1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year ended December 31, 1997 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 0-6272 DATUM INC. (Exact name of Registrant as specified in its charter) Delaware 95-2512237 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 9975 Toledo Way, Irvine, California 92618 (Address of principal executive offices) Registrant's telephone number, including area code: (714) 598-7500 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK (Title of Class) --------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- ---------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sales price of the Common Stock as of March 16,1998, was approximately $62,529,684. The number of outstanding shares of the Registrant's Common Stock as of March 16, 1998 was 5,348,633. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 4, 1998 (to be filed with the Commission within 120 days of December 31, 1997): Part III, Items 10-13. 2 INTRODUCTORY NOTE This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and Datum Inc. ("Datum" or the "Company") intends that such forward-looking statements be subject to the safe harbors created thereby. All statements other than statements of historical fact included in this Report, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" regarding: the Company's ability to design, develop, manufacture and market products; the ability of the Company's products to maintain commercial acceptance; the Company's ability to achieve new product commercialization; the anticipated growth of its target markets; its ability to maintain profitability; and other matters are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable at this time, it can give no assurance that such expectations will prove to have been correct. The Company makes no undertaking to correct or update any such statements in the future. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are set forth in "Management's Discussion and Analysis of Financial Condition or Results of Operations" and "Business". All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. PART I Item 1. BUSINESS. GENERAL Datum designs, manufactures and markets a wide variety of high-performance time and frequency products used to synchronize the flow of information in telecommunications networks and in numerous other applications. Utilizing its more than 29 years of experience with time and frequency standards, Datum supplies products that can provide accurate time to within a fraction of one second over 100,000 years. Datum serves the markets for high-precision time and frequency devices in the telecommunications industry which is rapidly expanding as a result of the conversion from analog to digital systems and the expansion of cellular and Personal Communications Services ("PCS") networks. The Company's Efratom subsidiary invented the rubidium oscillator in 1971 and believes it currently supplies approximately 80% of the high-precision, rubidium atomic clocks used in cellular and PCS network base stations in the United States. Datum is a major supplier of extremely precise cesium standards and Global Positioning System ("GPS") receivers that generate or capture time and frequency information for use in wireline telecommunications infrastructures. In addition to providing time and frequency products for telecommunications applications, Datum is a growing supplier of timing products used to ensure the integrity of information transmitted through enterprise computing networks. Datum also manufactures time and frequency devices for satellites, including GPS satellites which utilize the Company's cesium clocks to provide highly accurate timing and navigation information throughout the world. 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 3 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 telecommunications networks consist of numerous cells located throughout a service area, each with its own base station connected by wire or microwave radio to the wireline network through a network switch. Originally, cellular networks used analog technology and frequency division multiple access ("FDMA") to fit more channels into existing frequency bands. This requires accurate frequency control at the base station level, which is accomplished through the use of quartz or higher precision rubidium oscillators. In order to improve transmission quality, increase network capacity and expand network coverage, many network operators are converting older networks from analog to digital technology and expanding their digital wireless networks. Currently, the three leading digital technologies are Time Division Multiple Access ("TDMA"), Code Division Multiple Access ("CDMA") and Global System for Mobile Communications ("GSM"). In each of these transmission protocols, calls are segmented, transmitted over a wider spectrum of bandwidth than otherwise available under FDMA and reassembled by the applicable receiver within the network. As a result of the segmentation/reassembling process, signal degradation from improper synchronization is more likely to result in dropped calls and loss of data than would occur in analog networks. Dropped calls and data losses, in turn, require retransmission, thus decreasing network efficiency and capacity. In order to minimize the problems resultant from improper synchronization, many cellular operators utilize highly precise timing equipment located at each base station and its associated network switch. Wireless -- PCS. PCS was developed, in part, to provide an improved quality of wireless service and accommodate the increasing volume of transmissions utilizing wireless networks. PCS systems operate in a manner similar to cellular networks, but at a much higher frequency. As a result, PCS networks require a greater number of lower powered "microcells," located more closely together. As in cellular networks, time and frequency devices are necessary to synchronize the flow of voice and data transmissions. The base station in each PCS microcell and each PCS network switch connected to the wireline network requires one or more stable, reliable timing devices to ensure accurate synchronization. Wireline. The wireline sector of the telecommunications market has experienced increased need for high-accuracy timing and frequency equipment primarily as a result of the upgrading of existing networks from analog to digital and the installation of new wireline networks. The wireline sector currently consists of numerous networks and lines, which are connected by switches that provide a transferring mechanism to route transmissions to their ultimate destinations. In order to transfer voice, data or video traffic from one line or network to another, both lines or segments of the network must operate at the same frequency within a very narrow tolerance. Increased demand for higher capacity, higher speed and more accurate information flow has required the transition of wireline networks from analog to digital systems. Imperfect synchronization in an analog system may result merely in static or delayed communication. The failure to synchronize the components in digital networks, however, may result in the loss of information, requiring re-transmission and thus decreasing network efficiency, and increasing the costs to the network operator. As a result, digital systems have a greater need for accurate synchronization which is accomplished through the use of precise timing devices located throughout the networks. The wireline sector of the telecommunications market is also growing as operators expand their networks in order to meet the growing demand for telecommunications services. In developing countries, new wireline networks are being installed to provide basic telephony service. In developed countries, increased demand for new services and government deregulation has encouraged the development of expanded networks, particularly in the local exchange and long distance markets. The expansion of wireline networks has led to an increased need for timing devices to synchronize the flow of information and maximize the efficiency of the networks. Enterprise Computing Enterprise computing networks utilize interconnected computers, workstations, peripheral devices and application software to provide the transaction processing and control infrastructure for national and 4 international organizations. Accurate timing of operations throughout a network is essential to ensure the integrity of the data flowing through the network. When information is retrieved from multiple locations and forwarded to a central point for analysis, accurate interpretation of the data may depend on the ability to properly time sequence both the generation and receipt of the data. In order to satisfy these timing requirements, enterprise network operators utilize timing and frequency devices to ensure network synchronization. Traditionally, this function has been accomplished using remote public access time servers as the source of "standard time" and general purpose computers to acquire and distribute time to the network. This approach, however, relinquishes control of network timing to remote time servers and local operators. As a result, inadvertent manipulation of local time servers or their undetected malfunctioning may result in data distortion or loss with adverse consequences. To reduce these risks, many enterprise computing networks now utilize GPS receivers at local computers throughout the network. As each computer in the network operates under Universal Coordinated Time ("UTC"), as received from the GPS satellites, the entire network operates on the same timing. 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 5 and the use of feedback control loops, that this specific frequency is maintained. This highly stable frequency is then captured by the electronic package and generated as an output signal. Rubidium oscillators provide atomic oscillator stability, somewhat less stable than cesium over long durations, but generally at lower cost and in smaller packages. Quartz oscillators utilize the unique physical properties of quartz crystals. Applying a voltage potential across a properly prepared quartz crystal causes the crystal to vibrate and generate an electric signal with a relatively stable frequency. Quartz oscillators consist of specially prepared synthetic quartz crystals and associated electronics to apply the voltage and generate the frequency signal. Quartz oscillators provide a less stable frequency than rubidium oscillators, but are available at a substantially lower cost. Stable and accurate timing and frequency information is also obtained through the use of GPS receivers, which capture timing information from cesium standards or rubidium oscillators aboard GPS satellites. GPS receivers are typically used in systems integrated with quartz or rubidium oscillators that provide consistent timing output in the event the receiver loses the external satellite-based signal. The Company applies its core understanding of timing and frequency technology and its experience in delivering highly stable and accurate clocking devices to provide a wide range of timing and frequency products for telecommunications, enterprise computing and a variety of other commercial applications. The Company designs, manufactures and markets cesium standards, rubidium oscillators, quartz oscillators and GPS receivers in numerous configurations, depending on the desired application. The Company's products are the result of substantial research and development performed in the areas of atomic physics, electronics engineering and software design. The Company designs and manufactures its own physics packages, though which cesium or rubidium is energized as part of the frequency detection and control process. Datum also designs the electronics packages for its products, which are necessary to convert the signal generated by the physics package into highly stable electronic pulses. Datum is a leading supplier of time and frequency products for the overall telecommunications system, for satellite applications, enterprise computing networks, and for a variety of other test and measurement applications. For telecommunications markets, Datum provides rubidium and quartz oscillators that operate as stand-along frequency sources in cellular and PCS base stations and network switches or are combined with the Company's GPS receivers to provide timing information in the event of a loss of signal. In addition, Datum provides time and frequency cesium standards for network switches within wireline networks. The Company also supplies cesium standards for GPS satellites 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 an synchronized manner. The Company also provides quartz oscillators for a variety of satellite programs and test and measurement products used for a variety of applications, including missile guidance, geographic mapping and electric utility operations. PRODUCTS Datum designs and manufacturers a broad line of time and frequency products for telecommunications systems, enterprise computing networks, satellites and a variety of other test and measurement applications. Datum's products generate highly precise timing and frequency information through the manipulation of cesium or rubidium atoms or quartz crystals, or by capturing cesium or rubidium-based signals from GPS satellite transmissions. Telecommunications Products Wireless-Cellular and PCS Products Cellular and PCS networks require both accurate frequency control and timing information. The 6 Company provides a variety of products to meet these needs. Quartz and Rubidium Clocks -- For analog cellular and GSM applications, the Company provides highly cost-effective quartz oscillator clocking units to synchronize the transmissions of voice and data traffic at the base-station level. For customers requiring a more stable timing source, the Company provides rubidium clocks. GPS Disciplined Clocks -- For digital TDMA and CDMA applications, considerably more stable timing sources are required to maintain the base station's clocking integrity. To meet this need, the Company provides GPS time and frequency receivers which capture cesium or rubidium-based time signals produced by GPS satellites. GPS receivers combine the external cesium or rubidium-based timing signals with internal rubidium or quartz oscillators to provide consistent timing output in the event the receiver loses the external signal. Wireline Products Wireline telecommunications network synchronization systems involve two principal components, a primary frequency reference, to provide an accurate frequency source, and a timing signal generator, to provide control, management and distribution of the timing signals required for network operations. Cesium Beam Primary Reference Sources --Primary Reference Sources ("PRSs") generate the most stable frequency output in general commercial use. PRSs provide cesium-based stability at the central offices of wireline networks for distribution of timing and frequency information to other components within the networks. GPS Primary Reference Receivers -- Primary Reference Receivers ("PRRs") capture and process time and frequency signals from GPS satellites. Integrated rubidium or quartz oscillators back up the external frequency source to maintain timing accuracy during periods of loss of signal. Typically, a PRR would be installed in telecommunications network switches to provide a stable frequency at the network switch level, thereby allowing transmissions to be efficiently processed with minimal degradation or retransmission requirements. Timing Signal Generators -- Distribution of network synchronization information is achieved through timing signals embedded within the flow of network communications which are referenced to the primary frequency source, such as the Company's PRS at the central office, or to a PRR at the network switch level. In the event of the loss of the reference frequency, the Company's timing signal generators can maintain, for extended time periods, switch and network synchronization quality by using internal high-stability rubidium and quartz oscillators as "holdover" clocking sources. End Office Primary References -- The Company's End Office Primary References combines a PRR with a timing signal generator in a single cost-effective unit designed for use where fewer telecommunications lines require timing inputs. Enterprise Computing Products The Company's products provide accurate time-stamping of information flowing through enterprise computing networks. GPS Time Servers -- The Company's time servers, which are installed in enterprise computing networks, acquire UTC time from GPS satellite transmissions. Worldwide coverage of GPS provides that all server-equipped sites operate with time data that is uniform to within a few milliseconds, thereby allowing time-sensitive information input at one location to be meaningfully analyzed at any other site in the network. In a typical application of this technology, the Securities Industry Automation Corporation, which supports member firms of the New York Stock Exchange, uses the Company's time servers to accurately time-annotate stock transactions. Computer Time Modules -- The Company's computer time modules acquire time from external 7 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 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 8 The Company's GPS receivers, in addition to their use in telecommunications markets, are used in a wide variety of other applications. Electric utilities use the Company's GPS receivers to determine the exact geographical location of transmission line faults by comparing the times a which the fault is detected at various stations in the power distribution network, eliminating the need to visually search along the right-of-way. Other customers utilize the Company's GPS receivers to distribute highly accurate time to multiple sites in order to synchronize the recording of simultaneous test data, such as during missile testing or astronomical observations. In addition to fully configured GPS receivers, the Company also manufactures board level modules for OEM applications. Time Code Instrumentation Products In addition to the time and frequency standards described above, the Company manufactures and markets a line of products that process or utilize basic time and frequency information for various applications. 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-annotated data recording or transmission. To correspond with the time generating equipment described above, the Company makes devices which "read" the coded time, transmitting it to computers, displays, or other devices where the recording of accurate time is required. Product Development The Company believes that its future success depends in large part on its ability to maintain its technological leadership through enhancements of existing products and development of new products that meet a wide range of customer needs. The Company focuses its research and development efforts on improving the core physics and electronics packages in its time and frequency products. Specifically, the Company is conducting research and development in three areas: developing new time and frequency technologies, improving product manufacturability, and enhancing software functionality. Although the Company maintains an active development program to improve its product offerings, including specific goals of smaller product size and lower unit cost, there can be no assurance such efforts will be successful, that its new products will achieve customer acceptance or that its customers products will achieve market acceptance. Failure to develop, or introduce on a timely basis, new products, or product enhancements that achieve market acceptance could adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products or enhancing its existing products on a timely or cost-effective basis. The Company acquired all the assets of Sigma Tau Standards Corporation, the leading producer of hydrogen maser clocks, the most accurate timing device available. The acquisition allowed the Company to broaden its range of advanced timing solutions. Research and development expenses totalled $10.7 million, $7.7 million and $7.1 million in 1997, 1996 and 1995, respectively. CUSTOMERS A small number of customers account for a substantial portion of the Company's net sales, and the Company expects that a limited number of customers will continue to represent a substantial portion of the Company's net sales for the foreseeable future. The Company's largest customer, Lucent Technologies, Inc. ("Lucent"), accounted for approximately 38% and 36% of net sales for the years ended December 31, 1997 and 1996, respectively. The Company's second largest customer, Motorola, Inc., accounted for 10% of net sales in 1997 and less than 10% of net sales in 1996. Further, the Company's five largest customers accounted for approximately 58% and 53% 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 9 which the Company and such customers do business, which could materially adversely affect the Company's business, results of operations and financial condition. MARKETING, DISTRIBUTION AND INTERNATIONAL SALES The Company's marketing efforts are focused on establishing and developing long-term relationships with potential customers. Sales cycles for certain of the Company's products, particularly for its larger telecommunications timing systems are lengthy, and can range up to 36 months. Sales are typically made through standard purchase orders which can be subject to cancellation, postponement or other types of delays. The majority of the Company's sales occur through independent sales representatives and distributors that target the specific markets which they serve. Corporate personnel in the United States and Germany provide additional direct sales and marketing support for larger accounts. Export sales of the Company's products were approximately 19%, 22% and 19% of net sales for the years ended December 31, 1997, 1996 and 1995, respectively. The Company expects that international revenues will continue to account for a significant percentage of the Company's total sales for the foreseeable future. As a result, the Company is subject to various risks, which include: economic instability in Asia; a greater difficulty of administering its business globally; compliance with multiple and potentially conflicting regulatory requirements such as export requirements, tariffs and other barriers; differences in intellectual property protections; health and safety requirements; difficulties in staffing and managing foreign operations; longer accounts receivable cycles; currency fluctuations; restrictions against the repatriation of earnings; export control restrictions; overlapping or differing tax structures; political instability and general trade restrictions. There can be no assurance that any of the foregoing factors will not have a material adverse effect on the Company's business, results of operations and financial condition. The Company's foreign sales are generally invoiced in U.S. dollars and, accordingly, the Company does not currently engage in foreign currency hedging transactions. However, as the Company continues to expand its international operations, the Company may be paid in foreign currencies and exposure to losses in foreign currency transactions may increase. The Company may choose to limit such exposure by the purchase of forward foreign exchange contracts or through similar hedging strategies. There can be no assurance that any currency hedging strategy would be successful in avoiding exchange-related losses. In addition, if the relative value of the U.S. dollar in comparison to the currency of the Company's foreign customers should increase, the resulting effective price increase of the Company's products to such foreign customers could result in decreased sales which could have a material adverse impact on the Company's business, results of operations and financial condition. COMPETITION Intense competition exists among manufacturers of time and frequency products, and the Company believes that competition in the Company's markets from both new and existing competitors will increase in the future. The Company competes principally in several specialized market segments against a limited number of companies, some of which are more established, enjoy higher name recognition and possess far greater financial, technological and marketing resources that the Company. The Company currently competes principally on the basis of the performance and quality of its products, including reliability, as well as on cost and timely manufacture and delivery. While the Company believes that overall it competes favorably with respect to the foregoing elements, there can be no assurance that it will continue to be able to do so. In the cellular and PCS markets, the Company competes primarily with Hewlett-Packard Company ("Hewlett-Packard"), and various other quartz oscillator manufacturers. Hewlett-Packard has recently introduced products with performance characteristics between quartz and rubidium oscillators with prices similar to the Company's rubidium oscillators. In the wireline market, the Company competes primarily with Symmetricom, Inc., Hewlett Packard and Oscilloquartz SA. In the enterprise computing market, the Company competes primarily with Tech-Sym Corp., Odetics, Inc. and True-Time, Inc. In the cesium 10 standards market, the Company competes primarily with Hewlett-Packard and Frequency Electronics, Inc. In the rubidium oscillators market, the Company competes primarily with Frequency Electronics, Inc. In addition, certain companies, such as EG&G, Inc. that currently manufacture products exclusively for use in military applications, could enter commercial markets, and compete directly with the Company. There can be no assurance that the Company will be able to complete successfully in the future against existing or new competitors, that new technologies will not reduce the demand for its products or that it will be able to adapt successfully to changes in the markets served by its products. In addition, there can be no assurance that competitive pressures will not cause the Company to reduce prices, which would negatively affect gross margins and could have a material adverse effect on the Company's results of operations and financial condition. BACKLOG The Company's backlog of orders was approximately $34.0 million on December 31, 1997, compared to approximately $43.7 million a year earlier. The Company considers as backlog all orders that are expected to be shipped to customers within a 6-month period. As part of the Company's close working relationships with its major OEM customers, such customers expect the Company to respond quickly to changes in the volume and delivery schedule of their time and frequency product requirements and to inventory products at the Company's facilities for just-in-time delivery to the OEM customers. Therefore, although contracts with such customers typically specify aggregate volumes of products to be purchased over an extended time period, such contracts also provide that scheduled shipment dates of particular volumes are generally released to the Company only days or a few weeks prior to the required delivery date to the OEM customer. As a result of possible changes in product delivery schedules, cancellations of orders and potential delays in product shipments and orders received for products shipped in the same quarter, the Company's backlog at any particular date may not necessarily be representative of actual sales for any succeeding period. GOVERNMENT CONTRACTS The Company believes that approximately 13% of its sales in 1997 were made either directly to United States government agencies or indirectly to U.S. government agencies through subcontracts as compared to approximately 15% in 1996 and 22% in 1995 for these sales. Because several of the Company's customers are involved in commercial as well as governmental activities, it is difficult to accurately determine the percentage of its business attributable to the U.S. government. Government-related contracts and subcontracts are subject to standard provisions for termination at the convenience of the government. In such event, however, the Company is generally entitled to reimbursement of costs incurred on the basis of work completed plus other amounts specified in each individual contract. These contracts and subcontracts are either fixed price or cost reimbursable contracts. Fixed-price contracts provide fixed compensation for specified work. Under cost reimbursable contracts, the Company agrees to perform specified work in return for reimbursement of costs (to the extent allowable under government regulations) and a specified fee. In general, while the risk of loss is greater under fixed-price contracts than under cost reimbursable contracts, the potential for profit under such contracts is greater than under cost reimbursable contracts. MANUFACTURING The Company manufactures its products at its plants in Irvine and San Jose, California; Austin, Texas; Beverly, Massachusetts; and Hofolding, Germany. The Company's Irvine, Austin and Beverly facilities have received ISO 9001 certification, and the Company intends to seek such certification for its San Jose facility. The manufacturing process involves the assembly of numerous individual components by technically oriented production personnel. The parts and materials used by the Company consist primarily of printed circuit boards, fabricated housings, relays, and small electric circuit components, such as integrated circuits, semiconductors, resistors and capacitors. The Company also manufactures the physics packages for its cesium and rubidium oscillators. The Company manufactures products to fill firm orders and to meet forecasts received from its major customers. In some cases, as a result of customer 11 requirements and the long manufacturing process of certain of the Company's products, the Company maintains up to four weeks of forecasted amounts in finished goods inventory and up to an additional eight weeks of forecasted amounts in work-in-process inventory. The Company currently procures various components from single-sources due to unique component designs as well as certain quality and performance requirements. If single-sourced components were to become unavailable or were to become unavailable on terms satisfactory to the Company, the Company would be required to purchase comparable components from other sources. If for any reason the Company could not obtain comparable replacement components from other sources in an timely manner, the Company's business, results of operations and financial condition could be adversely affected. In addition, many of the Company's suppliers require long lead-times to deliver requested quantities of components. If the Company were unable to obtain sufficient quantities of components used in the manufacture of its time or frequency products, resulting delays or reductions in product shipments could occur and could have a material adverse effect on the Company's business, result of operations and financial condition. Due to rapid changes in semiconductor and other technology, on occasion one or more of the electronic components used in the Company's products have become unavailable, resulting in unanticipated redesign and related delays in shipments. There can be no assurance that the Company will not experience similar delays in the future, the occurrence of which could have a material adverse effect on the Company's business, financial condition and results of operations. INTELLECTUAL PROPERTY RIGHTS The Company seeks to protect certain key technologies through U.S. and foreign patents and by maintaining such technologies as trade secrets. The Company has licenses under various other patents. While the Company believes that its patents and licenses have value, it does not regard any such patents or licenses as essential to its business or to the maintenance of its competitive position. Accordingly, the Company does not have any material patent protection on its technology. To the extent that it depends on proprietary information it primarily relies on the protections afforded to trade secrets. There can be no assurance that others will not independently develop or otherwise acquire equivalent technology or that the Company can maintain such technology as trade secrets. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as the laws of the United States. The failure of the Company to protect its intellectual property rights could have a material adverse effect on the business, operating results and financial condition. There can be no assurance that patent or other intellectual property infringement claims will not be asserted against the Company in the future. Although patent and intellectual property disputes may be settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and there can be no assurance that necessary licenses would be available to the Company on satisfactory terms or at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent the Company from manufacturing and selling certain of its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, should the Company decide to, or be forced to, litigate such claims, such litigation could be expensive and time consuming, could divert management's attention from other matters and could have a material adverse effect on the Company's business, operating results and financial condition, regardless of the outcome of the litigation. EMPLOYEES The Company had 656 employees at December 31, 1997. None of the Company employees are represented by a union. The Company believes its relations with its employees are good. The Company's success depends upon the continued services of its key management personnel. The Company'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 12 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. Louis B. Horwitz, the Company's President and Chief Executive Officer, and Chairman of the Company's Board of Directors, will, on April 6, 1998, relinquish the roles of President and Chief Executive Officer to Mr. Erik H. van der Kaay who will also assume the role of a member of the Board of Directors. Item 2. PROPERTIES The Company's Irvine, California, manufacturing and executive office facilities occupy an aggregate of 109,000 square feet in two sites under leases, each expiring July 31, 2005. The Company also operates at a facility located in San Jose, California, consisting of a 21,800 square foot engineering and manufacturing building, under a lease expiring on February 28, 2001. The Company also operates a facility located in Hofolding, Germany, consisting of an 8,600 square foot manufacturing facility, under a lease expiring in June 1999. The Company 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. Item 3. 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 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. The Company is also a party to ordinary disputes arising in the normal course of business. The Company does not believe that the outcome of these matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended December 31, 1997. Item 4A. Executive Officers of the Registrant The following is a list of the executive officers of the Registrant: Name Age Positions and Offices with the Registrant ---------------- --- ------------------------------------------------------ Louis B. Horwitz 70 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 13 Name Age Positions and Offices with the Registrant ---------------- --- ------------------------------------------------------ and an Executive Vice President of Xerox Data Systems, a manufacturer of computers. Heinz Badura 60 Vice President of the Company and President of its Efratom subsidiary since August 1995. From 1973 to 1995, he held a variety of positions at Efratom, most recently as Vice President. Paul Baia 45 Vice President of the Company since January 1996 and President of its Frequency Time Systems subsidiary since January 1996. From January 1990 to January 1996 he was General Manager of FTS. From March 1988 to January 1990 he was Director of Operations for FTS. John (Jack) R. Rice 53 Vice President of the Company since April 1994 and President of the Company's Austron, Inc. subsidiary since May 1995. From April 1994 to May 1995 he was General Sales Manager of the Company. From 1987 to 1994, he served as Director of North American Sales and of OEM Sales for Emulex Corporation, a computer hardware manufacturing company. David C. Robinson 57 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, which he served as Vice President of Marketing since May 1978. Raymond L. Waguespack 66 Vice President of the Company since 1989 and Secretary of the Company from October 1993 to July 1994 and Vice President, International Sales since April 1996. He has been President of the Company's Timing Division since October 1993. From April 1993 to September 1993, he served as International Sales and Marketing Manager of the Timing Division. From September 1989 to March 1993, Mr. Waguespack served as President of TCXO Enterprises, formerly Spectrum Technology, Inc., a former subsidiary of the Company, which manufactured quartz oscillators. David A. Young 54 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. 14 PART II Item 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS. Shares of the Company's common stock are traded on The Nasdaq Stock Market under the symbol "DATM". The following table sets forth the range of high and low closing sales price per share of common stock of the Company as reported on The Nasdaq Stock Market for each quarter of the two most recent fiscal years: HIGH LOW ---- --- YEAR ENDED DECEMBER 31, 1997 1st Quarter.................................. 24-1/2 13-3/4 2nd Quarter.................................. 32-5/8 14-1/8 3rd Quarter.................................. 49-1/2 30 4th Quarter.................................. 40-1/8 12 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 It is the policy of the Company to retain earnings to finance the future growth and development of its business. Therefore, the Company does not anticipate paying cash dividends on its common stock in the foreseeable future. In addition, the Company's existing credit arrangements restrict the Company from paying cash dividends. At March 16, 1998, there were 383 stockholders of record. 15 Item 6. SELECTED 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, 1997 and 1996 and the related consolidated statements of operations and of cash flows for the three years ended December 31, 1997 and notes thereto appear elsewhere in this Report. Year Ended December 31, --------------------------------------------------------------------------------------- 1997 1996 1995(1) 1994 1993 ----------- ----------- ----------- ----------- ----------- (In thousands, except share and per share data) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net Sales . . . . . . . . . . . . . . . . . $ 114,092 $ 91,854 $ 67,257 $ 30,897 $ 24,593 Costs and expenses: Cost of goods sold . . . . . . . . . . 68,235 56,285 40,010 17,491 14,663 Selling. . . . . . . . . . . . . . . . 15,808 12,182 9,836 5,206 4,461 Product development. . . . . . . . . . 10,650 7,667 7,087 2,494 1,877 General and administrative (2) . . . . 9,479 10,127 8,460 3,934 3,294 ----------- ----------- ----------- ----------- ----------- Operating income (loss). . . . . . . . 9,920 5,593 1,864 1,772 298 ----------- ----------- ----------- ----------- ----------- Interest expense . . . . . . . . . . . 2,085 2,255 1,667 241 209 Interest (income). . . . . . . . . . . (349) (7) (17) (15) (7) ----------- ----------- ----------- ----------- ----------- Income before income taxes. . . . . . . . . 8,184 3,345 214 1,546 96 Income tax provision. . . . . . . . . . . . 3,355 1,371 154 610 24 ----------- ----------- ----------- ----------- ----------- Net income. . . . . . . . . . . . . . . . . $ 4,829 $ 1,974 $ 60 $ 936 $ 72 =========== =========== =========== =========== =========== Net income per share: Basic . . . . . . . . . . . . . . . . $ .97 $ .49 $ .02 $ .36 $ .03 =========== =========== =========== =========== =========== Diluted . . . . . . . . . . . . . . . $ .90 $ .46 $ .02 $ .34 $ .03 =========== =========== =========== =========== =========== Shares used in per share calculation: Basic . . . . . . . . . . . . . . . . 4,973,228 4,061,014 3,713,710 2,628,721 2,558,356 =========== =========== =========== =========== =========== Diluted . . . . . . . . . . . . . . . 5,389,862 4,253,019 3,954,307 2,732,812 2,558,356 =========== =========== =========== =========== =========== December 31, --------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- CONSOLIDATED BALANCE SHEET DATA: Working capital. . . . . . . . . . . . . . $ 47,482 $ 26,029 $ 12,310 $ 8,684 $ 7,299 Total assets . . . . . . . . . . . . . . . 85,746 68,688 66,137 24,578 23,185 Long-term debt . . . . . . . . . . . . . . 17,418 17,318 7,938 50 70 Stockholders' equity . . . . . . . . . . . 56,844 34,623 31,313 16,883 15,639 - ----------------- (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, $1.5 million and $1.1 million for 1997, 1996 and 1995, respectively, of amortized goodwill and increased depreciation resulting from the step-up of the assets purchased in the March 1995 acquisition of Efratom. 16 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with "Selected Consolidated Financial Data" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Report. Except for the historical information contained herein, the discussion in this Report contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Report should be read as being applicable to all related forward-looking statements wherever they appear in this Report. The Company's actual results could differ materially from those discussed here. OVERVIEW Datum designs, manufacturers 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 approximately 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 38% and 36% of net sales for the fiscal years ended December 31, 1997 and 1996. The Company's second largest customer, Motorola, Inc., accounted for 10% of net sales in 1997 and less than 10% of net sales in 1996. Further, the Company's five largest customers, including Lucent, accounted for approximately 58% and 53% of net sales during the same periods. See "Business-Customers." The Company has experienced, and expects to continue to experience, fluctuations in sales and operating results on an annual and quarterly basis. As a result, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful, and that such comparisons cannot be relied upon as indicators of future performance. In addition, there can be no assurance that the Company will maintain its current profitability in the future. A significant component of the fluctuations 17 results from rescheduling of orders by the Company's major customers, in some cases due in part to the customers' attempts to minimize inventories. In 1997, the Company's major customer shifted their purchasing policy to consignment inventory, reducing the billable sales for that customer. Other factors that could cause the Company's sales and operating results to vary significantly from period to period include: the economic forces in foreign markets; 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. The Company anticipates sales and net income for the first quarter of 1998 may reflect no growth from the fourth quarter of 1997. 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 operating results. The Company's 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 would be materially adversely affected. 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 Report. Percentage of Net Sales ---------------------------------- Year Ended December 31, ---------------------------------- 1997 1996 1995 ------ ------ ------ Net sales . . . . . . . . . . . . 100.0% 100.0% 100.0% ------ ------ ------ Costs and expenses Cost of goods sold. . . . . . 59.8% 61.3% 59.5% Selling . . . . . . . . . . . . 13.9% 13.3% 14.6% Product development . . . . . . 9.3% 8.3% 10.5% General and administrative. . . 8.3% 11.0% 12.6% Interest, net . . . . . . . . . 1.5% 2.5% 2.5% ------ ------ ------ Income before income taxes. . . . 7.2% 3.6% 0.3% Income tax provision. . . . . . . 2.9% 1.5% 0.2% ------ ------ ------ Net income. . . . . . . . . . . . 4.2% 2.1% 0.1% ====== ====== ====== Years Ended December 31, 1997 and December 31, 1996 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 24.2% from $91.9 million in 1996 to $114.1 million in 1997. This increase was primarily the result of increased sales into each of the 18 Company's principal markets. In particular, net sales were positively impacted as a result of increased sales of rubidium oscillators into the cellular and PCS wireless telecommunications markets. The Company's sales in the enterprise computing market also showed significant growth, largely due to increased international business. Direct and indirect sales to the United States government increased 8.6% from $13.9 million in 1996 to $15.1 million in 1997, constituting approximately 15.1% and 13.2% of net sales, respectively. Government-related contracts and subcontracts are subject to standard provisions for termination at the convenience of the government. In such event, however, the Company is generally entitled to reimbursement of costs incurred on the basis of work completed plus other amounts specified in each individual contract. Gross Margins. Gross margins are derived from net sales and cost of goods sold, which consists primarily of raw materials, labor, overhead and warranty costs. Gross margins were 40.2% and 38.7% in 1997 and 1996, respectively. The increase in gross margins in 1997 was primarily the result of an increased percentage of the Company's net sales in wireless telecommunications products, along with productivity improvements. Gross margins can be adversely affected by a number of factors, including pricing pressure from the Company's customers and the difficulty of reducing fixed expenses in connection with the rescheduling of customers' orders. 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 13.9% and 13.3% in 1997 and 1996, respectively. The increase in selling expense resulted from increased commissions and increased costs in 1997 for international sales. Selling expense increased by 29.8% from $12.2 million in 1996 to $15.8 million in 1997, primarily as a result of increased net sales and the creation of the Company's international sales division in 1996. Product Development. Product development expense consists primarily of salary, applied overhead, materials and third-party design services. Product development expense increased 38.9% from $7.7 million in 1996 to $10.7 million in 1997, representing 8.3% and 9.3% of net sales, respectively. The dollar increase resulted from the commencement of development programs in 1997 to improve certain products through new chip designs and software development. Although the Company maintains an active development program to improve its product offerings, there can be no assurance that such efforts will be successful, that its new products will be developed on a timely basis and will achieve customer acceptance. Failure to develop, or introduce on a timely basis, new products or product enhancements that achieve market acceptance could adversely affect the Company's business, operating results and financial condition. General and Administrative. General and administrative expense consists primarily of salaries and other expenses for management, finance, accounting and human resources, as well as amortization of goodwill and depreciation charges. General and administrative expense decreased by 6.4% from $10.1 million in 1996 to $9.5 million in 1997, and decreased as a percentage of net sales from 11.0% in 1996 to 8.3% in 1997. Such expenses include $1.5 million and $1.5 million for 1997 and 1996, respectively, of amortized goodwill and increased depreciation resulting from the step-up of the assets purchased in the March 1995 acquisition of Efratom. Interest, Net. Interest decreased 22.8% from $2.2 million in 1996 to $1.7 million in 1997, primarily as a result of the reduction of debt with proceeds from the follow-on public offering completed April 2, 1997 of approximately one million shares at $15 per share. Years Ended December 31, 1996 and December 31, 1995 19 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 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. 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. Gross Margins. 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. Selling Expense. 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 increased 8.2% from $7.1 million in 1995 to $7.7 million in 1996, and decreased as 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. General and Administrative. 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 the 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 36.2% 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. LIQUIDITY AND CAPITAL RESOURCES The Company finances its operations primarily through a combination of cash provided from operations, a commercial bank line of credit and long-term debt. In addition, on April 2, 1997, the Company completed a follow-on public offering of 1,035,000 shares of its common stock, raising net proceeds of approximately $14.2 million. Cash used for operating activities was approximately $4.9 million in 1997, compared to cash provided by operations of approximately $6.7 million in 1996 and cash used for operations of approximately $140 thousand in 1995. Cash flows in 1997 were adversely affected by increasing inventories due to lower than planned revenues. The increase in cash provided by operations 20 for the year ended December 31, 1996 was primarily the result of increased profitability and a decrease in inventory. Capital expenditures were approximately $4.5 million, $2.7 million and $2.9 million in 1997, 1996 and 1995, respectively. The increase from 1996 to 1997 was primarily the result of the need to provide manufacturing test equipment for the increased volumes produced in 1997. The 1998 year for capital expenditures should be comparable to the prior year. At December 31, 1997, the Company had working capital of $48.4 million and a current ratio of 6.4:1, compared to working capital of $26.0 million and a current ratio of 2.9:1 at December 31, 1996. The increase in working capital is primarily the result of the approximately $15.0 million follow-on public offering concluded by the Company on April 2, 1997. The Prudential 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 repaid in equal installments of $1.5 million on March 27 and September 27 of each year, commencing March 27, 1999, and (ii) $12.0 million of Series B Senior Secured promissory notes to mature September 27, 2003, bearing interest at the rate of 10.25% on the unpaid principal, payable quarterly, with the principal repaid in equal installments of $2.0 million on March 27 and September 27 of each year, commencing March 27, 2001. In addition, 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. Subsequently, in 1997, Prudential sold these common stock warrants to Swiss Bank Corporation. 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 2.25%. The Company is not currently utilizing the line of credit, which will expire in September 1998. The Company expects to renew the line of credit for a two-year period with Wells Fargo. The Wells Fargo credit facility and the Prudential credit facility provide the Company with an aggregate borrowing capacity of $30 million. Under the promissory notes and the credit agreement, 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. READINESS FOR THE YEAR 2000 The Company has taken actions to understand the nature and extent of the work required to make its systems, products and infrastructure Year 2000 compliant. This year the Company began to prepare its products and review its computer based systems for the Year 2000, including replacing or updating existing systems. The Company continues to evaluate the estimated costs associated with these efforts based on actual experience. While these efforts will involve additional costs, the Company believes, based on available information, that it will be able to manage its total Year 2000 transition without any material adverse effect on its business operations, products or financial condition. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements and report of independent accountants thereon are filed with this Annual Report on Form 10-K as shown on the Index to Consolidated Financial Statements covered by Report of Independent Accountants. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 21 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT There is hereby incorporated by reference the information appearing under the captions "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" from the Company's definitive proxy statement for the Annual Meeting of the Stockholders to be held June 4, 1998 to be filed with the Commission on or before April 30, 1998. Information as to the Company's executive officers is included in Item 4A of Part I of this Annual Report on Form 10-K. Item 11. EXECUTIVE COMPENSATION There is hereby incorporated by reference information appearing under the caption "Executive Compensation" from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held June 4, 1998 to be filed with the Commission on or before April 30, 1998. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There is hereby incorporated by reference the information appearing under the caption "Security Ownership of Certain Beneficial Owners and Management" from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held June 4, 1998 to be filed with the Commission on or before April 30, 1998. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There is hereby incorporated by reference the information appearing under the caption "Executive Compensation" from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held June 4, 1998 to be filed with the Commission on or before April 30, 1998. 22 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: (1) Financial Statements The list of financial statements contained in the accompanying Index to Consolidated Financial Statements covered by Report of Independent Accountants is herein incorporated by reference. (2) Financial Statement Schedules The list of financial statement schedules contained in the accompanying Index to Consolidated Financial Statements covered by Report of Independent Accountants is herein incorporated by reference. All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits The list of exhibits on the accompanying Exhibit Index is herein incorporated by reference. (b) Reports on Form 8-K. The Company filed no Current Reports on Form 8-K during the last quarter of the period covered by this Report. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, at Irvine, California this 24th day of March, 1998. DATUM INC. By Louis B. Horwitz ------------------------------- Louis B. Horwitz President and Director POWER OF ATTORNEY The undersigned directors and officers of Datum Inc. constitutes and appoints as their true and lawful attorney and agent with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto: and we do hereby ratify and confirm all that said attorney and agent, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ Louis B. Horwitz President and Director March 24, 1998 - ---------------------------- Louis B. Horwitz (Principal Executive Officer) /s/ David A. Young Chief Financial Officer March 24, 1998 - ---------------------------- David A. Young (Principal Financial and Accounting Officer) /s/ G. Tilton Gardner Director March 24, 1998 - ---------------------------- G. Tilton Gardner /s/ Dan L. McGurk Director March 24, 1998 - ---------------------------- Dan L. McGurk /s/ Edward A. Money Director March 24, 1998 - ---------------------------- Edward A. Money /s/ Michael M. Mann Director March 24, 1998 - ---------------------------- Michael M. Mann /s/ R. David Hoover Director March 24, 1998 - ---------------------------- R. David Hoover 24 DATUM INC. Index To Consolidated Financial Statements Covered By Report of Independent Accountants Item 14(a)(1) and (2) Page references Form 10-K ---- The information under the following captions, is included herein: Financial Statements Report of independent accountants..................................................F-1 Consolidated balance sheet at December 31, 1997 and 1996 .................................................................F-2 Consolidated statement of operations for each of the three years in the period ended December 31, 1997................................................................F-3 Consolidated statement of stockholders' equity for each of the three years in the period ended December 31, 1997..........................................................F-4 Consolidated statement of cash flows for each of the three years in the period ended December 31, 1997................................................................F-5 Notes to consolidated financial statements.........................................F-6 Financial Statement Schedules VIII - Valuation and Qualifying Accounts...........................................S-1 25 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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 12, 1998 F-1 26 DATUM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, ------------------------ 1997 1996 -------- -------- ASSETS Current assets Cash and cash equivalents ............................................................. $ 5,819 $ 1,389 Accounts receivable, less allowance for doubtful accounts of $71 and $107 ............................................................................... 15,043 16,816 Inventories ........................................................................... 31,219 19,270 Prepaid expenses ...................................................................... 363 425 Deferred income taxes ................................................................. 2,648 2,007 Income tax refund receivable .......................................................... 1,321 -- -------- -------- Total current assets .......................................................... 56,413 39,907 Land, buildings and equipment, net ...................................................... 16,791 15,255 Excess of purchase price over net assets acquired, net of accumulated amortization of $2,951 and $2,056 ..................................................... 12,126 13,020 Other assets ............................................................................ 416 506 -------- -------- $ 85,746 $ 68,688 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable ...................................................................... $ 3,343 $ 7,542 Accrued salaries and wages ............................................................ 3,298 2,693 Accrued warranty ...................................................................... 990 1,434 Other accrued expenses ................................................................ 1,277 1,119 Income taxes payable .................................................................. -- 1,049 Current portion of long-term debt ..................................................... 23 41 -------- -------- Total current liabilities ..................................................... 8,931 13,878 -------- -------- Long-term debt .......................................................................... 17,418 17,318 -------- -------- Post-retirement benefits ................................................................ 602 446 -------- -------- Other long-term liabilities ............................................................. 128 1,428 -------- -------- Deferred income taxes ................................................................... 1,823 995 -------- -------- Stockholders' equity-- Preferred stock, par value $.25 per share Authorized - 1,000,000 shares Issued - none Common stock par value $.25 per share Authorized-- 10,000,000 shares Issued - 5,332,860 shares in 1997 and 4,091,291 shares in 1996 ..................... 1,333 1,023 Additional paid-in capital ......................................................... 43,231 25,845 Retained earnings .................................................................. 12,785 7,956 Cumulative translation adjustment .................................................. (505) (201) -------- -------- Total stockholders' equity .................................................... 56,844 34,623 Commitments (Notes C and I) -------- -------- $ 85,746 $ 68,688 ======== ======== See Notes to Consolidated Financial Statements F-2 27 DATUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) YEAR ENDED DECEMBER 31, ------------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Net sales .................. $ 114,092 $ 91,854 $ 67,257 ----------- ----------- ----------- Costs and expenses: Cost of goods sold ....... 68,235 56,285 40,010 Selling .................. 15,808 12,182 9,836 Product development ...... 10,650 7,667 7,087 General and administrative 9,479 10,127 8,460 Interest expense ......... 2,085 2,255 1,667 Interest (income) ........ (349) (7) (17) ----------- ----------- ----------- 105,908 88,509 67,043 ----------- ----------- ----------- Income before income taxes . 8,184 3,345 214 Income tax provision ....... 3,355 1,371 154 ----------- ----------- ----------- Net income ................. $ 4,829 $ 1,974 $ 60 =========== =========== =========== Net income per share: Basic .................... $ .97 $ .49 $ .02 =========== =========== =========== Diluted .................. $ .90 $ .46 $ .02 =========== =========== =========== Shares used in per share calculation: ............... 4,973,228 4,061,014 3,713,710 =========== =========== =========== Basic Diluted .................. 5,389,862 4,253,019 3,954,307 =========== =========== =========== See Notes to Consolidated Financial Statements F-3 28 DATUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA) ADDITIONAL CUMULATIVE COMMON STOCK PAID-IN RETAINED TRANSLATION ------------------------------ SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ----------- ----------- ----------- ----------- ----------- 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) Issuance of common stock under 401(k) plan 26,520 6 622 Issuance of common stock under ESP plan ............................ 5,224 1 66 Exercise of stock options ......... 174,825 44 1,155 Income tax benefit from stock ..... 1,646 options exercised Issuance of common stock, net of costs incurred .................. 1,035,000 259 13,897 Cumulative translation adjustment . (304) Net income ........................ 4,829 ----------- ----------- ----------- ----------- ----------- Balances at December 31, 1997 ....... 5,332,860 $ 1,333 $ 43,231 $ 12,785 $ (505) =========== =========== =========== =========== =========== See Notes to Consolidated Financial Statements F-4 29 DATUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 -------- -------- -------- Cash flows from operating activities: Net income ............................................ $ 4,829 $ 1,974 $ 60 -------- -------- -------- Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization .................... 3,152 3,040 2,393 Amortization of goodwill ......................... 894 894 616 Contribution of shares of common stock to the Company's 401(k) plan ........................ 628 464 355 Changes in assets and liabilities, net of acquisition: (Increase) decrease in accounts receivable ......... 1,773 (3,178) (1,486) (Increase) decrease in inventories ................. (11,949) 891 (5,678) (Increase) decrease in prepaid expenses ............ 62 (225) (422) Decrease in income tax refund receivable ........... -- 109 107 (Increase) decrease in deferred income taxes ....... 187 (175) (1,111) (Increase) decrease in other assets ................ (26) (491) 12 Increase (decrease) in accounts payable ............ (4,199) 2,387 2,361 Increase (decrease) in accrued expenses ............ 320 (89) 2,222 Increase (decrease) in income taxes payable ........ (724) 944 105 Increase (decrease) in other long-term liabilities . (30) 40 188 Increase in post-retirement benefits ............... 156 156 138 -------- -------- -------- Total reconciling items ............................... (9,756) 4,767 (200) -------- -------- -------- Net cash provided by (used for) operating activities .. (4,927) 6,741 (140) -------- -------- -------- Cash flows from investing activities: Book value of equipment disposals ..................... 50 98 20 Capital expenditures .................................. (4,494) (2,685) (2,937) Payment for acquisition, net of cash acquired ......... (1,270) -- (15,246) Other ................................................. (292) (99) (190) -------- -------- -------- Net cash used in investing activities ................. (6,006) (2,686) (18,353) -------- -------- -------- Cash flows from financing activities: Proceeds from (reductions of) line of credit .......... (21) (10,442) 7,442 Proceeds from long-term debt and notes payable ........ -- 17,736 12,596 Repayment of long-term debt and notes payable ......... (38) (11,528) (1,550) Proceeds from issuance of common stock ................ 14,156 -- -- Proceeds from exercise of stock options ............... 1,199 196 371 Proceeds from ESP plan ................................ 67 -- -- Proceeds from issuance of common stock warrants ....... -- 785 -- -------- -------- -------- Net cash provided by (used for) financing activities .. 15,363 (3,253) 18,859 -------- -------- -------- Net increase in cash and cash equivalents ............... 4,430 802 366 Cash and cash equivalents at beginning of year .......... 1,389 587 221 -------- -------- -------- Cash and cash equivalents at end of year ................ $ 5,819 $ 1,389 $ 587 ======== ======== ======== See Notes to Consolidated Financial Statements F-5 30 DATUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE A-- DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of the Company: Datum designs, manufactures and markets a wide variety of high-performance time and frequency products used to synchronize the flow of information in telecommunications networks. The Company is also a leading supplier of precise timing products for enterprise computing networks and a wide variety of space, scientific and industrial test and measurement applications. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany transactions and accounts have been eliminated. Revenue Recognition: Most revenues are recorded when products are shipped. However, in 1997, a major customer enacted a consignment inventory policy requiring finished goods to be kept at the customer's location. Revenues from the sale of these products in consigned inventory are recognized when the customer uses the product. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Actual results could differ from those estimates. Inventory Valuation: Inventories are stated at lower of cost or market; cost is determined on a first-in, first-out basis. Inventories comprise the following: DECEMBER 31, ---------------------------- 1997 1996 ------- ------- Purchased parts ...................... $10,523 $ 7,074 Work-in-process ...................... 12,833 9,096 Finished products .................... 7,863 3,100 ------- ------- $31,219 $19,270 ======= ======= 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 1997 1996 LIFE ------- ------- --------------- Land ............................ $ 2,040 $ 2,040 Buildings ....................... 4,564 4,494 30 to 40 years Equipment ....................... 19,306 15,685 3 to 10 years Leasehold improvements .......... 1,013 930 5 to 10 years ------- ------- 26,923 23,149 Less accumulated depreciation and amortization .................. 10,132 7,894 ------- ------- $16,791 $15,255 ======= ======= Expenditures for maintenance and repairs are charged directly to income, and betterments and major renewals are capitalized. F-6 31 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: The Company uses the liability method of accounting for income taxes. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is calculated as the change in net deferred liabilities or assets. Consolidated Statement of Cash Flows: For purposes of the consolidated statement of cash flows, cash equivalents include highly liquid investments, with an original maturity of less than three months. Cash paid for interest totaled $ 2,019, $2,109 and $1,508 in 1997, 1996 and 1995, respectively. Cash paid for income taxes totaled $3,935, $580 and $909 in 1997, 1996 and 1995, respectively. Significant non-cash transactions in 1997 affecting the Company's accounts consisted of tax benefits from the exercise of common stock options of $1,646. In connection with the acquisition of Efratom in 1995, 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 Statement of Financial Accounting Standards No. 123 (FAS 123) in Note F. Net Income Per Share: Effective in the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128). FAS 128 requires dual presentation of Net Income per share - Basic and Net Income per share - Diluted. Net Income per share - Basic excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Net Income per share - Diluted reflects the potential dilution that could occur if stock options were exercised. Net income per share is calculated as follows: YEAR ENDED DECEMBER 31, -------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Net income ................... $ 4,829 $ 1,974 $ 60 ========== ========== ========== Shares outstanding - Basic ... 4,973,228 4,061,014 3,713,710 Effect of dilutive securities: Warrants ................. 89,200 2,846 -- Stock options ........... 327,434 189,159 240,597 ---------- ---------- ---------- Shares outstanding - Diluted . 5,389,862 4,253,019 3,954,307 ========== ========== ========== Net income per share - Basic . $ .97 $ .49 $ .02 ========== ========== ========== Net income per share - Diluted $ .90 $ .46 $ .02 ========== ========== ========== Options to purchase 133,750 shares of common stock at prices of $21.00 to $37.00 per share were not included in the computation of Net income per share - Diluted because the options' exercise price was greater than the average market price of common shares. 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. Foreign Currency Translation: Assets and liabilities of the Company's German subsidiary are translated at current exchange rates, while revenue and expenses are translated at average rates prevailing during the year. Translation adjustments are reported as components of stockholders' equity. Reclassifications: Certain reclassifications have been made to the consolidated financial statements for prior years to conform to the 1997 presentation. NOTE B-- ACQUISITION F-7 32 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 results of operations of the Company and Efratom for the year ended December 31, 1995, presuming the acquisition had taken place on January 1, 1995, after giving effect to certain pro forma adjustments are as follows: Net sales............................ $ 76,552 ======== Net income........................... $ 442 ======== Net income per share - Diluted....... $ .11 ======== 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-8 33 NOTE C-- LONG-TERM DEBT Long-term obligations outstanding are as follows: DECEMBER 31, ------------------------ 1997 1996 -------- -------- $12,000 Revolving Line of Credit, expires November 1, 1998, with interest payable at prime or at LIBOR plus 2.25%, (8.5% at December 31, 1997), secured by all assets .................... $ -- $ 21 $6,000 Series A Senior Secured Notes (net of discount of $203), principal due semi-annually beginning March 27, 1999, to September 27, 2000, with interest payable quarterly at 9.07%, secured by all assets ........................................ 5,797 5,750 $12,000 Series B Senior Secured Notes (net of discount of $407), principal due semi-annually beginning March 27, 2001, to September 27, 2003, with interest payable quarterly at 10.25%, secured by all assets ........................................ 11,593 11,500 Capital equipment leases for various machinery and equipment with ........................................................... 51 88 -------- -------- interest at 10.26% to 11.46% maturing at various dates Total debt ..................................................... 17,441 17,359 Less current portion ......................................... (23) (41) -------- -------- Long-term debt, less current portion ........................... $ 17,418 $ 17,318 ======== ======== Aggregate maturities of long-term debt before debt discount at December 31, 1997 are as follows: 1998 ................................................. $ 23 1999 ................................................. 3,025 2000 ................................................. 3,002 2001 ................................................. 4,001 2002 ................................................. 4,000 Thereafter ........................................... 4,000 ------- Total ...................................... $18,051 ======= The Company issued common stock warrants in connection with the Series A and Series B Senior Secured Notes allowing for the purchase of up to 175,000 shares of common stock at an exercise price of $11.50 per share. The common stock warrants, which were valued by the Company at $785, have been reflected as debt discount and amortized as additional interest expense. The value of the common stock warrants is included in additional paid-in capital. The current credit agreements impose operating and financial restrictions on the Company, including a requirement to maintain certain financial ratios and a certain profitability level. Such restrictions affect, and in some respects limit or prohibit, among other things, the ability of the Company to incur additional indebtedness, repay certain indebtedness prior to its stated maturity, create liens, engage in mergers and acquisitions, transfer assets, make certain capital expenditures and pay dividends. F-9 34 NOTE D-- INCOME TAXES The income tax provision comprises the following: YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 1995 ------- ------- ------ Provision for income taxes: Current: Federal..................... $2,587 $1,081 $ 702 State....................... 537 445 168 Foreign..................... 44 20 105 ------ ------ ----- 3,168 1,546 975 ------ ------ ----- Deferred: Federal..................... 223 (155) (683) State....................... (36) (20) (138) ------ ------ ----- 187 (175) (821) ------ ------ ----- $3,355 $1,371 $ 154 ====== ====== ===== The tax benefits associated with the exercise of non-qualified stock options reduced taxes currently payable as shown above by $1,646 in 1997. Such benefit was credited to additional paid in capital. 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, ----------------------------------------------------------------------------- 1997 1996 1995 -------------------- -------------------- ------------------- Pretax Pretax Pretax Amount Income Amount Income Amount Income ------- ---- ------- ---- ------- ---- Computed expected tax expense .......... $ 2,809 35.0% $ 1,171 35.0% $ 73 34.0% State income tax, net of federal income tax effect ........................... 326 4.0% 272 8.1% 11 5.1% Amortization of excess of purchase price over net assets acquired ............. 27 .3% 31 1.0% 31 14.5% Foreign earnings taxed at different rates ................................ (12) (.2%) 20 .6% 26 12.2% Other .................................. 205 2.5% (123) (3.7)% 13 6.2% ------- ---- ------- ---- ------- ---- $ 3,355 41.0% $ 1,371 41.0% $ 154 72.0% ======= ==== ======= ==== ======= ==== The primary components of temporary differences which give rise to the Company's net deferred tax asset are as follows: DECEMBER 31, ------------------- 1997 1996 ------ ------ Deferred tax assets: Inventory ................... $1,887 $1,001 Accruals and reserves ....... 1,022 1,201 ------ ------ 2,909 2,202 Deferred tax liabilities: Property, plant and equipment 2,037 1,171 Other ....................... 47 19 ------ ------ 2,084 1,190 $ 825 $1,012 ====== ====== F-10 35 NOTE E-- POST-RETIREMENT BENEFITS Post-retirement benefits are recognized over the employee's service period based on the expected costs of providing such benefits to the employee and the employee's beneficiaries after retirement. The Company elected to recognize the transition obligation over a 20-year period. The Company's post-retirement benefit program comprises two plans, the life insurance plan and the health care plan. Any permanent full-time employee is eligible upon retirement after age 62 and with 12 years of service. The health care plan is a contributory plan. The following sets forth the Company's post-retirement program's status reconciled with amounts reported in the consolidated balance sheet: DECEMBER 31, ---------------------- 1997 1996 ------- ------- Accumulated post-retirement benefit obligation: Retirees ............................................... $ 380 $ 343 Fully eligible active plan participants ................ 169 150 Other active plan participants ......................... 699 667 ------- ------- Total accumulated post-retirement benefit obligations .. 1,248 1,160 Plan assets at fair value .............................. -- -- ------- ------- Accumulated post-retirement benefit obligation in excess of plan assets ...................................... 1,248 1,160 Unrecognized transition obligation ..................... (453) (484) Unrecognized net loss .................................. (193) (230) ------- ------- Accrued post-retirement benefit obligation ............. $ 602 $ 446 ======= ======= Net periodic post-retirement benefit cost includes the following components: YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 ---- ---- ---- Service cost ........................ $ 71 $ 71 $ 68 Interest cost ....................... 70 71 68 Amortization of transition obligation 31 30 30 ---- ---- ---- Net periodic postretirement expense . $172 $172 $166 ==== ==== ==== Discount rate ....................... 7.0% 7.0% 7.0% ==== ==== ==== 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 1984 Stock Option Plan and Restricted Stock Award Plan that expired in 1994. The stockholders of the Company approved amendments of the 1994 Stock Incentive Plan, providing for 200,000 additional option shares in March 1995, and 200,000 additional option shares in June 1997, to be reserved for issuance thereunder. The following table summarizes activity under the 1994 Incentive Stock Plan during the years ended December 31, 1997 and 1996 and 1995: F-11 36 NUMBER WEIGHTED AVERAGE OF SHARES EXERCISE PRICE ------- ------ Outstanding, December 31, 1994... 86,800 $ 4.50 Issued during 1995 .............. 219,250 $11.00 Exercised during 1995 ........... (6,313) $ 4.38 Cancelled during 1995 ........... (30,500) $ 9.79 ------- Outstanding, December 31, 1995... 269,237 $ 9.13 Issued during 1996 .............. 132,500 $10.17 Exercised during 1996 ........... (6,388) $ 8.10 Cancelled during 1996 ........... (41,625) $ 9.73 ------- Outstanding, December 31, 1996... 353,724 $ 9.75 Issued during 1997 .............. 170,750 $21.82 Exercised during 1997 ........... (94,563) $ 9.44 Cancelled during 1997 ........... (14,375) $17.88 ------- Outstanding, December 31, 1997 (weighted average contractual life of 8.9 years) ........... 415,536 $14.32 ======= Exercisable: December 31, 1997 ............ 80,775 $ 8.66 ======= December 31, 1996 ............ 78,701 $ 8.30 ======= December 31, 1995 ............ 19,075 $ 4.65 ======= As of December 31, 1997, 1996 and 1995, 327,200, 233,575, and 274,450 option shares, respectively, were available for grant under the 1994 Plan. The following table summarizes activity under the 1984 Stock Option Plan for the years ended December 31, 1997, 1996 and 1995: NUMBER WEIGHTED AVERAGE OF SHARES EXERCISE PRICE ------- ----- Outstanding, December 31, 1994 . 283,275 $4.10 Exercised during 1995 .......... (36,325) $3.39 Cancelled during 1995 .......... (4,875) $4.88 ------- Outstanding, December 31, 1995 . 242,075 $4.19 Exercised during 1996 .......... (21,325) $3.49 ------- Outstanding, December 31, 1996 . 220,750 $4.25 Exercised during 1997 .......... (80,262) $3.82 Cancelled during 1997 .......... (1) $3.00 ------- Outstanding, December 31, 1997 (weighted average contractual life of 5.4 years .......... 140,487 $4.50 ======= Exercisable: December 31, 1997 ........... 116,918 $4.45 ======= December 31, 1996 ........... 163,238 $4.05 ======= December 31, 1995 ........... 155,807 $3.82 ======= No further option shares will be granted under the 1984 Stock Option Plan. In June 1997, the stockholders of the Company approved the Employee Stock Purchase Plan, which authorizes the Company to issue and reserve for the Purchase Plan, or purchase up to an aggregate of 250,000 shares of common stock in open market transactions for the benefit of participating employees during the term of the Purchase Plan. The purchase price per share for which shares of common stock are purchased in an offering period under the Purchase Plan is the lessor of 90% of the fair market value of a share of common F-12 37 stock on the grant date or 90% of the fair market value of a share of common stock on the purchase date. In 1997, 5,224 shares of common stock were issued at a price of $12.88 per share. Had compensation cost been determined on the basis of fair value pursuant to FAS 123 net income (loss) and net income (loss) per share would have been as follows: YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 --------- --------- --------- Net income (loss) As reported ............. $ 4,829 $ 1,974 $ 60 ========= ========= ========= Pro forma ............... $ 4,330 $ 1,824 $ (186) ========= ========= ========= Net income (loss) per share As reported - Diluted ... $ .90 $ .46 $ .02 ========= ========= ========= Pro forma - Diluted ..... $ .80 $ .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 6.37% in 1997, 5.97% in 1996 and 6.94% in 1995, expected volatility of 77% in 1997, 48% in 1996 and 49% in 1995, and an expected option life of 5 years and no expected dividends in 1997, 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 3% of employee deferral. Employer matching contributions are made in the form of shares of the Company's common stock. Total retirement expense under the Plan amounted to $741, $497, and $408 for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE H-- U.S. GOVERNMENT, FOREIGN SALES AND SIGNIFICANT CUSTOMERS Direct and indirect sales to the United States government aggregated approximately $15,074, $13,856 and $14,812 in 1997, 1996 and 1995, respectively. Direct sales to the United States government aggregated approximately $5,254, $5,668 and $5,167 in 1997, 1996 and 1995, respectively. Foreign sales in 1997, 1996 and 1995 amounted to $21,745, $20,151 and $13,033, respectively. Two customers accounted for 38% and 10% of net sales in 1997. One customer accounted for 36% and 30% of net sales in 1996 and 1995, respectively. NOTE I-- COMMITMENTS Total rental expense for operating leases amounted to $1,454, $1,735 and $1,031 in 1997, 1996 and 1995, respectively. The future minimum rental commitments under all non-cancelable operating leases, exclusive of property taxes and certain occupancy costs, are as follows: 1998 .......................... $ 1,438 1999 .......................... 1,381 2000 .......................... 1,309 2001 .......................... 1,223 2002 .......................... 1,159 Thereafter .................... 3,723 ------- Total minimum lease payments... $10,233 ======= F-13 38 DATUM INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) BALANCE AT BALANCE BEGINNING OTHER AT END OF DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS ACQUISITIONS DEDUCTIONS* PERIOD ----------------------------------- --------- --------- ---------- ------------ ----------- ------ YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts.... $ 107 $ 70 $ 106 $ 71 Reserve for inventories............ 2,084 2,394 741 3,737 Accumulated amortization of acquired intangible assets......... 2,056 895 2,951 YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts.... 68 121 36 $ 46 107 Reserve for inventories............ 1,952 1,309 1,177 2,084 Accumulated amortization of acquired intangible assets......... 1,162 894 2,056 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 * Aacom note payments received. S-1 39 EXHIBIT INDEX SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ ----------- ---- 2.1 Purchase Agreement dated as of October 20, 1994 by and among Ball Corporation, Efratom Holding, Inc. and the Registrant (incorporated by reference to Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). -- 3.1 Certificate of Incorporation of Datum Inc., a Delaware corporation, as amended to date (incorporated by reference to the same numbered exhibit on Form 10-Q for the quarter ended June 30, 1996). -- 3.2 Bylaws of Datum Inc. as amended to date (incorporated by reference to the same numbered exhibit on Form 10-K for the year ended December 31, 1994). -- 10.4 1984 Stock Option Plan, as amended to date (incorporated by reference to Registrant's Registration Statements on Form S-8 Registration numbers 2-96564, 33-10335 and 33-41709). -- 10.6 Executive Agreement dated March 7, 1986 with Louis B. Horwitz, (incorporated by reference to same numbered exhibit to Registrant's Annual Report on Form 10-K for the year 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 same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). -- 10.19 Savings and Retirement Plan, as amended to date (incorporated by reference to same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). -- 10.21 Consulting Agreement dated October 9, 1992 with Louis B. Horwitz (incorporated by reference to same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). -- 10.21.1 First Amendment to Consulting Agreement, dated as of March 1, 1996, between Louis B. Horwitz and the Registrant (incorporated by reference to the same numbered exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). -- 10.29 1994 Stock Incentive Plan (incorporated by reference to Registrant's registration statement on Form S-8 Registration #33-79772). -- 10.29.1 Amendment to 1994 Stock Incentive Plan, effective March 17, 1995. (incorporated by reference to the same numbered exhibit on Form 10-K for the year ended December 31, 1994). -- 40 SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ ----------- ---- 10.29.2 Second Amendment to 1994 Stock Incentive Plan, effective June 5, 1997 (incorporated by reference to Registrant's registration statement on Form S-8 Registration #33-79772). -- 10.30.5 Amended and Restated Credit Agreement dated as of September 27, 1996, by and between the Registrant and Wells Fargo Bank, N.A. (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). -- 10.32 Lease Agreement dated September 15, 1986 by and between The Irvine Company and Efratom Division, Ball Corporation, for Efratom Time and Frequency Products, Inc.'s facility at 3 Parker, Irvine, California. (incorporated by reference to the same numbered exhibit on Form 10-K for the year ended December 31, 1994). -- 10.32.1 First Amendment to Lease dated March 15, 1995 by and between The Irvine Company and Efratom Division, Ball Corporation for Lease Agreement dated September 15, 1986 (Exhibit 10.32) (incorporated by reference to the same numbered exhibit on Form 10-K for the year ended December 31, 1994). -- 10.32.2 Amendment to Leases dated May 11, 1995 between the Irvine Company and the Registrant (incorporated by reference to the same numbered exhibit on Form 10-Q for the quarter ended June 30, 1995). -- 10.32.4 Second Amendment to Lease dated May 11, 1995 for 3 Parker (incorporated by reference to the same numbered exhibit on Form 10-Q for the quarter ended June 30, 1995). -- 10.34 Industrial Lease dated May 11, 1995 between the Irvine Company and the Registrant (incorporated by reference to the same numbered exhibit to the Registrant's Form 10-Q for the quarter ended June 30, 1995). -- 10.35 Lease Agreement dated January 4, 1996, by and between Berg & Berg Developers and the Registrant relating to Registrant's Facility at 6781 Via Del Oro, San Jose, California (incorporated by refernece 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. -- 41 SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ ----------- ---- 10.37 Common Stock Purchase Warrant, dated September 27, 1996 (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). -- 10.38 Series A Senior Secured Notes, dated September 27, 1996, in favor of The Prudential Insurance Company of America (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). -- 10.39 Series B Senior Secured Notes, dated September 27, 1996, in favor of The Prudential Insurance Company of America (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). -- 10.40 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) (incorporated by reference to the Company's Registration Statement No. 333-22177 on Form S-2 filed February 21, 1997) -- 10.41 Employee Stock Purchase Plan (incorporated by reference to registrant's proxy statement for its Annual Meeting of Stockholders on June 5, 1997, filed with the Commission on May 1, 1997) 21 List of Subsidiaries -- 23 Consent of Independent Accountants 27.4 Financial Data Schedule Year Ended 1997 27.5 Financial Data Schedule Restated Quarterly and Year Ended 1996 27.6 Financial Data Schedule Restated Quarterly 1997 42 DATUM INC. FORM 10-K - ITEM 14(A)(3) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10.4 1984 Stock Option Plan, as amended to date (incorporated by reference to Registrant's Registration Statements on Form S-8 Registration numbers 2-96564, 33-10335 and 33-41709). 10.6 Executive Agreement dated March 7, 1986 with Louis B. Horwitz, (incorporated by reference to same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 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 same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). 10.21 Consulting Agreement dated October 9, 1992 with Louis B. Horwitz (incorporated by reference to same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 10.21.1 First Amendment to Consulting Agreement, dated as of March 1, 1996, between Louis B. Horwitz and the Registrant (incorporated by reference to the same numbered exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.29 1994 Stock Incentive Plan (incorporated by reference to Registrant's registration statement on Form S-8 Registration #33-79772). 10.29.1 Amendment to 1994 Stock Incentive Plan, effective March 16, 1995 (incorporated by reference to the same numbered exhibit to Registrant's Form 10-K for the year ended December 31, 1994). 10.29.2 Second Amendment to 1994 Stock Incentive Plan, effective June 5, 1997 (incorporated by reference to Registrant's registration statement on Form S-8 Registration #33-79772). 10.41 Employee Stock Purchase Plan (incorporated by reference to registrant's proxy statement for its Annual Meeting of Stockholders on June 5, 1997, filed with the Commission on May 1, 1997)