum Inc. 1994 48,654 20,000 15,000 423
- --------------- (1) Salary amounts for Mr. Horwitz include director's fees of $12,000, $12,000 and $10,667 for the years 1996, 1995 and 1994, respectively. (2) Amounts shown represent Company contributions under the Company's Savings and Retirement Plan for the listed executives. 40 42 OPTION MATTERS Option Grants. The following table sets forth certain information concerning grants of options to each of the Company's Named Executive Officers during the fiscal year ended December 31, 1996. In addition, in accordance with the rules and regulations of the Securities and Exchange Commission, the following table sets forth the hypothetical gains or "option spreads" that would exist for the options. Such gains are based on assumed rates of annual compound stock appreciation of 5% and 10% from the date on which the options were granted over the full term of the options. The rates do not represent the Company's estimate or projection of future Common Stock prices and no assurance can be given that the rates of annual compound stock appreciation assumed for the purposes of the following table will be achieved. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ------------------------------------------------------------ ANNUAL RATES OF NUMBER OF % OF TOTAL STOCK PRICE SECURITIES OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO OPTION TERM OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -------------------- NAME GRANTED(#) FISCAL YEAR(1) PRICE($/SH) DATE(2) 5%($) 10%($) - --------------------------- ---------- -------------- ----------- ---------- -------- -------- Louis B. Horwitz........... 40,000 30.2% 10.125 3/1/06 254,705 645,466 Heinz Badura............... 5,000 3.8% 10.125 3/1/06 31,839 80,685 Robert F. Ellis............ -- -- -- -- -- -- John (Jack) R. Rice........ 5,000 3.8% 10.125 3/1/06 31,839 80,685 David A. Young............. 5,000 3.8% 10.125 3/1/06 31,839 80,685
- --------------- (1) Options to purchase an aggregate of 132,500 shares of Common Stock were granted to employees, including the Named Executive Officers during the fiscal year ended December 31, 1996. (2) Options granted have a term of 10 years, subject to earlier termination in certain events related to termination of employment. Options become exercisable with respect to 25% of the shares on March 1, 1997, and the balance becomes exercisable in three equal annual installments thereafter. Option Exercises. The following table sets forth certain information concerning the exercise of options by each of the Company's Named Executive Officers during the fiscal year ended December 31, 1996, including the aggregate value of gains on the date of exercise. In addition, the table includes the number of shares covered by both exercisable and unexercisable stock options as of December 31, 1996. Also reported are the values for "in the money" options which represent the positive spread between the exercise prices of any such existing stock options and the fiscal year end price of the Company's Common Stock ($16.875 per share). AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS YEAR-END(#) AT FISCAL YEAR-END($) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE --------------------------------------------- ----------- ------------- ----------- ------------- Louis B. Horwitz............................. 32,500 52,500 405,000 420,000 Heinz Badura................................. 3,750 16,250 21,875 99,375 Robert F. Ellis.............................. 16,563 7,187 214,339 69,724 John (Jack) R. Rice.......................... 7,500 12,500 94,688 128,438 David A. Young............................... 10,000 10,000 118,750 93,125
SEVERANCE AND CONSULTING AGREEMENTS Effective as of March 7, 1986, the Company entered into an executive agreement with Louis B. Horwitz (the "Horwitz Executive Agreement"). The Horwitz Executive Agreement provides for the 41 43 payment of benefits in the event that Mr. Horwitz's employment is terminated within three years subsequent to a "change in control" of the Company (as defined in the Horwitz Executive Agreement) under certain circumstances. A "change in control" includes the ownership by any person of 30% or more of the combined voting power of the Company's outstanding securities and certain changes in the composition of the Company's Board of Directors. The benefits payable under the Horwitz Executive Agreement are (i) an amount equal to three times the average of the aggregate annual compensation paid by the Company to Mr. Horwitz during the five calendar years preceding the change in control of the Company, (ii) the right for a period of three months following the employment termination to exercise all unexercised stock options, whether or not they have vested, and (iii) the automatic vesting of all restricted stock awarded to Mr. Horwitz. The foregoing benefits are to be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended. The benefits are payable on the date of termination of Mr. Horwitz's employment. Under the Horwitz Executive Agreement, if such termination had occurred at the end of the fiscal year ended December 31, 1996, Mr. Horwitz would have received $761,080. On October 9, 1992, the Company entered into a consulting agreement with Mr. Horwitz (the "Horwitz Consulting Agreement"). The Horwitz Consulting Agreement provides for consulting services to be provided commencing on the retirement of Mr. Horwitz as an officer and employee of the Company. The Horwitz Consulting Agreement commences on Mr. Horwitz' retirement and continues for twelve months thereafter and may be renewed at the Company's option for successive additional twelve month periods or any portion thereof. In the event of a "change of control" of the Company (as defined in the Horwitz Consulting Agreement) while the Horwitz Consulting Agreement is in force, the term will be extended for a period of ten years from commencement. Under the Horwitz Consulting Agreement, Mr. Horwitz is to provide such advice and consultation as the Company requests, including with respect to strategic planning, management, financial analysis, product planning and other corporate matters. As compensation, Mr. Horwitz will be paid $8,333.33 per day, plus travel expenses, and will be guaranteed a minimum of twelve days of service per year. In the event of death or disability prior to the end of the term of the Horwitz Consulting Agreement, or any renewal term, and prior to a change of control of the Company, Mr. Horwitz, or his estate, shall be entitled to an amount equal to the fee for twelve days of consulting. In the event of death or disability after a change of control which results in an extension of the term, Mr. Horwitz, or his estate, will be entitled to the minimum annual payments for the balance of the term. The Horwitz Consulting Agreement provides that it will be binding on successors to the Company's business. On September 26, 1996, the Company entered into a consulting agreement with Robert F. Ellis (the "Ellis Consulting Agreement"), the Company's Vice President, Telecommunications Sales Division. Under the terms of the Consulting Agreement, Mr. Ellis is to provide consulting services to the Company, for an initial 12 month period, commencing on his retirement which is scheduled to occur in July 1999. The Ellis Consulting Agreement becomes null and void, unless reaffirmed by both parties, in the event that Mr. Ellis' service with the Company is severed, for any reason, prior to July 1999. Upon a "change in control" of the Company (as defined in the Ellis Consulting Agreement) while the Ellis Consulting Agreement is in force, the term will be extended for a period of five years commencing on Mr. Ellis's termination of employment. Under the Ellis Consulting Agreement, Mr. Ellis is to provide such advice and consultation as requested by the Company, including with respect to business planning, management, financial analysis and other corporate matters. As compensation, Mr. Ellis will be paid $2,500 per day plus travel expenses, for a guaranteed a minimum of twelve days of service per year. In the event of death or disability prior to the end of the term of the Ellis Consulting Agreement, or any renewal term, and prior to a change in control of the Company, Mr. Ellis, or his estate, shall be entitled to an amount equal to the fee for twelve days of consulting. In the event of death or disability after a change in control which results in an extension of the term, Mr. Ellis, or his estate, will be entitled to the minimum annual payments for the balance of the term. The Ellis Consulting Agreement provides that it will be binding on successor's of the Company's business. 42 44 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of February 11, 1997, (i) by each person (or group of affiliated persons) who is known by the Company to own beneficially more than five percent of the Company's Common Stock, (ii) the Selling Stockholders, (iii) by each of the Company's directors, (iv) by each of the Named Executive Officers, and (v) by all directors and executive officers as a group. The table is adjusted to reflect the sale of shares of Common Stock offered hereby. Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED PRIOR TO OFFERING AFTER OFFERING ------------------------- SHARES ------------------- NAME AND ADDRESS(1) NUMBER PERCENT BEING OFFERED NUMBER PERCENT - ---------------------------------- --------- ------- ------------- ------- ------- Efratom Holding, Inc.(2).......... 1,277,778 31.0% 1,277,778 -- -- 10 Longs Peak Drive Broomfield, Colorado 80021 The Prudential Insurance Company of America(3)........... 175,000 4.2 175,000 -- -- Louis B. Horwitz(4)(5)............ 220,120 5.3 -- 220,120 4.2 9975 Toledo Way Irvine, California 92718 Heinz Badura(4)(6)................ 8,579 * -- 8,579 * Robert F. Ellis(4)(7)............. 22,545 * -- 22,545 * G. Tilton Gardner(4).............. 37,000 * -- 37,000 * Donovan B. Hicks(8)............... 500 * -- 500 * R. David Hoover(9)................ 500 * -- 500 * Michael M. Mann(4)(10)............ 52,000 1.3 -- 52,000 * Dan L. McGurk(4).................. 41,000 * -- 41,000 * Edward A. Money(4)................ 39,000 * -- 39,000 * Thomas J. O'Rourke(4)(11)......... 93,000 2.2 -- 93,000 1.8 John (Jack) R. Rice(4)(12)........ 13,205 -- 13,205 * David A. Young(4)(13)............. 13,036 * -- 13,036 * All Officers and Directors as a Group (15 persons)(14).......... 593,199 13.6 -- 593,199 10.9
- --------------- * Less than 1% (1) Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options held by that person that are currently exercisable or exercisable within 60 days of February 11, 1997 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of each other person. To the Company's knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person's name. Information with respect to beneficial ownership is based upon the Company's stock records and data supplied to the Company by the holders. (2) Efratom Holding, Inc. is a wholly-owned subsidiary of Ball Corporation. (3) Shares subject to a Common Stock Purchase Warrant exercisable upon the earlier of September 27, 1997, the consummation of this offering, or certain other events. 43 45 (4) Included in the total number of shares listed are 48,750 shares for Mr. Horwitz, 21,000 shares for each of Messrs. McGurk, Money and O'Rourke, 19,000 shares for Mr. Mann, 19,688 shares for Mr. Ellis, 13,000 shares for Mr. Gardner, 12,500 shares for Mr. Rice, 11,250 shares for Mr. Young and 7,500 shares for Mr. Badura which may be acquired within sixty days of February 11, 1997, upon exercise of outstanding options. (5) Includes 4,605 shares held for the account of Mr. Horwitz in the Company's Savings and Retirement Plan. Does not include 18,000 shares owned by adult children of Mr. Horwitz. (6) Includes 579 shares held for the account of Mr. Badura in the Company's Savings and Retirement Plan. (7) Includes 2,857 shares held for the account of Mr. Ellis in the Company's Savings and Retirement Plan. (8) Does not include 1,277,778 shares held by Efratom Holding, Inc. Mr. Hicks was designated as a nominee for election to the Company's Board of Directors pursuant to a Stockholder's Agreement between the Company and Efratom Holding, Inc., and disclaims beneficial ownership of all such shares. (9) Does not include 1,277,778 shares held by Efratom Holding, Inc. Mr. Hoover is the Chief Financial Officer of Ball Corporation, the corporate parent of Efratom Holding, Inc., and disclaims beneficial ownership of all such shares. (10) Includes 33,000 shares that are subject to shared voting and investment powers. These shares are owned by Blue Marble Development Group, Inc. Defined Benefit Pension Plan and Trust, of which Mr. Mann and his spouse are co-trustees. (11) Includes 33,000 shares as to which Mr. O'Rourke has shared voting and investment powers. These shares are owned by O'Rourke Investment Corp., of which Mr. O'Rourke is president and chairman. (12) Includes 705 shares held for the account of Mr. Rice in the Company's Savings and Retirement Plan. (13) Includes 738 shares held for the account of Mr. Young in the Company's Savings and Retirement Plan. Also includes 548 shares as to which Mr. Young has shared voting or investment powers. (14) Includes 236,920 shares which may be acquired within sixty days after February 11, 1997, upon exercise of outstanding options. Also includes 14,849 shares held for the account of officers and directors in the Company's Savings and Retirement Plan. Excludes 1,277,778 shares held by Efratom Holding, Inc. -- see footnotes (8) and (9). 44 46 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 10,000,000 shares of Common Stock, $.25 par value, and 1,000,000 shares of Preferred Stock, $.25 par value. COMMON STOCK Holders of Common Stock are entitled to one vote per share in all matters to be voted on by the stockholders. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of the Company's liabilities. Holders of Common Stock have no preemptive rights and no rights to convert their Common Stock into any other securities, and there are no redemption provisions with respect to such shares. All of the outstanding shares of Common Stock are, and the shares to be issued in this offering will be, fully paid and nonassessable. PREFERRED STOCK No shares of Preferred Stock are outstanding. The Board of Directors has the authority, without further action by the stockholders, to issue the shares of Preferred Stock in one or more series and to fix the rights, preferences and privileges thereof, including voting rights, terms of redemption, redemption prices, liquidation preferences, conversion rights, number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. Although it presently has no intention to do so, the Board of Directors, without stockholder approval, could issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. This provision may be deemed to have a potential anti-takeover effect and the issuance of Preferred Stock in accordance with such provision may delay or prevent a change of control of the Company. See "Risk Factors -- Potential Effect of Anti-Takeover Provisions." DELAWARE LAW AND CERTAIN CHARTER PROVISIONS The Company is subject to the provisions of the Delaware General Corporation Law including Section 203, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless either (i) prior to the date at which the person becomes an interested stockholder, the Board of Directors approves such transaction or business combination, (ii) the stockholder acquires more than 85% of the outstanding voting stock of the corporation (excluding shares held by directors who are officers or held in certain employee stock plans) upon consummation of such transaction, or (iii) the business combination is approved by the Board of Directors and by two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder) at a meeting of stockholders (and not by written consent). A "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to such interested stockholder. For purposes of Section 203, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. The Company's Restated Certificate contains a provision which limits to the fullest extent permitted by Delaware law, the liability of a director to the Company or its stockholders for monetary damages for a breach of such director's fiduciary duty as a director. Delaware law presently permits such limitation of a director's liability except where a director (i) breaches his or her duty of loyalty to the Company or its stockholders, (ii) fails to act in good faith or engages in intentional misconduct or a knowing violation of law, (iii) authorizes payment of an unlawful dividend or stock repurchase, or (iv) obtains an improper personal benefit. 45 47 This provision is intended to afford directors additional protection, and limit their potential liability, from suits alleging a breach of the duty of care by a director. The Company believes this provision will assist it in maintaining and securing the services of directors who are not employees of the Company. As a result of the inclusion of such a provision, stockholders may be unable to recover monetary damages against directors for actions taken by them that constitute negligence or gross negligence or that are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions. If equitable remedies are found not to be available to stockholders for any particular case, stockholders may not have any effective remedy against the challenged conduct. The Restated Certificate and Bylaws also provide that directors or officers shall be indemnified against liabilities arising from their service as directors or officers to the fullest extent permitted by law, which generally requires that the individual act in good faith and in a manner he or she reasonably believes to be in or not opposed to the Company's best interests. The Company has obtained directors and officers insurance to limit its exposure under these provisions. Under the Company's Restated Certificate, the Board of Directors is divided into three classes of directors with each class serving a staggered three-year term. The classification system of electing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of the Company and may maintain the incumbency of the Board of Directors, as it generally makes it more difficult for stockholders to replace a majority of the directors. See "Risk Factors -- Potential Effect of Anti-Takeover Provisions." STOCK TRANSFER AGENT AND REGISTRAR The stock transfer agent and registrar for the Company's Common Stock is ChaseMellon Shareholder Services, L.L.C. 46 48 UNDERWRITING Hambrecht & Quist LLC, Oppenheimer & Co., Inc. and Van Kasper & Company are acting as representatives (the "Representatives") of each of the underwriters named below (the "Underwriters"). Subject to the terms and conditions set forth in an underwriting agreement dated as of the date hereof (the "Underwriting Agreement"), the Underwriters named below have severally agreed to purchase the aggregate number of shares of Common Stock set forth opposite their respective names:
NAME NUMBER OF SHARES ------------------------------------------------------------- ---------------- Hambrecht & Quist LLC........................................ Oppenheimer & Co., Inc....................................... Van Kasper & Company......................................... --------- Total.............................................. 2,452,778 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel and independent auditors. The nature of the Underwriters' obligations is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the public offering of the shares, the offering price and other selling terms may be changed by the Representatives. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to an aggregate of 367,917 additional shares of Common Stock at the public offering price, less the underwriting discount, set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to the total number of shares of Common Stock offered hereby. The Company will be obligated, pursuant to the option, to sell such shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of shares of Common Stock offered hereby. 47 49 The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The Underwriters reserve the right to reject an order for the purchase of shares in whole or in part. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. The Company and the beneficial owners of 593,199 shares of the Company's Common Stock, after giving effect to the sales by the Selling Stockholders in this offering, have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock owned by them during the 90 day period following the effective date of this offering, except that the Company may issue shares upon the exercise of options granted prior to the date hereof and pursuant to its Savings and Retirement Plan and may grant additional options under its stock option plans. In general, the rules of the Securities and Exchange Commission (the "Commission") will prohibit the Underwriters from making a market in the Company's Common Stock during the "cooling-off" period immediately preceding the commencement of sales in this offering. The Commission has, however, adopted exemptions from these rules that permit passive market making under certain conditions. These rules permit an Underwriter to continue to make a market subject to the conditions, among others, that its bid not exceed the highest bid by a market maker not connected with this offering and that its net purchases on any one trading day not exceed prescribed limits. Pursuant to these exemptions, certain Underwriters, selling group members (if any) or their respective affiliates intend to engage in passive market making in the Common Stock during the "cooling-off" period. Certain persons participating in this offering may overallot or effect transactions which stabilize, maintain or otherwise affect the market price of the common stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids or effecting syndicate covering transactions. A stabilizing bid means the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of the common stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. Such transactions may be effected on the Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such stabilizing, if commenced, may be discontinued at any time. G. Tilton Gardner, a member of the Company's Board of Directors, serves as Executive Vice President of Van Kasper & Company, which is acting as a representative of the Underwriters in this offering. The Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company and the Selling Stockholders by Stradling, Yocca, Carlson & Rauth, a professional corporation, Newport Beach, California. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. 48 50 EXPERTS The financial statements of the Company as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Ball Efratom (A unit of Ball Corporation) as of October 30, 1994 and December 31, 1993, and for the ten months ended October 30, 1994 and the twelve months ended December 31, 1993 and December 31, 1992 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement (including any amendments thereto) on Form S-2 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, omits certain of the information contained in the Registration Statement and the exhibits and schedules thereto on file with the Commission pursuant to the Securities Act and the rules and regulations of the Commission thereunder. The Registration Statement, including exhibits and schedules thereto, may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and copies may be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office in Washington, D.C. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Company is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith, files reports, proxy or information statements, and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the following Regional Offices: 7 World Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials also can be obtained from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, by mail at prescribed rates. In addition, the Commission has a Web site on the World Wide Web at http://www.sec.gov, containing registration statements, reports, proxy and information statements and other information that registrants, such as the Company, file electronically with the Commission. The Common Stock is traded on the Nasdaq National Market, and the Company's reports, proxy or information statements and other information may be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Company intends to furnish to its stockholders annual reports containing audited financial statements and quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year of the Company. 49 51 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company's Annual Report on Form 10-K for the year ended December 31, 1996, which has been filed by the Company with the Commission, is incorporated by reference in this Prospectus. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for all purposes to the extent that a statement contained in this Prospectus modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered, upon the written or oral request of such person, a copy of any or all of the documents incorporated herein by reference, other than exhibits to such documents (unless such exhibits are specifically incorporated by reference into the document). Requests for copies should be directed to David A. Young, Vice President and Chief Financial Officer, Datum Inc., 9975 Toledo Way, Irvine, California 92718-8119, telephone (714) 380-8880. 50 52 INDEX TO FINANCIAL STATEMENTS
PAGE ----- DATUM INC. Report of Price Waterhouse LLP, Independent Accountants............................... F-2 Consolidated Balance Sheet as of December 31, 1996 and 1995........................... F-3 Consolidated Statement of Operations for the years ended December 31, 1996, 1995 and 1994................................................... F-4 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994................................................... F-5 Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994................................................... F-6 Notes to Consolidated Financial Statements............................................ F-7 BALL EFRATOM (A unit of Ball Corporation)(1) Report of Price Waterhouse LLP, Independent Accountants............................... F-16 Combined Balance Sheet as of October 30, 1994 and December 31, 1995................... F-17 Combined Statement of Earnings for the ten months ended October 30, 1994 and the twelve months ended December 31, 1993 and 1992..................................... F-18 Combined Statement of Cash Flows for the ten months ended October 30, 1994 and the twelve months ended December 31, 1993 and 1992..................................... F-19 Combined Statement of Changes in Invested Equity for the ten months ended October 30, 1994 and the twelve months ended December 31, 1993 and 1992........................ F-20 Notes to Combined Financial Statements................................................ F-21
- --------------- (1) The financial statements for Ball Efratom contain information for Efratom as a stand-alone entity for periods prior to the Company's March 17, 1995 acquisition of Efratom and are included in accordance with the Commission's accounting rules. F-1 53 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Datum Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Datum Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Costa Mesa, California February 17, 1997 F-2 54 DATUM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------- 1996 1995 ------- ------- ASSETS Current assets Cash and cash equivalents.............................................. $ 1,389 $ 587 Accounts receivable, less allowance for doubtful accounts of $107 and $68................................................................. 16,816 13,638 Inventories............................................................ 19,270 20,161 Prepaid expenses....................................................... 425 200 Deferred income taxes.................................................. 2,007 1,830 Income tax refund receivable........................................... 109 ------- ------- Total current assets........................................... 39,907 36,525 Land, buildings and equipment, net....................................... 15,255 15,654 Excess of purchase price over net assets acquired, net of accumulated amortization of $2,056 and $1,162...................................... 13,020 13,914 Other assets............................................................. 506 44 ------- ------- $68,688 $66,137 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable....................................................... $ 7,542 $ 5,155 Accrued salaries and wages............................................. 2,693 2,102 Accrued warranty....................................................... 1,434 1,337 Other accrued expenses................................................. 1,119 1,896 Income taxes payable................................................... 1,049 105 Notes payable to bank.................................................. -- 10,442 Current portion of long-term debt...................................... 41 3,178 ------- ------- Total current liabilities...................................... 13,878 24,215 ------- ------- Long-term debt........................................................... 17,318 7,938 ------- ------- Post-retirement benefits................................................. 446 290 ------- ------- Other long-term liabilities.............................................. 1,428 1,388 ------- ------- Deferred income taxes.................................................... 995 993 ------- ------- Stockholders' equity -- Preferred stock, par value $.25 per share Authorized -- 1,000,000 shares in 1996 and no shares in 1995 Issued -- none Common stock par value $.25 per share Authorized -- 10,000,000 shares in 1996 and 8,000,000 shares in 1995 Issued -- 4,091,291 shares in 1996 and 4,018,968 shares in 1995..... 1,023 1,005 Additional paid-in capital.......................................... 25,845 24,418 Retained earnings................................................... 7,956 5,982 Cumulative translation adjustment................................... (201) (92) ------- ------- Total stockholders' equity..................................... 34,623 31,313 Commitments (Notes C and I) ------- ------- $68,688 $66,137 ======= =======
See Notes to Consolidated Financial Statements F-3 55 DATUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 --------- --------- --------- Net sales................................................. $ 91,854 $ 67,257 $ 30,897 --------- --------- --------- Costs and expenses Cost of goods sold...................................... 56,285 40,010 17,491 Selling................................................. 12,182 9,836 5,206 Product development..................................... 7,667 7,087 2,494 General and administrative.............................. 10,127 8,460 3,934 Interest expense........................................ 2,255 1,667 241 Interest (income)....................................... (7) (17) (15) --------- --------- --------- 88,509 67,043 29,351 --------- --------- --------- Income before income taxes................................ 3,345 214 1,546 Income tax provision...................................... 1,371 154 610 --------- --------- --------- Net income................................................ $ 1,974 $ 60 $ 936 ========= ========= ========= Net income per share...................................... $ .46 $ .02 $ .34 ========= ========= ========= Weighted average number of shares outstanding............. 4,253,019 3,954,307 2,732,812 ========= ========= =========
See Notes to Consolidated Financial Statements F-4 56 DATUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL CUMULATIVE ------------------ PAID-IN RETAINED TRANSLATION SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ---------- ------ ---------- -------- ----------- Balances at December 31, 1993................. 2,596,659 $ 649 $ 10,004 $4,986 -- Issuance of common stock under 401(k) plan..................................... 32,740 8 165 Exercise of stock options................... 38,825 10 125 Net income.................................. 936 --------- ------ -------- ------ ----- Balances at December 31, 1994................. 2,668,224 667 10,294 5,922 -- Issuance of common stock under 401(k) plan..................................... 30,328 8 347 Exercise of stock options................... 42,638 11 360 Acquisition of Efratom...................... 1,277,778 319 13,417 Cumulative translation adjustment........... $ (92) Net income.................................. 60 --------- ------ -------- ------ ----- Balances at December 31, 1995................. 4,018,968 1,005 24,418 5,982 (92) Issuance of common stock under 401(k) plan..................................... 44,610 11 453 Exercise of stock options................... 27,713 7 189 Issuance of common stock warrants........... 785 Cumulative translation adjustment........... (109) Net income.................................. 1,974 --------- ------ -------- ------ ----- Balances at December 31, 1996................. 4,091,291 $1,023 $ 25,845 $7,956 $(201) ========= ====== ======== ====== =====
See Notes to Consolidated Financial Statements F-5 57 DATUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 -------- -------- ------- Cash flows from operating activities: Net income.................................................. $ 1,974 $ 60 $ 936 -------- -------- ------- Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization.......................... 3,040 2,393 691 Amortization of goodwill............................... 894 616 79 Contribution of shares of common stock to the Company's 401(k) plan......................................... 464 355 173 Changes in assets and liabilities, net of acquisition: Increase in accounts receivable.......................... (3,178) (1,486) (1,280) (Increase) decrease in inventories....................... 891 (5,678) (342) Increase in prepaid expenses............................. (225) (422) (305) Decrease in income tax refund receivable................. 109 107 56 (Increase) decrease in deferred income taxes............. (175) (1,111) 59 (Increase) decrease in other assets...................... (491) 12 15 Increase (decrease) in accounts payable.................. 2,387 2,361 (49) Increase (decrease) in accrued expenses.................. (89) 2,222 263 Increase in income taxes payable......................... 944 105 -- Increase in other long-term liabilities.................. 40 188 -- Increase in post-retirement benefits..................... 156 138 76 -------- -------- ------- Total reconciling items..................................... 4,767 (200) (564) -------- -------- ------- Net cash provided by (used for) operating activities........ 6,741 (140) 372 -------- -------- ------- Cash flows from investing activities: Book value of equipment disposals........................... 98 20 18 Capital expenditures........................................ (2,685) (2,937) (766) Payment for acquisition, net of cash acquired............... -- (15,246) -- Other....................................................... (99) (190) -- -------- -------- ------- Net cash used in investing activities....................... (2,686) (18,353) (748) -------- -------- ------- Cash flows from financing activities: Proceeds from (reductions of) line of credit................ (10,442) 7,442 75 Proceeds from long-term debt and notes payable.............. 17,736 12,596 -- Repayment of long-term debt and notes payable............... (11,528) (1,550) (264) Exercise of stock options................................... 196 371 135 Proceeds from issuance of common stock warrants............. 785 -- -- -------- -------- ------- Net cash provided by (used for) financing activities........ (3,253) 18,859 (54) -------- -------- ------- Net increase (decrease) in cash and cash equivalents.......... 802 366 (430) Cash and cash equivalents at beginning of year................ 587 221 651 -------- -------- ------- Cash and cash equivalents at end of year...................... $ 1,389 $ 587 $ 221 ======== ======== =======
See Notes to Consolidated Financial Statements F-6 58 DATUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE A -- DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of the Company: Datum designs, manufactures and markets a wide variety of high-performance time and frequency products used to synchronize the flow of information in telecommunications networks. The Company is also a leading supplier of precise timing products for enterprise computing networks and a wide variety of space, scientific and industrial test and measurement applications. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany transactions and accounts have been eliminated. Revenue Recognition: Revenues are recorded when products are shipped. 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 the lower of cost or market; cost is determined on a first-in, first-out basis. Inventories comprise the following:
DECEMBER 31, ------------------- 1996 1995 ------- ------- Purchased parts.................................................. $ 7,074 $ 7,801 Work-in-process.................................................. 9,096 9,002 Finished products................................................ 3,100 3,358 ------- ------- $19,270 $20,161 ======= =======
Land, Buildings and Equipment: Land, buildings and equipment, which are recorded at cost and depreciated where appropriate by the straight-line method, consist of the following:
DECEMBER 31, ------------------- DEPRECIABLE 1996 1995 LIFE ------- ------- --------------- Land........................................... $ 2,040 $ 2,040 Buildings...................................... 4,494 4,474 20 to 40 years Equipment...................................... 15,685 15,145 3 to 10 years Leasehold improvements......................... 930 1,150 5 to 20 years ------- ------- 23,149 22,809 Less accumulated depreciation and amortization................................. 7,894 7,155 ------- ------- $15,255 $15,654 ======= =======
Expenditures for maintenance and repairs are charged directly to income, and betterments and major renewals are capitalized. F-7 59 DATUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Excess of Acquisition Costs 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 is amortized over varying periods ranging from 15 to 40 years. At each balance sheet date, the Company reviews the recoverability of long-lived assets and certain intangible assets, including goodwill. In the event the sum of expected undiscounted future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. Income Taxes: Effective January 1, 1993, the Company adopted statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under the liability method specified under FAS 109, the deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is calculated as the change in net deferred liabilities or assets. Consolidated Statement of Cash Flows: For purposes of the consolidated statement of cash flows, cash equivalents include highly liquid investments, with an original maturity of less than three months. Cash paid for interest totaled $2,109, $1,508 and $232 in 1996, 1995 and 1994, respectively. Cash paid for income taxes totalled $580, $909 and $730 in 1996, 1995 and 1994, respectively. In connection with the acquisition of Efratom, the Company issued 1,277,778 shares of common stock valued at $13,736. Stock Options and Awards: The Company accounts for employee stock-based compensation in accordance with Accounting Principles Bulletin No. 25. See the disclosures in accordance with Financial Accounting Standard No. 123 (FAS 123) in Note F. Net Income Per Share: Net income per share is based upon the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares include those issuable on the exercise of dilutive stock options and common stock warrants (after reduction for common shares assumed to have been purchased with the proceeds). Net income per share is the same on a fully diluted basis for all years presented. 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. Long-Lived Assets: In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," was issued. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During 1996, the Company adopted this statement and the effect of adoption in 1996 was not material. Foreign Currency Translation: The Company follows principles of Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation", (FAS 52) in accounting for foreign operations. The financial statements of the Company's German subsidiary, whose functional currency is the German mark, have been translated into U.S. dollars. Reclassifications: Certain reclassifications have been made to the consolidated financial statements for prior years to conform to the 1996 presentation. F-8 60 DATUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE B -- ACQUISITION On March 16, 1995 the stockholders of the Company approved the purchase of all the outstanding capital stock of Efratom Time and Frequency Products, Inc., a Colorado corporation, and Ball Efratom Elektronik GmbH, a corporation organized under the laws of the Republic of Germany (collectively, Efratom). The purchase price consisted of $15,000 cash and 1,277,778 shares of Datum common stock. The final purchase price was subject to a post-closing adjustment of $1,270 based on a comparison of the working capital and fixed assets of Efratom as of August 7, 1994 and as of March 17, 1995. The post closing adjustment was included in goodwill and other long-term liabilities. The acquisition, which has been accounted for as a purchase, closed March 17, 1995. The unaudited pro forma combined condensed balance sheet of the Company and Efratom as of December 31, 1994, presuming the acquisition had taken place on that date, after giving effect to certain pro forma adjustments is as follows: ASSETS Current assets..................................................... $28,545 Land, buildings and equipment, net................................. 15,446 Goodwill........................................................... 12,090 ------- $56,081 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities................................................ $13,587 Long-term debt and other liabilities............................... 14,328 Stockholders' equity............................................... 28,166 ------- $56,081 =======
The unaudited pro forma combined results of operations of the Company and Efratom for the years ended December 31, 1995 and 1994, presuming the acquisition had taken place on January 1, 1994, after giving effect to certain pro forma adjustments are as follows:
YEAR ENDED DECEMBER 31, ------------------- 1995 1994 ------- ------- Revenues......................................................... $76,552 $66,139 ======= ======= Net income....................................................... $ 442 $ 2,141 ======= ======= Net income per share............................................. $ 0.11 $ 0.53 ======= =======
The condensed pro forma combined financial information is provided for informational purposes only and does not purport to be indicative of the future results or financial position of the Company or what the results of operations or financial position would have been had the acquisition been effective on the dates indicated. This information should be read in conjunction with these audited consolidated financial statements. F-9 61 DATUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE C -- LONG-TERM DEBT Long-term obligations outstanding are as follows:
DECEMBER 31, ------------------- 1996 1995 ------- ------- $12,000 Revolving Line of Credit, expires November 1, 1998, with interest payable at prime or at LIBOR plus 2.75%, (8.25% at December 31, 1996), secured by all assets...................... $ 21 $6,000 Series A Secured Notes (net of discount of $250), principal due semi-annually beginning March 27, 1999, to September 27, 2000, with interest payable quarterly at 9.07%, secured by all assets.......................................... 5,750 $12,000 Series B Secured Notes (net of discount of $500), principal due semi-annually beginning March 27, 2001, to September 27, 2003, with interest payable quarterly at 10.25%, secured by all assets.......................................... 11,500 $14,000 Revolving Line of Credit, expires June 6, 1996, with interest payable at prime plus .5% (9.0% at December 31, 1995), secured by accounts receivable and inventory................... $10,442 Term Loan I, principal due in monthly installments of $35 beginning April 17, 1995, to March 17, 2001, with interest payable at prime plus .75% (9.25% at December 31, 1995), secured by equipment........................................... 2,187 Term Loan II, principal due in monthly installments of $8 beginning April 17, 1995, to March 17, 2000, with interest payable in monthly installments at prime plus .5% (9.0% at December 31, 1995), secured by real estate..................... 2,425 Term Loan III, principal due in monthly installments of $125 beginning April 17, 1995, to March 17, 1999, with interest payable at prime plus .75% (9.25% at December 31, 1995), unsecured...................................................... 4,875 Term Commitment up to $2,000, principal due in monthly installments of $42 beginning February 10, 1996, to January 10, 1999, with interest payable monthly commencing September 10, 1995, at a rate of prime plus .75% (9.25% at December 31, 1995), secured by equipment.................................... 1,500 Capital equipment leases for various machinery and equipment with interest at 6.25% to 14.26% maturing at various dates.......... 88 129 ------- ------- Total debt....................................................... 17,359 21,558 Less line of credit............................................ -- (10,442) Less current portion........................................... (41) (3,178) ------- ------- Long-term debt, less current portion............................. $17,318 $ 7,938 ======= =======
F-10 62 DATUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Aggregate maturities of long-term debt before debt discount at December 31, 1996 are as follows: 1997........................................................... $ 41 1998........................................................... 48 1999........................................................... 3,020 2000........................................................... 3,000 2001........................................................... 4,000 Thereafter..................................................... 8,000 ------- Total................................................ $18,109 =======
The Company issued common stock warrants in connection with the Series A and Series B Secured Notes allowing for the purchase of up to 175,000 shares of common stock at an exercise price of $11.50 per share. The common stock warrants, which were valued by the Company at $785, have been reflected as debt discount and amortized as additional interest expense. The value of the common stock warrants is included in additional paid-in capital. The current credit agreements impose operating and financial restrictions on the Company, including a requirement to maintain certain financial ratios and a certain profitability level. Such restrictions affect, and in some respects limit or prohibit, among other things, the ability of the Company to incur additional indebtedness, repay certain indebtedness prior to its stated maturity, create liens, engage in mergers and acquisitions, transfer assets, make certain capital expenditures and pay dividends. NOTE D -- INCOME TAXES The income tax provision comprises the following:
YEAR ENDED DECEMBER 31, ------------------------- 1996 1995 1994 ------ ----- ---- Provision for income taxes: Current: Federal............................................. $1,081 $ 702 $474 State............................................... 445 168 77 Foreign............................................. 20 105 -- ------ ----- ---- 1,546 975 551 ------ ----- ---- Deferred: Federal............................................. (155) (683) 32 State............................................... (20) (138) 27 ------ ----- ---- (175) (821) 59 ------ ----- ---- $1,371 $ 154 $610 ====== ===== ====
F-11 63 DATUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The income tax provision differs from the amount computed by applying the statutory federal income tax rate to income before taxes as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1996 1995 1994 ---------------- ---------------- ---------------- PRETAX PRETAX PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME ------ ------ ------ ------ ------ ------ Computed expected tax expense........... $1,171 35.0% $ 73 34.0% $541 35.0% State income tax, net of federal income tax effect............................ 272 8.1% 11 5.1% 87 5.6% Amortization of excess of purchase price over net assets acquired.............. 31 1.0% 31 14.5% 31 2.0% Foreign earnings taxed at different rates................................. 20 0.6% 26 12.2% -- -- Other................................... (123) (3.7)% 13 6.2% (49) (3.1)% ------ ---- ---- ---- ---- ---- $1,371 41.0% $154 72.0% $610 39.5% ====== ==== ==== ==== ==== ====
The primary components of temporary differences which give rise to the Company's net deferred tax asset (liability) are as follows:
DECEMBER 31, ----------------- 1996 1995 ------ ------ Deferred tax assets: Inventory...................................................... $ 470 $ 522 Accruals and reserves.......................................... 1,537 1,308 ------ ------ 2,007 1,830 ------ ------ Deferred tax liabilities: Property, plant and equipment.................................. 946 975 Other.......................................................... 49 18 ------ ------ 995 993 ------ ------ $1,012 $ 837 ====== ======
NOTE E -- POST-RETIREMENT BENEFITS Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Post-retirement Benefits Other Than Pensions" (FAS 106). Under FAS 106, post-retirement benefits are recognized over the employee's service period based on the expected costs of providing such benefits to the employee and the employee's beneficiaries after retirement. The Company elected to recognize the transition obligation over a 20-year period. The Company's post-retirement benefit program comprises two plans, the life insurance plan and the health care plan. Any permanent full-time employee is eligible upon retirement after age 62 and with 12 years of service. The health care plan is a contributory plan. F-12 64 DATUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following sets forth the Company's post-retirement program's status reconciled with amounts reported in the consolidated balance sheet:
DECEMBER 31, ---------------- 1996 1995 ------ ------ Accumulated post-retirement benefit obligation: Retirees.......................................................... $ 343 $ 316 Fully eligible active plan participants........................... 150 132 Other active plan participants.................................... 667 586 ------ ------ Total accumulated post-retirement benefit obligations............. 1,160 1,034 Plan assets at fair value......................................... -- -- ------ ------ Accumulated post-retirement benefit obligation in excess of plan assets......................................................... 1,160 1,034 Unrecognized transition obligation................................ (714) (744) ------ ------ Accrued post-retirement benefit obligation........................ $ 446 $ 290 ====== ======
Net periodic post-retirement benefit cost includes the following components:
YEAR ENDED DECEMBER 31, ------------------------- 1996 1995 1994 ----- ----- ----- Service cost.............................................. $ 71 $ 68 $ 22 Interest cost............................................. 71 68 46 Amortization of transition obligation..................... 30 30 30 ---- ---- ---- Net periodic postretirement expense....................... $ 172 $ 166 $ 98 ==== ==== ==== Discount rate............................................. 7.0% 7.0% 7.75%
F-13 65 DATUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE F -- COMMON STOCK RESERVED In June 1994, the stockholders of the Company approved the 1994 Incentive Stock Plan providing for the granting of 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 initial number of shares available under the Plan for issuance is 250,000 and will increase by 50,000 shares on the last day of each calendar year. The exercise price of the options shall not be less than 100% of the fair market value of the underlying common stock on the date of the grant. Options granted are exercisable in such amounts and at such intervals as the Board of Directors determined in granting the options. This plan replaces the prior stock option plan and Restricted Stock Award Plan that expired in 1994. In March 1995, the stockholders of the Company approved an amendment of the 1994 Stock Incentive Plan providing for 200,000 additional option shares to be reserved for issuance thereunder. The following table summarizes activity under the 1994 Incentive Stock Plan during the years ended December 31, 1996 and 1995 and 1994:
NUMBER PER SHARE OF SHARES OPTION PRICE --------- ------------------------ Issued during 1994....................................... 86,800 $4.25 - $ 5.00 -------- Outstanding, December 31, 1994........................... 86,800 $4.25 - $ 5.00 Issued during 1995....................................... 219,250 $10.31 - $16.38 Exercised during 1995.................................... (6,313) $4.38 Cancelled during 1995.................................... (30,500) $4.38 - $10.75 -------- Outstanding, December 31, 1995........................... 269,237 $4.25 - $16.38 Issued during 1996....................................... 132,500 $8.50 - $14.88 Exercised during 1996.................................... (6,388) $4.38 - $10.75 Cancelled during 1996.................................... (41,625) $4.38 - $10.75 -------- Outstanding, December 31, 1996........................... 353,724 $4.25 - $16.38 ======== Exercisable, December 31, 1996........................... 78,701 $4.25 - $16.38 ========
As of December 31, 1996, 1995 and 1994, 233,575, 274,450 and 213,200 option shares, respectively, were available for grant under the 1994 plan. The following table summarizes activity under the prior stock option plan for the years ended December 31, 1996, 1995 and 1994:
NUMBER PER SHARE OF SHARES OPTION PRICE --------- ----------------------- Outstanding, December 31, 1993............................ 250,075 $3.00 - $6.50 Issued during 1994........................................ 121,525 $4.88 Exercised during 1994..................................... (38,825) $3.00 - $5.25 Cancelled during 1994..................................... (49,500) $3.00 - $6.50 -------- Outstanding, December 31, 1994............................ 283,275 $3.00 - $5.00 Exercised during 1995..................................... (36,325) $3.00 - $4.88 Cancelled during 1995..................................... (4,875) $4.88 -------- Outstanding, December 31, 1995............................ 242,075 $3.00 - $4.88 Exercised during 1996..................................... (21,325) $3.00 - $4.88 -------- Outstanding, December 31, 1996............................ 220,750 $3.00 - $4.88 ======== Exercisable, December 31, 1996............................ 163,238 $3.00 - $4.88 ========
No further option shares will be granted under the prior plan. F-14 66 DATUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Had compensation cost been determined on the basis of fair value pursuant to FAS 123 net income and net income (loss) per share would have been as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1996 1995 ---------- --------- Net income (loss) As reported............................................... $1,974,000 $ 60,000 =========== ========== Pro forma................................................. $1,824,000 $(186,000) =========== ========== Net income (loss) per share As reported............................................... $ .46 $ .02 =========== ========== Pro forma................................................. $ .43 $ (.05) =========== ==========
The fair value of each option grant is estimated on the date of grant using the Black-Scholes model with the following assumptions used for grants during both periods: risk free interest rates of 5.97% in 1996 and 6.94% in 1995, expected volatility of 48% in 1996 and 49% in 1995, and an expected option life of 5 years and no expected dividends in 1996 and 1995. NOTE G -- 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 2% of employee deferral and 50% of the next 1% 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 $497, $408, and $190 for the years ended December 31, 1996, 1995 and 1994, respectively. NOTE H -- U.S. GOVERNMENT AND FOREIGN SALES AND SIGNIFICANT CUSTOMERS Direct and indirect sales to the United States government aggregated approximately $13,856, $14,812, and $10,043 in 1996, 1995 and 1994, respectively. Direct sales to the United States government aggregated approximately $5,668, $5,167, and $5,265 in 1996, 1995 and 1994, respectively. Foreign sales in 1996, 1995 and 1994 amounted to $20,151, $13,033, and $7,340. One customer accounted for 36%, 30% and 10% of net sales in 1996, 1995 and 1994, respectively. NOTE I -- COMMITMENTS Total rental expense for operating leases amounted to $1,735, $1,031, and $380 in 1996, 1995 and 1994, respectively. The future minimum rental commitments under all noncancelable operating leases, exclusive of property taxes and certain occupancy costs, are as follows: 1997....................................................... $ 1,337 1998....................................................... 1,239 1999....................................................... 1,221 2000....................................................... 1,327 2001....................................................... 1,241 Thereafter................................................. 4,152 ------- Total minimum lease payments..................... $10,517 =======
F-15 67 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Ball Corporation In our opinion, the accompanying combined balance sheet and the related combined statements of earnings, of changes in invested equity and of cash flows present fairly, in all material respects, the financial position of Ball Efratom (the Company) at October 30, 1994 and December 31, 1993, and the results of its operations and its cash flows for the ten months in the period ended October 30, 1994 and for each of the two years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Ball Efratom, as disclosed in the financial statements, has extensive transactions and relationships with Ball Corporation and its affiliates. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties. PRICE WATERHOUSE LLP Indianapolis, Indiana December 12, 1994 F-16 68 BALL EFRATOM (A UNIT OF BALL CORPORATION) COMBINED BALANCE SHEET (DOLLAR AMOUNTS IN THOUSANDS)
OCTOBER 30, DECEMBER 31, 1994 1993 ----------- ------------ ASSETS Current assets: Receivables...................................................... $ 5,299 $ 4,333 Inventories...................................................... 8,123 8,220 Prepaid expenses and other current assets........................ 116 103 Deferred income taxes............................................ 997 733 ----------- ------------ 14,535 13,389 Property, plant and equipment, net................................. 2,838 3,579 Goodwill........................................................... 344 389 ----------- ------------ Total assets..................................................... $17,717 $ 17,357 ========= ========== LIABILITIES AND INVESTED EQUITY Current liabilities: Accounts payable and accrued liabilities......................... $ 1,949 $ 2,178 Accrued payroll and employee benefits............................ 1,754 1,510 ----------- ------------ 3,703 3,688 Deferred income taxes.............................................. 17 77 Commitments and contingencies Invested equity.................................................... 13,997 13,592 ----------- ------------ Total liabilities and invested equity............................ $17,717 $ 17,357 ========= ==========
The accompanying notes are an integral part of these combined financial statements. F-17 69 BALL EFRATOM (A UNIT OF BALL CORPORATION) COMBINED STATEMENT OF EARNINGS (DOLLAR AMOUNTS IN THOUSANDS)
TEN TWELVE TWELVE MONTHS ENDED MONTHS ENDED MONTHS ENDED OCTOBER 30, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------ ------------ ------------ Revenue........................................... $ 29,768 $ 32,887 $ 29,922 ------------ ------------ ------------ Costs and expenses: Cost of sales................................... 17,485 19,846 16,525 Selling, general and administrative............. 6,748 6,891 7,113 Research and development........................ 3,624 3,752 3,569 ------------ ------------ ------------ 27,857 30,489 27,207 ------------ ------------ ------------ Earnings before income taxes...................... 1,911 2,398 2,715 Provision for income taxes........................ 789 931 1,121 ------------ ------------ ------------ Net earnings...................................... $ 1,122 $ 1,467 $ 1,594 =========== =========== ===========
The accompanying notes are an integral part of these combined financial statements. F-18 70 BALL EFRATOM (A UNIT OF BALL CORPORATION) COMBINED STATEMENT OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
TEN TWELVE TWELVE MONTHS ENDED MONTHS ENDED MONTHS ENDED OCTOBER 30, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------ ------------ ------------ Cash flows from operating activities: Net earnings.................................. $1,122 $ 1,467 $ 1,594 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization.............. 1,207 1,515 1,324 Other...................................... 4 17 -- Other changes that provided (used) cash: Receivables.............................. (966) 133 (1,024) Inventories.............................. 97 (777) 900 Prepaid expenses and other current assets................................ (13) 11 (20) Accounts payable and accrued liabilities........................... (229) 916 (270) Accrued payroll and employee benefits.... 244 715 (1,004) Deferred income taxes.................... (324) (80) (234) ------------ ------------ ------------ Net cash provided by operating activities.......................... 1,142 3,917 1,266 Cash flows from investing activities: Payments for property, plant and equipment.... (425) (932) (1,887) ------------ ------------ ------------ Net cash used by investing activities.......................... (425) (932) (1,887) Cash flows from financing activities: Intercompany transactions, net................ (717) (2,985) 621 ------------ ------------ ------------ Net increase in cash.......................... -- -- -- Cash at beginning of period................... -- -- -- ------------ ------------ ------------ Cash at end of period......................... $ -- $ -- $ -- =========== =========== ===========
The accompanying notes are an integral part of these combined financial statements. F-19 71 BALL EFRATOM (A UNIT OF BALL CORPORATION) COMBINED STATEMENT OF CHANGES IN INVESTED EQUITY (DOLLAR AMOUNTS IN THOUSANDS)
TEN TWELVE TWELVE MONTHS ENDED MONTHS ENDED MONTHS ENDED OCTOBER 30, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------ ------------ ------------ Invested equity, beginning of period.............. $ 13,592 $ 15,110 $ 12,895 ------------ ------------ ------------ Net earnings...................................... 1,122 1,467 1,594 ------------ ------------ ------------ Foreign currency translation adjustment: Cumulative translation adjustment, end of year......................................... 468 404 645 Less: Cumulative translation adjustment, beginning of year...................................... (404) (645) (562) ------------ ------------ ------------ Current year translation adjustment............. 64 (241) 83 ------------ ------------ ------------ Intercompany transactions, net.................... (781) (2,744) 538 ------------ ------------ ------------ Invested equity, end of period.................... $ 13,997 $ 13,592 $ 15,110 =========== =========== ===========
The accompanying notes are an integral part of these combined financial statements. F-20 72 BALL EFRATOM (A UNIT OF BALL CORPORATION) NOTES TO COMBINED FINANCIAL STATEMENTS OCTOBER 30, 1994 AND DECEMBER 31, 1993 (DOLLAR AMOUNTS IN THOUSANDS) 1. NATURE OF OPERATIONS AND RELATIONSHIP WITH BALL CORPORATION Ball Efratom (the Company) comprises a domestic division of Ball Corporation (Ball), operated as a part of Ball's Aerospace and Communication Group (BACG), and a wholly-owned foreign subsidiary, Ball Efratom Elektronik GmbH (Efratom GmbH). The Company manufactures and designs time and frequency products which are used primarily in communications and navigation systems. The Company has operations in Irvine, California and Hofolding, Germany. The Company has extensive transactions and relationships with Ball and its affiliates. Further information about such transactions is included in Notes 2 and 6. The Company operates in one business segment -- aerospace and communications. On October 20, 1994, Ball entered into a stock purchase agreement with Datum, Inc. Pursuant to the terms of the agreement, Ball will receive cash and shares of Datum, Inc. in exchange for the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of combination The combined financial statements of the Company include the accounts of the Ball Efratom division and Efratom GmbH. All material intercompany transactions and balances have been eliminated in combination. Revenue recognition Revenue, other than that recorded under certain fixed price long-term contracts, is recognized upon shipment of goods to customers. Revenue from certain fixed price long-term contracts is recognized under the "cost to cost" percentage of completion method of accounting. Provisions for anticipated losses on contracts are recorded in full as they are identified. Cash and invested equity Ball performs cash management on a centralized basis for the Company. Accordingly, during the normal course of business, Ball makes disbursements on behalf of the Company and collects all cash receipts due the Company. In addition, Ball allocates certain expenses to the Company and all current income taxes of the Company are considered to have been paid by Ball. All such related party transactions are recorded through the invested equity account. Inventories Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation. Generally, depreciation is recorded using the straight-line method over the estimated useful lives of the assets (building improvements, 20 years; machinery and equipment, 5-10 years; furniture and fixtures, 7-10 years). Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful lives of the improvements. F-21 73 BALL EFRATOM (A UNIT OF BALL CORPORATION) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) OCTOBER 30, 1994 AND DECEMBER 31, 1993 (DOLLAR AMOUNTS IN THOUSANDS) Maintenance, repairs and minor improvements are charged to expense as incurred. When assets are sold or otherwise disposed, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is recognized. Goodwill Goodwill is recorded at cost less accumulated amortization and is being amortized on a straight line basis over 20 years. Goodwill amortization expense totalled $38, $45 and $45 in 1994, 1993 and 1992, respectively. Research and development costs Research and development costs are expensed as incurred in connection with the Company's internal programs for the development of products and processes. Taxes on income The domestic operations of the Company are included in the consolidated U.S. federal, state and local income tax returns of Ball. The operations of Efratom GmbH are included in separate foreign income tax returns. However, for purposes of these financial statements, income tax expense is computed as if the Company was a separate taxpayer. The Company's tax provision was computed pursuant to the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," for all years presented. Under SFAS No. 109, deferred income taxes reflect the future tax consequences of differences between tax bases of assets and liabilities and their financial reporting amounts at each balance sheet date based upon enacted income tax laws and tax rates. Income tax expense or benefit is provided based on earnings reported in the financial statements. The provision for income tax expense or benefit differs from the amounts of income taxes currently payable, or paid, because certain items of income and expense included in the combined financial statements are recognized in different time periods by taxing authorities. Foreign currency translation Foreign currency financial statements of Efratom GmbH are translated using period end exchange rates for assets and liabilities and using average exchange rates during the period for results of operations and cash flows. Translation adjustments are accumulated in invested equity. Foreign exchange gains and losses incurred on foreign currency transactions are included in income. Concentration of credit and major customers A substantial portion of the accounts receivable at October 30, 1994 and December 31, 1993 is due from a group of companies in the telecommunications industry and from government contractors and subcontractors. Historically, the Company has not incurred any significant credit related losses. At October 30, 1994 and December 31, 1993, accounts receivable due from two telecommunications customers totalled $2,099 and $1,465, respectively. Sales to one customer amounted to $13,302, $12,613 and $7,416 for the ten month period ended October 30, 1994 and the years ended December 31, 1993 and 1992, respectively. Sales to another customer were $2,340, $3,227 and $3,973, F-22 74 BALL EFRATOM (A UNIT OF BALL CORPORATION) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) OCTOBER 30, 1994 AND DECEMBER 31, 1993 (DOLLAR AMOUNTS IN THOUSANDS) respectively, during the same periods. In addition, sales to U.S. government contractors, considered as a group, during these periods amounted to $4,697, $6,193 and $11,114, respectively. Pension benefits Eligible employees of the Company participate in the Ball Corporation Pension Plan for Salaried Employees, which is a defined benefit plan. Pension expense recorded in the Company's combined financial statements represents an allocation from Ball based on the Company's actuarially determined normal service cost and amortization of prior service cost and a proportional share of all other pension expense components of the plan. The Company's proportional share is based on the ratio of projected benefit obligation for Company employees relative to the projected benefit obligation for all Ball employees covered under the plan. Ball has retained the deferred pension assets and accrued liabilities of the plan. Other postretirement benefits Company employees meeting certain eligibility requirements participate in other postretirement benefit plans of Ball which provide retirement health care and life insurance benefits. The Company's allocation of plan expenses was actuarially determined by applying the provisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," to the Company's active work force and other eligible individuals. None of the transition cost associated with the Company's active workforce and other eligible individuals was allocated to the Company upon adoption of SFAS No. 106 by Ball. Ball has retained the postretirement benefit liability associated with the Company's active workforce and other eligible individuals. Other benefits Active domestic employees of the Company, meeting certain eligibility requirements, can elect to participate in group health care plans of Ball. The Company's combined financial statements include group health insurance claims paid by Ball on behalf of the Company. Estimated claims incurred but not paid have been retained by Ball. Employees of the Company who participate in Ball's 401(k) salary conversion plan and meet certain eligibility requirements automatically participate in Ball's Employee Stock Ownership Plan (ESOP). The expense related to the ESOP recorded in the Company's combined financial statements represents a proportional allocation from Ball for the value of shares allocated to participants' accounts, plus administrative costs, based on the ratio of Ball's contributions for Company employees relative to contributions for all participating Ball employees. Ball has retained the liability for the ESOP. Workers' compensation expenses are recorded based upon costs incurred for Company employees. The workers' compensation reserve recorded in the combined financial statements represents an estimate of the Company's liability for unpaid costs. Incentive compensation Certain employees are eligible to participate in the Ball incentive compensation plan. Expenses of the plan are accrued in the year the related performance occurs. Certain participating employees are eligible to defer a portion of their annual incentive compensation. The expense recorded in the F-23 75 BALL EFRATOM (A UNIT OF BALL CORPORATION) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) OCTOBER 30, 1994 AND DECEMBER 31, 1993 (DOLLAR AMOUNTS IN THOUSANDS) Company's combined financial statements includes interest expense based upon the deferred compensation account balances for participating Company employees. Ball has retained the liability for deferred compensation. General and administrative expense allocations Various centralized Ball Corporate and BACG services and general and administrative costs, such as accounting, audit, treasury, legal, credit, human resources, risk management and executive management are allocated to the Company by Ball and BACG based principally upon a weighted factor which considers the relative proportions of consolidated group and corporate sales, payroll, inventory and fixed assets represented by Efratom. 3. INVENTORIES Inventories consist of the following:
OCTOBER 30, DECEMBER 31, 1994 1993 ----------- ------------ Raw materials and subcomponents.................... $ 3,411 $3,953 Work-in-Progress................................... 2,431 3,358 Finished goods..................................... 2,784 1,502 ----------- ------------ 8,626 8,813 Less reserves...................................... (503) (593) ----------- ------------ $ 8,123 $8,220 ========= ==========
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
OCTOBER 30, DECEMBER 31, 1994 1993 ----------- ------------ Machinery and equipment............................ $ 8,670 $ 8,127 Furniture and fixtures............................. 641 653 Leasehold improvements............................. 815 815 ----------- ------------ 10,126 9,595 Less: Accumulated depreciation and amortization.... (7,396) (6,298) ----------- ------------ 2,730 3,297 Construction-in-progress........................... 108 282 ----------- ------------ $ 2,838 $ 3,579 ========= ==========
F-24 76 BALL EFRATOM (A UNIT OF BALL CORPORATION) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) OCTOBER 30, 1994 AND DECEMBER 31, 1993 (DOLLAR AMOUNTS IN THOUSANDS) 5. TAXES ON INCOME The amounts of income from continuing operations before income taxes by national jurisdiction follow:
TEN TWELVE TWELVE MONTHS ENDED MONTHS ENDED MONTHS ENDED OCTOBER 30, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------ ------------ ------------ Domestic.......................... $1,738 $1,882 $2,716 Foreign........................... 173 516 (1) ------------ ------------ ------------ $1,911 $2,398 $2,715 =========== =========== ===========
The provision for income taxes by jurisdiction is as follows:
TEN TWELVE TWELVE MONTHS ENDED MONTHS ENDED MONTHS ENDED OCTOBER 30, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------ ------------ ------------ Current United States....................... $ 833 $ 667 $1,064 State and local..................... 210 191 291 Foreign............................. 69 153 ------------ ------------ ------------ Total current............... 1,112 1,011 1,355 ------------ ------------ ------------ Deferred United States....................... $ (280) $ (69) $ (203) State and local..................... (43) (11) (31) ------------ ------------ ------------ Total deferred.............. (323) (80) (234) ------------ ------------ ------------ Total provision for income taxes..................... $ 789 $ 931 $1,121 =========== =========== ===========
The reconciliation of the statutory U.S. income tax rate to the effective income tax rate is as follows:
TEN TWELVE TWELVE MONTHS ENDED MONTHS ENDED MONTHS ENDED OCTOBER 30, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------ ------------ ------------ Statutory U.S. federal income tax rate................................ 34.0% 34.0% 34.0% Increase (decrease) in rates due to: State and local income taxes, net..... 5.8 5.0 6.3 Other................................. 1.5 (.2) 1.0 ----- ----- ----- Effective income tax rate............. 41.3% 38.8% 41.3% =========== =========== ===========
F-25 77 BALL EFRATOM (A UNIT OF BALL CORPORATION) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) OCTOBER 30, 1994 AND DECEMBER 31, 1993 (DOLLAR AMOUNTS IN THOUSANDS) Significant components of deferred tax (assets) liabilities is as follows:
OCTOBER 30, DECEMBER 31, 1994 1993 ----------- ------------ Gross deferred tax (assets): Incentive compensation............................. $(353) $ (35) Accrued vacation pay............................... (124) (91) Intercompany profit in inventory................... (80) (53) Inventory.......................................... (356) (519) Other.............................................. (84) (35) ----------- ------------ (997) (733) ----------- ------------ Gross deferred tax liabilities: Depreciation....................................... 17 77 ----------- ------------ Total gross deferred tax liabilities....... 17 77 ----------- ------------ Net deferred tax assets.................... $(980) $ (656) ========= ==========
The current tax provisions are considered to have been paid by Ball and such transactions were recorded through the invested equity account. 6. RELATED PARTY TRANSACTIONS The Company has extensive transactions and relationships with Ball and its affiliates. Generally, direct transactions and allocations between the Company and Ball and its affiliates are recorded at cost. The Company participates in Ball-sponsored programs for which it receives a direct charge from Ball representing the Company's proportional share of the costs incurred. The aforementioned transactions may not reflect the costs and revenues which would be derived from transactions between wholly unrelated entities. Refer to Note 2 of the combined financial statements which describes the bases of allocation and policies regarding related party transactions. The following is a summary of the nature and amount of expenses incurred by Ball and its affiliates which were charged to the Company for the respective periods.
TEN TWELVE TWELVE MONTHS ENDED MONTHS ENDED MONTHS ENDED OCTOBER 30, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------ ------------ ------------ General and administrative allocations from Ball and BACG.................. $1,517 $1,341 $1,637 Employee benefits other than pensions......................... 1,201 1,363 1,334 Pension plan........................ 149 179 (372) ------------ ------------ ------------ $2,867 $2,883 $2,599 =========== =========== ===========
The Company provides management information services for Ball Imaging Products and Ball Communication and Video Products, which are components of BACG. Charges for these services totaled $90 and $46 during 1994 and 1993, respectively. All transactions and related intercompany balances with Ball and its affiliates are recorded through the Company's invested equity account. No interest expense is allocated to the Company on the invested equity balance. F-26 78 BALL EFRATOM (A UNIT OF BALL CORPORATION) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) OCTOBER 30, 1994 AND DECEMBER 31, 1993 (DOLLAR AMOUNTS IN THOUSANDS) 7. COMMITMENTS The Company leases certain office space, facilities and equipment under noncancelable operating leases which expire in various years through 1999. These leases generally provide for renewal options ranging from one to five years. In addition, one lease contains an escalation clause for periodic rent increases based upon economic factors. Rental expense incurred under such leases was $760, $935 and $818 in 1994, 1993 and 1992, respectively. Future minimum lease commitments are as follows:
OCTOBER 30, 1994 ----------- 1995............................. $ 723 1996............................. 727 1997............................. 255 1998............................. 124 1999............................. 74 ----------- $ 1,903 =========
8. PRODUCT LINE DISCONTINUANCE In late 1994, Company management decided to discontinue the quartz oscillator product line. Neither the manner nor the timing of discontinuing this product has been determined. The product line represented 7.3%, 5.5% and 2.0%, respectively, of 1994, 1993 and 1992 combined revenue. Recovery of the Company's investment in related inventory and manufacturing equipment, as well as outstanding, noncancelable purchase commitments, the aggregate value of which approximated $1.0 million at October 30, 1994, is dependent upon future product sales and the proceeds which may be realized upon the eventual disposition of the product line. No provision has been made at October 30, 1994 for the financial impact of this product line discontinuance. However, while management does not believe that such impact would be material to invested equity or cash flows of Efratom, it is possible that the impact upon results of operations for a given period could be material. 9. SUBSEQUENT EVENT (UNAUDITED) The Company has been involved in customer discussions concerning the repair cost and product service life of a product for which the Company's warranty period has expired. As a matter of policy, the Company charges customers for all service work performed on products no longer under warranty. It has not been the Company's practice to extend the product warranty beyond the original warranty period, and the Company has not altered its warranty policy in connection with these customer discussions. Accordingly, no provision was made at October 30, 1994 for the possible effects of a resolution of this matter. Late in January 1995, the Company offered to repair, as necessary for a limited period, and without charge, certain out of warranty units used in critical customer applications which presently function normally. This repair proposal was made to maintain and enhance valuable customer relationships and to secure significant future sales opportunities. The Company estimates that the repair costs associated with this proposal are in the range of $500 to $1,500. However, there can be no assurance that such amounts will not be higher. F-27 79 ====================================================== NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary..................... 3 Risk Factors........................... 5 Use of Proceeds........................ 14 Price Range of Common Stock............ 14 Dividend Policy........................ 14 Capitalization......................... 15 Selected Consolidated Financial Data... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 17 Business............................... 23 Management............................. 37 Principal and Selling Stockholders..... 43 Description of Capital Stock........... 45 Underwriting........................... 47 Legal Matters.......................... 48 Experts................................ 49 Additional Information................. 49 Incorporation of Certain Documents by Reference............................ 50 Index to Financial Statements.......... F-1
====================================================== ====================================================== 2,452,778 SHARES LOGO LOGO COMMON STOCK -------------------- PROSPECTUS -------------------- HAMBRECHT & QUIST OPPENHEIMER & CO., INC. VAN KASPER & COMPANY , 1997 ====================================================== 80 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth all costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of the Common Stock being registered hereunder. All of the amounts shown are estimates except for the SEC registration fee, the NASD filing fee and the Nasdaq National Market application fee.
TO BE PAID BY THE COMPANY -------------- SEC registration fee.......................................... $ 16,347 NASD filing fee............................................... 5,895 Nasdaq National Market application fee........................ 17,500 Printing expenses............................................. 125,000 Legal fees and expenses....................................... 125,000 Accounting fees and expenses.................................. 100,000 Blue sky fees and expenses.................................... 10,000 Transfer agent and registrar fees............................. 5,000 Miscellaneous................................................. 95,258 -------- Total............................................... $500,000 ========
- ------------------------------ * To be filed by amendment The Company will bear the expenses in connection with the registration and offering of shares by the Selling Stockholders, other than the underwriting discounts and commissions and the fees and expenses of any separate counsel, advisors or accountants retained by one of the Selling Stockholders. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS (a) As permitted by the Delaware General Corporation Law, the Restated Certificate of Incorporation, as amended of the Company (the "Restated Certificate") limits the liability of directors to the Company or its stockholders for monetary damages for breach of fiduciary duty as a directors, except to the extent otherwise required by the Delaware General Corporation Law. The Company also carries directors and officers liability insurance. (b) The Restated Certificate provides that the Company will indemnify each person who was or is made a party to any proceeding by reason of the fact that such person is or was a director or officer of the Company against all expense, liability and loss reasonably incurred or suffered by such person in connection therewith to the fullest extent authorized by the Delaware General Corporation Law. The Company's Bylaws provide for a similar indemnity to directors and officers of the Company to the fullest extent authorized by the Delaware General Corporation Law. (c) The Restated Certificate also gives the Company the ability to enter into indemnification agreements with each of its directors and officers. The Company has entered into indemnification agreement with each of its directors and officers (Exhibit 10.10 hereto), which provide for the indemnification of directors and officers of the Company against any and all expenses, judgments, fines, penalties and amounts paid in settlement, to the fullest extent permitted by law. II-1 81 ITEM 16. EXHIBITS
EXHIBIT NUMBER DESCRIPTION -------- ---------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement. 2.1 Stock Purchase Agreement dated as of October 20, 1994 by and among Ball Corporation, Efratom Holding, Inc. and the Registrant (incorporated by reference to Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 4.1 Stockholder's Agreement dated as of March 17, 1995 by and between the Registrant and Efratom Holding, Inc. (incorporated by reference to the same numbered exhibit to Registrant's Form 10-K for the year ended December 31, 1994). 5.1 Opinion of Stradling, Yocca, Carlson & Rauth relating to the Common Stock covered by this Registration Statement. 10.3 1981 Restricted Stock Award Plan, as amended to date (incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). 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, 33-10335 and 33-41709). 10.6 Executive Agreement dated March 7, 1986 with Louis B. Horwitz, (incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). 10.10 Form of Indemnification Agreement dated May 27, 1987 as entered into with certain directors and officers of Registrant (incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). 10.18 Lease commencing January 1, 1992 relating to Registrant's facility at 749 Ward Drive, Goleta, California (incorporated by reference to the 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 the 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 the 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). 10.28 Sublease commencing November 1, 1993, relating to the Registrant's facility at 749 Ward Drive, Goleta, California (incorporated by reference to the same numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993). 10.29 1994 Stock Incentive Plan (incorporated by reference to Registrant's registration statement on Form S-8 Registration #33-79772). 10.29.1 Amendment to 1994 Stock Incentive Plan, effective March 16, 1995 (incorporated by reference to the same numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 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).
II-2 82
EXHIBIT NUMBER DESCRIPTION -------- ---------------------------------------------------------------------------- 10.31 Lease Agreement dated February 3, 1992 by and between The Irvine Company and Ball Efratom for EFRATOM Time and Frequency Products, Inc.'s facility at 4 Cromwell, Suite 201, Irvine, California (incorporated by reference to the same numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 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 to the Registrant's Annual Report 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 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10.32.2 Amendment to Leases dated May 11, 1995 by and 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). 10.32.3 Second Amendment to Lease dated May 11, 1995 by and between The Irvine Company and the Registrant, relating to the Registrant's facility at 4 Cromwell, Irvine, California (incorporated by reference to the same numbered exhibit to the Registrant's Form 10-Q for the quarter ended June 30, 1995). 10.32.4 Second Amendment to Lease dated May 11, 1995 by and between The Irvine Company and the Registrant, relating to the Registrant's facility at 3 Parker, Irvine, California (incorporated by reference to the same numbered exhibit to the Registrant's Form 10-Q for the quarter ended June 30, 1995). 10.34 Industrial Lease Agreement dated May 11, 1995, by and between The Irvine Company and the Registrant, relating to the Registrant's facility at 9975 Toledo Way, Irvine, California (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 between Berg & Berg Developers and the Registrant dated January 4, 1996, 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 Note, 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 Quarter Report on Form 10-Q for the quarter ended September 30, 1996). 10.39 Series B Note, 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 Quarter Report on Form 10-Q for the quarter ended September 30, 1996).
II-3 83
EXHIBIT NUMBER DESCRIPTION -------- ---------------------------------------------------------------------------- 10.40 Agreement dated June 12, 1995 between the Company and AT&T Corp. (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). 10.41 Consulting Agreement dated September 26, 1996, between the Company and Robert F. Ellis.+ 11 Computation of Earnings Per Common Share.+ 23.1 Consent of Stradling, Yocca, Carlson & Rauth (included in Exhibit 5.1) 23.2 Consent of Price Waterhouse LLP, independent accountants. 23.3 Consent of Price Waterhouse LLP, independent accountants. 24.1 Power of Attorney.+ 27.1 Financial Data Schedule.+
- ------------------------------ + Previously filed. ITEM 17. UNDERTAKINGS The Company hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers, and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The Company hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of a Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 84 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Amendment No. 2 to Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Irvine, State of California, on the 26th day of March, 1997. Datum Inc. By: /s/ LOUIS B. HORWITZ ------------------------------------ Louis B. Horwitz President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 2 to Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ----------------------------------------------- ---------------------- ------------------ /s/ LOUIS B. HORWITZ President, Chief March 26, 1997 - ----------------------------------------------- Executive Officer and Louis B. Horwitz Director (Principal Executive Officer) /s/ DAVID A. YOUNG Chief Financial March 26, 1997 - ----------------------------------------------- Officer (Principal David A. Young Financial and Principal Accounting Officer) * Director March 26, 1997 - ----------------------------------------------- G. Tilton Gardner * Director March 26, 1997 - ----------------------------------------------- Donovan B. Hicks * Director March 26, 1997 - ----------------------------------------------- R. David Hoover * Director March 26, 1997 - ----------------------------------------------- Michael M. Mann * Director March 26, 1997 - ----------------------------------------------- Dan L. McGurk * Director March 26, 1997 - ----------------------------------------------- Edward A. Money * Director March 26, 1997 - ----------------------------------------------- Thomas J. O'Rourke
*By: /s/ LOUIS B. HORWITZ ------------------------------- Louis B. Horwitz Attorney-in-Fact II-5 85 DATUM INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT BALANCE AT BEGINNING *OTHER END OF DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS ACQUISITIONS DEDUCTIONS PERIOD - --------------------------------- ---------- --------- ---------- ------------ ---------- ---------- Year Ended December 31, 1996 Allowance for doubtful accounts.................... $ 68 $ 121 $ 36 $ 107 Reserve for inventories........ 1,952 1,309 1,177 2,084 Accumulated amortization of acquired intangible assets...................... 1,162 894 2,056 Year Ended December 31, 1995 Allowance for doubtful accounts.................... 93 53 86 $ 49 $ 41 68 Reserve for inventories........ 854 1,124 1,024 998 1,952 Accumulated amortization of acquired intangible assets...................... 546 616 1,162 Year Ended December 31, 1994 Allowance for doubtful accounts.................... 131 31 31 38 93 Reserve for inventories........ 872 332 350 854 Accumulated amortization of acquired intangible assets...................... 467 79 546
- --------------- * Aacom note payments received. S-1 86 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE -------- ---------------------------------------------------------------- ----------- 1.1 Form of Underwriting Agreement.................................. 2.1 Stock Purchase Agreement dated as of October 20, 1994 by and among Ball Corporation, Efratom Holding, Inc. and the Registrant (incorporated by reference to Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994)....................................................... 4.1 Stockholder's Agreement dated as of March 17, 1995 by and between the Registrant and Efratom Holding, Inc. (incorporated by reference to the same numbered exhibit to Registrant's Form 10-K for the year ended December 31, 1994)...................... 5.1 Opinion of Stradling, Yocca, Carlson & Rauth relating to the Common Stock covered by this Registration Statement............. 10.3 1981 Restricted Stock Award Plan, as amended to date (incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991).............................................. 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, 33-10335 and 33-41709)............ 10.6 Executive Agreement dated March 7, 1986 with Louis B. Horwitz, (incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991).............................................. 10.10 Form of Indemnification Agreement dated May 27, 1987 as entered into with certain directors and officers of Registrant (incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991).............................................. 10.18 Lease commencing January 1, 1992 relating to Registrant's facility at 749 Ward Drive, Goleta, California (incorporated by reference to the 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 the 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 the 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)....................................................... 10.28 Sublease commencing November 1, 1993, relating to the Registrant's facility at 749 Ward Drive, Goleta, California (incorporated by reference to the same numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993)..............................................
87
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE -------- ---------------------------------------------------------------- ----------- 10.29 1994 Stock Incentive Plan (incorporated by reference to Registrant's registration statement on Form S-8 Registration #33-79772)...................................................... 10.29.1 Amendment to 1994 Stock Incentive Plan, effective March 16, 1995 (incorporated by reference to the same numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994).............................................. 10.30.5 Amended and Restated Credit Agreement, dated as of September 27, 1996, by and between the Registrant and Wells Fargo Bank, N.A. (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996)............................................. 10.31 Lease Agreement dated February 3, 1992 by and between The Irvine Company and Ball Efratom for EFRATOM Time and Frequency Products, Inc.'s facility at 4 Cromwell, Suite 201, Irvine, California (incorporated by reference to the same numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994)................................... 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 to the Registrant's Annual Report 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 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994)........................................................... 10.32.2 Amendment to Leases dated May 11, 1995 by and 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).................................... 10.32.3 Second Amendment to Lease dated May 11, 1995 by and between The Irvine Company and the Registrant, relating to the Registrant's facility at 4 Cromwell, Irvine, California (incorporated by reference to the same numbered exhibit to the Registrant's Form 10-Q for the quarter ended June 30, 1995)....................... 10.32.4 Second Amendment to Lease dated May 11, 1995 by and between The Irvine Company and the Registrant, relating to the Registrant's facility at 3 Parker, Irvine, California (incorporated by reference to the same numbered exhibit to the Registrant's Form 10-Q for the quarter ended June 30, 1995)....................... 10.34 Industrial Lease Agreement dated May 11, 1995, by and between The Irvine Company and the Registrant, relating to the Registrant's facility at 9975 Toledo Way, Irvine, California (incorporated by reference to the same numbered exhibit to the Registrant's Form 10-Q for the quarter ended June 30, 1995).....
88
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE -------- ---------------------------------------------------------------- ----------- 10.35 Lease Agreement between Berg & Berg Developers and the Registrant dated January 4, 1996, 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 Note, 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 Quarter Report on Form 10-Q for the quarter ended September 30, 1996)........................................................... 10.39 Series B Note, 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 Quarter Report on Form 10-Q for the quarter ended September 30, 1996)........................................................... 10.40 Agreement dated June 12, 1995 between the Company and AT&T Corp. (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)..................................... 10.41 Consulting Agreement dated September 26, 1996, between the Company and Robert F. Ellis+.................................... 11 Computation of Earnings Per Common Share+....................... 23.1 Consent of Stradling, Yocca, Carlson & Rauth (included in Exhibit 5.1).................................................... 23.2 Consent of Price Waterhouse LLP, independent accountants........ 23.3 Consent of Price Waterhouse LLP, independent accountants........ 24.1 Power of Attorney+.............................................. 27.1 Financial Data Schedule+........................................
- --------------- * To be filed by amendment. + Previously filed. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 DATUM INC. 2,452,778 SHARES(1) COMMON STOCK UNDERWRITING AGREEMENT ---------------------- , 1997 ----------- HAMBRECHT & QUIST LLC OPPENHEIMER & CO., INC. VAN KASPER & COMPANY c/o Hambrecht & Quist LLC One Bush Street San Francisco, CA 94104 Ladies and Gentlemen: Datum Inc., a Delaware corporation (herein called the Company), proposes to issue and sell 1,000,000 shares of its authorized but unissued Common Stock, $0.25 par value (herein called the Common Stock), and the stockholders of the Company named in Schedule II hereto (herein collectively called the Selling Stockholders) propose to sell an aggregate of 1,452,778 shares of Common Stock of the Company (said 2,452,778 shares of Common Stock being herein called the Underwritten Stock). The Company proposes to grant to the Underwriters (as hereinafter defined) an option to purchase up to an aggregate of 367,917 additional shares of Common Stock (herein called the Option Stock and with the Underwritten Stock herein collectively called the Stock). The Common Stock is more fully described in the Registration Statement and the Prospectus hereinafter mentioned. The Company and the Selling Stockholders severally hereby confirm the agreements made with respect to the purchase of the Stock by the several underwriters, for whom you are acting, named in Schedule I hereto (herein collectively called the Underwriters, which term shall also include any underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent and warrant that you have been authorized by each of the other Underwriters to enter into this Agreement on its behalf and to act for it in the manner herein provided. 1. REGISTRATION STATEMENT. The Company has filed with the Securities and Exchange Commission (herein called the Commission) a registration statement on Form S-2 (No. 333-22177), including the related preliminary prospectus, for the registration under the Securities Act of 1933, as amended (herein called the Securities Act), of the Stock. Copies of such registration statement and of each amendment thereto, if any, including the related preliminary prospectus (meeting the requirements of Rule 430A of the rules and - ------------ 1 Plus an option to purchase from the Company up to 367,917 additional shares to cover over-allotments. 2 regulations of the Commission) heretofore filed by the Company with the Commission have been delivered to you. The term Registration Statement as used in this agreement shall mean such registration statement, including all documents incorporated by reference therein, all exhibits and financial statements, all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, in the form in which it became effective, and any registration statement filed pursuant to Rule 462(b) of the rules and regulations of the Commission with respect to the Stock (herein called a Rule 462(b) registration statement), and, in the event of any amendment thereto after the effective date of such registration statement (herein called the Effective Date), shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended (including any Rule 462(b) registration statement). The term Prospectus as used in this Agreement shall mean the prospectus, including the documents incorporated by reference therein, relating to the Stock first filed with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is required, as included in the Registration Statement) and, in the event of any supplement or amendment to such prospectus after the Effective Date, shall also mean (from and after the filing with the Commission of such supplement or the effectiveness of such amendment) such prospectus as so supplemented or amended. The term Preliminary Prospectus as used in this Agreement shall mean each preliminary prospectus, including the documents incorporated by reference therein, included in such registration statement prior to the time it becomes effective. The Registration Statement has been declared effective under the Securities Act, and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. The Company has caused to be delivered to you copies of each Preliminary Prospectus and has consented to the use of such copies for the purposes permitted by the Securities Act. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING STOCKHOLDERS. (a) The Company hereby represents and warrants to the Underwriters and the Selling Stockholders as follows: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and as being conducted, and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary (except where the failure to be so qualified would not have a material adverse effect on the business, properties, condition (financial or otherwise) or results of operations or prospects of the Company and its subsidiaries taken as whole (a "Material Adverse Effect")). (ii) The Company owns all of the shares of capital stock of each subsidiary of the Company, and each of the Company's subsidiaries has been duly 2 3 incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and as being conducted, and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary except where the failure to be so qualified would not have a Material Adverse Effect. (iii) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any materially adverse change in the business, properties, financial condition or results of operations or prospects of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, other than as set forth in the Registration Statement and the Prospectus, and since such dates, except in the ordinary course of business, neither the Company nor any of its subsidiaries has entered into any material transaction not referred to in the Registration Statement and the Prospectus. (iv) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus relating to the proposed offering of the Stock nor instituted or, to the best knowledge of the Company, after due inquiry, threatened instituting proceedings for that purpose. The Registration Statement and the Prospectus comply, and on the Closing Date (as hereinafter defined) and any later date on which Option Stock is to be purchased, the Prospectus will comply, in all material respects, with the provisions of the Securities Act and the Securities Exchange Act of 1934, as amended (herein called the "Exchange Act"), and the rules and regulations of the Commission thereunder. On the Effective Date, the Registration Statement did not contain any untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date the Prospectus did not and, on the Closing Date and any later date on which Option Stock is to be purchased, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties in this subparagraph (iv) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus made in reliance upon and in conformity with information herein or otherwise furnished in writing to the Company by or on behalf of the Underwriters for use in the Registration Statement or the Prospectus. (v) The Stock is duly and validly authorized, is (or, in the case of shares of the Stock to be sold by the Company and The Prudential Insurance Company of America, a Selling Stockholder ("Prudential"), will be, when issued and sold to the Underwriters as provided herein) duly and validly issued, fully paid and nonassessable and conforms to the description thereof in the Prospectus. No further approval or authority of the stockholders or the Board of Directors of the Company will be required for the issuance and sale of the Stock as contemplated herein. The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. The shares of Common Stock outstanding 3 4 prior to the issuance of the Underwritten Stock and, if any, the Option Stock have been duly authorized and are validly issued, fully paid and non-assessable. (vi) Prior to the Closing Date, the Stock to be issued and sold by the Company will be authorized for listing on the Nasdaq National Market (herein called "NNM") upon official notice of issuance. (vii) Except as specifically disclosed in the Registration Statement, the Company does not have outstanding any options to purchase, or any preemptive rights, or other rights to subscribe or to purchase or rights of co-sale, any securities or obligations convertible into, or any contracts or commitments to issue or sell or register for sale, shares of its capital stock or any such options, rights, convertible securities or obligations. (viii) The consolidated financial statements of the Company, together with related notes and schedules as set forth in the Registration Statement ("Financial Statements"), present fairly the financial position and the results of operations of the Company and its subsidiaries, taken as a whole, at the indicated dates and for the indicated periods. The Financial Statements have been prepared in accordance with generally accepted accounting principles, consistently applied through the period involved, and all adjustments necessary for a fair presentation of results for such periods have been made. The selected and summary financial data and the tables set forth under "Results of Operations" and "Quarterly Results of Operations" in the Management's Discussion and Analysis of Financial Condition and Results of Operations section, included in the Registration Statement, present fairly the information shown therein and have been compiled on a basis consistent with the Financial Statements presented in the Registration Statement. (ix) Neither the Company nor any of its subsidiaries is in violation or default under any provision of its charter documents or bylaws, as currently in effect, or any indenture, license, mortgage, lease, franchise, permit, deed of trust or other agreement or instrument to which such corporation is a party or by which such corporation or any of its properties is bound or may be affected, except where such violation or default would not have a Material Adverse Effect. (x) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by applicable laws and except as the enforcement hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally, or by general equitable principles. The execution and performance of this Agreement and the consummation of the transactions herein contemplated do not and will not: (i) conflict with, or result in a breach of, or violation of, any of the terms or provisions of, or constitute, either by itself or upon notice or the passage of time or both, a default under, any indenture, license, mortgage, lease, franchise, permit, deed of trust or other agreement or instrument to which the Company or any of its 4 5 subsidiaries is a party or by which any such corporation or any of its properties is bound or may be affected, except where such breach, violation or default would not have a Material Adverse Effect, (ii) violate any of the provisions of the charter documents or bylaws of any such corporation, except where such violation would not have a Material Adverse Effect or (iii) violate any material order, judgment, statute, rule or regulation applicable to any such corporation or of any regulatory, administrative or governmental body or agency having jurisdiction over any such corporation or any of its properties, except where such violation would not have a Material Adverse Effect. (xi) Except as disclosed in the Prospectus, there is not any pending or, to the Company's knowledge, threatened action, suit, claim or proceeding against the Company or any of its subsidiaries or any of their respective officers or any of their properties, assets or rights before any court or governmental agency or body or otherwise which (i) might have a Material Adverse Effect, or (ii) might prevent consummation of the transactions contemplated hereby or (iii) is required to be disclosed in the Registration Statement; and there are no contracts or documents of the Company or any of its subsidiaries that are required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been fairly and accurately described in all material respects in the Prospectus or filed as exhibits to the Registration Statement as the case may be. The contracts so described in the Prospectus are in full force and effect on the date hereof; and neither the Company nor any of its subsidiaries nor, to the Company's knowledge any other party, is in breach of or default under any of such contracts. (xii) Except as disclosed in the Prospectus, the Company owns or possesses adequate rights to use all patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names and copyrights described or referred to in the Prospectus as owned or used by it or which are necessary for the conduct of its businesses as described in the Prospectus; the Company has not received any notice of, and the Company has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, might reasonably have a Material Adverse Effect. (xiii) The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Stock. (xiv) Except as set forth in the Prospectus, the Company and each of its subsidiaries has all permits, licenses, approvals and registrations required to be issued under applicable federal, state and local laws, statutes and regulations relating to the protection of human health, safety, the environment and natural resources ("Environmental Laws") with respect to its business as conducted and as proposed to be conducted in the Prospectus and is in substantial compliance with the terms and conditions thereunder except where failure to have such permits, licenses, approvals and registrations, or to be in compliance thereunder would not have a Material Adverse Effect. Except as set forth in the Prospectus, the Company and each of 5 6 its subsidiaries is in substantial compliance with and there are no past or present conditions, activities, actions or plans which may prevent substantial compliance with, any current or past law related to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the release, emission or discharge of any hazardous substance or hazardous waste ("Hazardous Substance Issues") or any regulations, plans, judgments, injunctions or notices promulgated or approved thereunder which may give rise to any liability of the Company or its subsidiaries or otherwise form the basis of any ongoing or threatened claims, actions, demands, suits, proceedings, hearings, studies or investigations against or relating to the Company or its subsidiaries, the property owned or leased by the Company or its subsidiaries that are based on or related to any Hazardous Substance Issues except for such non-compliance which would not have a Material Adverse Effect. (xv) Except as set forth in the Prospectus, there has been no material disposal, release or threatened release of any hazardous substance or hazardous waste on, from or under the property owned or leased currently or in the past by the Company, its subsidiaries or any predecessor, other than those authorized by permit under federal, state and local laws except such as would not have a Material Adverse Effect. For purposes of this Agreement, the terms "disposal," "release," "hazardous substance" and "hazardous waste" shall have the definitions assigned thereto under federal, state and local laws applicable to the Company, its subsidiaries, the Company's or any subsidiary's assets and the property owned or leased by the Company, including without limitation the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et seq., as amended, and any regulations promulgated thereto. (xvi) Except as set forth in the Prospectus, no disposal or release of a hazardous substance or hazardous waste has come to be located on or beneath and remain located on or beneath any of the real property owned or leased currently or in the past by the Company, any subsidiary or any predecessor or upon which any of the property owned or leased currently or in the past by the Company, any subsidiary or any predecessor are, or have been, held or maintained except such as would not have a Material Adverse Effect. (xvii) Except as set forth in the Prospectus, the Company and its subsidiaries have no knowledge of the possible or actual presence, disposal, release or threatened release of any hazardous substance or hazardous waste on or under any adjacent properties to the any property owned or leased currently or in the past by the Company, any subsidiary or any predecessor except such as would not have a Material Adverse Effect. (b) Each of the Selling Stockholders severally and not jointly hereby represents and warrants to the Underwriters and the Company as follow (provided that the representation and warranty set forth in subsection (ii) below is made solely by Efratom Holding, Inc. ("Efratom")): (i) Such Selling Stockholder has, or will have upon delivery to the Underwriters, good and valid title to all the shares of Stock to be sold by such Selling Stockholder hereunder, free and clear of all liens, encumbrances, equities, security interests and 6 7 claims whatsoever, with full right and authority to deliver the same hereunder, subject, in the case of each Selling Stockholder, to the rights of any custodian pursuant to a custody agreement (herein called the "Custodian"), and that upon the delivery of and payment for such shares of the Stock hereunder, the several Underwriters will receive good and valid title thereto, free and clear of all liens, encumbrances, equities, security interests and claims whatsoever. (ii) Efratom has duly authorized, executed and delivered, in the form heretofore furnished to the Underwriters, a Custody Agreement and Power of Attorney (the "Custody Agreement and Power of Attorney") appointing Louis B. Horwitz and David A. Young as attorneys-in-fact (collectively, the "Attorneys" and individually, an "Attorney") and appointing Chase Mellon Shareholder Services as Custodian; the Custody Agreement and Power of Attorney constitutes a valid and binding agreement on the part of Efratom, enforceable in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; and each of Efratom's Attorneys, acting alone, is authorized to execute and deliver this Agreement and the certificate referred to in Section 9(k) hereof on behalf of Efratom, to determine the purchase price to be paid by the several Underwriters to Efratom as provided in Section 3 hereof, to authorize the delivery of the shares of Stock to be sold by Efratom under this Agreement and to duly endorse (in blank or otherwise) the certificate or certificates representing such Stock or a stock power or powers with respect thereto, to accept payment therefor, and otherwise to act on behalf of Efratom in connection with this Agreement. (iii) All consents, approvals, authorizations and orders required for the execution and delivery by Efratom of the Custody Agreement and Power of Attorney, the execution and delivery by or on behalf of such Selling Stockholder of this Agreement and the sale and delivery of the shares of Stock to be sold by such Selling Stockholder under this Agreement (other than, at the time of the execution hereof (if the Registration Statement has not yet been declared effective by the issuance of the order of the Commission declaring the Registration Statement effective and such consents, approvals, authorizations or orders as may be necessary under state or other securities or Blue Sky laws) have been obtained and are in full force and effect; such Selling Stockholder, if other than a natural person, has been duly organized and is validly existing in good standing under the laws of the jurisdiction of its organization as the type of entity that it purports to be; and such Selling Stockholder has full legal right, power and authority to enter into and perform its obligations under this Agreement and such Custody Agreement and Power of Attorney (if applicable), and to sell, assign, transfer and deliver the Stock to be sold by such Selling Stockholder under this Agreement. (iv) Certificates in negotiable form for the shares of the Stock to be sold by Efratom have been placed in custody under a Custody Agreement and Power of Attorney for delivery under this Agreement with the Custodian and in the case of shares to be sold by Prudential pursuant hereto upon exercise of a warrant to purchase Common Stock Prudential shall have deposited with their legal counsel irrevocable instructions to exercise such warrant (the "Irrevocable Instructions"); Efratom specifically agrees that the shares of the Stock represented by the certificates so held in custody for such Selling Stockholder, and Prudential 7 8 specifically agrees that the shares of the Stock to be issued upon exercise of the warrant, are subject to the interests of the several Underwriters and the Company, that the arrangements made by such Selling Stockholder for such custody, or the arrangements made for such exercise, including the Power of Attorney provided for in such Custody Agreement and Power of Attorney, or the Irrevocable Instructions, are to that extent irrevocable, and that the obligations of such Selling Stockholder shall not be terminated by any act of such Selling Stockholder or by operation of law, whether by the death or incapacity of such Selling Stockholder (or, in the case of a Selling Stockholder that is not an individual, the dissolution or liquidation of such Selling Stockholder) or the occurrence of any other event; if any such death, incapacity, dissolution, liquidation or other such event should occur before the delivery of such shares of the Stock hereunder, certificates for such shares of the Stock shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, incapacity, dissolution, liquidation or other event had not occurred, regardless of whether the Custodian shall have received notice of such death, incapacity, dissolution, liquidation or other event. (v) All information relating to such Selling Stockholder and the shares of Stock to be sold by such Selling Stockholder pursuant hereto or set forth in the Registration Statement or the Prospectus under the caption "Principal and Selling Stockholders" furnished in writing by such Selling Stockholder is, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date, was or will be, true, correct and complete, and does not, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date (hereinafter defined) will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make such information not misleading. (vi) Such Selling Stockholder will comply with all agreements and satisfy all conditions on its part to be complied with or satisfied pursuant to this Agreement on or prior to the Closing Date and will advise one of its Attorneys and Hambrecht & Quist LLC prior to the Closing Date if any statement to be made on behalf of such Selling Stockholder in the certificate contemplated by Section 9(k) would be inaccurate if made as of the Closing Date. (vii) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Stock. (viii) Such Selling Stockholder does not have, or has waived prior to the date hereof, any preemptive right, co-sale right or right of first refusal or other similar right to purchase any of the Stock that are to be sold by the Company or any of the other Selling Stockholders to the Underwriters pursuant to this Agreement; such Selling Stockholder does not have, or has waived prior to the date hereof, any registration right or other similar right to participate in the offering made by the Prospectus, other than such rights of participation as have been satisfied by the participation of such Selling Stockholder in the transactions to which this Agreement relates in accordance with the terms of this Agreement; and such Selling Stockholder 8 9 does not own any warrants, options or similar rights to acquire, and does not have any right or arrangement to acquire, any capital stock, rights, warrants, options or other securities from the Company, other than those described in the Registration Statement and the Prospectus and any document incorporated therein by reference. (ix) Such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Stock. 3. PURCHASE OF THE STOCK BY THE UNDERWRITERS. (a) On the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to issue and sell 1,000,000 shares of the Underwritten Stock to the several Underwriters, each Selling Stockholder agrees to sell to the several Underwriters the number of shares of the Underwritten Stock set forth in Schedule II opposite the name of such Selling Stockholder, and each of the Underwriters agrees to purchase from the Company and the Selling Stockholders the respective aggregate number of shares of Underwritten Stock set forth opposite its name in Schedule I. The price at which such shares of Underwritten Stock shall be sold by the Company and the Selling Stockholders and purchased by the several Underwriters shall be $ per share. The obligation of each Underwriter to the Company and each of the Selling Stockholders shall be to purchase from the Company and the Selling Stockholders that number of shares of the Underwritten Stock which represents the same proportion of the total number of shares of the Underwritten Stock to be sold by each of the Company and the Selling Stockholders pursuant to this Agreement as the number of shares of the Underwritten Stock set forth opposite the name of such Underwriter in Schedule I hereto represents of the total number of shares of the Underwritten Stock to be purchased by all Underwriters pursuant to this Agreement, as adjusted by you in such manner as you deem advisable to avoid fractional shares. In making this Agreement, each Underwriter is contracting severally and not jointly; except as provided in paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is to purchase only the respective number of shares of the Underwritten Stock specified in Schedule I. (b) If for any reason one or more of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for the number of shares of the Stock agreed to be purchased by such Underwriter or Underwriters, the Company or the Selling Stockholders shall immediately give notice thereof to you, and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by you of such notice to purchase, or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon between you and such purchasing Underwriter or Underwriters and upon the terms herein set forth, all or any part of the shares of the Stock which such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to make such arrangements with respect to all such shares and portion, the number of shares of the Stock which each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining shares and portion which the defaulting 9 10 Underwriter or Underwriters agreed to purchase; provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the shares and portion which the defaulting Underwriter or Underwriters agreed to purchase if the aggregate number of such shares of the Stock exceeds 10% of the total number of shares of the Stock which all Underwriters agreed to purchase hereunder. If the total number of shares of the Stock which the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company and the Selling Stockholders shall have the right, within 24 hours next succeeding the 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to you for purchase of such shares and portion on the terms herein set forth. In any such case, either you or the Company and the Selling Stockholders shall have the right to postpone the Closing Date determined as provided in Section 5 hereof for not more than seven business days after the date originally fixed as the Closing Date pursuant to said Section 5 in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If neither the non-defaulting Underwriters nor the Company and the Selling Stockholders shall make arrangements within the 24-hour periods stated above for the purchase of all the shares of the Stock which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company or the Selling Stockholders to any non-defaulting Underwriter and without any liability on the part of any non-defaulting Underwriter to the Company or the Selling Stockholders. Nothing in this paragraph (b), and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. (c) On the basis of the representations, warranties and covenants herein contained, and subject to the terms and conditions herein set forth, the Company grants an option to the several Underwriters to purchase, severally and not jointly, up to 367,917 shares of the Option Stock at the same price per share as the Underwriters shall pay for the Underwritten Stock. The option may be exercised only to cover over-allotments in the sale of the Underwritten Stock by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the thirtieth day after the date of this Agreement upon written or telegraphic notice by you to the Company setting forth the aggregate number of shares of the Option Stock as to which the several Underwriters are exercising the option. Delivery of certificates for the shares of Option Stock, and payment therefor, shall be made as provided in Section 5 hereof. The number of shares of the Option Stock to be purchased by each Underwriter shall be the same percentage of the total number of shares of the Option Stock to be purchased by the several Underwriters as such Underwriter is purchasing of the Underwritten Stock, as adjusted by you in such manner as you deem advisable to avoid fractional shares. 4. OFFERING BY UNDERWRITERS. (a) The terms of the initial public offering by the Underwriters of the Stock to be purchased by them shall be as set forth in the Prospectus. The Underwriters may from time to time change the public offering price after the closing of the initial public offering and increase or decrease the concessions and discounts to dealers as they may determine. 10 11 (b) The information set forth in the last paragraph on the front cover page and under "Underwriting" in the Registration Statement, any Preliminary Prospectus and the Prospectus relating to the Stock filed by the Company (insofar as such information relates to the Underwriters) constitutes the only information furnished by the Underwriters to the Company for inclusion in the Registration Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of the respective Underwriters represent and warrant to the Company that the statements made therein are correct. 5. DELIVERY OF AND PAYMENT FOR THE STOCK. (a) Delivery of certificates for the shares of the Underwritten Stock and the Option Stock (if the option granted by Section 3(c) hereof shall have been exercised not later than 7:00 A.M., San Francisco time, on the date two business days preceding the Closing Date), and payment therefor, shall be made at the office of Stradling, Yocca, Carlson & Rauth, 660 Newport Center Drive, Suite 1600, Newport Beach, California, at 7:00 a.m., San Francisco time, on the [fourth] business day after the date of this Agreement, or at such time on such other day, not later than seven full business days after such fourth business day, as shall be agreed upon in writing by the Company, the Selling Stockholders and you. The date and hour of such delivery and payment (which may be postponed as provided in Section 3(b) hereof) are herein called the Closing Date. (b) If the option granted by Section 3(c) hereof shall be exercised after 7:00 a.m., San Francisco time, on the date two business days preceding the Closing Date, delivery of certificates for the shares of Option Stock, and payment therefor, shall be made at the office of Stradling, Yocca, Carlson & Rauth, 660 Newport Center Drive, Suite 1600, Newport Beach, California, at 7:00 a.m., San Francisco time, on the third business day after the exercise of such option. (c) Payment for the Stock purchased from the Company shall be made to the Company or its order, payment for the Stock purchased from Efratom shall be made to the Custodian, for the account of Efratom, and payment for the Stock purchased from Prudential shall be made to Prudential or its order, in each case by one or more certified or official bank check or checks in same day funds or wire transfer, if requested by any party. Such payment shall be made upon delivery of certificates for the Stock to you for the respective accounts of the several Underwriters against receipt therefor signed by you. Certificates for the Stock to be delivered to you shall be registered in such name or names and shall be in such denominations as you may request at least one business day before the Closing Date, in the case of Underwritten Stock, and at least one business day prior to the purchase thereof, in the case of the Option Stock. Such certificates will be made available to the Underwriters for inspection, checking and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New York, New York 10004 on the business day prior to the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New York time, on the business day preceding the date of purchase. It is understood that you, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company and the Selling Stockholders for 11 12 shares to be purchased by any Underwriter whose check shall not have been received by you on the Closing Date or any later date on which Option Stock is purchased for the account of such Underwriter. Any such payment by you shall not relieve such Underwriter from any of its obligations hereunder. 6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. Each of the Company or the Selling Stockholders, as the case may be, respectively covenants and agrees as follows: (a) The Company will (i) prepare and timely file with the Commission under Rule 424(b) a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you shall have reasonably objected in writing or which is not in compliance with the Securities Act or the rules and regulations of the Commission. (b) The Company will promptly notify each Underwriter in the event of (i) the request by the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, (ii) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, (iii) the institution or notice of intended institution of any action or proceeding for that purpose, (iv) the receipt by the Company of any notification with respect to the suspension of the qualification of the Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the initiation or threatening of any proceeding for such purpose. The Company and the Selling Stockholders will make every reasonable effort to prevent the issuance of such a stop order and, if such an order shall at any time be issued, to obtain the withdrawal thereof at the earliest possible moment. (c) The Company will (i) on or before the Closing Date, deliver to you a signed copy of the Registration Statement as originally filed and of each amendment thereto filed prior to the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post-effective amendment, if any, to the Registration Statement (together with, in each case, all exhibits thereto unless previously furnished to you) and will also deliver to you, for distribution to the Underwriters, a sufficient number of additional conformed copies of each of the foregoing (but without exhibits) so that one copy of each may be distributed to each Underwriter, (ii) as promptly as possible deliver to you and send to the several Underwriters, at such office or offices as you may designate, as many copies of the Prospectus as you may reasonably request, and (iii) thereafter from time to time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, likewise send to the Underwriters as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended prospectus, filed by the Company with the Commission, as you may reasonably request for the purposes contemplated by the Securities Act. 12 13 (d) If at any time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer any event relating to or affecting the Company, or of which the Company shall be advised in writing by you, shall occur as a result of which it is necessary, in the opinion of counsel for the Company or of counsel for the Underwriters, to supplement or amend the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser of the Stock, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus so that the Prospectus as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time such Prospectus is delivered to such purchaser, not misleading. If, after the initial public offering of the Stock by the Underwriters and during such period, the Underwriters shall propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, you will advise the Company in writing of the proposed variation, and, if in the opinion either of counsel for the Company or of counsel for the Underwriters such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus setting forth such variation. The Company authorizes the Underwriters and all dealers to whom any of the Stock may be sold by the several Underwriters to use the Prospectus, as from time to time amended or supplemented, in connection with the sale of the Stock in accordance with the applicable provisions of the Securities Act and the applicable rules and regulations thereunder for such period. (e) Prior to the filing thereof with the Commission, the Company will submit to you, for your information, a copy of any post-effective amendment to the Registration Statement and any supplement to the Prospectus or any amended prospectus proposed to be filed. (f) The Company will cooperate, when and as requested by you, in the qualification of the Stock for offer and sale under the securities or blue sky laws of such jurisdictions as you may designate and, during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, in keeping such qualifications in good standing under said securities or blue sky laws; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. The Company will, from time to time, prepare and file such statements, reports, and other documents as are or may be required to continue such qualifications in effect for so long a period as you may reasonably request for distribution of the Stock. (g) During a period of five years commencing with the date hereof, the Company will furnish to you, and to each Underwriter who may so request in writing, copies of all periodic and special reports furnished to stockholders of the Company and of all information, documents and reports filed with the Commission. (h) Not later than the 45th day following the end of the fiscal quarter first occurring after the first anniversary of the Effective Date, the Company will make generally 13 14 available to its security holders an earnings statement in accordance with Section 11(a) of the Securities Act and Rule 158 thereunder. (i) The Company agrees to pay all costs and expenses incident to the performance of their respective obligations under this Agreement, including all costs and expenses incident to (i) the preparation, printing and filing with the Commission and the National Association of Securities Dealers, Inc. ("NASD") of the Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the furnishing to the Underwriters of copies of any Preliminary Prospectus and of the several documents required by paragraph (c) of this Section 6 to be so furnished, (iii) the printing of this Agreement and related documents delivered to the Underwriters, (iv) the preparation, printing and filing of all supplements and amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v) the furnishing to you and the Underwriters of the reports and information referred to in paragraph (g) of this Section 6 and (vi) the printing and issuance of stock certificates, including the transfer agent's fees. The Selling Stockholders will pay any transfer taxes incident to the transfer to the Underwriters of the shares the Stock being sold by the Selling Stockholders. (j) The Company agrees to reimburse you, for the account of the several Underwriters, for blue sky fees and related disbursements (including counsel fees and disbursements and cost of printing memoranda for the Underwriters) paid by or for the account of the Underwriters or their counsel in qualifying the Stock under state securities or blue sky laws and in the review of the offering by the NASD. (k) The provisions of paragraphs (i) and (j) of this Section are intended to relieve the Underwriters from the payment of the expenses and costs which the Company hereby agrees to pay and shall not affect any agreement which the Company and the Selling Stockholders may make, or may have made, for the sharing of any such expenses and costs. (l) The Company hereby agrees that, without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not, for a period of 90 days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make any short sale, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences or ownership of Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Stock to be sold to the Underwriters pursuant to this Agreement, (B) shares of Common Stock issued by the Company upon the exercise of options granted under the stock option plans of the Company (the "Option Plans"), all as described in footnote (1) to the table under the caption "Capitalization" in the Preliminary Prospectus, and (C) options to purchase Common Stock granted under the Option Plans. 14 15 7. INDEMNIFICATION AND CONTRIBUTION. (a) Subject to the provisions of paragraph (f) of this Section 7, the Company and the Selling Stockholders jointly and severally agree to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Securities Exchange Act of 1934, as amended (herein called the Exchange Act), or the common law or otherwise, and the Company and the Selling Stockholders jointly and severally agree to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that (1) the indemnity agreements of the Company and the Selling Stockholders contained in this paragraph (a) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of any Underwriter for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto, (2) the indemnity agreement contained in this paragraph (a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Stock which is the subject thereof (or to the benefit of any person controlling such Underwriter) if at or prior to the written confirmation of the sale of such Stock a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented) unless the failure is the result of noncompliance by the Company with paragraph (c) of Section 6 hereof, and (3) each Selling Stockholder shall only be liable under this paragraph with respect to (A) information identified in Section 2(b)(v) hereof pertaining to such Selling Stockholder furnished by or on behalf of such Selling Stockholder expressly for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto or (B) facts that would constitute a breach of any representation or warranty of such Selling Stockholder set forth in Section 2(b)(v) hereof. 15 16 The indemnity agreements of the Company and the Selling Stockholders contained in this paragraph (a) and the representations and warranties of the Company and the Selling Stockholders contained in Section 2 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (b) Each Underwriter severally agrees to indemnify and hold harmless the Company, each of its officers who signs the Registration Statement on his own behalf or pursuant to a power of attorney, each of its directors, each other Underwriter and each person (including each partner or officer thereof) who controls the Company or any such other Underwriter within the meaning of Section 15 of the Securities Act, and the Selling Stockholders (and each person who controls such Selling Stockholder) from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or the common law or otherwise and to reimburse each of them for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of such indemnifying Underwriter for use in the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto. The indemnity agreement of each Underwriter contained in this paragraph (b) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (c) Each party indemnified under the provision of paragraphs (a) and (b) of this Section 7 agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against, it in respect of which indemnity may be sought on account of any indemnity agreement contained in such paragraphs, it will promptly give written notice (herein called the Notice) of such service or notification to the party or parties from whom indemnification may be sought hereunder. No indemnification provided for in such paragraphs shall be available to any party who shall fail so to give the 16 17 Notice if the party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related and was prejudiced by the failure to give the Notice, but the omission so to notify such indemnifying party or parties of any such service or notification shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of such indemnity agreement. Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by giving written notice (herein called the Notice of Defense) to the indemnified party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; provided, however, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then counsel for the indemnified party or parties shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party or parties and (ii) in any event, the indemnified party or parties shall be entitled to have counsel chosen by such indemnified party or parties participate in, but not conduct, the defense. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will not be liable under paragraphs (a) through (c) of this Section 7 for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence and (B) the indemnifying party or parties shall bear such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as is appropriate to reflect the relative benefits received by each indemnifying party from the offering of the Stock or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each indemnifying party in connection with the 17 18 statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Stock received by the Company and the Selling Stockholders and the total underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price of the Stock. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by each indemnifying party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this paragraph (d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this paragraph (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this paragraph (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigation, preparing to defend or defending against any action or claim which is the subject of this paragraph (d) to the extent such indemnified party would be entitled to indemnification for such legal or other expenses under paragraph 7(c). Notwithstanding the provisions of this paragraph (d), no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Stock purchased by such Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this paragraph (d) to contribute are several in proportion to their respective underwriting obligations and not joint. Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in paragraph (c) of this Section 7). (e) Neither the Company nor the Selling Stockholders will, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. 18 19 (f) The liability of each Selling Stockholder under the indemnity and reimbursement agreements contained in the provisions of this Section 7 and Section 11 hereof shall be limited to an amount equal to the initial public offering price of the stock sold by such Selling Stockholder to the Underwriters. The Company and the Selling Stockholders may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. (g) The Company hereby acknowledges the indemnification agreements with the Selling Stockholders contained in that certain Stockholder's Agreement dated March 17, 1995 (the "Stockholder's Agreement") and that certain Common Stock Purchase Warrant dated September 27, 1996 (the "Warrant"). The Company agrees that nothing contained in this Agreement shall modify the Company's obligations under the Stockholder's Agreement or the Warrant. 8. TERMINATION. This Agreement may be terminated by you at any time prior to the Closing Date by giving written notice to the Company and the Selling Stockholders if after the date of this Agreement trading in the Common Stock shall have been suspended, or if there shall have occurred (i) the engagement in hostilities or an escalation of major hostilities by the United States or the declaration of war or a national emergency by the United States on or after the date hereof, (ii) any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, calamity, crisis or change in economic or political conditions in the financial markets of the United States would, in the Underwriters' reasonable judgment, make the offering or delivery of the Stock impracticable, (iii) suspension of trading in securities generally or a material adverse decline in value of securities generally on the New York Stock Exchange, the American Stock Exchange, or The Nasdaq Stock Market, or limitations on prices (other than limitations on hours or numbers of days of trading) for securities on either such exchange or system, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of, or commencement of any proceeding or investigation by, any court, legislative body, agency or other governmental authority which in the Underwriters' reasonable opinion materially and adversely affects or will materially or adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Underwriters' reasonable opinion has a material adverse effect on the securities markets in the United States. If this Agreement shall be terminated pursuant to this Section 8, there shall be no liability of the Company or the Selling Stockholders to the Underwriters and no liability of the Underwriters to the Company or the Selling Stockholders; provided, however, that in the event of any such termination the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company and the Selling Stockholders under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof. 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Stock shall be subject to the performance by the 19 20 Company and by the Selling Stockholders of all their respective obligations to be performed hereunder at or prior to the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, and to the following further conditions: (a) The Registration Statement shall have become effective; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings therefor shall be pending or threatened by the Commission. (b) The legality and sufficiency of the sale of the Stock hereunder and the validity and form of the certificates representing the Stock, all corporate proceedings and other legal matters incident to the foregoing, and the form of the Registration Statement and of the Prospectus (except as to the financial statements contained therein), shall have been approved at or prior to the Closing Date by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel for the Underwriters. (c) You shall have received opinions addressed to the Underwriters dated the Closing Date from (i) Stradling, Yocca, Carlson & Rauth, counsel for the Company, covering the matters set forth in Annex A hereto, (ii) Donald C. Lewis, Vice President and Secretary of Efratom Holding, Inc., a Selling Stockholder, covering the matters set forth in Annex B hereto, (iii) James F. Evert, Assistant General Counsel of The Prudential Insurance Company of America, a Selling Stockholder, covering the matters set forth in Annex C hereto and (iv) Kelly, Hart & Hallman, environmental counsel for the Company covering the matters set forth in Annex D hereto and if Option Stock is purchased at any date after the Closing Date, additional opinions from each counsel set forth in (i) and (iv) above, addressed to the Underwriters and dated such later date, confirming that the statements expressed as of the Closing Date in such opinions remain valid as of such later date. (d) You shall be satisfied that (i) as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct and neither the Registration Statement nor the Prospectus omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, respectively, not misleading, (ii) since the Effective Date, no event has occurred which should have been set forth in a supplement or amendment to the Prospectus which has not been set forth in such a supplement or amendment, (iii) since the respective dates as of which information is given in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, and, since such dates, except in the ordinary course of business, the Company does not have/neither the Company nor any of its subsidiaries has entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (iv) neither the Company nor any of its subsidiaries has any material contingent obligations which are not disclosed in the Registration Statement and the Prospectus, (v) there are not any pending or known threatened legal proceedings to which the Company or any of its subsidiaries 20 21 is a party or of which property of the Company or any of its subsidiaries is the subject which are material and which are not disclosed in the Registration Statement and the Prospectus, (vi) there are not any franchises, contracts, leases or other documents which are required to be filed as exhibits to the Registration Statement which have not been filed as required, (vii) the representations and warranties of the Company herein are true and correct in all material respects as of the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, and (viii) there has not been any material change in the market for securities in general or in political, financial or economic conditions from those reasonably foreseeable as to render it impracticable in your reasonable judgment to make a public offering of the Stock, or a material adverse change in market levels for securities in general (or those of companies in particular) or financial or economic conditions which render it inadvisable to proceed. (e) You shall have received on the Closing Date and on any later date on which Option Stock is purchased a certificate, dated the Closing Date or such later date, as the case may be, and signed by the President and the Chief Financial Officer of the Company, stating that the respective signers of said certificate have carefully examined the Registration Statement in the form in which it originally became effective and the Prospectus contained therein and any supplements or amendments thereto, and that the statements included in clauses (i) through (vii) of paragraph (d) of this Section 9 are true and correct. (f) You shall have received from Price Waterhouse LLP, a letter or letters, addressed to the Underwriters and dated the Closing Date and any later date on which Option Stock is purchased, confirming that they are independent public accountants with respect to the Company within the meaning of the Securities Act and the applicable published rules and regulations thereunder and based upon the procedures described in their letter delivered to you concurrently with the execution of this Agreement (herein called the Original Letter), but carried out to a date not more than three business days prior to the Closing Date or such later date on which Option Stock is purchased (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of the Original Letter or to reflect the availability of more recent financial statements, data or information. The letters shall not disclose any change, or any development involving a prospective change, in or affecting the business or properties of the Company or any of its subsidiaries which, in your sole judgment, makes it impractical or inadvisable to proceed with the public offering of the Stock or the purchase of the Option Stock as contemplated by the Prospectus. (g) You shall have received from Price Waterhouse LLP a letter stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's financial statements as at December 31, 1996, did not disclose any weakness in internal controls that they considered to be material weaknesses. 21 22 (h) You shall have been furnished evidence in usual written or telegraphic form from the appropriate authorities of the several jurisdictions, or other evidence satisfactory to you, of the qualification referred to in paragraph (f) of Section 6 hereof. (i) Prior to the Closing Date, the Stock to be issued and sold by the Company shall have been duly authorized for listing by the Nasdaq National Market upon official notice of issuance. (j) On or prior to the Closing Date, you shall have received from all directors, officers, and beneficial holders of more than 5% of the outstanding Common Stock agreements, in form reasonably satisfactory to Hambrecht & Quist LLC, stating that without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will not, for a period of 90 days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make any short sale, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences or ownership of Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. (k) You shall be satisfied that, and you shall have received a certificate, dated the Closing Date, or any later date on which Option Stock are to be purchased, as the case may be, from the Attorneys for each Selling Stockholder to the effect that, as of the Closing Date, or any later date on which Option Stock are to be purchased, as the case may be, they have not been informed that: (i) The representations and warranties made by such Selling Stockholder herein are not true or correct in any material respect on the Closing Date or on any later date on which Option Stock are to be purchased, as the case may be; or (ii) Such Selling Stockholder has not complied with any obligation or satisfied any condition which is required to be performed or satisfied on the part of such Selling Stockholder at or prior to the Closing Date or any later date on which Option Stock are to be purchased, as the case may be. All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel for the Underwriters, shall be satisfied that they comply in form and scope. In case any of the conditions specified in this Section 9 shall not be fulfilled, this Agreement may be terminated by you by giving notice to the Company and to the Selling Stockholders. Any such termination shall be without liability of the Company or the Selling Stockholders to the Underwriters and without liability of the Underwriters to the Company or the 22 23 Selling Stockholders; provided, however, that (i) in the event of such termination, the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company and the Selling Stockholders under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you because of any refusal or failure on the part of the Company or the Selling Stockholders to perform any agreement herein, to fulfill any of the conditions herein, or to comply with any provision hereof other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all reasonable out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the transactions contemplated hereby. Such indemnity and reimbursement shall be the only liabilities of the Company to the Underwriters in such events. 10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING STOCKHOLDERS. The obligation of the Company and the Selling Stockholders to deliver the Stock shall be subject to the conditions that (a) the Registration Statement shall have become effective and (b) no stop order suspending the effectiveness thereof shall be in effect and no proceedings therefor shall be pending or threatened by the Commission. The obligations of the Selling Stockholders to deliver the Stock shall also be subject to receipt by such Selling Stockholder of the opinion of Stradling, Yocca, Carlson & Rauth referred to in Section 9(c) hereof addressed to the Selling Stockholders. In case either of the conditions specified in this Section 10 shall not be fulfilled, this Agreement may be terminated by the Company and the Selling Stockholders by giving notice to you. Any such termination shall be without liability of the Company and the Selling Stockholders to the Underwriters and without liability of the Underwriters to the Company or the Selling Stockholders; provided, however, that in the event of any such termination the Company and the Selling Stockholders jointly and severally agree to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company and the Selling Stockholders under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof. 11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other obligations under Section 7 of this Agreement, the Company agrees to reimburse on a quarterly basis the Underwriters for all reasonable legal and other expenses incurred in connection with investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in Section 7(a) of this Agreement, and subject to clause (3) thereof, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this Section 11 and the possibility that such payments might later be held to be improper; provided, however, that (i) to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them and (ii) such persons shall provide to the Company, upon request, reasonable assurances of their ability to effect any refund, when and if due. 23 24 12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to the benefit of the Company, the Selling Stockholders and the several Underwriters and, with respect to the provisions of Section 7 hereof, the several parties (in addition to the Company, the Selling Stockholders and the several Underwriters) indemnified under the provisions of said Section 7, and their respective personal representatives, successors and assigns. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Stock from any of the several Underwriters. 13. NOTICES. Except as otherwise provided herein, all communications hereunder shall be in writing or by facsimile and, if to the Underwriters, shall be mailed, sent by facsimile or delivered to Hambrecht & Quist LLC, One Bush Street, San Francisco, California 94104; and if to the Company, shall be mailed, , sent by facsimile or delivered to it at its office, 9975 Toledo Way, Irvine, California 92618, Attention: Louis B. Horwitz, President and Chief Executive Officer; and if to the Selling Stockholders, shall be mailed, , sent by facsimile or delivered to the Selling Stockholders in care of Louis B. Horwitz or David A. Young at Datum Inc., 9975 Toledo Way, Irvine, California 92618. All notices given by facsimile shall be promptly confirmed by letter. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or the Selling Stockholders or their respective directors or officers, and (c) delivery and payment for the Stock under this Agreement; provided, however, that if this Agreement is terminated prior to the Closing Date, the provisions of paragraphs (g), (h) and (l) of Section 6 hereof shall be of no further force or effect. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 24 25 Please sign and return to the Company and to the Selling Stockholders in care of the Company the enclosed duplicates of this letter, whereupon this letter will become a binding agreement among the Company, the Selling Stockholders and the several Underwriters in accordance with its terms. Very truly yours, DATUM INC. By: ------------------------------------------ Louis B. Horwitz President and Chief Executive Officer SELLING STOCKHOLDERS: EFRATOM HOLDING, INC. By ------------------------------------------- Name ----------------------------------------- Title ---------------------------------------- THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By ------------------------------------------- Name ----------------------------------------- Title ---------------------------------------- The foregoing Agreement is hereby confirmed and accepted as of the date first above written. HAMBRECHT & QUIST LLC OPPENHEIMER & CO., INC. VAN KASPER & COMPANY By Hambrecht & Quist LLC By --------------------------------------------- Managing Director Acting on behalf of the several Underwriters, including themselves, named in Schedule I hereto. 26 SCHEDULE I UNDERWRITERS NUMBER OF SHARES TO BE UNDERWRITERS PURCHASED - ------------ ------------ Hambrecht & Quist LLC . . . . . . . . . . . . . Oppenheimer & Co. Inc. . . . . . . . . . . . . Van Kasper & Company . . . . . . . . . . . . . --------- Total . . . . . . . . . . . . . . . ========= 27 SCHEDULE II SELLING STOCKHOLDERS NUMBER OF SHARES TO BE NAME AND ADDRESS OF SELLING STOCKHOLDERS SOLD - ---------------------------------------- ------------ Efratom Holding, Inc. 10 Longs Peak Drive Broomfield, Colorado 80021 The Prudential Insurance Company of America Four Embarcadero Center Suite 2700 San Francisco, California 94111 --------- Total . . . . . . . . . . . . . . . . . . . ========= 28 ANNEX A Matters to be Covered in the Opinion of Stradling, Yocca, Carlson & Rauth Counsel for the Company (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, is duly qualified as a foreign corporation and in good standing in California, and is so qualified and in good standing in each jurisdiction in which, to its knowledge, the ownership or leasing of property requires such qualification (except where the failure to be so qualified would not have a material adverse effect on the business, properties, condition (financial or otherwise) or results of operations or prospects of the Company and its subsidiaries taken as whole and has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; (ii) The Company owns of record, and to our knowledge owns beneficially all of the outstanding shares of capital stock of each subsidiary of the Company, and each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; (iii) The authorized capital stock of the Company consists of 1,000,000 shares of Preferred Stock, $.25 par value, none of which are issued and outstanding, and 10,000,000 shares of Common Stock, $.25 par value, of which there are issued and outstanding of record shares (including the Underwritten Stock plus the number of shares of Option Stock issued on the date hereof); proper corporate proceedings have been taken validly to authorize such authorized capital stock; all of the outstanding shares of such capital stock (including the Underwritten Stock plus the number of shares of Option Stock issued on the date hereof) have been duly and validly issued and are fully paid and nonassessable; any Option Stock purchased on or after the Closing Date, when issued and delivered to and paid for by the Underwriters as provided in the Underwriting Agreement, will have been duly and validly issued and be fully paid and nonassessable; no preemptive rights or rights of refusal exist with respect to the Stock, or the issue and sale thereof, pursuant to the Restated Certificate of Incorporation or Bylaws of the Company; and, to the best of such counsel's knowledge, there are no contractual preemptive rights, rights of first refusal or rights of co-sale which exist with respect to the issue and sale of the Stock by the Company or the sale of Stock by the Selling Stockholders that have not been waived. Except as disclosed in the Registration Statement, to the best of such counsel's knowledge the Company does not have outstanding any options to purchase, or any other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell shares of its capital stock or any such options, rights, convertible securities or obligations; (iv) The Registration Statement has become effective under the Securities Act and, to the best of such counsel's knowledge after due inquiry, no stop order suspending the effectiveness of the Registration Statement or suspending or preventing the use of the Prospectus A-1 29 is in effect and no proceedings for that purpose have been instituted or are pending or threatened by the Commission. Any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner within the time period required by such Rule 424(b). (v) The Registration Statement at the Effective Date and the Prospectus and each amendment and supplement thereto (except as to the financial statements and schedules and other financial data contained therein and matters related to patents, as to which such counsel need express no opinion) complied as to form in all material respects with the requirements of the Securities Act, the Exchange Act and with the rules and regulations of the Commission thereunder; (vi) The information required to be set forth in the Registration Statement in answer to Items 9 and 10 (insofar as Item 10 relates to the beneficial ownership of shares of Common Stock of the Company by partners of such counsel) of Form S-2 is, to the best of such counsel's knowledge, accurately and adequately set forth therein in all material respects or no response is required with respect to such Items; and to such counsel's knowledge, the description of the Company's stock option plans and the options granted and which may be granted thereunder set forth or incorporated by reference in the Prospectus accurately and fairly presents the information required to be shown with respect to said plans and options to the extent required by the Securities Act and the rules and regulations of the Commission thereunder; (vii) To the best of such counsel's knowledge, there are no franchises, contracts, leases, documents or legal proceedings, pending or threatened, which in the opinion of such counsel are of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement, which are not described or filed as required, as the case may be; such franchises, contracts, leases, documents and legal proceedings as are summarized in the Registration Statement or the Prospectus fairly and correctly present the information disclosed with respect thereto in all material aspects; (viii) The Underwriting Agreement has been duly authorized, executed and delivered by the Company; (ix) The issue and sale by the Company of the shares of Stock sold by the Company as contemplated by the Underwriting Agreement will not conflict with, or result in a breach of, the Restated Certificate of Incorporation or Bylaws of the Company or any material agreement or instrument known to such counsel to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their assets are bound or any applicable law or regulation, or so far as is known to such counsel, any order, writ, injunction or decree, of any jurisdiction, court or governmental instrumentality to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their assets are bound; (x) To such counsel's knowledge, all holders of securities of the Company having rights to the registration of shares of Common Stock, or other securities, because of the filing of the Registration Statement by the Company are set forth in the Prospectus under the A-2 30 heading "Principal and Selling Stockholders" or have waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement; (xi) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions contemplated in the Underwriting Agreement, except such as have been obtained under the Securities Act and such as may be required under state securities or blue sky laws or under the rules of the National Association of Securities Dealers, Inc. in connection with the purchase and distribution of the Stock by the Underwriters; and (xii) The Stock to be sold under the Agreement to the Underwriters is duly authorized for quotation on the Nasdaq National Market. Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or of the State of Delaware, upon opinions of local counsel satisfactory in form and scope to counsel for the Underwriters. Copies of any opinions so relied upon shall be delivered to the Representatives and to counsel for the Underwriters and the foregoing opinion shall also state that counsel knows of no reason the Underwriters are not entitled to rely upon the opinions of such local counsel. In addition to the matters set forth above, counsel rendering the foregoing opinion shall also include a statement to the effect that nothing has come to the attention of such counsel that leads them to believe that the Registration Statement (except as to the financial statements and schedules and other financial and statistical data contained or incorporated by reference therein, as to which such counsel need not express any opinion or belief) at the Effective Date contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus (except as to the financial statements and schedules and other financial and statistical data contained or incorporated by reference therein, as to which such counsel need not express any opinion or belief) as of its date or at the Closing Date (or any later date on which Option Stock is purchased), contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances as under which they were made, not misleading. A-3 31 ANNEX B Matters to be Covered in the Opinion of Donald C. Lewis, Vice President and Secretary Efratom Holding, Inc., a Selling Stockholder (i) The Underwriting Agreement has been duly executed and delivered by or on behalf of Efratom Holding, Inc., a Selling Stockholder ("Efratom"); (ii) The Custody Agreement and Power of Attorney between Efratom and the Custodian (as defined in the Custody Agreement and Power of Attorney) has been duly executed and delivered by or on behalf of Efratom; (iii) Good and valid title to the shares of Stock sold by Efratom under the Underwriting Agreement, free and clear of any adverse claim (within the meaning of the Uniform Commercial Code), has been transferred to the Underwriters who have severally purchased such shares of Stock under the Underwriting Agreement, assuming for the purpose of this opinion that the Underwriters purchased the same in good faith without notice of any adverse claims (within the meaning of the Uniform Commercial Code); (iv) To the best of such counsel's knowledge, there are no contractual preemptive rights, rights of first refusal or rights of co-sale which exist with respect to the sale of Stock by Efratom that have not been waived; and (v) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions contemplated in the Underwriting Agreement, except such as have been obtained under the Securities Act and such as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Stock by the Underwriters. B-1 32 ANNEX C Matters to be Covered in the Opinion of James F. Evert, Assistant General Counsel of The Prudential Insurance Company of America, a Selling Stockholder (i) The Underwriting Agreement has been duly executed and delivered by or on behalf of The Prudential Insurance Company of America, a Selling Stockholder ("Prudential"); (ii) Good and valid title to the shares of Stock sold by Prudential under the Underwriting Agreement, free and clear of any adverse claim (within the meaning of the Uniform Commercial Code), has been transferred to the Underwriters who have severally purchased such shares of Stock under the Underwriting Agreement, assuming for the purpose of this opinion that the Underwriters purchased the same in good faith without notice of any adverse claims (within the meaning of the Uniform Commercial Code); (iii) To the best of such counsel's knowledge, there are no contractual preemptive rights, rights of first refusal or rights of co-sale which exist with respect to the sale of Stock by Prudential that have not been waived; and (iv) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions contemplated in the Underwriting Agreement, except such as have been obtained under the Securities Act and such as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Stock by the Underwriters. C-1 33 ANNEX D Matters to be Covered in the Opinion of Kelly, Hart & Hallman Environmental Counsel for the Company Such counsel are familiar with the environmental issues faced by the Company in its business and have read the Registration Statement and the Prospectus, including particularly the portions of the Registration Statement and the Prospectus referring to environmental issues and: (i) The statements in the Registration Statement and the Prospectus under the captions "Risk Factors-Risks Associated with Government Regulations-Environmental Regulations; Notice of Environmental Claim" and "Business-Legal Proceedings," to the best of such counsel's knowledge and belief, are accurate and complete statements or summaries of the matters therein set forth and nothing has come to such counsel's attention that causes such counsel to believe that the above-described portions of the Registration Statement and the Prospectus contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; D-1 EX-5.1 3 OPINION OF STRADLING, YOCCA, CARLSON & RAUTH 1 EXHIBIT 5.1 [STRADLING, YOCCA, CARLSON & RAUTH LETTERHEAD] March 25, 1997 Datum Inc. 9975 Toledo Way Irvine, California 92618 Ladies and Gentlemen: At your request, we have examined the Registration Statement on Form S-2, Registration No. 333-22177, filed by Datum Inc., a Delaware corporation (the "Company"), with the Securities and Exchange Commission on February 21, 1997 (as amended, the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of 2,820,695 shares of Common Stock, $.25 par value per share, of the Company (the "Common Stock"). Said shares of Common Stock, which include 367,917 shares which will be subject to an over-allotment option to be granted to the underwriters by the Company, are to be sold to the underwriters as described in the Registration Statement for sale to the public. As your counsel in connection with this transaction, we have examined the proceedings taken and are familiar with the proceedings proposed to be taken by you in connection with the authorization, issuance and sale of the shares of the Common Stock. Based on the foregoing, and subject to compliance with applicable state securities laws, it is our opinion that the 2,820,695 shares of Common Stock, when issued and sold in the manner described in the Registration Statement, will be legally issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Prospectus which is a part of the Registration Statement. Very truly yours, /s/ STRADLING, YOCCA, CARLSON & RAUTH ------------------------------------- STRADLING, YOCCA, CARLSON & RAUTH EX-10.40 4 AGREEMENT DATED 6/12/95 BETWEEN THE COMPANY & AT&T 1 EXHIBIT 10.40 [Confidential treatment is being sought for certain portions of this exhibit, as indicated by "omitted pursuant to Rule 406" or "column data omitted pursuant to Rule 406"] AT&T Global Procurement CONTRACT NO. LCB529E Datum Inc. ACCEPTANCE SHALL BE INDICATED BY SIGNING Efratom Time and Frequency AND RETURNING DUPLICATE TO: Products, Inc. 3 Parker AT&T Corp. Irvine, California 92718 6200 E. Broad Street Columbus, Ohio 43213 AT&T Corp. ("Company") agrees to purchase and Datum/Efratom ("Supplier") agrees to sell in accordance with the terms and conditions stated in this Agreement and on the reverse side of page one of this Agreement. MATERIAL Such quantities of Reference Frequency and Timing Generators of Supplier's manufacture, identified in the PRICE Clause, as may be ordered by Company during the period of May 1, 1995 through April 30, 1998. PRICE See Attachment A CFC PACKAGING Supplier warrants that all packaging materials furnished under this Agreement and all packaging associated with material furnished under this Agreement were not manufactured using and do not contain Chloroflurocarbons. "Packaging" means all bags, wrappings, boxes, cartons, and any other packing materials used for packaging. Supplier shall indemnify and hold Company harmless for usability, fine, or penalty incurred by Company to any third party or governmental agency arising out of Company's good faith reliance upon said warranty. CONSIGNMENT PROCEDURES A. CONSIGNMENT MATERIAL MANAGEMENT (1) For Consignment items mutually agreed upon between Company and Supplier, and shall be designated as such on Attachment A, Company shall issue to Supplier an annual order during the term of this Agreement which will state Company's (12) 1 2 month estimated annual usage for such material (the "Master Purchase Order"). Such Master Purchase Order will include the statement "Consignment Items covered by this order are subject to the clause CONSIGNMENT PROCEDURES in the above referenced governing contract." Such estimated annual usage will be provided for administrative and planning purposes only and shall not be deemed a commitment to purchase the amount set forth in the Master Purchase Order. (2) Each week Company shall provide Supplier a report for each such item of Consignment Material in the form attached hereto as Attachment B (the "Consignment Report"). The Consignment Report shall contain a twelve (12) month forecast including weekly estimated requirements for a minimum of 26 weeks. The forecast shall be for planning purposes only and, except to the extent set forth in paragraphs 5 and 6, shall not be deemed a commitment to purchase the amount set forth in the forecast. The forecast contained in the Consignment Report may differ from the Master Purchase Order estimated annual usage. The Consignment Report shall also list the net amount of material withdrawn (the quantity designated in the row entitled "Total Used") by part number by Company from Consigned Material Storage, and the balance of such Consigned Material Storage (designated in the row entitled "On-hand Quantity"). Supplier shall invoice Company each week only for net Consigned Material withdrawn by Company the previous week, quantity designated in the row entitled "Total Used." (3) Supplier shall review the forecast contained in the consignment Report and shall adjust Consigned Material Storage support levels. Supplier shall manufacture and ship enough finished goods material into Consigned Material Storage so that Consigned Material Storage contains the following 1 week forecast plus a level of safety stock not to exceed the next 3 weeks of Company's forecast for such part numbers in Attachment B based on the then current Consignment Report. (4) Supplier shall have the Material Management responsibility for Company's Consignment Site for the part numbers included in Consignment. (5) Company's commitment to purchase shall be only those quantities withdrawn by Company from Consigned Material Storage and to the extent set forth in the next subsection (6). (6) If at any time during the twelve (12) month period covered by a Master Purchase Order, Consignment is terminated by mutual agreement of the parties or unilaterally terminated by Company as set forth in the clause TERMINATION, or if Company changes the forecast contained in the Consignment Report to eliminate or materially reduce the quantities forecasted under the Master Purchase Order(s), of if the Consignment Agreement expires and is not renewed, Company's sole liability to Supplier shall be to purchase the first 4 weeks of finished goods (as forecasted in the previous week's Consignment Report). Such 4 weeks gross forecasted finished goods shall include those already in Consigned Material Storage, in transit or at Supplier's location. For the portion of the work in process material at the Supplier's location, 2 3 Company's obligation will be specified in Attachment B and limited to: (a) Supplier's purchase price of raw material (not usable in Supplier's other operations or salable to Supplier's other customers), (b) minus any salvage thereof (c) plus Supplier's direct labor cost in manufacturing such work in progress. (d) not to exceed the equivalent quantity of Company's previous forecast prior to the termination which precipitated the inventory buildup for weeks one through ten (1-10) of that forecast. If requested, Supplier agrees to substantiate such costs with proof satisfactory to Company. (7) Volume Reductions - In the case of a reduction in demand, adjustments will be made to work in process at Supplier to accommodate the change. If the reduction results in a stock level greater than six months' future usage or results in a significant dollar amount of stranded stock, removal of the comcode from Consignment and billing of inventory at the Company location at the current price will occur. The Company will provide either a routine purchase order to consume Supplier's finished goods and work in process or scrap authorization within 60 days consistent with the liabilities stated in subsection three (3) "Authorized Stock" or scrap authorization within thirty (30) days. B. MATERIAL ON CONSIGNMENT Supplier shall deliver the material on Consignment to Company as set forth below: (1) Consigned material - Per Supplier's or Company's specifications as indicated in the clause SPECIFICATIONS/DRAWINGS, a copy of which Supplier and Company have in their possession, as they may be amended from time to time by Company or with Company's written approval. Additionally, a pink sticker with the word "CONSIGNMENT" is required on the outside of each final carton. (See Attachment B for Consigned Material.) (2) The Consignment Report shall set forth the Consignment Site (designated by the row entitled "Rec Loc") and Company's contact person (designated by the row entitled "Contact"). (3) Consigned Material Storage - Upon receipt of each shipment of Consigned Material, Company shall cause it to be placed in segregated storage ("Consigned Material Storage") at the Consignment Site partitioned or marked to evidence Supplier's 3 4 ownership and in such a way that the Consigned Material may be readily distinguished from other inventory by physical inspection. Supplier may physically inspect Consigned Material in Consigned Material Storage at a mutually agreeable time during normal business hours. After such inspection, Supplier may invoice Company for any unaccounted for inventory of Consigned Material at the price then in effect under this Agreement. (4) Title and Risk of Loss - Upon receipt at Consignment Site of a particular lot of Consigned Material for Consigned Material Storage, risk of loss of such lot shall pass to Company. Upon withdrawal of such lot by Company from Consigned Material Storage, title to such lot shall pass to Company and sale of that lot shall be deemed to occur. (5) Terms of Payment - Terms of payment for material withdrawn from Consigned Material Storage are Net 15 days. (6) Withdrawal from Consigned Material Storage - Company may withdraw or cause to be withdrawn Consigned Material from Consigned Material Storage at any time. Company shall keep or cause to be kept records and reports ("Consignment Reports") and shall provide weekly to Supplier the quantities withdrawn and the balance of Consigned Material in Consigned Material Storage as set forth in the section CONSIGNMENT MATERIAL MANAGEMENT. Supplier's invoices for the Consigned Material shall be based upon such Consignment Reports. Supplier shall regularly replace quantities withdrawn to maintain mutually agreed stock support levels as set forth in the section CONSIGNMENT MATERIAL MANAGEMENT. (7) Personal Property Taxes - Supplier shall be responsible for the reporting and payment of personal property taxes, if any, on such Consigned Material Storage by Company. (8) Transportation Loss and Damage or Hidden Manufacturing Defects - As to loss of or damage to Consigned Material which is reasonably apparent upon delivery from the Carrier, Company shall cause the following to be done: (a) At time of delivery, mark delivery receipt with appropriate exceptions describing the damage before signing; and (b) At the time of delivery, request the Carrier to either inspect the loss or damage and forward to Supplier a signed exception report outlining the extent of loss or damage, or issue a written waiver of inspection and forward it to Supplier; and (c) Within ten (10) days after delivery, inspect the damaged material and notify Supplier whether Company will (i) accept it at a mutually agreed lower price 4 5 reflecting the transportation damage (if Supplier had the risk of loss) or the manufacturing defect, or (ii) reject it. Rejected lots shall be set aside by Company pending disposition by Supplier as soon as reasonably possible but no later than sixty (60) days following delivery, after which time any such damaged Consigned Material remaining undisposed of shall be deemed to be abandoned and Company may dispose of it as it sees fit without any obligation to Supplier. As to concealed transportation damage of hidden manufacturing defects in material, if after withdrawal of Consigned Material from Consigned Material Storage, Company discovers concealed transportation damage or defective material, Company shall notify Supplier within five (5) days of such discovery, take reasonable steps to preserve evidence of how such damage occurred and take all actions provided for in subparagraph (c) above. Where Consigned Material Storage is located on premises other than Company premises, Company shall direct the owner of such other premises to comply with the procedure set forth in this clause. C. CONSIGNMENT SERVICE PERFORMANCE The Company intends to monitor the delivery performance of Supplier via special performance reports. However, for Consigned Material, Supplier shall maintain a 100% performance rating for "PERCENT OF FORECAST QUANTITY ON-HAND WHEN MEASURED." Company will provide monthly updates to Supplier's performance results. CONTINUING AVAILABILITY Supplier agrees to offer for sale to Company, during the term of this Agreement and for at least one year after the expiration of this Agreement, MATERIAL conforming to the Technical Specifications set forth in this Agreement. Supplier further agrees to offer for sale to Company, during the term of this Agreement and until five (5) years after the expiration of this Agreement, maintenance, replacement, and repair parts ("Parts") which are functionally equivalent and identical in form and fit for the MATERIAL covered by this Agreement. The price for the MATERIAL and Parts shall be the price set forth in Supplier's then current agreement with Company for said MATERIAL or Parts or, if no such agreement exists, at a price agreed upon by Company and Supplier. If the parties fail to agree on a price, the price shall be a reasonably competitive price for said MATERIAL or Parts at the time for delivery. The MATERIAL and Parts shall be warranted as set forth in the WARRANTY clause of this Agreement. In the event Supplier files for bankruptcy and fails to supply such MATERIAL or Parts and Supplier is unable to obtain another source of supply for Company, then such failure or inability shall be considered noncompliance with this clause and Supplier shall, without obligation of or charge to Company, provide Company with Supplier's technical information and grant a non-exclusive world wide license to use Supplier's technical information or any other rights required so that Company can manufacture, have manufactured or obtain such MATERIAL or Parts from other sources; limited only to that part of the Material which Supplier is unable to continue to supply or discontinues to manufacture. 5 6 DEMAND PULL PROCEDURES A. For Demand Pull items mutually agreed upon between Company and Supplier, and shall be designed as such on Attachment A; Company shall issue an annual order during the term of this Agreement which will state Company's estimated annual usage for such material (the "EAU order"). Such EAU order will include the statement "Demand Pull Items covered by this order are subject to the clause DEMAND PULL PROCEDURES in the above referenced governing contract." Each week Company shall provide Supplier with a 52-week forecast for each such item of Demand Pull material in the form attached hereto as Attachment C (the "Forecast"). Such Forecast may also contain Company's authorization to Supplier to ship, within twenty-four hours of Supplier's receipt of the Forecast, the quantity designated in the column entitled "Supplier Action." The shipment shall have an on-Company dock date no later than Friday of the week in which the Demand Pull sheet is issued. Supplier shall immediately notify Company's authorizing agent in writing (e.g., fax, e-mail, or EDI) as to the quantity and description of material shipped, as well as any failure to ship complete an authorized shipment. Supplier shall reference the EAU order number on its shipping and invoicing documents. Said EAU order and Forecast shall be for planning purposes only and, except to the extent set forth in paragraph D below, shall not be deemed a commitment to purchase the amount set forth in the EAU order or Forecast. B. Supplier shall maintain 1) an inventory of Supplier inspected finished Demand Pull material equivalent to the amount specified on Attachment A of the then current forecast and 2) Demand-pull material in process and/or raw materials and components in the aggregate sufficient to manufacture such Demand-Pull material equivalent to the amount specified on Attachment A of the then current forecast (subject to the proviso in paragraph C below). C. Supplier shall review the weekly Forecast and make adjustments to Supplier's inspected inventory, work in process and raw materials and components based upon increases/decreases in the Forecast and Company's "Customer Quantity on Hand" level as set forth in said Forecast. Provided, however, that if the total of the weeks 1 through 12 of a Forecast has increased or decreased by more than 25% from the previous week's total Forecast of weeks 1 through 12, such adjustment must be confirmed in writing by Company and Supplier. D. Company's commitment for the Demand Pull material shall be limited to 1) the quantities set forth in the "Supplier Action" column of the Forecast, 2) the inspected inventory, work in process, raw materials and components as set forth in paragraph B above. Company's liability for the items in paragraph D.2) shall be limited to: a. for inspected inventory (not usable in Supplier's other operations or salable to Supplier's other customers): the unit prices set forth in the Agreement; 6 7 b. for raw materials and components: Supplier's purchase price of such raw materials and components (not usable in Supplier's other operations or salable to Supplier's other customers); c. for work in process: the actual costs incurred by Supplier in procuring and manufacturing Demand Pull material (not usable in Supplier's other operations or salable to Supplier's other customers); less d. any salvage value thereof. If requested, Supplier agrees to substantiate such costs with proof satisfactory to Company. DISTRIBUTION RIGHTS Supplier agrees that it will not sell or offer for sale anywhere in the world products which are the same as described in the Technical Specification clause of this Agreement. Nothing in this clause shall be deemed to be contradiction with the rights of the Company as stated in the clause "NONEXCLUSIVE MARKET RIGHTS." EPIDEMIC CONDITION In the event that during the term of this Agreement and for one year after the last shipment date of MATERIAL under this Agreement Company notifies Supplier that MATERIAL shows evidence of an "Epidemic Condition," Supplier shall prepare and propose a Corrective Action Plan ("CAP") with respect to such MATERIAL within ten (10) working days of such notification, addressing implementation and procedure milestones for remedying such Epidemic Condition(s). An extension of this time-frame is permissible upon mutual written agreement of the parties. Upon notification of the Epidemic Condition to Supplier, Company shall have the right to postpone all or part of the shipments of unshipped MATERIAL, by giving written notice of such postponement to Supplier, pending correction of the Epidemic Condition. Such postponement shall temporarily relieve Supplier of its shipment liability and Company of its shipment acceptance liability. Should Supplier not agree to the existence of an Epidemic Condition or should Company not agree to the CAP, then Company shall have the right to suspend all or part of its unshipped orders without liability to Company until such time as a mutually acceptable solution is reached. An Epidemic Condition will be considered to exist when one or more of the following conditions occur: (1) Failure reports or statistical samplings show that one (1) percent or more of MATERIAL installed or one (1) percent or more of MATERIAL shipped during any two consecutive months, or one (1) percent or more of the MATERIAL tracked by Company's Field Quality Engineering contain a potential safety hazard (such as personal injury or death, fire, 7 8 explosion, toxic emissions, etc.), or exhibit a highly objectionable symptom (such as emissions of smoke, loud noises, deformation of housing) or other disconcerting symptoms of this type. (2) Reliability plots of relevant data indicate that the MATERIAL has actual Mean Time Between Failures (MTBF) of less than 80% of the MTBF stipulated in the Technical Specification. The MTBF parameter of MATERIAL is defined as the total operating or power-on time of any population under observation ("T"), in hours, divided by the total number of critical failures ("n") that have occurred during the observed period. A critical failure is defined as a failure to operate per the requirements of the Technical Specification. The total operating time of a population is the summation of operating time of individual units in that population. MTBF is expressed as MTBF = T/n. An Epidemic Condition shall exist when data derived from populations being tracked confirms the condition with 80% confidence. (3) MATERIAL Dead on Arrival (DOA) failures exceed 5%. Only major functional and visual/mechanical/appearance defects are considered for determining Epidemic condition. MATERIAL could be either sampled or, at Company's option, 100% audited at Company warehouses, factories or Company's customers' locations. If MATERIAL is sampled, the data must have 80% or better statistical confidence. For the purpose of this Agreement, functional DOA shall be defined as any MATERIAL that during the test, installation or upon its first use fails to operate as expected or specified. Visual/mechanical/appearance DOA is defined as any MATERIAL containing one or more major defects that would make the MATERIAL unfit for use or installation. An Epidemic Condition shall not include failures due to customer misapplication, utilization of parts not approved by Supplier, or chain failures induced by internally or externally integrated subassemblies. In the event that Supplier develops a remedy for the defect(s) that caused the Epidemic Condition and Company agrees in writing that the remedy is acceptable, Supplier shall: (a) Incorporate the remedy in the affected MATERIAL. (b) Ship all subsequent MATERIAL incorporating the required modification correcting the defect(s) at no additional charge to Company; and (c) Repair and/or replace MATERIAL, at Supplier's option, that caused the Epidemic Condition. In the event that Company incurs costs due to such repair and/or replacement, including but not limited to labor and shipping costs, Supplier shall reimburse Company for such costs. Supplier shall bear risk of in transit loss and damage for such repaired and/or replaced MATERIAL. 8 9 Supplier and Company shall mutually agree in writing as to the remedy's implementation schedule. Supplier agrees to utilize its best efforts to implement the remedy in accordance with the agreed-upon schedule. In the event that Supplier is unable to develop a mutually agreeable remedy, or does not adequately take into account the business interests of Company, as reasonably agreed by the parties, Company may (1) develop and implement such remedy and, in such case, implementation costs and risk of in-transit loss and damage shall be allocated between the parties as set forth in this clause, and/or (2) cancel postponed orders without liability and return all MATERIAL affected by such Epidemic Condition for full refund, payable by Supplier within thirty (30) days after receipt of returned MATERIAL (with risk of loss or in-transit damage borne by Supplier) and/or (3) terminate this Agreement without further liability. FLEXIBLE DELIVERY From time to time during the term of this Agreement, one or more ordering Companies and/or one or more of the Company's ordering locations (e.g., a Company manufacturing location) may decide to implement a "Consignment" or "Demand Pull" delivery arrangement for one or more items of MATERIAL covered by the Agreement. Upon mutual agreement between Company and Supplier, Company shall have the right to implement such delivery arrangements by providing written notice to Supplier at least one hundred twenty (120) days prior to the implementation date; unless an earlier date is mutually agreed upon. Such notice shall specify the particular Company or Companies and/or Company ordering locations which will be covered by such delivery arrangement, the item(s) of MATERIAL covered by such delivery arrangement, and the implementation date. The terms and conditions of the applicable delivery arrangement, which are covered in the clauses CONSIGNMENT PROCEDURES and DEMAND PULL PROCEDURES shall apply to any such implemented delivery arrangements. The other terms and conditions of this Agreement shall also apply to such delivery arrangements, provided, however that if there is a conflict between the terms and conditions in Appendices and/or the other terms and conditions stated in this Agreement, the terms and conditions of such applicable Appendices shall control. FREIGHT ON BOARD Freight Collect-Irvine, Ca. HEAVY METAL IN PACKAGING Supplier warrants to Company that no lead, cadmium, mercury, or hexavalent chromium have been intentionally added to any packaging or packaging components (as defined under applicable laws) to be provided to Company under this Agreement. Supplier further warrants to Company that the sum of the concentration levels of lead, cadmium, mercury, or hexavalent chromium in the package or packaging components provided to Company under this Agreement does not exceed 100 parts per million. Upon request, Supplier shall provide to Company Certificates of Compliance certifying that the packaging and/or packaging components provided under this Agreement are in compliance with the requirements set forth above in this clause. Supplier shall indemnify and hold Company 9 10 harmless for any liability, fine or penalty incurred by Company to any third party or governmental agency arising out of Company's good faith reliance upon said warranties or any Certificates of Compliance. ISO COMPLIANCE Supplier shall make best effort to obtain ISO 9000 certification within the eighteen (18) month period following the execution of this Agreement. LATE DELIVERY In addition to any other rights and remedies Company may have for Supplier's late delivery, if Supplier fails to deliver fully conforming MATERIAL within the Supplier Interval specified in this Agreement, or by the delivery date specified in an order placed pursuant to this Agreement and accepted by Supplier, Company may, at its option, establish a new delivery date for Supplier or cancel this Agreement or order. If Company establishes a revised delivery date and Supplier fails to deliver fully conforming MATERIAL by the revised date, Company may cancel this Agreement or order. Cancellations made pursuant to this clause shall be at no charge or liability to Company. LEAD TIME (SUPPLIER INTERVAL) Supplier is responsible for delivery within the Supplier Interval stated in this Agreement, unless Supplier agrees to an earlier delivery date on the purchase order acknowledgment. Supplier Interval is defined as that time from placement of order with Supplier to delivery at Company's final destination. Unless otherwise specified in this Agreement or the purchase order, Supplier will be responsible for meeting the delivery requirements specified in the clause "SERVICE". MARKING All MATERIAL furnished under this Agreement shall be marked for identification purposes in accordance with the specifications set forth in this Agreement and as follows: (a) with Supplier model/serial number; and (b) with month and year of manufacture. In addition, Supplier agrees to add any other identification which might be requested by Company from time to time. Charges, if any, for such additional identification marking shall be as agreed upon by Supplier and Company. MEDIATION If a dispute arises out of or relates to this Agreement, or its breach, and the parties have not been 10 11 successful in resolving such dispute through negotiation, the parties agree to attempt to resolve the dispute through mediation by submitting the dispute to a sole mediator selected by the parties or, at any time at the option of a party, to mediation by the American Arbitration Association ("AAA"). Each party shall bear its own expenses and an equal share of the expenses of the mediator and the fees of the AAA. The parties, their representatives, other participants and the mediator shall hold the existence, content and result of the mediation in confidence. If such dispute is not resolved by such mediation, the parties shall have the right to resort to any remedies permitted by law. All defenses based on passage of time shall be tolled pending the termination of mediation. Nothing in this clause shall be construed to preclude any party from seeking injunctive relief in order to protect its rights pending mediation. A request by a party to a court for such injunctive relief shall not be deemed a waiver of the obligation to mediate. NEW AND CHANGED METHODS/COST REDUCTIONS Supplier agrees to keep abreast of major developments in Supplier's industry and promptly advise Company of any developments which might affect the production of any MATERIAL under this Agreement. If during the term of this Agreement Supplier's costs are reduced by using improvement from the: 1. adoption of new production methods, processes, techniques, or materials, or 2. use of additional, new, or different equipment or facilities prices shall be reduced by agreement of the parties to fairly reflect such reduction. NON-EXCLUSIVE MARKET RIGHTS It is expressly understood and agreed that this Agreement neither grants to Supplier an exclusive right or privilege to manufacture or repair for Company any or all MATERIAL of the type described in this Agreement, nor requires the purchase of any manufactured or repaired MATERIAL from Supplier by Company. It is, therefore, understood that Company may contract with other manufacturers and suppliers for the manufacture or repair of MATERIAL and other products. OPTION TO EXTEND Company shall have the right to extend the period specified in the clause MATERIAL for up to Twenty-four (24) months by giving Supplier at least thirty (30) days prior written notice. Within ten (10) days of the date of Company's notice to extend the period, Supplier shall notify Company in writing whether Supplier proposes to revise the price(s) under this Agreement. If the parties fail to agree on the revised price(s) within twenty (20) days after the date of Supplier's notice, Company's notice of extension shall be considered withdrawn and prices for outstanding orders or orders placed during the term of this Agreement shall not be revised. 11 12 OZONE DEPLETING SUBSTANCES LABELING Supplier warrants and certifies that all products, including packaging and packaging components, provided to Company under this Agreement have been accurately labeled, in accordance with the requirements of 40 CFR part 82 entitled "Protection of Stratospheric Ozone, Subpart E - The Labeling of Products Using Ozone Depleting Substances." Supplier agrees to indemnify, defend and save harmless Company, its officers, directors and employees from and against any losses, damages, claims, demands, suits, liabilities, fines, penalties, and expenses (including reasonable attorneys' fees) that may be sustained by reason of Supplier's non-compliance with such applicable law or the terms of this warranty and certification. OZONE DEPLETING CHEMICALS Supplier hereby warrants that it is aware of international agreements and pending legislation in several nations, including the United States, which would limit, ban and/or tax importation of any product containing, or produced using, ozone depleting chemicals ("ODCs"), including chlorofluorocarbons, halons, and certain chlorinated solvents. Supplier hereby warrants that manufactured and/or repaired Material will conform to applicable requirements established pursuant to such agreements, legislation, or regulations, and that manufactured and repaired Material will be able to be imported into and used lawfully in (and without additional taxes associated with ODCs not reported to Company by Supplier as set forth in this clause) the United States and other countries designated by Company, under all such agreements, legislation, and regulations. Supplier also warrants that it is currently reducing, and is currently causing all of its parts and component manufacturing vendors to reduce, and will, in an expeditious manner, eliminate and cause its parts and component manufacturing vendors to eliminate, the use of ODCs in the manufacture and repair of Material and all of its parts and components. Supplier shall, upon execution of this Agreement, and at any time that new products are ordered under this Agreement or changes are made to Material manufactured and/or repaired under this Agreement, complete, sign, and return to Company an ODC Content Certification, in the form requested by Company. The ODC Content Certification must be signed by Supplier's facility manager, corporate officer, or delegate. The term "ODC content" on the ODC Content Certification means the total pounds of ODC used directly in the manufacture and/or repair of each unit of Material. This includes all ODCs Supplier uses in its manufacturing, assembly, and repair operations, plus all ODCs used by Supplier's vendors and any other vendors in producing parts, components, or other products incorporated into Material. Supplier warrants to Company that all information furnished by Supplier on the ODC Content Certification is complete and accurate and that Company may rely on such information for any purpose, including but not limited to providing reports to government agencies or otherwise complying with applicable laws. Supplier agrees to defend, indemnify, and hold Company harmless of and from any claims, demands, suits, judgments, liabilities, costs, and expenses (including additional ODC taxes and reasonable attorneys' fees) which Company may incur under any applicable federal, state, or local laws or international agreements, and any and all amendments thereto, by reason of Company's use of or reliance on the information furnished to Company by Supplier on the ODC Content Certification or by reason of Supplier's breach of this clause. Supplier 12 13 agrees to cooperate with Company in responding to any inquiry concerning the use of ODCs to manufacture and/or repair Material or components thereof and to execute without additional charge any documents reasonably required to certify the absence or quantity of ODCs used to manufacture and/or repair Material or components thereof. PACKING MATERIAL purchased, repaired, replaced or refurbished under this Agreement shall be packed by Supplier at no additional charge in containers which meet the specifications set forth in PKG-91NJ1045 Issue 3 and any other individual product packaging specifications and as may be changed from time to time by Company, attached hereto and incorporated herein as Attachment D. PAYMENT TERMS Net 30 days. PRICE REVISION Either party may initiate a revision in prices under the Agreement by giving written notice to the other at least thirty (30) days prior to the proposed effective date thereof. Such revision shall be based on changes in Supplier's cost and shall be determined by mutual agreement of the parties. Supplier shall substantiate such changes in cost with documentation satisfactory to Company, including, but not limited to, a list of purchased material and purchased services showing quantities and cost of each, and direct labor hours for each operation. If the parties fail to mutually agree upon revised prices by the proposed effective date, Company shall have the right to terminate outstanding orders with respect to all unshipped material other than quantities theretofore manufactured, which quantities shall not be affected by the proposed price revision, and no further orders will be placed against this Agreement. PROCESS CERTIFICATION Company has the right to review, inspect, and evaluate Supplier's parts and supplies and Supplier's sources for parts and supplies. Company has the right to specify types of parts used in manufacture and/or repair of Material and/or suppliers of these parts. If this impacts previously agreed to unit prices, such prices shall be negotiated and mutually agreed to. All changes to Company specified parts, supplies, and sources must be approved in writing by Company, which approval shall not be unreasonably delayed or withheld. In regard to Supplier's manufacturing processes, Company also reserves the right to perform periodic quality surveys, evaluations, and approvals, including, but not limited to, analysis of each manufacturing or assembly position for acceptability of procedures, equipment calibration, and operator performance, as well as evaluation of quality control/quality assurance and data collection and analysis procedures. 13 14 Supplier shall conduct appropriate incoming inspection of components in accordance with its standard practices approved by Company and any specific requirements of Company. Such practices may be modified from time to time to address specific conditions as requested by Company. Any increases or decreases to price resulting from such modifications shall be mutually agreed upon. PRODUCT CONFORMANCE REVIEW Paragraph (1) of the clause PRODUCT CONFORMANCE REVIEW on the reverse side of page 1 applies. PRODUCT DOCUMENTATION Supplier agrees to furnish, at mutually agreed upon prices, product documentation and any succeeding changes thereto, as described in the Technical Specification. Company may use, reproduce, reformat, modify and distribute such product documentation. Company agrees to reproduce Supplier's copyright notice contained in any documentation reproduced without change by Company. For documentation which is reformatted or modified by Company, Company shall have the right to place only Company's own copyright notice on the reformatted or modified documentation. It is the intent of the parties that Company's copyright notice shall be interpreted to protect the underlying copyright rights of Supplier to the documentation to the extent such underlying rights are owned by Supplier. REGISTRATION AND RADIATION STANDARDS When MATERIAL furnished under this Agreement is subject to Part 2, Part 15, Part 22 or any other part of the Federal Communication Commission's Rules and Regulations, as may be amended from time to time (hereinafter "FCC Rules"), Supplier warrants that such MATERIAL complies with the registration, certification, type-acceptance and/or verification standards of the FCC Rules including, but not limited to, all labeling, customer instruction requirements, and the suppression of radiation to specified levels. Supplier shall also establish periodic on-going compliance retesting and follow a Quality Control program, submitted by Company, to assure that MATERIAL shipped complies with the applicable FCC Rules. Supplier agrees to indemnify and save Company harmless from any liability, claims or demands (including the costs, expenses and reasonable attorney's fees on account thereof) that may be made because of Supplier's noncompliance with the applicable FCC Rules. Supplier agrees to defend Company, at Company's request, against such liability, claim or demand. In addition, should MATERIAL which is subject to Part 15 of the FCC Rules, during use generate harmful interference to radio communications, Supplier shall provide the Company information relating to methods of suppressing such interference and pay the cost of suppressing such interference or, at the option of Company, accept the return of the MATERIAL and refund to Company the price paid for the MATERIAL less a reasonable amount for depreciation, if applicable. To the extent that MATERIAL furnished under this Agreement is also subject to FCC Rules governing the use of the MATERIAL as a component in a system, Company shall be responsible for 14 15 compliance with the applicable FCC Rules governing the system. Supplier shall fully cooperate with Company, by providing technical support and information, and, upon written request from Company, shall modify MATERIAL to enable Company to ensure ongoing compliance with the FCC Rules. Company agrees to pay any increase in Supplier's costs and/or expenses resulting from Company's request to modify MATERIAL to enable Company to comply with the FCC Rules. Nothing in this clause shall be deemed to diminish or otherwise limit Supplier's obligations under the "WARRANTY" clause or any other clause for this Agreement. REPAIRS NOT COVERED UNDER WARRANTY In addition to repairs provided for in the WARRANTY clause, Supplier agrees to provide repair service on all MATERIAL ordered under this Agreement during the term of this Agreement and until five (5) years after the expiration of this Agreement. Repairs shall be provided by Supplier at no charge, except as may be mutually agreed to by the parties and charges for repairs in such excepted cases shall be stated on an individual purchase order. MATERIAL to be repaired under this clause will be returned to a location designated by Supplier, and unless otherwise agreed upon by Supplier and Company, Supplier shall ship the repaired MATERIAL which meets the specifications set forth in the "SPECIFICATIONS OR DRAWINGS" clause within thirty (30) days of receipt of the defective or non-conforming MATERIAL. If MATERIAL is returned to Supplier for repair as provided for in this clause and is determined to be beyond repair, Supplier shall so notify Company and provide replacement (or substitute) Material to Company at its then current price for such MATERIAL. Further, if requested by Company, Supplier shall take the necessary steps to dispose of the irreparable MATERIAL and pay to Company the salvage value, if any. Replacement and repaired MATERIAL shall be warranted as set forth in the WARRANTY clause. It is expressly understood and agreed that this Agreement does not grant Supplier an exclusive privilege to repair any or all of the MATERIAL purchased under this Agreement for which Company may require repair; and Company may perform the repairs or contract with others for these services. In addition, Supplier authorizes Company and any qualified repairer with whom Company may contract to perform repairs on all MATERIAL purchased under this Agreement. All transportation costs of and in transit risk of loss and damage to MATERIAL returned to Supplier for repair under this clause will be borne by Company and all transportation costs of and in transit risk of loss and damage to such repaired or replacement MATERIAL returned to Company will be borne by Company. REPAIR PROCEDURES Company shall furnish a repair order containing the following information with MATERIAL returned to Supplier for repair: (a) Company's name and complete address; (b) name(s) and telephone number(s) of Company's employee(s) to contact in case of questions about the MATERIAL to be repaired; (c) ship-to address for return of repaired MATERIAL if different than (a); (d) a complete list of MATERIAL returned; (e) the nature of the defect or failure if known; and (f) whether or not returned MATERIAL is in warranty. Supplier shall, within ten (10) days of the execution of this Agreement, provide a written notice to Company specifying (i) the name(s) and telephone number(s) of the individual(s) to be contacted concerning any questions that may arise 15 16 concerning repair, and (ii) if required, any special packing of MATERIAL which might be necessary to provide adequate in-transit protection from transportation damage. MATERIAL repaired by Supplier shall have the repair completion date stenciled or otherwise identified in a permanent manner at a readily visible location on the MATERIAL and the repaired MATERIAL shall be returned with a tag or other papers describing the repairs which have been made. Material forwarded to Supplier may have original factory designation markings. Supplier shall line out these markings in a manner such that they will remain partially readable, and then affix replacement nomenclature as may be provided by Company. Supplier will close all repair orders and recover transportation charges by forwarding to Company a weekly summary listing indicating the serial numbers and the associated transportation costs of all Material shipped. In addition, if replacement Material has been substituted by Supplier for original Material, Supplier shall furnish, by repair order number, the serial numbers of both the original and replacement Material. Company shall reimburse Supplier for transportation costs monthly. Any invoices originated by Supplier for repair services must be clearly identified as such, and must contain: (1) a reference to Company's purchase order for these repair services, and (2) a description of repairs made by Supplier. Further, the provisions of the INVOICING and SHIPPING clauses, other than provisions relating to transportation charges with respect to MATERIAL repaired under warranty, shall apply to Supplier's return to Company of repaired MATERIAL. RETURN GOODS MATERIAL Company may return Material that was either (1) never shipped by Company; or (2) never installed by Company (hereinafter referred to as RGM). Such RGM will be returned to Supplier for repair, upgrade or refurbishment. Supplier shall, within thirty (30) days receipt of any such Material, evaluate the extent of reconditioning required to upgrade and rewarrant Material and provide a written cost estimate for such RGM services to Company. If Company accepts Supplier's cost estimate then Company shall issue a purchase order for the completion by Supplier of RGM services. RGM MATERIAL returned by Supplier shall be warranted as set forth in the WARRANTY clause. Any invoices originated by Supplier for (RGM) repair services must be clearly identified as such, and must contain: (1) a reference to Company's purchase order for these (RGM) repair services, and (2) a description of repairs made by Supplier. Further, the provisions of the INVOICING and SHIPPING clauses, other than provisions relating to transportation charges with respect to MATERIAL repaired under warranty, shall apply to Supplier's return to Company of repaired MATERIAL. SAFETY CERTIFICATION All Material purchased under this Agreement shall be designed to be in compliance with the applicable Underwriters Laboratories (UL), Canadian Standards Association (CSA) and International standards and regulations. Supplier shall be responsible for making Material available for testing and Company and Supplier agree to negotiate all costs associated with bringing Material into compliance with said UL, CSA and International standards and regulations. 16 17 SECTION HEADINGS The headings of the clauses in this Agreement are inserted for convenience only and are not intended to affect the meaning or interpretation of this Agreement. SERVICE Company intends to monitor the delivery performance of each Supplier via special performance reports. It should be noted that Company shall interpret delivery as arrival at the final destination specified in the order. Ideally every Supplier should maintain a performance level of 100% received to Want Date (current and back) and 100% received by lead time (Supplier Interval). Company's minimum requirement is that Supplier will maintain an "AVERAGE PERCENT RECEIVED TO REQUIRED DATE of 85% and an "AVERAGE PERCENT RECEIVED BY LEAD TIME" (Supplier Interval) of 100%. For MATERIAL ordered via Consignment, if any, Supplier shall maintain a one hundred percent (100%) performance rating for "PERCENT OF FORECAST QUANTITY ON HAND WHEN MEASURED". Supplier is expected to make every reasonable effort to deliver MATERIAL in accordance with Company's required delivery schedule as contained in Company's orders, and as the delivery schedule may be subsequently modified by Company. Supplier is also expected to communicate to Company any foreseeable change to Supplier's acknowledged delivery schedule. Supplier's compliance with the foregoing expectations will not relieve Supplier of the minimum service requirements established in the preceding paragraph. If Supplier advises Company that it will be unable to meet acknowledged delivery dates, and Company elects to call for expedited shipments, Supplier will be required to pay the difference in cost between the method of shipping specified in the order and the actual cost incurred for expedited shipment. SPECIFICATIONS OR DRAWINGS Technical Specifications, WP-92066, Iss. 2 dated 8/11/94; and KS-24019, Iss. 1.0 dated 02/28/95, copies of which are in the Supplier's possession, and as may be changed from time to time with Supplier's written approval, are hereby made part of this Agreement. Any Proposed changes to the Technical Specification shall require the prior written approval of Company. Supplier shall provide Company with at least thirty (30) days prior written notice of any change proposed to be made by Supplier in the MATERIAL furnished pursuant to the Technical Specification under this Agreement. If Company, in its sole discretion, does not agree to the change proposed by Supplier, then in addition to all other rights and remedies at law or equity or otherwise, and without any cost to or liability or obligation of Company, Company shall have the right to terminate this Agreement and to terminate any or all purchase orders for MATERIAL affected by such change. Supplier agrees to continue to supply MATERIAL to Company pursuant to the Technical Specification for the term of the Agreement. If Supplier is unable to continue to thus supply or discontinues manufacture of MATERIAL, Company shall be entitled to one year's advance notice. 17 18 TERMINATION OF ORDER(S) Company may at any time terminate without cause any or all Orders placed by it hereunder. Unless otherwise specified herein, Company's liability to Supplier with respect to such terminated Order or Orders shall be limited to the lesser of: (1) the value of the terminated Order, or (2) the total of: (i) Supplier's purchase price of all parts (not usable in Supplier's other operations or, with the exception of all programmed ROM type devices, salable to Supplier's other customers), less the salvage value thereof, plus (ii) the actual costs incurred by Supplier in manufacturing Material in process at the date of notice of termination. However, no such termination charges will be invoiced, if within sixty (60) days of notice of termination, manufactured or repaired Material equivalent in volume to that being terminated is ordered by Company. If requested, Supplier agrees to substantiate such costs with proof satisfactory to Company. Termination of Orders under this Clause shall not require judicial intervention to be effective. Supplier shall use its best efforts to cancel, stop, return, or otherwise dispose of all Supplier-sourced parts not used in manufacture or repair of Material. Upon request, Supplier shall identify its parts suppliers and cancellation terms, and shall permit and assist Company in discussions concerning cancellation charges with such parts suppliers. TERMINATION Company may terminate this Agreement in whole or part by giving Supplier at least sixty (60) days prior written notice. Prices for any work remaining with Supplier under this Agreement terminated in part may be adjusted to fairly reflect Supplier's costs resulting from work withdrawn. Upon termination, Company shall pay Supplier all amounts due for services and material provided by Supplier to Company under this Agreement up to and including the effective date of termination. Such payment shall constitute a full and complete discharge of Company's obligations under this Agreement. TRAINING If requested by Company, Supplier will provide instructors and the necessary instructional material of Supplier's standard format, at mutually agreed upon prices, to train Company's personnel in the installation, practices, operation, maintenance and repair of conducted at reasonable intervals at locations agreed upon by Supplier and Company. WARRANTY The WARRANTY clause on the reverse side of Page 1 is hereby amended to read as follows in item (b) of the second sentence: (b) Three years after the material is accepted by Company or WORK DONE BY OTHERS If any part of the Work is dependent upon work done by others, Supplier shall inspect, and promptly report to Company's Representative any defect that renders such other work unsuitable for Supplier's proper performance. Supplier's silence shall constitute approval of such other work as fit, proper and suitable for Supplier's performance of the Work. 18 19 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. ACCEPTED: Date June 12, 1995 Supplier:Datum Inc./Efratom Time AT&T Corp. and Frequency Products, Inc. By: /s/ DONALD SINNAR By: /s/ L.S. CONTERNO -------------------------------- -------------------------------- Donald Sinnar L.S. Conterno Title: Vice President Title: Global Procurement Vice President Worldwide Operations 19 20 ATTACHMENT A - LCB529E
LEAD DEMAND/PULL CONSIGNMENT FINISHED GOODS WIP COMCODE DESCRIPTION PRICE (ea) TIME(wks) Y/N Y/N (WEEKS) (WEEKS) Column data Column data Column data omitted pursuant omitted pursuant omitted pursuant to Rule 406 to Rule 406 to Rule 406 12 Y N 2 Through 5 6 Through 12 8 Y N 2 Through 5 6 Through 8 12 Y N 2 Through 5 6 Through 12 8 Y N 2 Through 5 6 Through 8 12 Y N 2 Through 5 6 Through 12 8 Y N 2 Through 5 6 Through 8 12 Y N 2 Through 5 6 Through 12 8 Y N 2 Through 5 6 Through 8 12 Y N 2 Through 5 6 Through 12 8 Y N 2 Through 5 6 Through 8 8 Y N 2 Through 5 6 Through 8 12 Y N 2 Through 5 6 Through 12 8 Y N 2 Through 5 6 Through 8 12 Y N 2 Through 5 6 Through 12 8 Y N 2 Through 5 6 Through 8 8 Y N 2 Through 5 6 Through 8
20 21 LCB529E ATTACHMENT B Page 1 of 1 AT&T NETWORK SYSTEMS -- COLUMBUS WORKS - --------------------------------------------------------------------------------------------------------------------------------- AT&T ENTERPRISE PROCUREMENT AND PAYABLES SYSTEM DATE: ___/95 REPORT: 8655 CONSIGNMENT REPORT TIME: 00:18 ORD-LOC: COLUMBUS WORKS FOR WEEK OF ___/01/95 PAGE: 106 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PUR-LOC: CB COLUMBUS WORKS REC LOC: CB SHIP TO: 8 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- VENDOR: DI PURCHASE ORDER NUMBER: ITEM NUMER: 00001 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- CONTACT: 42BF PHONE: 614-860-______ EDI: N EDS: Y ERS: N - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PART NUMBER: Omitted pursuant ISSUE: DESCRIPTION: to Rule 406 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- ON-HAND QTY: 2498 DENOM: PC - --------------------------------------------------------------------------------------------------------------------------------- ***** TOTAL USED 0 ***** - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- NETTED WEEKLY REQUIREMENTS: FISCAL MONTHLY REQUIREMENTS: - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- 05/01/95 Column data omitted 07/31/95 Column data omitted 11/95 Column data omitted 05/08/95 pursuant to Rule 406 08/07/95 pursuant to Rule 406 12/95 pursuant to Rule 406 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- 05/15/95 08/14/95 01/96 05/22/95 08/21/95 02/96 05/29/95 08/28/95 03/96 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- 06/05/95 09/04/95 04/96 06/12/95 09/11/95 06/19/95 09/18/95 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- 06/26/95 09/25/95 07/03/95 10/02/95 07/10/95 10/09/95 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- 07/17/95 10/16/95 07/24/95 10/23/95 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- ********************************************* TOTAL (WEEKLY + MONTHLY): Omitted pursuant to Rule 406 ********************************************* - --------------------------------------------------------------------------------------------------------------------------------- LAST RECEIVALS: PACKING SLIP # - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- 04/28/95 Column data omitted 138379 04/20/95 pursuant to Rule 406 238298 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- 04/13/95 138295 03/31/95 138200 03/24/95 138191 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- ATT -- PROPRIETARY USE PURSUANT TO COMPANY INSTRUCTIONS - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
21 22
LCB529E ATTACHMENT C Page 1 of 1 - --------------------------------------------------------------------------------------------------------------------------------- AT&T NETWORK SYSTEMS -- COLUMBUS WORKS - --------------------------------------------------------------------------------------------------------------------------------- AT&T ENTERPRISE PROCUREMENT AND PAYABLES SYSTEM DATE: ___/95 REPORT: 8650 DEMAND PULL REPORT TIME: 00:18 ORD-LOC: COLUMBUS WORKS FOR WEEK OF ___/01/95 PAGE: 236 - --------------------------------------------------------------------------------------------------------------------------------- PUR-LOC: CB COLUMBUS WORKS REC LOC: CB SHIP TO: 8 - --------------------------------------------------------------------------------------------------------------------------------- VENDOR: DI PURCHASE ORDER NUMBER: ITEM NUMER: 00001 - --------------------------------------------------------------------------------------------------------------------------------- CONTACT: 42BF PHONE: 614-860-______ EDI: N EDS: Y ERS: N - --------------------------------------------------------------------------------------------------------------------------------- PART NUMBER: Omitted pursuant ISSUE: DESCRIPTION: to Rule 406 - --------------------------------------------------------------------------------------------------------------------------------- ON-HAND QTY: 949 DENOM: PC - --------------------------------------------------------------------------------------------------------------------------------- ***** SUPPLIER ACTION: SHIP 674 ***** - --------------------------------------------------------------------------------------------------------------------------------- NETTED WEEKLY REQUIREMENTS: FISCAL MONTHLY REQUIREMENTS: - --------------------------------------------------------------------------------------------------------------------------------- 05/01/95 Column data omitted 07/31/95 Column data omitted 11/95 Column data omitted 05/08/95 pursuant to Rule 406 08/07/95 pursuant to Rule 406 12/95 pursuant to Rule 406 - --------------------------------------------------------------------------------------------------------------------------------- 05/15/95 08/14/95 01/96 05/22/95 08/21/95 02/96 05/29/95 08/28/95 03/96 - --------------------------------------------------------------------------------------------------------------------------------- 06/05/95 09/04/95 04/96 06/12/95 09/11/95 06/19/95 09/18/95 - --------------------------------------------------------------------------------------------------------------------------------- 06/26/95 09/25/95 07/03/95 10/02/95 07/10/95 10/09/95 - --------------------------------------------------------------------------------------------------------------------------------- 07/17/95 10/16/95 07/24/95 10/23/95 - --------------------------------------------------------------------------------------------------------------------------------- ********************************************* TOTAL (WEEKLY + MONTHLY): Omitted pursuant to Rule 406 ********************************************* - --------------------------------------------------------------------------------------------------------------------------------- LAST RECEIVALS: PACKING SLIP # - --------------------------------------------------------------------------------------------------------------------------------- 04/29/95 Column data omitted 87200 04/20/95 pursuant to Rule 406 067344 - --------------------------------------------------------------------------------------------------------------------------------- 04/19/95 065216 04/04/95 64949 03/28/95 NA - --------------------------------------------------------------------------------------------------------------------------------- ATT -- PROPRIETARY USE PURSUANT TO COMPANY INSTRUCTIONS - ---------------------------------------------------------------------------------------------------------------------------------
22 23 TERMS AND CONDITIONS (3-94) Applicable to PD-60-59 and PD-59A ASSIGNMENT AND SUBCONTRACTING - Supplier shall not assign any right or interest under this Agreement (excepting monies due or to become due) or delegate or subcontract any Work or other obligation to be performed or owed under this Agreement without the prior written consent of Company. Any attempted assignment, delegation or subcontracting in contravention of the above provisions shall be void and ineffective. Any assignment of monies shall be void and ineffective to the extent that (1) Supplier shall not have given Company at least thirty (30) days prior written notice of such assignment or (2) such assignment attempts to impose upon Company obligations to the assignee additional to the payment of such monies, or to preclude Company from dealing solely and directly with Supplier in all matters pertaining to this Agreement including the negotiation of amendments or settlements of charges due. All Work performed by Supplier's subcontractor`(s) at any tier shall be deemed Work performed by Supplier. CHOICE OF LAW - The construction, interpretation and performance of this Agreement and all transactions under it shall be governed by the laws of the State of New Jersey excluding its choice of laws rules and excluding the Convention of the International Sale of Goods. The parties agree that the provisions of the New Jersey Uniform Commercial Code apply to this Agreement and all transactions under it, including agreements and transactions relating to the furnishing of services, the lease or rental of equipment or material, and the license of software. Supplier agrees to submit to the jurisdiction of any court wherein an action is commenced against Company based on a claim for which Supplier has agreed to identify Company under this Agreement. COMPLIANCE WITH LAWS - Supplier and all persons furnished by Supplier shall comply at their own expense with all applicable federal, state, local and foreign laws, ordinances, regulations and codes, including those relating to the use of chlorofluorocarbons, and including the identification and procurement of required permits, certificates, licenses, insurance, approvals and inspections in performance under this Agreement. Supplier agrees to indemnify, defend (at Company's request) and save harmless Company, its affiliates, its and their customers and each of their officers, directors and employees from and against any losses, damages, claims, demands, suits, liabilities, fines, penalties and expenses (including reasonable attorney's fees) that arise out of or result from any failure to do so. ENTIRE AGREEMENT - This Agreement shall incorporate the typed or written provisions on Company's orders issued pursuant to this Agreement and shall constitute the entire agreement between the parties with respect to the subject matter of this Agreement and the order(s) and shall not be modified or rescinded, except by a writing signed by Supplier and Company. All references in these terms and conditions to this Agreement or to Work, services, material, equipment, products, software or information furnished under, in performance of, pursuant to, or in contemplation of, this Agreement shall also apply to any orders issued pursuant to this Agreement. Printed provisions on the reverse side of Company's orders (except as specified otherwise in this Agreement) and all provisions on Supplier's forms shall be deemed deleted. Additional or different terms inserted in this Agreement by Supplier, or deletions thereto, whether by alterations, addenda, or otherwise, shall be of no force and effect, unless expressly consented to by Company in writing. Estimates of 23 24 forecasts furnished by Company shall not constitute commitments. The provisions of this Agreement supersede all contemporaneous oral agreements and all prior oral and written quotations, communications, agreements and understandings of the parties with respect to the subject matter of this Agreement. The term "Work" as used in this Agreement may also be referred to as "services." FORCE MAJEURE - Neither party shall be held responsible for any delay or failure for any delay or failure in performance of any part of this Agreement to the extent such delay or failure is caused by fire, flood, explosion, war, strike, embargo, government requirement, civil or military authority, act of God, or other similar causes beyond its control and without the fault or negligence of the delayed or nonperforming party or its subcontractors ("force majeure conditions"). Notwithstanding the foregoing, Supplier's liability for loss or damage to Company's material in Supplier's possession or control shall not be modified by this clause. If any force majeure condition occurs, the party delayed or unable to perform shall not be modified by this clause. If any force majeure condition occurs, the party delayed or unable to perform shall give immediate notice to the other party, stating the nature of the force majeure condition and any action being taken to avoid or minimize its effect. The party affected by the other's delay or inability to perform may elect to: (1) suspend this Agreement or an order for the duration of the force majeure condition and (i) at is option buy, sell, obtain or furnish elsewhere material or services to be bought, sold, obtained or furnished under this Agreement or an order (unless such sale or furnishing is prohibited under this Agreement) and deduct from any commitment the quality bought, sold, obtained or furnished or for which commitments have been made elsewhere and (ii) once the force majeure condition ceases, resume performance under this Agreement or order with an option in the affected party to extend the period of this Agreement or an order up to the length of time the force majeure condition endured and/or (2) when the delay or nonperformance continues for a period of at least fifteen (15) days, terminate, at no charge, this Agreement or an order or the part of it relating to material not already shipped, or services not already performed. Unless written notice is given within forty-five (45) days after the affected party is notified of the force majeure condition, (1) shall be deemed selected. GOVERNMENT CONTRACT PROVISIONS - The following provisions regarding equal opportunity, and all applicable laws, rules, regulations and executive orders specifically related thereto, including applicable provisions and clauses from the Federal Acquisition Regulation and all supplements thereto are incorporated in this Agreement as they apply to work performed under specific U.S. Government contracts: 41 CFR 60-1.4, Equal Opportunity; 41 CFR 60-1.7, Reports and Other Required information; 41 CFR 60-1.8, Segregated Facilities; 41 CFR 60-250.4, Affirmative Action for Disabled Veterans and Veterans of the Vietnam Era (if in excess of $10,000); and 41 CFR 60-741.4, Affirmative Action for Disabled Workers (if in excess of $2,500), wherein the terms "contractor" and "subcontractor" shall mean "Supplier". In Addition, orders placed under this Agreement containing a notation that the material or services are intended for use under Government contracts shall be subject to such other Government provisions printed, typed or written hereon, or on the reverse side thereof, or in attachments thereto. IDENTIFICATION - Supplier shall not, without Company's prior written consent, engage in advertising, promotion or publicity related to this Agreement, or make public use of any identification in any circumstances related to this Agreement. "Identification" means any copy or semblance of any trade name, trademark, service mark, insignia, symbol, logo, or any other product, 24 25 service or organization designation, or any specification or drawing to AT&T or its affiliates, or evidence of inspection by or for any of them. Supplier shall remove or obliterate any Identification prior to any use of disposition of any material rejected or not purchased by Company, and, failing to do so, shall indemnify, defend (at Company's request) and save harmless AT&T and its affiliates and each of their officers, directors and employees from and against any losses, damages, claims demands, suits, liabilities, fines, penalties and expenses (including reasonable attorneys' fees) arising out of Supplier's failure to so remove or obliterate. IMPLEADOR - Supplier shall not implead or bring an action against Company or its customers or the employees of either based on any claim by any person for personal injury or death to an employee of Company or its customers occurring in the course or scope of employment and that arises out of material or services furnished under this Agreement. INFRINGEMENT - Supplier shall indemnify and save harmless Company, its affiliates, its and their customers and each of their officers, directors, employees, successors and assigns (all hereinafter referred to in this clause as Company) from and against any losses, damages, liabilities, fines, penalties, and expenses (including reasonable attorneys' fees) that arise out of or result from any proved or unproved claim (1) of infringement of any patent, copyright, trademark or trade secret right, or other intellectual property right, private right, or any other proprietary or personal interest, and (2) related by circumstances to the existence of this Agreement or performance under or in contemplation of it (an Infringement Claim). If the Infringement Claim arises solely from Supplier's adherence to Company's written instructions regarding services or tangible or intangible goods provided by Supplier (Items) and if the Items are not (1) commercial items available on the open market or the same as such items, or (2) items of Supplier's designated origin, design or selection, Company shall indemnify Supplier. Company or Supplier (at Company's request) shall defend or settle, at its own expense any demand, action or suit on any Infringement Claim for which it is indemnitor under the preceding provisions and each shall timely notify the other of any assertion against it of any Infringement Claim and shall cooperate in good faith with the other to facilitate of any such action. INVOICING - Supplier shall: (1) render original Invoice, or as otherwise specified in this Agreement, showing Agreement and order number, through routing and weight; (2) render separate invoices for each shipment within twenty-four (24) hours after shipment; and (3) mail invoices with copies of bills of lading and shipping notices to the address shown on this Agreement or order. If prepayment of transportation charges is authorized, Supplier shall include the transportation charges from the FOB point to the destination as a separate item on the invoice stating the name of the carrier used. No minimum billing charges are permitted unless expressly authorized in this Agreement. PAYMENT TERMS - Unless payment terms more favorable to Company appear on Supplier's invoice and Company elects to pay on such items, invoices shall be paid in accordance with the terms stated in this Agreement, and due dates for payment of invoices shall be computed from the date of receipt of invoices by Company. PRODUCT CONFORMANCE REVIEWS - paragraph (1) or (2) applies if either is indicated in this Agreement or order. Paragraph (3) applies to both paragraphs (1) and (2). (1) All material is subject to a Product Conformance Review ("Review") prior to shipment. Supplier shall notify Company's 25 26 Global Manufacturing and Engineering (GM&E) organization when material is ready for such Review. (2) Supplier may ship material without a Review but Company may perform such Review prior to shipment by giving Supplier notice to that effect, in which event Supplier shall notify Company's GM&E organization when material is ready for such Review. (3) Supplier will provide, without charge, any production testing facilities and personnel required to perform or assist in the Review as specified in the applicable Quality Program Specification or other quality specification provided under this Agreement or order. Company's reviews as set forth in Paragraphs (1) and (2) may only be waived by written notification from Company's GM&E organization. RELEASE VOID - Neither party shall require (i) waivers or releases of any personal rights or (ii) execution of documents which conflict with the terms of this Agreement, from employees, representatives or customers of the other in connection with visits to its premises and both parties agree that no such releases, waivers or documents shall be pleaded by them or third persons in any action or proceeding. RIGHT OF ENTRY AND PLANT RULES - Each party shall have the right to enter the premises of the other party during normal business hours with respect to the performance of this Agreement, subject to all plant rules and regulations, security regulations and procedures and U.S. Government clearance requirements if applicable. SHIPPING - Supplier shall: (1) ship the material covered by this Agreement or order complete unless instructed otherwise; (2) ship to the destination designation designated in the Agreement or order; (3) ship according to routing instructions given by Company; (4) place the Agreement and order number on all subordinate documents; (5) enclose a packing memorandum with each shipment and, when more than one package is shipped, identify the package containing the memorandum; and (6) mark the Agreement and order number on all packages and shipping papers. Adequate protective packing shall be furnished at no additional charge. Shipping and routing instructions may be furnished or altered by Company without a writing. If Supplier does not comply with the terms of the FOB clause of this Agreement or order or with Company's shipping or routing instructions, Supplier authorizes Company to deduct from any invoice of Supplier (or to charge back to Supplier), any increased costs incurred by Company as a result of Supplier's noncompliance. SUPPLIER'S INFORMATION - Supplier shall not provide under, or have provided in contemplation of, this Agreement any idea, data, program, technical, business or other intangible information, however conveyed, or any document, print, tape, disc, semiconductor memory or other information-conveying tangible article, unless Supplier has the right to do so, and Supplier shall not view any of the foregoing as confidential or proprietary. SURVIVAL OF OBLIGATIONS - The obligations of the parties under this Agreement, which by their nature would continue beyond the termination, cancellation or expiration of this Agreement, including, by way of illustration only and not limitation, those in the clauses COMPLIANCE WITH LAWS, IDENTIFICATION, IMPLEADER, INFRINGEMENT, RELEASES VOID, USE OF INFORMATION and WARRANTY (and INSURANCE and INDEMNITY if included in this Agreement), shall survive termination, cancellation or expiration of this Agreement. TAXES - Company shall reimburse Supplier only for the following tax payments with respect to transactions under this Agreement unless Company advises Supplier that an exemption applies: 26 27 state and local sales and use taxes, as applicable. Taxes payable by Company shall be billed as separate items on Supplier's invoices and shall not be included in Supplier's prices. Company shall have the right to have Supplier contest any such taxes that Company deems improperly levied at Company's expense and subject to Company's direction and control. TITLE AND RISK OF LOSS - Title and risk of loss and damage to material purchased by Company under this Agreement shall vest in Company when the material has been delivered at the FOB point. If this Agreement or an order issued pursuant to this Agreement calls for additional services including, but not limited to, unloading, installation, or testing, to be performed after delivery. Supplier shall retain title and risk of loss and damage to the material until the additional services have been performed. Notwithstanding the foregoing sentence, if Supplier is expressly authorized to invoice Company for material upon shipment or prior to the performance of additional services, title to such material shall vest in Company upon payment of the invoice, but risk of loss and damage shall pass to Company as provided in the foregoing sentence. USE OF INFORMATION - Supplier shall view as Company's property any idea, data, program, technical, business or other tangible information, however conveyed, and any document, print, tape, disc, tool or other tangible information-conveying or performance-aiding article owned or controlled by Company, and provided to, or acquired by, Supplier under or in contemplation of this Agreement (Information). Supplier shall, at no charge to Company, as Company directs, destroy or surrender to Company promptly at its request any such article or any copy of such information. Supplier shall keep information confidential and use it only in performing under this Agreement and obligated its employees, subcontractors and others working for it to do so, provided that the foregoing shall not apply to information previously known to Supplier free of obligation, or made public through no fault imputable to Supplier. VARIATION IN QUANTITY - Company assumes no liability for material produced, processed or shipped in excess of the amount specified in this Agreement or order. WAIVER - The failure of either party at any time to enforce any right or remedy available to it under this Agreement or otherwise with respect to any breach or failure by the other party shall not be construed to be a waiver of such right or remedy with respect to any other breach or failure by the other party. WARRANTY - Supplier warrants to Company and its customers that material furnished will be new, merchantable, free from defects in design, material and workmanship and will conform to and perform in accordance with the specifications, drawings and samples. These warranties extended to the future performance of the material and shall continue for a period of twelve months (or such longer period specified elsewhere in this Agreement) following acceptance by Company, or if for resale, by Company's customer. Supplier also warrants to Company and its customers that services will be performed in a first class, workmanlike manner. In addition, if material furnished contains one or more manufacturers' warranties, Supplier hereby assigns such warranties to Company and its customers. All warranties shall survive inspection, acceptance and payment. Material or services not meeting the warranties will be, at Company's option, returned for or subject to refund, repair, replaced or reperformed by Supplier at no cost to Company or its customers and with transportation costs and risk of loss and damage in transit borne by Supplier. Repaired and replacement material shall be warranted as set forth above in this clause. 27 EX-23.2 5 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-2 of our report dated February 17, 1997 relating to the financial statements of Datum Inc., which appears in such Prospectus. We also consent to the application of such report to the Financial Statement Schedule for the three years ended December 31, 1996 appearing on page S-1 of this Registration Statement when such schedule is read in conjunction with the financial statements referred to in our report. The audits referred to in such report also included these Financial Statement Schedules. We also consent to the references to us under the headings "Experts" and "Selected Consolidated Financial Data" in such Prospectus. However, it should be noted that Price Waterhouse LLP has not prepared or certified such "Selected Consolidated Financial Data." PRICE WATERHOUSE LLP Costa Mesa, California March 25, 1997 EX-23.3 6 CONSENT OF PRICE WATERHOUSE, LLP 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-2 of Datum Inc. of our report dated December 12, 1994 relating to the financial statements of Ball Efratom (A unit of Ball Corporation), which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. PRICE WATERHOUSE LLP Indianapolis, Indiana March 25, 1997 -----END PRIVACY-ENHANCED MESSAGE-----