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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, 1995
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 92718
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 380-8880
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sales price of the Common Stock as of March
18,1996, was approximately $35,562,756.
The number of outstanding shares of the Registrant's Common Stock as of March
18, 1996 was 4,040,165.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting of Stockholders
to be held on June 6, 1996 (to be filed with the Commission within 120 days of
December 31, 1995): Part III, Items 10-13.
Page 1 of Pages
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Exhibit Index is Located on Sequential Numbered Page of this Report.
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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 the Registrant intends
that such forward-looking statements be subject to the safe harbors created
thereby. These forward-looking statements include (i) the development of
certain markets for the Registrant's products, (ii) anticipated competition,
(iii) the potential rescheduling or elimination of orders and the concentration
of the Registrant's customers, (iv) fluctuations in operating results, (v)
necessary elements for the successful management of growth, and (vi) the need
for, and availability of, additional financing. The forward-looking statements
and associated risks set forth in this Report also include or relate to trend
information related to the Registrant's March 1995 acquisition of Efratom Time
and Frequency Products, Inc., a Colorado corporation and Efratom Elektronik
GmbH, a corporation organized under the laws of the Republic of Germany
(collectively "Efratom") and Efratom's ongoing operations.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on assumptions that the Company will not
lose a significant customer or customers or experience increased fluctuations
of demand or rescheduling of purchase orders, that the Registrant's markets
will continue to grow, that the Registrant's products will remain accepted
within their respective markets and will not be replaced by new technology,
that competitive conditions within the Registrant's markets will not change
materially or adversely, that the Registrant will be successful in integrating
the operations of its Efratom subsidiary with the rest of the Registrant's
operations, that the Registrant will retain key technical and management
personnel, that the Registrant's forecasts will accurately anticipate market
demand, and that there will be no material adverse change in the Registrant's
operations or business. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and
market conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
the Registrant. Although the Registrant believes that the assumptions
underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the results contemplated in forward-looking statements will be realized.
In addition, the business and operations of the Registrant are subject to
substantial risks which increase the uncertainty inherent in such
forward-looking statements. In light of the significant uncertainties inherent
in the forward-looking information included herein, the inclusion of such
information should not be regarded as a representation by the Registrant or any
other person that the objectives or plans of the Registrant will be achieved.
PART I
Item 1. BUSINESS.
General
Datum Inc. ("Datum" or the "Company") designs, manufactures and
markets a wide variety of high-quality, high-performance time and frequency
products used to synchronize the flow of information in telecommunications and
distributed data networks. The Company is a supplier of time and frequency
products used in the wireline and fiber optic networks of public telephone
companies worldwide, in cellular and personal communication services ("PCS")
telephone networks, including base stations, in the United States, and in
aerospace and industrial applications. The Company also is a supplier of
timing products used to ensure the integrity of information transmitted through
distributed data networks, including local area networks ("LAN") and wide area
"enterprise networks," and manufactures and markets high precision timing and
frequency products and systems for a wide range of scientific and industrial
test and measurement applications, including satellite-based global navigation,
missile guidance, precise geographic mapping, electric utility operations and
aircraft flight testing.
Products
The Company sells its products primarily into three markets: the
telecommunications market, the distributed data networks ("DDN") market and the
scientific and industrial test and measurement market. Telecommunications
networks are evolving from analog- based systems, in which information is
transmitted in continuous signals of various magnitudes, to digital-based
systems, in which voice, video and data are encoded and transmitted in a
sequence of pulses. Digital-based
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systems have a greater need for accurate synchronization than their analog
counterparts. This synchronization is accomplished by the use of highly accurate
timing devices, including those offered by the Company, throughout the networks.
A distributed data network consists of interconnected computers,
workstations, peripheral devices and application software aggregated in a LAN,
or a collection of LANs in a wide area "enterprise network," to provide the
transaction processing and control infrastructure for national and
international enterprises. Accurate timing of operations throughout a network
is essential to ensure the integrity of the data flowing through the network.
When information is being retrieved from multiple locations and forwarded to a
central point for analysis, accurate interpretation of the data may rely on
the ability to properly time sequence both the generation and receipt of the
data. In order to satisfy these time requirements, LAN and enterprise network
operators utilize sophisticated timing protocols to acquire time from network
clocks (called time servers) and distribute time to all workstations in the
network. The Company's distributed data network products provide Global
Positioning System ("GPS") satellite timing information at the server level,
for use at the server and for distribution through the network.
The Company also develops and sells test and measurement products for
a wide range of scientific and industrial applications, including
satellite-based global navigation, communication satellites, precise geographic
mapping, missile guidance, electric utility operation and aircraft flight
testing.
There are three sub-markets within the Company's telecommunications
market: cellular systems, PCS and wireline. A cellular system consists of
numerous cells located throughout a service area, each with its own base
station connected by wire or microwave to the cellular network operator's
interface with the related wireline network ("network switch"). The Company
supplies rubidium oscillator timing devices used for frequency control in
cellular base stations and GPS receivers used to provide accurate timing at
each network switch. The limitations of cellular networks have led to the
development of personal communications services, which are another, higher
frequency, form of wireless cellular communications.
As in a cellular system, accurate time synchronization of each element
in a PCS system is critical to each cell site and the central stations require
stable, reliable, high-precision timing devices. 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 appropriate
destinations. In order to transfer a transmission from one line or network to
another, both lines or segments of the network must operate within a very
narrow range of frequencies.
As the Company derives substantially all of its revenue from
relatively few markets, if any of these markets becomes static or declines,
the Company's business and results of operations would be adversely affected.
See "Introductory Note."
TELECOMMUNICATIONS PRODUCTS
The Company focuses primarily on high-growth segments of the
telecommunications markets and offers a broad range of timing products for
applications in that industry.
Cellular and PCS Products.
Cellular and PCS networks require both accurate frequency control and
time information. The Company provides two classes of products to meet these
needs.
Rubidium Frequency Standards - Rubidium oscillators, when combined with
electronic control circuitry, provide accurate frequency control at cellular
base stations, independent of external frequency inputs. The Company designs its
rubidium frequency standards for long-term "install and forget" applications as
compared to quartz oscillators, which require periodic on-site calibration.
Newer designs utilize surface mount technology to reduce size, enabling
installation on standard plug-in circuit cards.
GPS Timing Receivers - The Company's GPS receivers obtain Universal
Coordinated Time ("UTC") from orbiting GPS satellites to provide accurate time
to cellular base stations and the network switch interface between a cellular
system and the related wireline network. In order to maintain accurate timing
during periods of signal loss, the Company's GPS receivers incorporate quartz
or rubidium oscillators that maintain timing output.
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Wireline Products.
Wireline telecommunications network synchronization systems involve
building blocks - primary frequency references and timing signal generators -
to convert the reference frequency to the timing signals required for network
operations.
Primary Reference Receivers - Primary Reference Receivers ("PRRs")
capture and process time and frequency signals from GPS satellites and/or from
the LORAN-C radio navigation system. The Company developed the PRR and
currently markets three different configurations: one based on GPS
transmissions, a second using LORAN-C transmissions, and a third, dual
configuration with software that mathematically combines both sources to
optimize timing accuracy. Internal 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 at each switch in the
telecommunications network to provide a stable frequency throughout the switch,
thereby allowing transmissions to be efficiently processed with minimal signal
degradation or retransmission requirements.
Timing Signal Generators - Network synchronization is implemented
through timing signals embedded within the communications flowing through the
network and referenced to the primary clocking source, such as the Company's
PRR. In the event of loss of the reference frequency, the Company's timing
signal generators can maintain, for extended time periods, switch
synchronization quality within internationally specified error limits by using
internal high-stability rubidium and quartz oscillators as "holdover" clocking
sources.
Cesium Primary Reference Sources - The most precise synchronization
source available is that based upon the cesium standard. These units are
usually located at several, but not all sites is within the telecommunications
network. Where used, they become the source against which all other timing
signals are measured.
End Office Primary Reference Source - The Company's End Office Primary
Reference Source combines a PRR with a timing signal generator in a single
cost-effective unit designed for use where smaller numbers of devices require
timing inputs.
DDN PRODUCTS
The Company's products provide accurate time-stamping of information
flowing through distributed data networks.
Time Servers - The Company's time servers, which are installed at the
server level in a DDN, acquire UTC from GPS satellite transmissions. Typically,
a single server installed at each site distributes time to all user workstations
over LAN communication lines. Worldwide coverage of GPS ensures that all
server-equipped sites operate with time data that is uniform to within a few
microseconds, thereby allowing time-sensitive information input at one location
to be meaningfully analyzed at any other site in the network.
Computer Time Modules - The Company's computer time modules acquire
time from external sources (such as GPS satellites or time code generators) to
perform a variety of timing functions within the host computer with accuracy to
within thousandths or millionths of a second. 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 computer modules for IBM PC, Sun
Microsystems, VME, VXI and Digital Equipment Corp.'s compatible computers and
workstations and 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 standalone computers and workstations used for test and
measurement applications.
TEST, MEASUREMENT AND SATELLITE PRODUCTS
Atomic Frequency Sources
The Company produces and markets frequency sources that range from
high-stability quartz oscillators to atomic reference frequency standards for a
wide variety of commercial and scientific applications.
Cesium Frequency Standards - The Company's cesium frequency standards
include a cesium beam tube manufactured by the Company that utilizes the
resonance of the cesium atom to produce an invariant frequency suitable
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as a "primary" standard, requiring no other reference for calibration. The
Company has developed a broad line of cesium frequency products for numerous
applications that require an invariant frequency reference.
Rubidium Oscillators - In addition to wide use in the
telecommunications industry, the Company's rubidium oscillators have a number
of other specific types of applications, such as frequency control for
television networks and 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 into time and frequency or synchronization equipment.
GPS Time and Frequency Receivers
The Company's GPS time and frequency receivers capture the invariant
cesium-based time signal produced by the GPS satellites for use in varied
commercial, industrial and defense applications in which on-site cesium clocks
may not be suitable or cost effective. These products combine the external
cesium-based timing signals with internal rubidium or quartz oscillators to
provide consistent timing output in the event the receiver loses the external
signal. Electric utilities use the Company's GPS time and frequency receivers
to determine the exact geographical location of transmission line faults by
comparing the times at which the fault is detected at various stations in the
power distribution network, eliminating the need to visually search along the
right-of-way. Other customers utilize the Company's GPS receivers to
distribute highly accurate time to multiple sites in order to synchronize the
recording of simultaneous test data, such as during aircraft and 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 range of products that process or utilize
the basic time and frequency information for various applications.
Time Code Generators ("TCG") - These instruments derive a frequency
reference either from external sources or internal, high-stability frequency
oscillators. TCGs are essentially clocks that output time-of-day information
in a variety of electronic signals or digital codes tailored to specific
applications, usually to time-annotate data recording or transmission.
Aerospace manufacturers use the Company's TCGs to time-annotate flight test
records in order to integrate and analyze data produced and recorded in
different parts of an aircraft during flight testing.
Time Code Translators - The Company's time code translators process the
electronic signals produced by a TCG, either in real time or from recorded data,
to display visually a time log or other time-sequenced data or to time-annotate
stored data.
Tape Search Units - These products allow high-speed location and
retrieval of specific information from within large bodies of data recorded
over long periods of time. These systems have particular application for
industrial, scientific and military users that typically record huge quantities
of information on magnetic media for later analysis. Because much of the data
may be irrelevant, the Company's tape search units enable the user to retrieve
only the desired data recorded at or around the specific time of the event of
interest.
Video Data Instrumentation - The Company's data encoders insert a
digital stream of annotation-information directly into a standard television
signal without affecting the picture to be viewed. The encoded data may then be
extracted by video data readers manufactured and sold by the Company. Military
and aerospace customers use the Company's video data instrumentation products to
add non-visual information (including elapsed time or time-of-day) to the video
records of weapons system field tests or military training exercises.
Satellite Products
Cesium Clocks - The Company's cesium clocks are installed aboard the
24 GPS satellites now operating in space, a project that launched the Company's
early exploitation of GPS signals as a method for transferring precise UTC time
from the U.S. Naval Observatory to worldwide users as primary frequency
sources. The Company is now under contract to develop an advanced cesium space
clock based on digital technology.
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Quartz Clocks - The Company produces and markets high-stability quartz
clocks whose characteristics of light weight, high- stability and low phase
noise sources are particularly suited to satellite clock requirements.
Space-qualified versions of these quartz units are aboard the IntelSat VIII and
the Cassini satellites.
Marketing and Distribution and International Sales
The Company markets its products on a direct sales basis through its
employees and through independent sales representatives and distributors.
These representatives and distributors receive support from marketing and sales
personnel in the United States and Germany. Sales cycles for certain of the
Company's products, including its larger telecommunications systems are
lengthy, ranging from 12 to 36 months.
Export sales of the Company's products amounted to approximately 19%,
24% and 20% of net sales for the years ended December 31, 1995, 1994 and 1993.
The Company believes that its gross profit margins with respect to these sales
do not materially differ from gross profit margins with respect to domestic
sales. International sales of some of the Company's products are subject to
national security and export regulations and may require the Company to obtain
a permit or license. In recent years, the Company has not experienced any
material difficulty in obtaining required permits or licenses.
Warranty obligations and other maintenance services for frequency
products and timing instrumentation products are performed by the Company's
service employees located in California, Massachusetts, Texas and Germany.
The table below sets forth for the periods indicated the approximate
percentage of the Company's sales attributed to the described classes of
products:
<TABLE>
<CAPTION>
Distributed Frequency, Test
Telecommunications Data Networks and Measurement
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<S> <C> <C> <C>
1995 55.0% 8.4% 36.6%
1994 32.4% 13.9% 53.7%
1993 20.3% 13.0% 66.7%
</TABLE>
Competition
Competition among manufacturers of telecommunications and timing
instrumentation products is intense. The Company competes principally in
several, specialized market segments against a limited number of companies, some
of which are more established, enjoy higher name recognition and possess far
greater financial, technological and marketing resources than the Company. In
the telecommunications market, domestic competition is primarily from
SymmetriCom, Inc. The Company also anticipates competition in the
telecommunications market from Hewlett-Packard Company. International
competition often includes Oscilloquartz, S.A. In the distributed data network
market, Brandywine System Inc., Cadence Design Systems Inc., and a number of
public domain and shareware products offer competition. The Company's primary
competitors in the frequency products market are Hewlett-Packard Company and
Frequency Electronics, Inc. In the timing instrumentation market, the Company's
principal competitors are Kinemetrics Inc., Odetics, Inc., and Tech-Sym
Corporation. There can be no assurance that the Company will be able to compete
successfully in the future against existing or new competitors, that new
technologies will not reduce the demand for its products or that it will be able
to adapt successfully to changes in the markets served by its products. See
"Introductory Note."
Backlog
The Company's backlog of orders was approximately $33 million on
December 31, 1995, compared to approximately $7 million a year earlier. The
primary source of the increase was due to backlog at Efratom. The Company
considers as backlog all orders expected to be shipped to customers within a 12
month period. In addition to other factors affecting backlog of orders, the
Company's backlog can fluctuate from reductions or rescheduling of orders by the
Company's major customers. As such, the Company may experience variations in the
total amount of its backlog at any given date, and accordingly, the Company's
backlog is not necessarily indicative of trends in its business. See
"Introductory Note."
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Customers
The Company sells its products to a wide variety of customers
worldwide. However, a small number of customers account for a substantial
portion of the Company's net sales. During the year ended December 31, 1995,
sales to AT&T, Motorola and SymmertriCom, Inc. accounted for 41% of total
sales. 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. In this regard, the Company experienced a rescheduling
of orders from a major customer in the second quarter of 1995 which adversely
affected its operating results in that quarter and anticipates that similar
rescheduling may occur in the future. While the Company receives periodic
order forecasts from its major customers, such customers have no obligation to
purchase the forecasted amounts. Nonetheless, the Company maintains, in some
cases resulting from customer requirements, significant work-in-progress and
finished goods inventory to meet such forecasted orders. To the extent its
major customers do not purchase the forecasted amounts, the Company will have
higher levels of inventory than otherwise needed, increasing the risk of
obsolescence. Such higher levels of inventory will reduce the Company's
liquidity and increase its interest expenses, and could have a material adverse
effect on the Company's results of operation. In addition, major customers may
also significantly change the terms upon which the Company and such customers
do business or require the Company to decrease the price of a product, in
either case adversely affecting the Company's results of operations. See
"Introductory Note."
Government Contracts
The Company believes that approximately 22% of its sales in 1995 were
made either directly with United States government agencies or indirectly with
government agencies through subcontracts intended for government end-use
compared to approximately 33% in 1994 for these sales. Because several of the
Company's customers are involved in commercial as well as governmental
activities, it is difficult to accurately determine the percentage of its
business attributable to the 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. A significant
portion of the Company's U.S. government business is also subject to reduction
or termination due to reductions in funds available for the Company's projects,
and government policy changes such as reductions in military defense spending.
Manufacturing and Supplies
The Company manufactures its products at its plants in Anaheim, Irvine
and San Jose, California; Austin, Texas; Beverly, Massachusetts; and Hofolding,
Germany. The Company's Irvine facility has received ISO 9001 certification, a
uniform European quality-control standard, and the Company is in the process of
seeking such certification for its other manufacturing facilities. However,
there can be no assurance the Company's other manufacturing facilities will
become certified on a timely basis, if ever. 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
and glassware 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, 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 continually attempts to reduce manufacturing costs while
retaining product quality. Newer designs of the Company's products utilize
surface mount technology to decrease manufacturing costs. The Company obtains
certain components and raw materials from a single or limited number of
sources. The Company operates without a substantial
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inventory of components or raw materials, but believes that it can obtain most
components and raw materials from existing or alternative suppliers. A
significant interruption in the delivery of certain components or raw materials
could have a material adverse effect on the Company's results of operations.
Patents
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. The markets for the Company's products are characterized
by rapidly changing technology, evolving industry standards and new product
introductions and enhancements. Sales of timing and frequency products such as
those offered by the Company depend in part on the continuing development and
deployment of emerging timing and frequency standards and new services based on
such standards. The Company's success depends to a significant extent upon its
ability to enhance its existing products and to develop and introduce
innovative new products that gain market acceptance. There can be no assurance
that new technologies developed by others and protected by patent or other
intellectual property rights will not require the Company to license such
technologies. Further, if the Company is required to license technology, there
can be no assumption it could do so on commercially acceptable terms, if at all.
Employees
The Company had 537 employees at December 31, 1995.
Product Development
The Company undertakes ongoing research and development programs in an
effort to maintain and enhance its competitive position. Such activities
involve development of new technologies and products as well as enhancements to
existing technologies and products. The Company's development efforts also
seek to reduce the cost or increase the manufacturing efficiency of existing
products. Expenditures for product development amounted to $7,087,000 in 1995,
$2,494,000 in 1994, and $1,877,000 in 1993. While the Company maintains an
active development program to continually improve its product offerings,
including specific goals of improved performance, smaller size and lower cost,
there can be no assurances such efforts will be successful or that other
companies or institutions will not develop and commercialize products based on
new technologies that are superior in performance or cost-effectiveness to the
Company's products. In addition, new developments in telecommunications
technology may reduce the demand for high precision timing products in cellular
and PCS base stations. There also 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.
Moreover, the Company may encounter technical problems in connection with its
product development that could delay introduction of new products or product
enhancements. 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. See
"Introductory Note."
Item 2. Properties
The Company's Irvine, California, manufacturing and executive office
facilities occupy an aggregate of 130,361 square feet in three sites under
leases expiring October 31, 1997 and July 31, 2005. The Company has notified
the landlord that it will be vacating 17,017 square feet of the Irvine facility
in September 1996. The Company's Anaheim, California manufacturing operations
occupy a 40,000 square foot facility under a lease expiring September 30, 1996,
with a two-year renewal option. The Company intends to vacate the Anaheim
facility by the expiration of the lease. 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's facility in Beverly, Massachusetts
comprises a 32,000 square foot building located on approximately four acres of
land owned by the Company. The Company facility Austin, Texas comprises a
50,000 square foot building located on approximately nine acres of land owned
by the Company. The Company also leases a small office facility in Front
Royal, Virginia, which serves as its Washington, D.C. area sales office.
The Company believes that its current facilities are adequate for its
present level of operations.
Item 3. Legal Proceedings
Datum is a party to ordinary disputes arising in the normal course of business.
Management is of the opinion that the outcome of these matters will not have a
material adverse effect on Datum's consolidated financial position.
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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, 1995.
Item 4A. Executive Officers of the Registrant
The following is a list of the executive officers of the Registrant:
<TABLE>
<CAPTION>
Name Age Positions and Offices with the Registrant
- ---- --- -----------------------------------------
<S> <C> <C>
Louis B. Horwitz 68 President and Chairman of the Board of Directors of the Company since
October 1976 and a director of the Company since May 1975. Prior to joining the
Company, Mr. Horwitz was an independent management consultant and an Executive
Vice President of Xerox Data Systems, a manufacturer of computers.
Heinz Badura 58 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 43 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.
Robert F. Ellis 56 Vice President of the Company since November 1988. Led the Company's
Telecommunications Sales Division since May 1995. From November 1988 to May 1995
he served as President of the Company's subsidiary, Austron Inc. From 1975 to
November 1988, Mr. Ellis served as Senior Vice President of Austron Inc.
John (Jack) R. Rice 51 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 also
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 55 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 64 Vice President of the Company since 1989 and Secretary of the Company from
October 1993 to July 1994. 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 52 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.
</TABLE>
9
<PAGE> 10
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 National 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 National Market for each quarter of the two most recent fiscal
years:
Common stock price per share:
<TABLE>
<CAPTION>
Quarter Ended
-------------
1995 March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
High........................ 12 1/8 16 1/4 19 1/8 12 7/8
Low......................... 8 1/2 10 1/4 10 3/8 8 1/4
1994
High........................ 5 5/16 5 5/8 7 3/8 10 5/8
Low......................... 3 13/16 4 1/8 4 5/8 6 1/2
</TABLE>
No dividends have been paid by the Company. The payment of dividends has been
restricted by the Company's line of credit and loan agreements. See Note C of
Notes to Consolidated Financial Statements.
At March 18, 1996, there were 469 stockholders of record.
10
<PAGE> 11
Item 6. Selected Financial Data
Datum Inc. And Subsidiaries Five-Year Consolidated Summary of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net product sales and
contract revenues $67,257,000 $30,897,000 $24,593,000 $27,340,000 $31,566,000
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Cost of products sold
and contract revenues 40,010,000 17,491,000 14,663,000 17,704,000 19,298,000
Selling 9,836,000 5,206,000 4,461,000 4,561,000 4,875,000
Product development 7,087,000 2,494,000 1,877,000 1,819,000 2,096,000
General and administrative 8,460,000 3,934,000 3,294,000 4,218,000 3,979,000
Loss on discontinued operations 1,750,000
Interest expense 1,667,000 241,000 209,000 294,000 372,000
Interest (income) (17,000) (15,000) (7,000) (4,000)
----------- ----------- ----------- ----------- -----------
67,043,000 29,351,000 24,497,000 30,342,000 30,620,000
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
effect of change in accounting $ 214,000 $ 1,546,000 $ 96,000 $(3,002,000) $ 946,000
=========== =========== =========== =========== ===========
Net income (loss) $ 60,000 $ 936,000 $ 72,000 $(2,207,000) $ 697,000
=========== =========== =========== =========== ===========
Earnings (loss) per common and common equivalent share:
Income (loss) before effect of
change in accounting $ .02 $ .34 $ .03 $ (.89) $ .22
Effect of change in accounting .06
----------- ----------- ----------- ----------- -----------
Net income (loss) $ .02 $ .34 $ .03 $ (.89) $ .28
=========== =========== =========== =========== ===========
SELECTED BALANCE SHEET DATA
Current assets $36,525,000 $15,034,000 $13,604,000 $13,785,000 $13,809,000
Current liabilities 24,215,000 12,310,000 6,305,000 7,524,000 7,096,000
Working capital 12,310,000 8,684,000 7,299,000 6,261,000 6,713,000
Long-term debt 7,938,000 50,000 70,000 307,000 789,000
Stockholders' equity 31,313,000 16,883,000 15,639,000 15,325,000 17,335,000
Total assets $66,137,000 $24,578,000 $23,185,000 $23,877,000 $26,109,000
=========== =========== =========== =========== ===========
</TABLE>
11
<PAGE> 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following information includes forward-looking statements, the
realization of which may be impacted by certain important factors discussed in
the "Introductory Note" to this Annual Report on Form 10-k.
OVERVIEW
The Company designs, manufactures and markets a wide variety of
high-quality, high performance time and frequency products used to synchronize
the flow of information in telecommunications and distributed data networks. The
Company also is a leading supplier of high-performance timing products for a
wide variety of scientific and industrial test and measurement applications.
On March 17, 1995, the Company completed its acquisition of Efratom,
the inventor and leading supplier of high-stability, rubidium- based oscillators
widely used in cellular and PCS systems. The purchase price consisted of
$15,000,000 cash and 1,277,778 shares of the Company's common stock. The final
purchase price is subject to a post-closing adjustment. The transaction has been
accounted for as a purchase and, accordingly, the acquired assets and
liabilities have been recorded at their estimated fair market values at the date
of the acquisition. In connection with the acquisition, the Company recorded
$12,117,000 in goodwill, which amount will be amortized (and charged against
earnings) for 15 years from the date of the acquisition. Included in goodwill is
an amount that the Company expects to settle with Ball Corporation upon final
negotiations of the purchase price adjustment.
As a result of the acquisition, the Company has experienced significant
increases (in absolute terms) in revenue, selling expenses, general and
administrative expenses, accounts receivable, inventory and accounts payable, in
the year ended December 31, 1995 from the year ended December 31, 1994. In
addition, the Company has experienced, and expects to continue to experience,
material changes (in percentage terms) in certain areas of its operations as a
result of the acquisition of Efratom. Efratom has historically experienced
substantial fluctuations in quarterly operating results because of its
dependence on the ordering patterns of its customers and other factors. The
future operating results of the Company may exhibit similar fluctuations due to
the combination with Efratom. Due to contractual obligations and the nature of
its manufacturing processes, Efratom maintains higher levels of inventories,
both on absolute and percentage basis, than the Company historically maintained.
As a result, the Company anticipates that inventories, as a percentage of total
assets, will continue above previous levels, which will have the effect of
increasing the Company's working capital requirements. In addition, Efratom
traditionally has had higher research and product development expenses as a
percentage of net sales, and the Company anticipates maintaining such higher
level of expenditures.
The Datum companies traditionally have operated on a relatively
independent basis. Should the Company desire to integrate them to a greater
extent in the future, certain operational changes, cost controls, systems
integration, marketing focus and the coordination of new product development may
be required. There can be no assurance that the Company will be successful in
completing any such efforts or that such efforts will result in increased
revenues or earnings. See "Introductory Note."
The Company's ability to manage its growth effectively will require it
to enhance its operational, financial and management systems; to expand its
facilities and equipment; and to successfully hire, train and motivate
additional employees. The failure of the Company to manage its growth on an
effective basis could have a material adverse effect on the Company's operating
results and financial condition. The Company may be required to increase
staffing and other expenses as well as its expenditures on capital equipment and
leasehold improvements in order to meet the demands of its customers or to enter
new markets. Customers, however, may not commit to firm production schedules for
more than a short time in advance, and new products may have uncertain market
acceptance. The Company's profitability would be adversely affected if the
Company increases its expenditures in anticipation of future sales that do not
materialize. See "Introductory Note."
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated,
certain income and expense items expressed as a percentage of the Company's
total sales:
12
<PAGE> 13
<TABLE>
<CAPTION>
Percentage of Total Sales
--------------------------------------------------------
1995 1994 1993
------------- ------------- -----------
<S> <C> <C> <C>
Net product sales and contract revenue . . . . 100.0% 100.0% 100.0%
Costs and expenses
Cost of products sold and contract
revenue . . . . . . . . . . . . . . . . . 59.5% 56.6% 59.6%
Selling . . . . . . . . . . . . . . . . . . . 14.6% 16.8% 18.1%
Product development . . . . . . . . . . . . . 10.5% 8.1% 7.6%
General and administrative . . . . . . . . . 12.6% 12.7% 13.4%
Interest expense . . . . . . . . . . . . . . 2.5% 0.8% 0.8%
Interest (income) . . . . . . . . . . . . . . 0.0% 0.0% 0.0%
Income before income taxes . . . . . . . . . . 0.3% 5.0% 0.4%
Income tax provision . . . . . . . . . . . . . 0.2% 2.0% 0.1%
Net income . . . . . . . . . . . . . . . . . . 0.1% 3.0% 0.3%
</TABLE>
Years Ended December 31, 1995, December 31, 1994 and December 31, 1993
Consolidated net product sales and contract revenues ("consolidated
sales") increased 117.7% in 1995 to $67,257,000 from $30,897,000 in 1994. The
addition of Efratom accounted for $36.2 million in revenue of the $36.4 million
increase. Consolidated sales increased 25.6% in 1994 to $30,897,000 from
$24,593,000 in 1993. The improved demand for the Company's telecommunication
and LAN synchronization products was the major reason for this increase.
Consolidated sales are subject to a number of risks, including competitive
factors and pricing demands by significant customers. Accordingly,
there can be no assurance that consolidated sales will continue to increase or
remain constant. See "Introductory Note."
Direct and indirect sales to the United States Government for 1995,
1994 and 1993 were $14,812,000, $10,043,000 and $10,812,000, respectively. The
major risk associated with such sales is the ability of the government
unilaterally to reprice or cancel sales contracts. The Company's exposure to
this risk has decreased as a percentage of sales since 1993. In addition, the
Company has reduced this risk by concentrating its selling efforts in other
sectors of the economy, including telecommunications and LAN synchronization.
Cost of products sold and contract revenues as a percentage of sales
was 59.5% for 1995 when compared to 56.6% in 1994 and 59.6% in 1993.
Competitive pricing pressures and increased contractual requirements from some
large customers have resulted in an increase in the cost of sales in 1995 over
1994. The Company also experienced inventory valuation adjustments that
increased cost of sales in 1995. In addition, effective January 1, 1996,
the prices charged to one of the Company's largest customers for certain
products was reduced pursuant to the terms of the supply contract between the
Company and that customer. In 1994 from 1993, increased margins resulted from
the improved level of sales in telecommunications and LAN products, which have
higher gross margins than the Company's other product lines. In addition,
lower costs as a percentage of sales in certain of the Company's product lines
resulted from efficiencies realized in producing larger volumes of products
without special modification to customer specification.
Selling expense as a percentage of sales was 14.6% for 1995, a
decrease from 1994 of 16.8% and a decrease from 1993 of 18.1%. The mix of the
products sold and the varying commission rates within product lines of the
company, account for the percentage variance in 1995 from 1994. The large
dollar increase resulted from the presence of Efratom in 1995. From 1993 to
1994 the increase in dollars of selling expense largely resulted from the
implementation of a centralized national and international sales force.
Product development investment rose in 1995 to $7,087,000 compared to
$2,494,000 in 1994, which was increased from 1993 at $1,877,000. In 1995,
development investment rose as a percentage of sales, to 10.5% in 1995 from
8.1% in 1994. The corresponding investment for 1993 was 7.6%. The Company
continues to concentrate its investment in telecommunications products, GPS
timing receivers, cesium standards and LAN computer synchronization products.
Efratom accounted for $4.0 million of the $4.6 million increase in 1995.
13
<PAGE> 14
General and administrative expenses as a percentage of sales were
12.6%, 12.7%, and 13.4% for the years 1995, 1994 and 1993 respectively. In
1995, the addition of Efratom accounted for $4.2 million of the $4.5 million
increase. A large portion of the remaining 1995 increase in dollars resulted
from the decision to record employee relocation, termination costs and moving
expenses relating to the Company's recent decision to merge its Timing and
Bancomm product lines.
Effective January 1, 1993, the Company adopted Financial Accounting
Standard No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions." The Company has elected to amortize the transition obligation over
20 years and has provided a pretax provision of $166,000 for 1995 and $98,000
for each of the years 1994 and 1993.
Interest expense increased to $1,667,000 in 1995 compared to $241,000
in 1994 and $209,000 in 1993. The increase in 1995 is due to the borrowing of
$15 million for part of the Efratom purchase price and up to an additional $12
million to cover the increased daily capital needs of the combined operations.
The increase in 1994 interest expense was due to a combination of higher
average borrowings and higher average interest rates than in 1993.
During the last three years, inflation has not had any material effect
on the Company's consolidated sales or income from operations.
LIQUIDITY AND CAPITAL RESOURCES
Accounts receivable, including accounts receivable unbilled, increased
to $13,638,000 at December 31, 1995 from $6,304,000 at December 31, 1994. The
major reason for the increase was the presence of Efratom receivables of
$6,758,000 not applicable on December 31, 1994. In addition, increased sales
volume in other operations resulted in increased accounts receivable. Accounts
receivable increased from $5,024,000 at December 31, 1993 to $6,304,000 at
December 31, 1994. This increase was caused by a large portion of the
quarter's sales being shipped in the closing weeks of December, and also due to
the larger quantities of telecommunication products shipped by the company's
Austron Subsidiary.
Inventories increased to $20,161,000 at December 31, 1995 from
$6,992,000 at December 31, 1994, and increased from $6,650,000 at December 31,
1993. The increase resulted primarily from $13,138,000 of Efratom inventories
not present on December 31, 1994. From December 31, 1993 to December 31, 1994,
inventories increased slightly due to higher sales levels, particularly in the
telecommunication and local area network products. The Company anticipates
continuing increased levels of inventories which will result in increased
demand on capital resources.
Accounts payable increased to $5,155,000 at December 31, 1995 from
$1,598,000 at December 31, 1994. Efratom accounts payable accounted for
$3,285,000 of that difference. At December 31, 1994, the accounts payable
decrease to $1,598,000 from $1,647,000 at December 31, 1993.
At December 31, 1995, the Company had working capital of $12,310,000
and a current ratio of 1.5:1. This compares to working capital of $8,684,000
and a current ratio of 2.5:1 at December 31, 1994. This compares to working
capital of $7,299,000 and a current ratio of 2.2:1 at December 31, 1993. The
decline in the current ratio in 1995 resulted primarily from additional
financing associated with the Efratom acquisition.
In connection with the acquisition of Efratom in March 1995, the
Company financed the cash portion of the purchase price and expenses and
provided for an ongoing credit facility under a credit agreement with an
aggregate credit availability of $22,000,000. The credit facility included,
(i) an $11,000,000 Revolving Line of Credit bearing interest at the bank's
prime rate plus 0.5%, (ii) a $2,500,000 Term Loan bearing interest at the
bank's prime rate plus 0.75% with interest and principal payable ratably over
72 months (Term Loan I), (iii) a $2,500,000 Term Loan bearing interest at the
Bank's prime rate plus 0.5% amortized over 25 years, payable in five years
(Term Loan II), and (iv) a $6,000,000 Term Loan bearing interest at the bank's
prime rate plus 0.75% with interest and principal payable ratably over 48
months (Term Loan III). The loans are secured by the accounts receivable,
inventory, real estate and equipment of the Company. Upon repayment of Term
Loan III, the interest rates on each of the Revolving Line of Credit and Term
Loan I will be reduced by 0.25%. On August 31, 1995, the credit facility was
amended to increase the Revolving Line of Credit from $11,000,000 to
$14,000,000 and to provide for an additional Term Commitment of up to
$2,000,000 through January 10, 1996 bearing interest at the bank's prime rate
plus .75%, with interest payable monthly and principal payable in 36 monthly
14
<PAGE> 15
installments commencing February 1996. On December 31, 1995, an aggregate of
approximately $21,430,000 million was outstanding under the Company's bank
credit arrangement. The notes payable to the bank of $10,442,000 at December
31, 1995 reflects the balance outstanding under the $14,000,000 Revolving Line
of Credit. Such balance included $4,000,000 utilized for a portion of the
$15,000,000 cash purchase price of Efratom. The additional usage was to cover
the higher levels of accounts receivable and inventory.
The current portion of long-term debt reflects the portion of the
banking arrangements described above which is due and payable in the current
year.
On March 14, 1996, the credit facility was amended to permit an
overadvance on the borrowing base calculation by up to $2,000,000. As
consideration for this overadvance line, the Company will pay a non-refundable
monthly fee of 0.5% on the revolving line of credit amount.
The expansion of the Company's business and continued implementation
of its acquisition strategy may require the Company to seek additional
financing, which may include bank financing or the issuance of debt or equity
securities. The Company is currently experiencing liquidity constraints, but
expects to manage them through operational results. There can be no assurance
that any additional financing will be available to the Company if and when
required on terms acceptable to the Company or that such additional financing,
if available, would not result in substantial dilution of the equity interest
of existing shareholders. The ability of the Company to obtain bank financing
or to raise additional debt or equity capital will depend upon its financial
condition, results of operations, covenants and limitations of outstanding debt
obligations, and general economic conditions. See "Introductory Note."
The Company sells its products to companies and governmental agencies
throughout the world, other than in countries in the former Eastern Block, and
those countries subject to embargo by the United States Government. As payment
arrangements with respect to such foreign sales are made through Letters of
Credit drawn upon United States banks, the payment risks associated with
international business are considered minimal.
On January 12, 1993, the Company sold certain accounts receivable,
inventory and other assets of its subsidiary, Spectrum Technology, Inc., for
$1,259,000 cash and a promissory note, subsequently paid, in the amount of
$49,000. Net costs incurred in 1993 amounted to $1,744,000, which completed
the discontinuance.
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.
15
<PAGE> 16
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 of June 6, 1996
to be filed with the Commission on or before April 29, 1996. 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 6, 1996 to be
filed with the Commission on or before April 29, 1996.
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 on June 6, 1996 to be filed with the
Commission on or before April 29, 1996.
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 on June 6, 1996 to
be filed with the Commission on or before April 29, 1996.
16
<PAGE> 17
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.
17
<PAGE> 18
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 26 day of March, 1996.
DATUM INC.
By /s/ 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.
<TABLE>
<S> <C> <C>
/s/ LOUIS B. HORWITZ
- ------------------------------------ President and Director March 26, 1996
Louis B. Horwitz (Principal Executive Officer)
/s/ DAVID A. YOUNG
- ------------------------------------ Chief Financial Officer March 26, 1996
David A. Young (Principal Financial and Accounting Officer)
/s/ G. TILTON GARDNER
- ------------------------------------ Director March 26, 1996
G. Tilton Gardner
/s/ DAN L. MCGURK
- ------------------------------------ Director March 26, 1996
Dan L. McGurk
/s/ EDWARD A. MONEY
- ------------------------------------ Director March 26, 1996
Edward A. Money
/s/ THOMAS J. O'ROURKE
- ------------------------------------ Director March 26, 1996
Thomas J. O'Rourke
/s/ MICHAEL M. MANN
- ------------------------------------ Director March 26, 1996
Michael M. Mann
/s/ R. DAVID HOOVER
- ------------------------------------ Director March 26, 1996
R. David Hoover
/s/ DONOVAN B. HICKS
- ------------------------------------ Director March 26, 1996
Donovan B. Hicks
</TABLE>
18
<PAGE> 19
DATUM INC.
Index To Consolidated Financial Statements Covered
By Report of Independent Accountants
Item 14(a)(1) and (2)
<TABLE>
<CAPTION>
Page references
--------------
Form
10-K
----
<S> <C>
The information under the following captions, is included herein:
Financial Statements
Report of independent accountants . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated balance sheet at December 31,
1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated statement of operations for each
of the three years in the period ended
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated statement of stockholders' equity
for each of the three years in the period
ended December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated statement of cash flows for each
of the three years in the period ended
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . F-6
Financial Statement Schedules
VIII - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . S-1
</TABLE>
19
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Datum Inc.
In our opinion, the consolidated financial statements listed in the
index appearing under item 14(a)(1) and (2) on page 19 present fairly, in all
material respects, the financial position of Datum Inc. and its subsidiaries at
December 31, 1995, 1994 and 1993, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995,
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.
/s/ PRICE WATERHOUSE LLP
- ------------------------
PRICE WATERHOUSE LLP
Costa Mesa, California
March 11, 1996, except Note B,
which is as of March 26, 1996
F-1
<PAGE> 21
DATUM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
December 31,
----------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current assets
Cash and short-term investments ...................................... $ 587,000 $ 221,000 $ 651,000
Accounts receivable, less allowance for doubtful accounts
of $68,000, $93,000 and $131,000 .................................. 13,572,000 5,978,000 4,443,000
Accounts receivable, unbilled ........................................ 66,000 326,000 581,000
Inventories .......................................................... 20,161,000 6,992,000 6,650,000
Prepaid expenses ..................................................... 200,000 432,000 127,000
Deferred income taxes ................................................ 1,830,000 869,000 880,000
Income tax refund receivable ......................................... 109,000 216,000 272,000
----------- ----------- -----------
Total current assets ............................................. 36,525,000 15,034,000 13,604,000
Land, buildings and equipment, net ..................................... 15,654,000 7,075,000 7,017,000
Excess of purchase price over net assets acquired,
net of accumulated amortization of $1,162,000
$546,000 and $467,000 ............................................... 13,914,000 2,413,000 2,493,000
Other assets ........................................................... 44,000 56,000 71,000
----------- ----------- -----------
$66,137,000 $24,578,000 $23,185,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ..................................................... $ 5,155,000 $ 1,598,000 $ 1,647,000
Accrued salaries and wages ........................................... 2,102,000 1,256,000 1,004,000
Accrued warranty ..................................................... 1,337,000 126,000 125,000
Other accrued expenses ............................................... 1,822,000 350,000 340,000
Customer deposits .................................................... 74,000
Income taxes payable ................................................. 105,000
Notes payable to bank ................................................ 10,442,000 3,000,000 2,925,000
Current portion of long-term debt .................................... 3,178,000 20,000 264,000
----------- ----------- -----------
Total current liabilities ........................................ 24,215,000 6,350,000 6,305,000
Long-term debt ......................................................... 7,938,000 50,000 70,000
----------- ----------- -----------
Postretirement benefits ................................................ 290,000 152,000 76,000
----------- ----------- -----------
Other long-term liabilities ............................................ 1,388,000
----------- ----------- -----------
Deferred income taxes .................................................. 993,000 1,143,000 1,095,000
----------- ----------- -----------
Stockholders' equity --
Common stock, par value $.25 per share
Authorized--8,000,000 shares, 5,000,000 shares
and 5,000,000 shares
Issued--4,018,968 shares, 2,668,224 shares
and 2,596,659 shares ....................................... 1,005,000 667,000 649,000
Additional paid-in capital ......................................... 24,418,000 10,294,000 10,004,000
Retained earnings .................................................. 5,982,000 5,922,000 4,986,000
Cumulative translation adjustment .................................. (92,000)
----------- ----------- -----------
Total stockholders' equity ....................................... 31,313,000 16,883,000 15,639,000
Commitments (Notes C and I) ............................................
----------- ----------- -----------
$66,137,000 $24,578,000 $23,185,000
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE> 22
DATUM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net product sales and contract revenues ............................... $67,257,000 $30,897,000 $24,593,000
----------- ----------- -----------
Costs and expenses
Cost of products sold and contract revenues ......................... 40,010,000 17,491,000 14,663,000
Selling ............................................................. 9,836,000 5,206,000 4,461,000
Product development ................................................. 7,087,000 2,494,000 1,877,000
General and administrative .......................................... 8,460,000 3,934,000 3,294,000
Interest expense .................................................... 1,667,000 241,000 209,000
Interest (income).................................................... (17,000) (15,000) (7,000)
----------- ----------- -----------
67,043,000 29,351,000 24,497,000
----------- ----------- -----------
Income before income taxes ............................................ 214,000 1,546,000 96,000
Income tax provision .................................................. 154,000 610,000 24,000
----------- ----------- -----------
Net income ............................................................ $ 60,000 $ 936,000 $ 72,000
=========== =========== ===========
Earnings per common and common
equivalent share .................................................... $ .02 $ .34 $ .03
=========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding ................................ 3,954,307 2,732,812 2,558,356
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 23
DATUM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Cumulative
------------------------- Paid-in Retained Translation
Shares Amount Capital Earnings Adjustment
----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1992 ....... 2,524,635 $ 631,000 $ 9,780,000 $4,914,000 - - -
Issuance of common stock under
401(k) plan ..................... 57,024 14,000 166,000
Exercise of stock options ......... 15,000 4,000 58,000
Net income ........................ 72,000
----------- ---------- ----------- ---------- ----------
Balances at December 31, 1993 ....... 2,596,659 649,000 10,004,000 4,986,000 - - -
Issuance of common stock under
401(k) plan ..................... 32,740 8,000 165,000
Exercise of stock options ......... 38,825 10,000 125,000
Net income ........................ 936,000
----------- ---------- ----------- ---------- ----------
Balances at December 31, 1994 ....... 2,668,224 667,000 10,294,000 5,922,000 - - -
Issuance of common stock under
401(k) plan ..................... 30,328 8,000 347,000
Exercise of stock options ......... 42,638 11,000 360,000
Acquisition of Efratom ............ 1,277,778 319,000 13,417,000
Cumulative translation adjustment.. $ (92,000)
Net income ........................ 60,000
----------- ---------- ----------- ---------- ----------
Balances at December 31, 1995 ....... 4,018,968 $1,005,000 $24,418,000 $5,982,000 $ (92,000)
=========== ========== =========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 24
DATUM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 60,000 $ 936,000 $ 72,000
------------ ----------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ........................ 3,009,000 770,000 821,000
Contribution of shares of common stock
to the Company's 401(k) plan ....................... 355,000 173,000 180,000
Changes in assets and liabilities:
Increase in accounts receivable ......................... (1,486,000) (1,280,000) (83,000)
Increase in inventories ................................. (5,678,000) (342,000) (792,000)
(Increase) decrease in prepaid expenses ................. (422,000) (305,000) 9,000
Decrease in income tax refund receivable ................ 107,000 56,000 334,000
(Increase) decrease in deferred income taxes ............ (1,111,000) 59,000 204,000
Decrease in other assets ................................ 12,000 15,000 71,000
Increase (decrease) in accounts payable ................. 2,361,000 (49,000) 270,000
Increase in accrued expenses ............................ 2,148,000 263,000 52,000
Increase in income taxes payable ........................ 105,000
Decrease in reserve for net assets held for
disposition, net of cash ............................. (374,000)
Increase in customer deposits ........................... 74,000
Increase in other long-term liabilities ................. 188,000
Increase in postretirement benefits ..................... 138,000 76,000 76,000
------------ ----------- ---------
Total reconciling items .................................... (200,000) (564,000) 768,000
------------ ----------- ---------
Net cash provided by (used for) operating activities ....... (140,000) 372,000 840,000
------------ ----------- ---------
Cash flows from investing activities:
Book value of equipment disposals .......................... 20,000 18,000 73,000
Capital expenditures ....................................... (2,937,000) (766,000) (427,000)
Payment for acquisition, net of cash acquired .............. (15,246,000)
Other ...................................................... (190,000)
------------ ----------- ---------
Net cash used in investing activities ...................... (18,353,000) (748,000) (354,000)
------------ ----------- ---------
Cash flows from financing activities:
Proceeds from line of credit ............................... 7,442,000 75,000 200,000
Proceeds from (reductions of) long-term debt
and notes payable ....................................... 11,046,000 (264,000) (523,000)
Exercise of stock options .................................. 371,000 135,000 62,000
------------ ----------- ---------
Net cash provided by (used for) financing activities ....... 18,859,000 (54,000) (261,000)
------------ ----------- ---------
Net increase (decrease) in cash and cash equivalents .......... 366,000 (430,000) 225,000
Cash and cash equivalents at beginning of year ................ 221,000 651,000 426,000
------------ ----------- ---------
Cash and cash equivalents at end of year ...................... $ 587,000 $ 221,000 $ 651,000
============ =========== =========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 25
DATUM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE A - DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF THE COMPANY: The Company is engaged in the design, development
and manufacture of precision frequency and timing instrumentation products.
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.
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 reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION: A portion of the Company's revenues results from
contracts performed for the United States Government, some of which provide for
reimbursement of cost plus fees and others which are fixed price. Generally,
revenues and fees on contracts are recognized as services are performed using
the percentage-of-completion method of accounting, primarily based on contract
costs incurred to date compared with total estimated costs at completion.
Revenues from the sale of other manufactured products are recorded when the
products are shipped.
The Company provides for anticipated losses on contracts by a charge to income
during the period in which the losses are first identified.
Unbilled accounts receivable are stated at estimated realizable value.
Revenues become billable to customers on the basis of contract terms and
delivery schedules.
Contract costs, including indirect costs under government contracts, are
subject to audit and adjustment by negotiations between the Company and
government representatives. Contract revenues have been recorded in amounts
which are expected to be realized upon final settlement.
SHORT-TERM INVESTMENTS: Short-term investments are stated at the lower of
aggregate cost or market at the balance sheet date and consist of money market
funds. Dividend and interest income are accrued as earned.
INVENTORY VALUATION: Inventories are stated at the lower of cost or market;
cost is generally determined on a first-in, first-out basis.
Inventories comprise the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Purchased parts . . . . . . . . . $ 7,801,000 $2,081,000 $1,832,000
Work-in-process . . . . . . . . . 9,002,000 4,465,000 4,443,000
Finished products . . . . . . . . 3,358,000 446,000 375,000
----------- ---------- ----------
$20,161,000 $6,992,000 $6,650,000
=========== ========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
----------------------------------------- Depreciable
1995 1994 1993 Life
---- ---- ---- ----------------
<S> <C> <C> <C> <C>
Land . . . . . . . . . . . . . $ 2,040,000 $ 2,040,000 $ 2,040,000
Buildings . . . . . . . . . . . 4,474,000 4,450,000 4,446,000 20 to 40 years
Equipment . . . . . . . . . . . 15,145,000 6,017,000 5,487,000 3 to 10 years
Leasehold improvements . . . . 1,150,000 878,000 831,000 5 to 20 years
----------- ----------- -----------
22,809,000 13,385,000 12,804,000
Less accumulated depreciation and
amortization . . . . . . . . 7,155,000 6,310,000 5,787,000
----------- ----------- -----------
$15,654,000 $ 7,075,000 $ 7,017,000
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE A (Continued)
Expenditures for maintenance and repairs are charged directly to income, and
betterments and major renewals are capitalized. When the assets are retired or
otherwise disposed of, the cost of assets and the related accumulated
depreciation are removed from the respective accounting records and the
resulting gain or loss is credited or charged to income.
EXCESS OF ACQUISITION COSTS OVER FAIR VALUE OF NET ASSETS OF BUSINESSES
ACQUIRED: The excess of the purchase price of businesses or assets acquired
over the fair value of the net assets is amortized over varying periods ranging
from 15 to 40 years. At each balance sheet date, the Company reviews the
recoverability of long-lived assets and certain intangible assets, including
goodwill. In the event the sum of expected undiscounted future cash flows
resulting from the use of the asset is less than the carrying amount of the
asset, an impairment loss equal to the excess of the asset's carrying value
over its fair value is recorded.
INCOME TAXES: Effective January 1, 1993, the Company adopted statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS
109). Under the liability method specified under FAS 109, the deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by
the enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is calculated as the change in net deferred liabilities
or assets.
CONSOLIDATED STATEMENT OF CASH FLOWS: For purposes of the consolidated
statement of cash flows, cash equivalents include short-term investments, such
as money market funds, with an original maturity of less than three months.
Cash paid for interest totaled $1,508,000, $232,000, and $208,000 in 1995, 1994
and 1993, respectively. Cash paid for income taxes totalled $909,000,
$730,000, and $28,000 in 1995, 1994 and 1993, respectively. In connection with
the acquisition of Efratom, the Company issued 1,277,778 shares of common stock
valued at $13,736,000.
STOCK OPTIONS AND AWARDS: Proceeds from the sale of common stock issued under
options are credited to common stock at par value and the excess of the option
price over the par value is credited to additional paid-in capital. The
Company makes no charges or credits to income in connection with the options.
Under the Company's Restricted Stock Award Plan, the fair market value of
shares awarded is charged to income over the period of time during which the
restrictions lapse, with a corresponding credit to common stock (at par value)
and additional paid-in capital.
NET INCOME PER SHARE: Net income per share is based upon the weighted average
number of common and common equivalent shares outstanding during the year.
Common equivalent shares include those issuable on the exercise of dilutive
stock options (after reduction for common shares assumed to have been purchased
with the proceeds). Net income per share is the same on a fully diluted basis
for all years presented.
FOREIGN CURRENCY TRANSLATION: The Company follows principles ofo Statement of
Financial Accounting Standards No. 52 "Foreign Currency Translation", (FAS 52)
in accounting for foreign operations. The financial statements of the
Company's German subsidiary, whose functional currency is the German Mark, have
been translated into U.S. dollars.
RECLASSIFICATIONS: Certain reclassifications have been made to the
consolidated financial statements for prior years to conform to the 1995
presentation.
F-7
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE B -- ACQUISITION
On March 16, 1995 the stockholders of the Company approved the purchase of all
the outstanding capital stock of Efratom Time and Frequency Products, Inc., a
Colorado corporation, and Ball Efratom Elektronik GmbH, a corporation organized
under the laws of the Republic of Germany (collectively, Efratom). The purchase
price consisted of $15,000,000 cash and 1,277,778 shares of Datum common stock.
The final purchase price is subject to a post-closing adjustment based on a
comparison of the working capital and fixed assets of Efratom as of August 7,
1994 and as of March 17, 1995. Included in goodwill and other long-term
liabilities is an amount the Company expects to settle with Ball Corporation
upon final negotiations. The acquisition closed March 17, 1995.
The Company financed the cash portion of the purchase price and expenses under
a credit agreement providing for an aggregate credit availability of
$22,000,000. The new credit facility includes; (i) an $11,000,000 Revolving
Line of Credit bearing interest at the Bank's prime rate plus 0.5%, (ii) a
$2,500,000 term loan bearing interest at the Bank's prime rate plus 0.75% with
interest and principal payable ratably over 72 months (Term Loan I), (iii) a
$2,500,000 Term Loan bearing interest at the Bank's prime rate plus 0.5%
amortized over 25 years, payable in five years (Term Loan II), and (iv) a
$6,000,000 Term Loan bearing interest at the Bank's prime rate plus 0.75% with
interest and principal payable ratably over 48 months (Term Loan III). In
addition to the required repayments under the term loans, the Company will pay
to the Bank, within 120 days after the end of each fiscal year, an amount equal
to 75% of the difference between the Company's earnings before interest, taxes,
depreciation and amortization and $5,800,000, which shall reduce the
outstanding balance of Term Loan I, Term Loan II or Term Loan III. The loans
will be secured by the accounts receivable, inventory, real estate and
equipment of the Company. Upon repayment of Term Loan III, the interest rates
on each of the Revolving Line of Credit and Term Loan I will be reduced by
0.25%. Under the credit agreement, the Company is required to maintain certain
financial ratios and attain a certain profitability level, and may not pay
dividends. Other restrictions include limitations on the amounts of leases and
capital expenditures that may be incurred.
The unaudited pro forma combined condensed balance sheet of the Company and
Efratom as of December 31, 1994, presuming the acquisition had taken place on
that date, after giving effect to certain pro forma adjustments is as follows:
<TABLE>
<S> <C>
ASSETS
Current assets $28,545,000
Land, buildings and equipment, net 15,446,000
Goodwill 12,090,000
-----------
$56,081,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $13,587,000
Long-term debt and other liabilities 14,328,000
Stockholders' equity 28,166,000
-----------
$56,081,000
===========
</TABLE>
The unaudited pro forma combined results of operations of the Company and
Efratom for the years ended December 31, 1995, 1994 and 1993, presuming the
acquisition had taken place on January 1, 1993, after giving effect to certain
pro forma adjustments are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues $76,552,000 $66,139,000 $56,730,000
=========== =========== ===========
Net income $ 442,000 $ 2,141,000 $ 637,000
=========== =========== ===========
Net income per common share $ 0.11 $ 0.53 $ 0.17
=========== =========== ===========
</TABLE>
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
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE C -- LONG-TERM DEBT
Long-term obligations outstanding as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
$14,000,000 Revolving Line of Credit, expires June 6, 1996, with interest payable at
prime plus .5%, secured by accounts receivable and inventory. . . . . . . . . . . . . . . . . . . . . . . $ 10,442,000
Term Loan I, principal due in monthly installments of $34,722 beginning April 17, 1995 to
March 17, 2001, with interest payable at prime plus .75%, secured by equipment . . . . . . . . . . . . . 2,187,000
Term Loan II, principal due in monthly installments of $8,333 beginning April 17, 1995 to
March 17, 2000, with interest payable in monthy installments at prime plus .5%, secured by real estate. . 2,425,000
Term Loan III, principal due in monthly installments of $125,000 beginning April 17, 1995 to
March 17, 1999, with interest payable at prime plus .75%, unsecured . . . . . . . . . . . . . . . . . . . 4,875,000
Term Commitment up to $2,000,000, principal due in monthly installments of $41,667
beginning February 10, 1996 to January 10, 1999, with interest payable monthly commencing
September 10, 1995 at a rate of prime plus .75%, secured by equipment . . . . . . . . . . . . . . . . . 1,500,000
Capital equipment lease for various machinery and equipment, with interest at 6.25% to 14.26%
maturing at various dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,000
------------
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,558,000
Less line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,442,000)
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,178,000)
------------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,938,000
============
</TABLE>
Aggregate maturities of long-term debt at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996 $13,620,000
1997 2,550,000
1998 2,234,000
1999 608,000
2000 2,442,000
Thereafter 104,000
-----------
Total $21,558,000
===========
</TABLE>
Under the current credit agreement, the Company is required to maintain certain
financial ratios and attain a certain profitability level, and may not pay
dividends. Other restrictions include limitations on the amount of additional
debt, leases, and capital expenditures that may be incurred. At December 31,
1995, the Company was not in compliance with certain covenants of the credit
agreement. The Company has received waivers for the non-compliance.
F-9
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE D -- INCOME TAXES
The income tax provision comprises the following:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
Provision for income taxes: ....... 1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal ...................... $ 702,000 $474,000 $(190,000)
State ........................ 168,000 77,000 10,000
Foreign ...................... 105,000 - - - - - -
--------- -------- ---------
975,000 551,000 (180,000)
--------- -------- ---------
Deferred:
Federal ...................... (683,000) 32,000 361,000
State ........................ (138,000) 27,000 (157,000)
--------- -------- ---------
(821,000) 59,000 204,000
--------- -------- ---------
$ 154,000 $610,000 $ 24,000
========= ======== =========
</TABLE>
The income tax provision differs from the amount computed by applying the
statutory federal income tax rate to income before taxes as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------ ------------------ ------------------
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax
expense ............................ $ 73,000 34.1% $541,000 35.0% $ 33,000 35.0%
State income tax, net of
federal income tax effect .......... 11,000 5.1% 87,000 5.6% (19,000) (19.8%)
Amortization of excess of purchase
price over net assets acquired ..... 31,000 14.5% 31,000 2.0% 31,000 32.4%
Foreign earnings taxed at
different rates ..................... 26,000 12.2% - - - - - - - - - - - -
Other ................................ 13,000 6.1% (49,000) (3.1%) (21,000) (22.0%)
-------- ---- -------- ----- -------- -----
$154,000 72.0% $610,000 39.5% $ 24,000 25.6%
======== ==== ======== ===== ======== =====
</TABLE>
The primary components of temporary differences which give rise to the Company's
net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Inventory ............................ $ 522,000 $ 238,000 $ 228,000
Accruals and reserves ................ 1,308,000 631,000 683,000
Net operating loss carryforwards/
franchise tax ..................... - - - - - - 137,000
---------- ---------- ----------
1,830,000 869,000 1,048,000
---------- ---------- ----------
Deferred tax liabilities:
Property, plant and equipment ........ 975,000 1,143,000 1,145,000
Other ................................ 18,000 - - - 118,000
---------- ---------- ----------
993,000 1,143,000 1,263,000
---------- ---------- ----------
$ 837,000 $ (274,000) $ (215,000)
========== ========== ==========
</TABLE>
F-10
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE E -- POSTRETIREMENT BENEFITS
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (FAS 106). Under FAS 106, postretirement 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 postretirement 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 postretirement program's status
reconciled with amounts reported in the consolidated balance sheet:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees .................................... $ 316,000 $ 314,000 $ 303,000
Fully eligible active plan participants ..... 132,000 113,000 102,000
Other active plan participants .............. 586,000 269,000 245,000
---------- --------- ---------
Total accumulated postretirement benefit
obligations .............................. 1,034,000 696,000 650,000
Plan assets at fair value ................... -- -- --
---------- --------- ---------
Accumulated postretirement benefit obligation
in excess of plan assets ................. 1,034,000 696,000 650,000
Unrecognized transition obligation .......... (744,000) (544,000) (574,000)
---------- --------- ---------
Accrued postretirement benefit obligation ... $ 290,000 $ 152,000 $ 76,000
========== ========= =========
</TABLE>
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost ........................... $ 68,000 $22,000 $22,000
Interest cost .......................... 68,000 46,000 46,000
Amortization of transition obligation .. 30,000 30,000 30,000
-------- ------- -------
Net periodic postretirement
expense .............................. $166,000 $98,000 $98,000
======== ======= =======
Discount rate .......................... 7.0% 7.75% 7.75%
</TABLE>
F-11
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
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 on the date of the grant. Options granted
are exercisable in such amounts and at such intervals as the Board of Directors
determined in granting the options. This plan replaces the prior stock option
plan and Restricted Stock Award Plan that expired in 1994. In March 1995, the
stockholders of the Company approved an amendment of the 1994 Stock Incentive
Plan providing for 200,000 additional option shares to be reserved for issuance
thereunder. The following table summarizes activity under the 1994 Incentive
Stock Plan during the years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Number Per Share
of Shares Option Price
--------- ---------------
<S> <C> <C>
Issued during 1994 86,800 $4.25 - $ 5.00
-------
Outstanding, December 31, 1994 86,800 $4.25 - $ 5.00
Issued during 1995 219,250 $5.13 - $16.38
Exercised during 1995 (6,313) $4.38
Cancelled during 1995 (30,500) $4.38 - $10.75
-------
Outstanding, December 31, 1995 269,237
=======
Exercisable at end of year 19,075
=======
</TABLE>
As of December 31, 1995 and 1994, 274,450 and 213,200 option shares were
available for grant under the 1994 plan.
The following table summarizes activity under the prior stock option plan for
the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Number Per Share
of Shares Option Price
--------- ---------------
<S> <C> <C>
Outstanding, December 31, 1992 290,825 $3.00 - $ 6.50
Exercised during 1993 (15,000) $4.13
Cancelled during 1993 (25,750) $3.50 - $ 4.13
-------
Outstanding, December 31, 1993 250,075 $3.00 - $ 6.50
Issued during 1994 121,525 $4.88
Exercised during 1994 (38,825) $3.00 - $ 5.25
Cancelled during 1994 (49,500) $3.00 - $ 6.50
-------
Outstanding, December 31, 1994 283,275 $3.00 - $ 5.00
Exercised during 1995 (36,325) $3.00 - $4.875
Cancelled during 1995 (4,875) $4.88
-------
Outstanding, December 31, 1995 242,075
=======
Exercisable, December 31, 1995 155,807
=======
</TABLE>
No further option shares will be granted under the prior plan.
F-12
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE G -- SAVINGS AND RETIREMENT PLAN
Effective July 1, 1984, the Company adopted a savings and retirement plan which
covers all eligible employees. The plan provides for matching by the Company
of 100% of the first 2% of employee deferral and 50% of the next 1% of employee
deferral. Employer matching contributions are made in the form of shares of the
Company's common stock. Total retirement expense under the Plan amounted to
$408,000, $190,000 and $173,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
NOTE H -- U.S. GOVERNMENT AND FOREIGN SALES AND SIGNIFICANT CUSTOMERS
Direct and indirect sales to the United States Government aggregated
approximately $14,812,000, $10,043,000, and $10,812,000 in 1995, 1994 and 1993,
respectively. Direct sales to the United States Government aggregated
approximately $5,167,000, $5,265,000 and $5,861,000 in 1995, 1994 and 1993,
respectively. Foreign sales in 1995, 1994 and 1993 amounted to $13,033,000,
$7,340,000 and $4,830,000. Three customers accounted for 41% of total sales
for the year ended December 31, 1995.
NOTE I -- COMMITMENTS
Total rental expense for operating leases amounted to $1,031,000, $380,000 and
$286,000 in 1995, 1994 and 1993, respectively. The future minimum rental
commitments under all noncancelable operating leases, exclusive of property
taxes and certain occupancy costs, are as follows:
<TABLE>
<S> <C>
1996 $1,657,000
1997 1,262,000
1998 1,151,000
1999 1,150,000
2000 1,260,000
Thereafter 5,348,000
-----------
Total minimum
lease payments $11,828,000
===========
</TABLE>
NOTE J -- ACCOUNTING POLICY CHANGES
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123 "Accounting for Stock-based Compensation
(SFAS 123) which establishes financial accounting and reporting standards for
stock-based employee compensation. Under SFAS 123, companies are encouraged,
but not required, to adopt a method of accounting for stock compensation awards
based upon the estimated fair value at the date the options/awards are granted
as determined through the use of a pricing model ("Fair Value Method").
Companies continuing to account for such awards in accordance with the existing
guidance of Accounting Principles Board Opinion 25 "Accounting for Stock Issued
to Employees" (APB 25) will have to disclose, in Notes to Financial
Statements, the pro forma impact on net income and net income per share had the
Company utilized the Fair Value Method. The Company anticipates accounting for
future stock compensation awards in accordance with APB 25 with the appropriate
footnote disclosure required under SFAS 123.
F-13
<PAGE> 33
DATUM INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Balance at
Beginning *Other End of
Description of Period Additions Deductions Acquisitions Deductions Period
----------- ---------- --------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1995
Allowance for doubtful accounts $ 93,000 $ 53,000 $ 86,000 $ 49,000 $41,000 $ 68,000
Reserve for inventories 854,000 1,124,000 1,024,000 998,000 1,952,000
Accumulated amortization of
acquired intangible assets 546,000 616,000 1,162,000
Year Ended December 31, 1994
Allowance for doubtful accounts $131,000 $ 31,000 $ 31,000 $38,000 $ 93,000
Reserve for inventories 872,000 332,000 350,000 854,000
Accumulated amortization of
acquired intangible assets 467,000 79,000 546,000
Year Ended December 31, 1993
Allowance for doubtful accounts $131,000 $ 131,000
Reserve for inventories 919,000 438,000 485,000 872,000
Accumulated amortization of
acquired intangible assets 387,000 80,000 467,000
</TABLE>
*Aacom note payments received.
S-1
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
<S> <C> <C>
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-K for the year ended
December 31, 1994). --
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). --
4.1 Stockholders' Agreement dated as of March 17, 1995 by and between the Registrant and Efratom
Holding, Inc. (incorporated by reference to the same numbered exhibit on Form 10-K for the year
ended December 31, 1994). --
10.1 Lease commencing July 31, 1973 relating to Registrant's facility at 1363 South State College
Boulevard, Anaheim, California (incorporated by reference to the same numbered exhibit on Form
10-K for the year ended December 31, 1991). --
10.2 First Amendment to Lease dated December 28, 1973 relating to Registrant's facility at 1363 South
State College Boulevard, Anaheim, California (incorporated by reference to the same numbered
exhibit on Form 10-K for the year ended December 31, 1991). --
10.3 1981 Restricted Stock Award Plan, as amended to date (incorporated by reference to the same
numbered exhibit on Form 10-K for the year ended December 31, 1991). --
10.4 1984 Stock Option Plan, as amended to date (incorporated by reference to Registrant's
Registration Statements on Form S-8 Registration numbers 2-96564, 33-10335 and 33-41709). --
10.6 Executive Agreement dated March 7, 1986 with Louis B. Horwitz, (incorporated by reference to
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). --
10.18 Lease commencing January 1, 1992 relating to Registrant's facility at 749 Ward Drive, Goleta,
California (incorporated by reference to same numbered exhibit to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1991). --
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
<S> <C> <C>
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). --
10.23 Purchase and Sale Agreement dated January 12, 1993, by and among Spectrum Technology, Inc., the
Company and Oak Crystal, Inc. (incorporated by reference to Exhibit 2.2 of Registrant's Current
Report on Form 8-K filed January 27, 1993). --
10.26 Amendment to Lease for premises located at 1363 South State College Boulevard, Anaheim,
California, dated July 22, 1993 (incorporated by reference to the same numbered exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). --
10.27 Consulting Agreement with William E. Baldwin dated September 29, 1993 (incorporated by reference
to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993). --
10.28 Sublease commencing November 1, 1993, relating to the Registrant's facility at 749 Ward Drive,
Goleta, California (incorporated by reference to the same numbered exhibit to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993). --
10.29 1994 Stock Incentive Plan (incorporated by reference to Registrant's registration statement on
Form S-8 Registration #33-79772). --
10.29.1 Amendment to 1994 Stock Incentive Plan, effective March 17, 1995. (incorporated by reference to
the same numbered exhibit on Form 10-K for the year ended December 31, 1994). --
10.30 Credit Agreement dated as of December 16, 1994, by and between the Registrant and Wells Fargo,
National Association. (incorporated by reference to the same numbered exhibit on Form 10-K for
the year ended December 31, 1994). --
10.30.1 First Amendment to Credit Agreement dates as of August 31, 1995 by and between Datum and Wells
Fargo, National Association (incorporated by reference to the same numbered exhibit on Form
10-Q for the quarter ended September 30, 1995). --
10.31 Lease Agreement dated February 3, 1992 by and between The Irvine Company and Ball Efratom for
Efratom Time and Frequency Products, Inc.'s facility at 4 Cromwell, Suite 201, Irvine,
California. (incorporated by reference to the same numbered exhibit on Form 10-K for the year
ended December 31, 1994). --
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
<S> <C> <C>
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 between the Irvine Company and the Company (incorporated by reference to the
same numbered exhibit on Form 10-Q for the quarter ended June 30, 1995). --
10.32.3 Second Amendment to Lease for 4 Cromwell (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 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 between the Irvine Company and the Company (incorporated by reference to the
same numbered exhibit on 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 Datum, Inc.
relating to Registrant's facility at 6781 Via Del Oro, San Jose, California. --
11 Computation of Earning Per Common Share --
21 List of Subsidiaries --
23 Consent of Independent Accountants --
27.4 Financial Data Schedule --
</TABLE>
<PAGE> 37
DATUM INC.
FORM 10-K - ITEM 14(A)(3)
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
<TABLE>
<S> <C>
10.3 1981 Restricted Stock Award Plan, as amended to date (incorporated by reference to the
same numbered exhibit on Form 10-K for the year ended December 31, 1992).
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, 1992).
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, 1992).
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).
10.27 Consulting Agreement with William E. Baldwin, dated September 29, 1993 (incorporated by
reference to the same numbered exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993).
10.29 1994 Stock Incentive Plan (incorporated by reference to registrant's registration
statement on Form S-8 Registration #33-79772).
10.29.1 Amendment to 1994 Stock Incentive Plan, effective March 17, 1995 (incorporated by
reference to the same numbered exhibit on Form 10-K for the year ended December 31, 1994).
</TABLE>
<PAGE> 1
Exhibit 10.35
================================================================================
STANDARD FORM LEASE
================================================================================
PARTIES: This Lease, executed in duplicate at Cupertino, California, on
January 4, 1996, by and between Berg & Berg Developers, a California General
Partnership, and Datum, Inc., a California Corporation, hereinafter called
respectively Lessor and Lessee, without regard to number or gender.
USE: Witnesseth: That Lessor hereby leases to Lessee, and Lessee hires from
Lessor, for the purpose of conducting therein office, research and development,
light manufacturing, and warehouse activities, and any other legal activity;
and for no other purpose without obtaining the prior written consent of Lessor.
PREMISES: The real property with appurtenances as shown on Exhibit A (the
"Premises") situated in the City of San Jose, County of Santa Clara, State of
California, and more particularly described as follows:
Lessee's portion of the Premises is 21,800 square feet of building,
including all improvements thereto, as shown on Exhibit B.1 including
the right to use up to 76 unreserved parking spaces. The address for
the leased portion of the Premises is 6781 Via Del Oro, San Jose,
California. The pro-rata share of the building is 42%.
TERM: The term shall be for sixty (60) months unless extended pursuant to
Section 35 of this Lease (the "Lease Term"), commencing on the 1st day of
March, 1996 (the "Commencement Date"), and ending on the 28th day of February,
2001.
RENT: Base rent shall be payable in monthly installments as follows:
<TABLE>
<S> <C>
Months 1 through 12 $15,721
Months 13 through 24 $16,375
Months 25 through 36 $17,029
Months 37 through 48 $17,683
Months 49 through 60 $18,119
</TABLE>
Base rent as scheduled above shall be payable in advance on or before the first
day of each calendar month during the Lease Term. The term "Rent," as used
herein, shall be deemed to be and to mean the base monthly rent and all other
sums required to be paid by Lessee pursuant to the terms of this Lease. Rent
shall be paid in lawful money of the United States of America, without offset
or deduction, and shall be paid to Lessor at such place or places as may be
designated from time to time by Lessor. Rent for any period less than a
calendar month shall be a pro rata portion of the monthly installment. Upon
execution of this Lease, Lessee shall deposit with Lessor the first month's
rent.
SECURITY DEPOSIT: Lessee shall deposit with Lessor the sum of Fifteen Thousand
Seven Hundred Twenty-One Dollars ($15,721) (the "Security Deposit"). The
Security Deposit shall be held by Lessor as security for the faithful
performance by Lessee of all of the terms, covenants, and conditions of this
Lease applicable to Lessee. If Lessee commits a default as provided for
herein, including but not limited to a default with respect to the provisions
contained herein relating to the
<PAGE> 2
condition of the Premises, Lessor may (but shall not be required to) use,
apply or retain all or any part of the Security Deposit for the payment of any
amount which Lessor may spend by reason of default by Lessee. If any portion
of the Security Deposit is so used or applied, Lessee shall, within ten days
after written demand therefor, deposit cash with Lessor in an amount sufficient
to restore the Security Deposit to its original amount. Lessee's failure to
do so shall be a default by Lessee. Any attempt by Lessee to transfer or
encumber its interest in the Security Deposit shall be null and void. Upon
execution of this Lease, Lessee shall deposit with Lessor the Security Deposit.
LATE CHARGES: Lessee hereby acknowledges that a late payment made by Lessee to
Lessor of Rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges, which may be imposed on Lessor
according to the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of Rent or any other sum due from Lessee is not
received by Lessor or Lessor's designee within ten (10) days after such amount
is due, Lessee shall pay to Lessor a late charge equal to five (5%) percent of
such overdue amount. The parties hereby agree that such late charge represents
a fair and reasonable estimate of the costs Lessor will incur by reason of late
payments made by Lessee. Acceptance of such late charges by Lessor shall in no
event constitute a waiver of Lessee's default with respect to such overdue
amount, nor shall it prevent Lessor from exercising any of the other rights and
remedies granted hereunder.
QUIET ENJOYMENT: Lessor covenants and agrees with Lessee that upon Lessee
paying Rent and performing its covenants and conditions under this Lease,
Lessee shall and may peaceably and quietly have, hold and enjoy the Premises
for the Lease Term, subject, however, to the rights reserved by Lessor
hereunder.
IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS:
1. POSSESSION: Possession shall be deemed tendered upon substantial completion
of Lessee's improvements. Rent shall commence on the later of the Commencement
Date or the date Lessee's improvements are substantially completed.
2. LESSEE'S IMPROVEMENTS: Lessor and Lessee hereby agree that Lessor shall
cause the improvements specified on Exhibit B attached hereto to be made to the
Premises at the sole cost and expense of Lessor. Notwithstanding the
foregoing, Lessor's obligation to cause the improvements to be made shall be
limited to those specified on Exhibit B. Additional Improvements (those
improvements not specified on Exhibit B), if any, may be made by Lessor, upon
written request by Lessee, provided Lessee pays for any such improvements. See
Exhibit B.1 - Floor Plan.
2.1 ACCEPTANCE OF PREMISES AND COVENANTS TO SURRENDER: Lessor represents that
the Premises are in good order and repair, and complies with all requirements
for occupancy as of the Commencement Date. Lessee agrees on the last day of
the Lease Term, or on the sooner termination of this Lease, to surrender the
Premises to Lessor in Good Condition and Repair. Good Condition and Repair
("Good Condition and Repair") shall not mean original condition, but shall mean
that the Premises
PAGE 2
<PAGE> 3
are in a commercially acceptable condition suitable for occupancy by a
reasonable lessee. The interior walls of all office and warehouse areas, the
floors of all office and warehouse areas, all suspended ceilings and any
carpeting are to be cleaned and in Good Condition and Repair. Lessee also
agrees to surrender unto Lessor all alterations, additions, and improvements
which may have been made in, to, or on the Premises by Lessee, except that
Lessee shall ascertain from Lessor, within (30) days before the end of the
Lease Term or earlier termination of this Lease, whether Lessor desires to have
the Premises or any part or parts thereof restored to their condition as of the
Commencement Date of this Lease; if Lessor shall so desire, then Lessee shall
restore any Lessee installed improvements to said Premises or such part or
parts thereof before the end of the Lease Term or earlier termination of this
Lease at Lessee's sole cost and expense. Lessee, on or before the end of the
Lease Term or sooner termination of this Lease, shall remove all its personal
property and trade fixtures from the Premises, and all such property not so
removed shall be deemed to be abandoned by Lessee. Lessee shall reimburse
Lessor for all disposition costs incurred by Lessor relative to Lessee's
abandoned property. If the Premises are not surrendered at the end of the
Lease Term or earlier termination of this Lease, Lessee shall indemnify Lessor
against loss or liability resulting from any delay caused by Lessee in
surrendering the Premises including, without limitation, any claims made by any
succeeding Lessee founded on such delay.
3. USES PROHIBITED: Lessee shall not commit, or suffer to be committed, any
waste upon the Premises, or any nuisance, or other act or thing which may
disturb the quiet enjoyment of any other tenant in or around the buildings in
which the subject Premises are located or allow any sale by auction upon the
Premises, or allow the Premises to be used for any improper, immoral, unlawful
or objectionable purpose, or place any loads upon the floor, walls, or ceiling
which may endanger the structure, or use any machinery or apparatus which will
in any manner vibrate or shake the Premises or the building of which it is a
part, or place any harmful liquids in the drainage system of the building. No
waste materials or refuse shall be dumped upon or permitted to remain upon any
part of the Premises outside of the building proper. No materials, supplies,
equipment, finished products or semi-finished products, raw materials or
articles of any nature shall be stored upon or permitted to remain on any
portion of the Premises outside of the building structure, unless approved by
the local, state federal or other applicable governing authority. Lessor
consents to Lessee's use of materials which are incidental to the normal,
day-to-day operations of any office user, such as copier fluids, cleaning
materials, etc., but this does not relieve Lessee of any of its obligations not
to contaminate the Premises or related real property or violated any Hazardous
Materials Laws.
4. ALTERATIONS AND ADDITIONS: Lessee shall not make, or suffer to be made, any
alteration or addition to said Premises, or any part thereof, without the
express, advance written consent of Lessor; any addition or alteration to said
Premises, except movable furniture, Lessee movable partitions, and trade
fixtures, shall become at once a part of the realty and belong to Lessor at the
end of the Lease Term or earlier termination of this Lease. Alterations and
additions which are not deemed as trade fixtures shall include HVAC systems,
lighting systems, electrical systems, fixed partitioning, carpeting, or any
other installation which has become an integral part of the Premises. Lessee
agrees that it will not proceed to make such alterations or additions until all
required government permits have been obtained and after having obtained
consent from Lessor to do so, until five (5) days from the receipt of such
consent, so that Lessor may post appropriate notices to avoid any liability to
PAGE 3
<PAGE> 4
contractors or material suppliers for payment for Lessee's improvements.
Lessee shall at all times permit such notices to be posted and to remain posted
until the completion of work. At the end of the Lease Term or earlier
termination of this Lease, Lessee shall remove and shall be required to remove
its special tenant improvements and all related equipment installed by Lessee
at or during the Lease Term. Notwithstanding the above, Lessor agrees to allow
any reasonable alterations and improvements and will use its best efforts to
notify Lessee at the time of approval if such improvements or alterations are
to be removed at Lease Expiration or earlier termination of this Lease.
5. MAINTENANCE OF PREMISES: Lessee shall at its sole cost and expense keep and
maintain the interior of the Premises, including, but not limited to, all
lighting systems, temperature control systems and plumbing systems, in Good
Condition and Repair, including any required replacements. Lessee shall
maintain all wall surfaces and floor coverings in Good Condition and Repair,
free of holes larger than 1/16 inch, gouges, or defacements.
Lessor shall keep and maintain in Good Condition and Repair including
replacements, at Lessee's expense including an accounting fee equal to five
percent of all such costs, based on a pro-rata share of cost based on square
footage or costs directly related to Lessee's use of the Premises the
following:
1. The exterior of the building, any appurtenances and every part
thereof, including but not limited to, glazing, sidewalks, parking
areas, electrical systems, HVAC systems, elevator systems, roof, and
painting of exterior walls.
2. The HVAC by a service contract with a licensed air conditioning
and heating contractor which contract shall provide for a minimum
of bi-monthly maintenance of all air conditioning and heating
equipment at the Premises including HVAC repairs or replacements
which are either excluded from such service contract or any
existing equipment warranties.
3. The landscaping by a landscape contract to water, maintain, trim
and replace, when necessary, any shrubbery and landscaping on the
Premises.
4. The roof membrane by a service contract with a licensed reputable
roofing contractor which contract shall provide for a minimum of
semi-annual maintenance, cleaning storm gutters, drains and
removing debris and trimming overhanging trees, repair of the
roof, and application of a finish coat every five years at the
Premises.
5.1 LESSOR'S REPAIRS: Notwithstanding the provisions of Section 5 above, Lessor
shall maintain the following: (a) Lessor shall pay the maintenance and repair
costs for the roof, provided that the failure or repair is not caused by the
negligence or misconduct of Lessee or Lessee's Agents; (b) Lessor shall pay the
repair costs for the HVAC systems, provided that the failure or repair is not
caused by the negligence or misconduct of Lessee or Lessee's Agents. The
repair responsibilities of Lessor for the HVAC systems shall not include
temperature-related service calls not due to equipment failure, and shall not
include the cost of the HVAC preventative-maintenance service contract; and (c)
Lessor shall maintain the parking area, provided however, that the
responsibilities of Lessor for the parking area shall not include cleaning,
sweeping, or restriping.
PAGE 4
<PAGE> 5
Lessee hereby waives any and all rights to make repairs at the expense of
Lessor as provided in Section 1942 of the Civil Code of the State of
California, and all rights provided for by Section 1941 of said Civil Code.
Lessor shall be responsible for any structural defects in the Premises
including the roof structure (not membrane), exterior walls and foundation
during the Lease Term.
6. HAZARD INSURANCE: Lessee shall not use, or permit said Premises, or any part
thereof, to be used, for any purpose other than that for which said Premises
are hereby leased; and no use shall be made or permitted to be made of the
Premises, nor acts done, which may cause a cancellation of any insurance policy
covering said building, or any part thereof, nor shall Lessee sell or permit to
be kept, used or sold, in or about said Premises, any article which may be
prohibited by a standard form fire insurance policy. Lessee shall, at its sole
cost and expense, comply with any and all requirements, pertaining to said
Premises, of any insurance organization or company, necessary for the
maintenance of reasonable fire and general liability insurance, covering said
building and appurtenances. Lessor agrees to purchase and keep in force fire
and extended coverage insurance covering loss or damage to the Premises in
amounts not to exceed the full replacement cost of said Premises as determined
by Lessor, with proceeds payable to Lessor. Lessee acknowledges that the
insurance referenced above does not include coverage for Lessee's personal
property. In the event of a loss per the insurance provisions of this
paragraph, Lessee shall be responsible for deductibles up to a maximum of
$5,000 per occurrence. Lessee agrees to pay to the Lessor as additional Rent,
on demand, the full cost of said insurance as evidenced by insurance billings
to Lessor. If said insurance billings cover the Premises, and Lessee does not
occupy the entire Premises, the insurance premiums and deductibles shall be
allocated to the portion of the Premises occupied by Lessee on a pro-rata
square footage or other equitable basis, as determined by Lessor. It is
understood and agreed that Lessee's obligation under this paragraph will be
prorated to reflect the Commencement Date and the end of the Lease Term.
Lessor and Lessee hereby waive any rights each may have against the other
related to any loss or damage caused to Lessor or Lessee as the case may be, or
to the Premises or its contents, and which may arise from any risk generally
covered by fire and extended coverage insurance. The parties shall provide
that their respective insurance policies insuring the property or the personal
property include a waiver of any right of subrogation which said insurance
company may have against Lessor or Lessee, as the case may be. Lessor shall
maintain in full force and effect, a policy of rental loss insurance, in an
amount equal to the amount of Rent payable by Lessee commencing on the date of
loss during the next ensuing one (1) year, as reasonably determined by Lessor
with proceeds payable to Lessor ("Loss of Rents Insurance"). Lessee shall
reimburse Lessor for the full cost of said rental loss insurance coverage.
7. ABANDONMENT: Lessee shall not vacate or abandon the Premises at any time
during the Lease Term; and if Lessee shall abandon, vacate or surrender said
Premises, or be dispossessed by process of law, or otherwise, any personal
property
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belonging to Lessee and left on the Premises shall be deemed to be abandoned,
at the option of Lessor. Notwithstanding the above, the Premises shall not be
considered vacated or abandoned if Lessee maintains the Premises in Good
Condition and Repair, provides security and is not in default.
8. FREE FROM LIENS: Lessee shall keep the subject Premises and the property in
which the subject Premises are situated, free from any and all liens including
but not limited to liens arising out of any work performed, materials
furnished, or obligations incurred by Lessee. However, the Lessor shall allow
Lessee to contest a lien claim, so long as the claim is discharged prior to any
foreclosure proceeding being initiated against the property and provided Lessee
provides Lessor a bond if the lien exceeds $5,000.
9. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Lessee shall, at its sole cost and
expense, comply with all of the requirements of all local, municipal, state and
federal authorities now in force, or which may hereafter be in force,
pertaining to Lessee's use and occupancy of the said Premises, and shall
faithfully observe in the use of the Premises all local and municipal
ordinances and state and federal statutes now in force or which may hereafter
be in force.
10. LESSEE'S INSURANCE: Lessee, as a material part of the consideration to be
rendered to Lessor, hereby waives all claims against Lessor and Lessor's Agents
for damages to goods, wares and merchandise, and all other personal property
in, upon or about said Premises, and for injuries to persons in, upon or about
said Premises, from any cause arising at any time, and Lessee will hold Lessor
and Lessor's Agents exempt and harmless from any damage or injury to any
person, or to the goods, wares and merchandise and all other personal property
of any person, arising from the use or occupancy of the Premises by Lessee, or
from the failure of Lessee to keep the Premises in good condition and repair,
as herein provided. Lessee shall secure and keep in force a standard policy of
commercial general liability insurance and property damage policy covering the
Premises, including parking areas, insuring the Lessee. A certificate of said
policy naming Lessor as an additional insured shall be delivered to Lessor and
will have a combined single limit for both bodily injury, death and property
damage in an amount not less than five million dollars ($5,000,000.00). The
limits of said insurance shall not, however, limit the liability of Lessee
hereunder. Lessee shall obtain a written obligation on the part of the insurer
to notify Lessor 30 days in advance in writing before any cancellation thereof.
Lessee shall obtain, at Lessee's sole cost and expense, a policy of fire and
extended coverage insurance including coverage for direct physical loss special
form, and a sprinkler leakage endorsement, if applicable, insuring the personal
property of Lessee. The proceeds from any property damage policy shall be
payable to Lessee. Lessee shall, at its sole cost and expense, comply with all
of the insurance requirements of all local, municipal, state and federal
authorities now in force, or which may hereafter be in force, pertaining to
Lessee's use and occupancy of the said Premises.
11. ADVERTISEMENTS AND SIGNS: Lessee shall not place or permit to be placed,
in, upon or about the Premises any unusual or extraordinary signs, or any signs
not approved by the city, local, state, federal or other applicable governing
authority. Lessee shall not place, or permit to be placed upon the Premises,
any signs, advertisements or notices without the written consent of
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the Lessor, and such consent shall not be unreasonably withheld. A sign so
placed on the Premises shall be so placed upon the understanding and agreement
that Lessee will remove same at the end of the Lease Term or earlier
termination of this Lease and repair any damage or injury to the Premises
caused thereby, and if not so removed by Lessee, then Lessor may have the same
removed at Lessee's expense.
12. UTILITIES: Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities supplied to the Premises. Any charges for sewer
usage or related fees shall be the obligation of Lessee and paid for by Lessee.
If any such services are not separately metered to Lessee, Lessee shall pay a
reasonable proportion of all charges which are jointly metered, the
determination to be made by Lessor acting reasonably and on any equitable
basis.
13. ATTORNEY'S FEES: In case suit should be brought for the possession of the
Premises, for the recovery of any sum due hereunder, or because of the breach
of any other covenant herein, the losing party shall pay to the prevailing
party reasonable attorney's fee which shall be deemed to have accrued on the
commencement of such action and shall be enforceable whether or not such action
is prosecuted to judgment.
14.1 DEFAULT: The occurrence of any of the following shall constitute a default
and breach of this Lease by Lessee: a) Any failure by Lessee to pay Rent or to
make any other payment required to be made by Lessee hereunder when due if not
cured within ten (10) days after written notice thereof by Lessor to Lessee; b)
The abandonment or vacation of the Premises by Lessee except as provided in
Section 7; c) A failure by Lessee to observe and perform any other provision of
this Lease to be observed or performed by Lessee, where such failure continues
for thirty days after written notice thereof by Lessor to Lessee; provided,
however, that if the nature of such default is such that the same cannot be
reasonably cured within such thirty (30) day period, Lessee shall not be deemed
to be in default if Lessee shall, within such period, commence such cure and
thereafter diligently prosecute the same to completion; d) The making by Lessee
of any general assignment for the benefit of creditors; the filing by or
against Lessee of a petition to have Lessee adjudged a bankrupt or of a
petition for reorganization or arrangement under any law relating to
bankruptcy; e) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets or Lessee's interest in this Lease, or the
attachment, execution or other judicial seizure of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease.
14.2 SURRENDER OF LEASE: In the event of any such default by Lessee, then in
addition to any other remedies available to Lessor at law or in equity, Lessor
shall have the immediate option to terminate this Lease before the end of the
Lease Term and all rights of Lessee hereunder, by giving written notice of such
intention to terminate. In the event that Lessor terminates this Lease due to
a default of Lessee, then Lessor may recover from Lessee: a) the worth at the
time of award of any unpaid Rent which had been earned at the time of such
termination; plus b) the worth at the time of award of unpaid Rent which would
have been earned after termination until the time of award exceeding the amount
of such rental loss that the Lessee proves could have been reasonably avoided;
plus c) the worth at the time of award of the amount by which the unpaid Rent
for the balance of
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the Lease Term after the time of award exceeds the amount of such rental loss
that the Lessee proves could have been reasonably avoided; plus d) any other
amount necessary to compensate Lessor for all the detriment proximately caused
by Lessee's failure to perform his obligations under this Lease or which in the
ordinary course of things would be likely to result therefrom; and e) at
Lessor's election, such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable California law.
As used in (a) and (b) above, the "worth at the time of award" is computed by
allowing interest at the rate of Wells Fargo's prime rate plus two percent (2%)
per annum. As used in (c) above, the "worth at the time of award" is computed
by discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco at the time of award plus one percent (1%).
14.3 RIGHT OF ENTRY AND REMOVAL: In the event of any such default by Lessee,
Lessor shall also have the right, with or without terminating this Lease, to
re-enter the Premises and remove all persons and property from the Premises;
such property may be removed and stored in a public warehouse or elsewhere at
the cost of and for the account of Lessee.
14.4 ABANDONMENT: In the event of the vacation or abandonment, except as
provided in Section 7, of the Premises by Lessee or in the event that Lessor
shall elect to re-enter as provided in paragraph 14.3 above or shall take
possession of the Premises pursuant to legal proceeding or pursuant to any
notice provided by law, and Lessor does not elect to terminate this Lease as
provided in paragraph 14.2 above, then Lessor may from time to time, without
terminating this Lease, either recover all Rent as it becomes due or relet the
Premises or any part thereof for such term or terms and at such rental rates
and upon such other terms and conditions as Lessor, in its sole reasonable
discretion, may deem advisable with the right to make alterations and repairs
to the Premises. In the event that Lessor elects to relet the Premises, then
Rent received by Lessor from such reletting shall be applied; first, to the
payment of any indebtedness other than Rent due hereunder from Lessee to
Lessor; second, to the payment of any cost of such reletting; third, to the
payment of the cost of any alterations and repairs to the Premises; fourth, to
the payment of Rent due and unpaid hereunder; and the residue, if any, shall be
held by Lessor and applied to the payment of future Rent as the same may become
due and payable hereunder. Should that portion of such Rent received from such
reletting during any month, which is applied by the payment of Rent hereunder
according to the application procedure outlined above, be less than the Rent
payable during that month by Lessee hereunder, then Lessee shall pay such
deficiency to Lessor immediately upon demand therefor by Lessor. Such
deficiency shall be calculated and paid monthly. Lessee shall also pay to
Lessor, as soon as ascertained, any costs and expenses incurred by Lessor in
such reletting or in making such alterations and repairs not covered by the
rentals received from such reletting.
14.5 NO IMPLIED TERMINATION: No re-entry or taking possession of the Premises
by Lessor pursuant to 14.3 or 14.4 of this Article 14 shall be construed as an
election to terminate this Lease unless a written notice of such intention is
given to Lessee or unless the termination thereof is decreed by a court of
competent jurisdiction. Notwithstanding any reletting without termination by
Lessor because of any default by Lessee, Lessor may at any time after such
reletting elect to terminate this Lease for any such default.
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15. SURRENDER OF LEASE: The voluntary or other surrender of this Lease by
Lessee, or a mutual cancellation thereof, shall not work a merger, and shall,
at the option of Lessor, terminate all or any existing subleases or sub
tenancies, or may, at the option of Lessor, operate as an assignment to him of
any or all such subleases or sub tenancies.
16. TAXES: Lessee shall pay and discharge punctually and when the same shall
become due and payable without penalty, all real estate taxes, personal
property taxes, taxes based on vehicles utilizing parking areas in the
Premises, taxes computed or based on rental income (other than federal, state
and municipal net income taxes), environmental surcharges, privilege taxes,
excise taxes, business and occupation taxes, school fees or surcharges, gross
receipts taxes, sales and/or use taxes, employee taxes, occupational license
taxes, water and sewer taxes, assessments (including, but not limited to,
assessments for public improvements or benefit), assessments for local
improvement and maintenance districts, and all other governmental impositions
and charges of every kind and nature whatsoever, regardless of whether now
customary or within the contemplation of the parties hereto and regardless of
whether resulting from increased rate and/or valuation, or whether
extraordinary or ordinary, general or special, unforeseen or foreseen, or
similar or dissimilar to any of the foregoing (all of the foregoing being
hereinafter collectively called "Tax" or "Taxes") which, at any time during the
Lease Term, shall be applicable or against the Premises, or shall become due
and payable and a lien or charge upon the Premises under or by virtue of any
present or future laws, statutes, ordinances, regulations, or other
requirements of any governmental authority whatsoever. The term "Environmental
Surcharge" shall include any and all expenses, taxes, charges or penalties
imposed by the Federal Department of Energy, Federal Environmental Protection
Agency, the Federal Clean Air Act, or any regulations promulgated thereunder,
or any other local, state or federal governmental agency or entity now or
hereafter vested with the power to impose taxes, assessments or other types of
surcharges as a means of controlling or abating environmental pollution or the
use of energy in regard to the use, operation or occupancy of the Premises that
is assessed on an area wide basis or as a result of Lessee or Lessee's Agents
actions or omissions. The term "Tax" shall include, without limitation, all
taxes, assessments, levies, fees, impositions or charges levied, imposed,
assessed, measured, or based in any manner whatsoever (i) in whole or in part
on the Rent payable by Lessee under this Lease, (ii) upon or with respect to
the use, possession, occupancy, leasing, operation or management of the
Premises, (iii) upon this transaction or any document to which Lessee is a
party creating or transferring an interest or an estate in the Premises, (iv)
upon Lessee's business operations conducted at the Premises, (v) upon, measured
by or reasonably attributable to the cost or value of Lessee's equipment,
furniture, fixtures and other personal property located on the Premises or the
cost or value of any leasehold improvements made in or to the Premises by or
for Lessee, regardless of whether title to such improvements shall be in Lessor
or Lessee, or (vi) in lieu of or equivalent to any Tax set forth in this
Section 16. In the event any such Taxes are payable by Lessor and it shall not
be lawful for Lessee to reimburse Lessor for such Taxes, then the Rent payable
thereunder shall be increased to net Lessor the same net rent after imposition
of any such Tax upon Lessor as would have been payable to Lessor prior to the
imposition of any such Tax. It is the intention of the parties that Lessor
shall be free from all such Taxes and all other governmental impositions and
charges of every kind and nature whatsoever. However, nothing contained in
this Section 16 shall require Lessee to pay any Federal or State income,
franchise,
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estate, inheritance, succession, transfer or excess profits tax imposed upon
Lessor. If any general or special assessment is levied and assessed against
the Premises, Lessor agrees to use its best reasonable efforts to cause the
assessment to become a lien on the Premises securing repayment of a bond sold
to finance the improvements to which the assessment relates which is payable in
installments of principal and interest over the maximum term allowed by law.
It is understood and agreed that Lessee's obligation under this paragraph will
be prorated to reflect the Commencement Date and the end of the Lease Term. It
is further understood that if Taxes cover the Premises and Lessee does not
occupy the entire Premises, the Taxes will be allocated to the portion of the
Premises occupied by Lessee based on a pro-rata square footage or other
equitable basis.
Subject to any limitations or restrictions imposed by any deeds of trust or
mortgages now or hereafter covering or affecting the Premises, Lessee shall
have the right to contest or review the amount or validity of any Tax by
appropriate legal proceedings but which is not to be deemed or construed in any
way as relieving, modifying or extending Lessee's covenant to pay such Tax at
the time and in the manner as provided in this Section 16. However, as a
condition of Lessee's right to contest, if such contested Tax is not paid
before such contest and if the legal proceedings shall not operate to prevent
or stay the collection of the Tax so contested, Lessee shall, before
instituting any such proceeding, protect the Premises and the interest of
Lessor and of the beneficiary of a deed of trust or the mortgagee of a mortgage
affecting the Premises against any lien upon the Premises by a surety bond,
issued by an insurance company acceptable to Lessor and in an amount equal to
one and one-half (1 1/2) times the amount contested or, at Lessor's option, the
amount of the contested Tax and the interest and penalties in connection
therewith. Any contest as to the validity or amount of any Tax, whether before
or after payment, shall be made by Lessee in Lessee's own name, or if required
by law, in the name of Lessor or both Lessor and Lessee. Lessee shall defend,
indemnify and hold harmless Lessor from and against any and all costs or
expenses, including attorneys' fees, in connection with any such proceedings
brought by Lessee, whether in its own name or not. Lessee shall be entitled to
retain any refund of any such contested Tax and penalties or interest thereon
which have been paid by Lessee. Nothing contained herein shall be construed as
affecting or limiting Lessor's right to contest any Tax at Lessor's expense.
17. NOTICES: Unless otherwise provided for in this Lease, any and all written
notices or other communication (the "Communication") to be given in connection
with this Lease shall be given in writing and shall be given by personal
delivery, facsimile transmission or by mailing by registered or certified mail
with postage thereon or recognized overnight courier, fully prepaid, in a
sealed envelope addressed to the intended recipient as follows:
(a) to the Lessor at: 10050 Bandley Drive
Cupertino, California 95014
Attention: Carl E. Berg
Fax No: (408) 725-1626
(b) to the Lessee at: 6781 Via Del Oro
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San Jose, California
Attention: President, Bancomm
Fax No: (408) 578-4161
1363 S. State College Boulevard
Anaheim, California 92806
Attention: Corporate Secretary (D. Young)
Fax No: (714) 533-8772
or such other addresses, facsimile number or individual as may be designated by
a Communication given by a party to the other parties as aforesaid. Any
Communication given by personal delivery shall be conclusively deemed to have
been given and received on a date it is so delivered at such address provided
that such date is a business day, otherwise on the first business day following
its receipt, and if given by registered or certified mail, on the day on which
delivery is made or refused or if given by recognized overnight courier, on the
first business day following deposit with such overnight courier and if given
by facsimile transmission, on the day on which it was transmitted provided such
day is a business day, failing which, on the next business day thereafter.
18. ENTRY BY LESSOR: Lessee shall permit Lessor and its agents to enter into
and upon said Premises at all reasonable times using the minimum amount of
interference and inconvenience to Lessee and Lessee's business, subject to any
security regulations of Lessee, for the purpose of inspecting the same or for
the purpose of maintaining the building in which said Premises are situated, or
for the purpose of making repairs, alterations or additions to any other
portion of said building, including the erection and maintenance of such
scaffolding, canopies, fences and props as may be required, without any rebate
of Rent and without any liability to Lessee for any loss of occupation or quiet
enjoyment of the Premises; and shall permit Lessor and his agents, at any time
within ninety (90) days prior to the end of the Lease Term, to place upon said
Premises any usual or ordinary "For Sale" or "For Lease" signs and exhibit the
Premises to prospective tenants at reasonable hours.
19. DESTRUCTION OF PREMISES: In the event of a partial destruction of the said
Premises during the Lease Term from any cause which is covered by Lessor's
property insurance, Lessor shall forthwith repair the same, provided such
repairs can be made within ninety (90) days under the laws and regulations of
State, Federal, County, or Municipal authorities, but such partial destruction
shall in no way annul or void this Lease, except that Lessee shall be entitled
to a proportionate reduction of Rent while such repairs are being made to the
extent of payments received by Lessor under its Loss of Rents Insurance
coverage. With respect to any partial destruction which Lessor is obligated to
repair or may elect to repair under the terms of this paragraph, the provision
of Section 1932, Subdivision 2, and of Section 1933, Subdivision 4, of the
Civil Code of the State of California are waived by Lessee. In the event that
the building in which the subject Premises may be situated is destroyed to an
extent greater than thirty-three and one-third (33 1/3%) of the replacement
cost thereof, Lessor or Lessee may elect to
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terminate this Lease, whether the subject Premises is insured or not. A total
destruction of the building in which the subject Premises are situated shall
terminate this Lease. Notwithstanding the above, Lessor is only obligated to
repair or rebuild to the extent of available insurance proceeds including any
deductible amount. Should Lessor determine that insufficient or no insurance
proceeds are available for repair or reconstruction of Premises, Lessor, at its
sole option, may terminate the Lease. Lessee shall have the option of
continuing this Lease by agreeing to pay all repair costs to the subject
Premises.
20. ASSIGNMENT AND SUBLETTING: Lessee shall not assign this Lease, or any
interest therein, and shall not sublet the said Premises or any part thereof,
or any right or privilege appurtenant thereto, or cause any other person or
entity (a bona fide subsidiary or affiliate of Lessee excepted) to occupy or
use the Premises, or any portion thereof, without the advance written consent
of Lessor, which consent shall not be unreasonably withheld or delayed. Any
such assignment or subletting without such consent shall be void, and shall, at
the option of the Lessor, terminate this Lease. This Lease shall not, or shall
any interest therein, be assignable, as to the interest of Lessee, by operation
of law, without the written consent of Lessor. If Lessee desires to assign its
rights under this Lease or to sublet, all or a portion of the subject Premises
to a party other than a bona fide subsidiary or affiliate of Lessee, Lessee
shall first notify Lessor of the proposed terms and conditions of such
assignment or subletting. Lessor shall have the right of first refusal to
enter into a direct Lessor-lessee relationship with such party under such
proposed terms and conditions, in which event Lessee shall be relieved of its
obligations hereunder to the extent of the Lessor-lessee relationship entered
into between Lessor and such third party. Notwithstanding the foregoing,
Lessee may assign this Lease to a successor in interest, whether by merger or
acquisition, provided there is no substantial reduction in the net worth of the
resulting entity.
21. CONDEMNATION: If any part of the Premises shall be taken for any public or
quasi-public use, under any statute or by right of eminent domain or private
purchase in lieu thereof, and a part thereof remains which is susceptible of
occupation hereunder, this Lease shall as to the part so taken, terminate as of
the date title vests in the condemnor or purchaser, and the Rent payable
hereunder shall be adjusted so that the Lessee shall be required to pay for the
remainder of the Lease Term only that portion of Rent as the value of the part
remaining. The rental adjustment resulting will be computed at the same Rental
rate for the remaining part not taken; however, Lessor shall have the option to
terminate this Lease as of the date when title to the part so taken vests in
the condemnor or purchaser. If all of the Premises, or such part thereof be
taken so that there does not remain a portion susceptible for occupation
hereunder, this Lease shall thereupon terminate. If a part or all of the
Premises be taken, all compensation awarded upon such taking shall be payable
to the Lessor.
22. EFFECTS OF CONVEYANCE: The term "Lessor" as used in this Lease, means only
the owner for the time being of the land and building constituting the
Premises, so that, in the event of any sale of said land or building, or in the
event of a Lease of said building, Lessor shall be and hereby is entirely freed
and relieved of all covenants and obligations of Lessor hereunder, and it shall
be deemed and construed, without further agreement between the parties and
the purchaser of any such sale, or the Lessor of the building, that the
purchaser or lessor of the building has assumed and agreed to carry out any
and all covenants and
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obligations of the Lessor hereunder. If any security is given by Lessee to
secure the faithful performance of all or any of the covenants of this Lease
on the part of Lessee, Lessor may transfer and deliver the security, as such,
to the purchaser at any such sale of the building, and thereupon the Lessor
shall be discharged from any further liability.
23. SUBORDINATION: This Lease, in the event Lessor notifies Lessee in writing,
shall be subordinate to any ground lease, deed of trust, or other hypothecation
for security now or hereafter placed upon the real property at which the
Premises are a part and to any and all advances made on the security thereof
and to renewals, modifications, replacements and extensions thereof. Lessee
agrees to promptly execute any documents which may be required to effectuate
such subordination. Notwithstanding such subordination, if Lessee is not in
default and so long as Lessee shall pay the Rent and observe and perform all of
the provisions and covenants required under this Lease, Lessee's right to quiet
possession of the Premises shall not be disturbed or effected by any
subordination.
24. WAIVER: The waiver by Lessor of any breach of any term, covenant or
condition, herein contained shall not be construed to be a waiver of such term,
covenant or condition or any subsequent breach of the same or any other term,
covenant or condition therein contained. The subsequent acceptance of Rent
hereunder by Lessor shall not be deemed to be a waiver of Lessee's breach of
any term, covenant, or condition of the Lease.
25. HOLDING OVER: Any holding over after the end of the Lease Term shall be
construed to be a hold over tenancy from month to month. In addition to the
liabilities and obligations provided for herein, including but not limited to
in Section 2.1, Lessee shall pay to Lessor monthly base rent equal to one and
one-half (1.5) times the monthly base rent installment due in the last month of
the Lease Term and all other additional rent and all other terms and conditions
of the Lease shall apply, so far as applicable. No holding over shall be
deemed or construed to exercise any option to extend or renew this Lease in
lieu of full and timely exercise of any such option as required hereunder.
26. SUCCESSORS AND ASSIGNS: The covenants and conditions herein contained
shall, subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of all of the parties hereto;
and all of the parties hereto shall be jointly and severally liable hereunder.
27. ESTOPPEL CERTIFICATES: Lessee shall at any time during the Lease Term, upon
not less than ten (10) days prior written notice from Lessor execute and
deliver to Lessor a statement in writing certifying that, this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification) and the dates to which the Rent and other charges have been
paid in advance, if any, and acknowledging that there are not, to Lessee's
knowledge, any uncured defaults on the part of Lessor hereunder or specifying
such defaults if they are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
Lessee's failure to deliver such a statement within such time shall be
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conclusive upon the Lessee that (a) this Lease is in full force and effect,
without modification except as may be represented by Lessor; (b) there are no
uncured defaults in Lessor's performance.
28. TIME: Time is of the essence of the Lease.
29. CAPTIONS: The headings on titles to the paragraphs of this Lease are not a
part of this Lease and shall have no effect upon the construction or
interpretation of any part thereof. This instrument contains all of the
agreements and conditions made between the parties hereto and may not be
modified orally or in any other manner than by an agreement in writing signed
by all of the parties hereto or their respective successors in interest.
30. PARTY NAMES: Landlord and Tenant may be used in various places in this
Lease as a substitute for Lessor and Lessee respectively.
31. EARTHQUAKE INSURANCE: As a condition of Lessor agreeing to waive the
requirement for earthquake insurance, Lessee agrees that it will pay, as
additional Rent, an amount not to exceed Ten Thousand Nine Hundred Dollars
($10,900) per year for earthquake insurance if Lessor desires to obtain some
form of earthquake insurance in the future, if and when available, on terms
acceptable to Lessor.
32. HABITUAL DEFAULT: Notwithstanding anything to the contrary contained in
Section 14 herein, Lessor and Lessee agree that if Lessee shall have defaulted
in the payment of Rent for three or more times during any twelve month period
during the Lease Term, then such conduct shall, at the option of the Lessor,
represent a separate event of default which cannot be cured by Lessee. Lessee
acknowledges that the purpose of this provision is to prevent repetitive
defaults by the Lessee under the Lease, which constitute a hardship to the
Lessor and deprive the Lessor of the timely performance by the Lessee
hereunder.
33. HAZARDOUS MATERIALS
33.1 DEFINITIONS: As used herein, the following terms shall have the following
meaning:
a. The term "Hazardous Materials" shall mean (i) polychlorinated
biphenyls; (ii) radioactive materials and (iii) any chemical, material
or substance now or hereafter defined as or included in the
definitions of "hazardous substance" "hazardous water", "hazardous
material", "extremely hazardous waste", "restricted hazardous waste"
under Section 25115, 25117 or 15122.7, or listed pursuant to Section
25140 of the California Health and Safety Code, Division 20, Chapter
6.5 (Hazardous Waste Control Law), (ii) defined as "hazardous
substance" under Section 25316 of the California Health and Safety
Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous
Substances Account Act), (iii) defined as "hazardous material",
"hazardous substance", or "hazardous waste" under Section 25501 of the
California Health and Safety Code, Division 20, Chapter 6.95
(Hazardous Materials Release, Response, Plans and Inventory), (iv)
defined as a "hazardous substance" under Section 25181 of the
California Health and
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Safety Code, Division 20l, Chapter 6.7 (Underground Storage of
Hazardous Substances), (v) petroleum, (vi) asbestos, (vii) listed
under Article 9 or defined as "hazardous" or "extremely hazardous"
pursuant to Article II of Title 22 of the California Administrative
Code, Division 4, Chapter 20, (viii) defined as "hazardous substance"
pursuant to Section 311 of the Federal Water Pollution Control Act, 33
U.S.C. 1251 et seq. or listed pursuant to Section 1004 of the Federal
Water Pollution Control Act (33 U.S.C. 1317), (ix) defined as a
"hazardous waste", pursuant to Section 1004 of the Federal Resource
Conservation and Recovery Act, 42 U.S.C. 6901 et seq., (x) defined as
"hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Responsibility Compensations, and Liability Act, 42
U.S.C. 9601 et seq., or (xi) regulated under the Toxic Substances
Control Act, 156 U.S.C. 2601 et seq.
b. The term "Hazardous Materials Laws" shall mean any local, state and
federal laws, rules, regulations, or ordinances relating to the use,
generation, transportation, analysis, manufacture, installation,
release, discharge, storage or disposal of Hazardous Material.
c. The term "Lessor's Agents" as used herein shall mean Lessor's agents,
representatives, employees, contractors, subcontractors, directors,
officers and partners.
d. The term "Lessee's Agents" as used herein shall mean Lessee's agents,
representatives, employees, contractors, subcontractors, directors,
officers, partners, invitees or any other person in or about the
Premises.
33.2 LESSEE'S RIGHT TO INVESTIGATE: Lessee shall be entitled to cause such
inspection, soils and ground water tests, and other evaluations to be made of
the Premises as Lessee deems necessary regarding (i) the presence and use of
Hazardous Materials in or about the Premises, and (ii) the potential for
exposure to Lessee's employees and other persons to any Hazardous Materials
used and stored by previous occupants in or about the Premises. Lessee shall
provide Lessor with copies of all inspections, tests and evaluations. Lessee
shall indemnify, defend and hold Lessor harmless from any cost, claim or
expense arising from such entry by Lessee or from the performance of any such
investigation by such Lessee.
33.3 LESSOR'S REPRESENTATIONS: Lessor hereby represents and warrants to Datum
that to the best of Lessor's knowledge that the Premises are, as of the date of
this Lease, in compliance with all Hazardous Material Laws.
33.4 LESSEE'S OBLIGATION TO INDEMNIFY: Lessee, at its sole cost and expense,
shall indemnify, defend, protect and hold Lessor and Lessor's Agents harmless
from and against any and all cost or expenses, including those described under
subparagraphs i, ii and iii herein below set forth, arising from or caused in
whole or in part, directly or indirectly by:
a. Lessee's or Lessee's Agents' use, analysis, storage, transportation,
disposal, release, threatened release, discharge or generation of
Hazardous Material to, in, on, under, about or from the Premises; or
b. Lessee's or Lessee's Agents failure to comply with Hazardous Material
laws; or
PAGE 15
<PAGE> 16
c. Any release of Hazardous Material to, in, on, under, about, from or
onto the Premises caused by Lessee or Lessee's Agents or occurring
during the Lease Term, except ground water contamination from other
parcels where the source is from off the Premises not arising from or
caused by Lessee or Lessee's Agents.
The cost and expenses indemnified against include, but are not limited to the
following:
i. Any and all claims, actions, suits, proceedings, losses, damages,
liabilities, deficiencies, forfeitures, penalties, fines, punitive
damages, cost or expenses;
ii. Any claim, action, suit or proceeding for personal injury (including
sickness, disease, or death), tangible or intangible property damage,
compensation for lost wages, business income, profits or other
economic loss, damage to the natural resources of the environment,
nuisance, pollution, contamination, leaks, spills, release or other
adverse effects on the environment;
iii. The cost of any repair, clean-up, treatment or detoxification of the
Premises necessary to bring the Premises into compliance with all
Hazardous Material Laws, including the preparation and implementation
of any closure, disposal, remedial action, or other actions with
regard to the Premises, and expenses (including, without limitation,
reasonable attorney's fees and consultants fees, investigation and
laboratory fees, court cost and litigation expenses).
33.5 LESSEE'S OBLIGATION TO REMEDIATE CONTAMINATION: Lessee shall, at its sole
cost and expense, promptly take any and all action necessary to remediate
contamination of the Premises by Hazardous Materials as herein defined
occurring as a result of the actions or omissions of Lessee or Lessee's Agents.
33.6 OBLIGATION TO NOTIFY: Lessor and Lessee shall each give written notice to
the other as soon as reasonably practical of (i) any communication received
from any governmental authority concerning Hazardous Material which related to
the Premises and (ii) any contamination of the Premises by Hazardous Materials
which constitutes a violation of any Hazardous Material Laws.
33.7 SURVIVAL: The obligations of Lessee under this Section 33 shall survive
the Lease Term or earlier termination of this Lease.
33.8 CERTIFICATION AND CLOSURE: On or before the end of the Lease Term or
earlier termination of this Lease, Lessee shall deliver to Lessor a
certification executed by Lessee stating that, to the best of Lessee's
knowledge, there exists no violation of Hazardous Material Laws resulting from
Lessee's obligation in Paragraph 33. If pursuant to local ordinance, state or
federal law, Lessee is required, at the expiration of the Lease Term, to submit
a closure plan for the Premises to a local, state or federal agency, then
Lessee shall furnish to Lessor a copy of such plan.
33.9 PRIOR HAZARDOUS MATERIALS: Lessee shall have no obligation to clean up or
to hold Lessor harmless with respect to, any Hazardous Material or wastes
discovered on the Premises which were not introduced into, in, on, about, from
or under the
PAGE 16
<PAGE> 17
Premises by Lessee or Lessee's Agents during the Lease Term or ground water
contamination from other parcels where the source is from off the Premises not
arising from or caused by Lessee or Lessee's Agents.
34. BROKERS: Lessor and Lessee represent that they have not utilized or
contacted a real estate broker or finder with respect to this Lease and Lessee
agrees to indemnify and hold Lessor harmless against any claim, cost, liability
or cause of action asserted by any broker or finder claiming through Lessee.
Lessor represents and warrants that it has not utilized or contacted a real
estate broker or finder with respect to this Lease and Lessor agrees to
indemnify and hold Lessee harmless against any claim, cost, liability or cause
of action asserted by any broker or finder claiming through Lessor.
35. OPTION TO EXTEND
A. Option: Lessor hereby grants to Lessee one (1) option to extend the Lease
Term, with the extended term to be for a period of five (5) years, on the
following terms and conditions:
(i) Lessee shall give Lessor written notice of its exercise of its
options to extend no earlier than twenty-four (24) calendar months,
nor later than six (6) calendar months before the Lease Term would end
but for said exercise. Time is of the essence.
(ii) Lessee may not extend the Lease Term pursuant to any option granted
by this section 35 if Lessee is in default as of the date of the
exercise of its option. If Lessee has committed a default by Lessee
as defined in Section 14 or 32 that has not been cured or waived by
Lessor in writing by the date that any extended term is to commence,
then Lessor may elect not to allow the Lease Term to be extended,
notwithstanding any notice given by Lessee of an exercise of this
option to extend.
(iii) All terms and conditions of this Lease shall apply during the extended
term, except that the base rent and rental increases for each extended
term shall be determined as provided in Section 35 (B) below.
(iv) Once Lessee delivers a notice of exercise of its options to extend
the Lease Term, Lessee may not withdraw such exercise and subject to
the provisions of this Section 35, such notice shall operate to
extend the Lease Term. Upon any extension of the Lease Term pursuant
to this Section 35, the term "Lease Term" as used in this Lease shall
thereafter include the then extended term.
(v) The option rights of Datum, Inc. granted under this Section 35 are
granted for Datum, Inc.'s personal benefit and may not be assigned or
transferred by Datum, Inc. or exercised if Datum, Inc. is not
occupying the Premises at the time of exercise.
PAGE 17
<PAGE> 18
(vi) Lessee shall have the first right of offer for the balance of the
space in the building that is the subject of this Lease when the space
is vacated by GSS/Array Technology.
B. Extended Term Rent - Option Period: The monthly Rent for the Premises during
the extended term shall equal the fair market monthly Rent for the Premises as
of the commencement date of the extended term, but in no case, less than the
Rent during the last month of the prior Lease term. Promptly upon Lessee's
exercise of the option to extend, Lessee and Lessor shall meet and attempt to
agree on the fair market monthly Rent for the Premises as of the commencement
date of the extended term. In the event the parties fail to agree upon the
amount of the monthly Rent for the extended term prior to commencement thereof,
the monthly Rent for the extended term shall be determined by appraisal in the
manner hereafter set forth; provided, however, that in no event shall the
monthly Rent for the extended term be less than in the immediate preceding
period. Annual base rent increases during the extended term shall be three
percent (3%) per year. In the event it becomes necessary under this paragraph
to determine the fair market monthly Rent of the Premises by appraisal, Lessor
and Lessee each shall appoint a real estate appraiser who shall be a member of
the American Institute of Real Estate Appraiser ("AIREA") and such appraisers
shall each determine the fair market monthly Rent for the Premises taking into
account the value of the Premises and the amenities provided by the outside
areas, the common areas, and the Building, and prevailing comparable Rentals in
the area. Such appraisers shall, within twenty (20) business days after their
appointment, complete their appraisals and submit their appraisal reports to
Lessor and Lessee. If the fair market monthly Rent of the Premises established
in the two (2) appraisals varies by five percent (5%) or less of the higher
Rent, the average of the two shall be controlling. If said fair market monthly
Rent varies by more than five percent (5%) of the higher Rental, said
appraisers, within ten (10) days after submission of the last appraisal, shall
appoint a third appraiser who shall be a member of the AIREA and who shall also
be experienced in the appraisal of Rent values and adjustment practices for
commercial properties in the vicinity of the Premises. Such third appraiser
shall, within twenty (20) business days after his appointment, determine by
appraisal the fair market monthly Rent of the Premises taking into account the
same factors referred to above, and submit his appraisal report to Lessor and
Lessee. The fair market monthly Rent determined by the third appraiser for the
Premises shall be controlling, unless it is less than that set forth in the
lower appraisal previously obtained, in which case the value set forth in said
lower appraisal shall be controlling, or unless it is greater than that set
forth in the higher appraisal previously obtained in which case the Rent set
for in said higher appraisal shall be controlling. If either Lessor or Lessee
fails to appoint an appraiser, or if an appraiser appointed by either of them
fails, after his appointment to submit his appraisal within the required period
in accordance with the foregoing, the appraisal submitted by the appraiser
properly appointed and timely submitting his appraisal shall be controlling.
If the two appraisers appointed by Lessor and Lessee are unable to agree upon a
third appraiser within the required period in accordance with the foregoing,
application shall be made within twenty (20) days thereafter by either Lessor
or Lessee to AIREA, which shall appoint a member of said institute willing to
serve as appraiser. The cost of all appraisals under this subparagraph shall
be borne equally be Lessor and Lessee.
PAGE 18
<PAGE> 19
36. APPROVALS: Whenever in this Lease the Lessor's or Lessee's consent is
required, such consent shall not be unreasonably or arbitrarily withheld or
delayed. In the event that the Lessor or Lessee does not respond to a request
for any consents which may be required of it in this Lease within ten business
days of the request of such consent in writing by the Lessee or Lessor, such
consent shall be deemed to have been given by the Lessor or Lessee.
37. AUTHORITY: Each party executing this Lease represents and warrants that he
or she is duly authorized to execute and deliver the Lease. If executed on
behalf of a corporation, that the Lease is executed in accordance with the
by-laws of said corporation (or a partnership that the Lease is executed in
accordance with the partnership agreement of such partnership), that no other
party's approval or consent to such execution and delivery is required, and
that the Lease is binding upon said individual, corporation (or partnership) as
the case may be in accordance with its terms.
38. INDEMNIFICATION OF LESSOR: Except to the extent caused by the negligence or
willful misconduct of Lessor or Lessor's Agents, Lessee shall defend, indemnify
and hold Lessor harmless from and against any and all obligations, losses,
costs, expenses, claims, demands, attorney's fees, investigation costs or
liabilities on account of, or arising out of the use, condition or occupancy of
the Premises or any act or omission to act of Lessee or Lessee's Agents or any
occurrence in, upon, about or at the Premises, including, without limitation,
any of the foregoing provisions arising out of the use, generation,
manufacture, installation, release, discharge, storage, or disposal of
Hazardous Materials by Lessee or Lessee's Agents. It is understood that Lessee
is and shall be in control and possession of the Premises and that Lessor shall
in no event be responsible or liable for any injury or damage or injury to any
person whatsoever, happening on, in, about, or in connection with the Premises,
or for any injury or damage to the Premises or any part thereof, except to the
extent caused by the sole negligence or willful misconduct of Lessor or
Lessor's Agents. This Lease is entered into on the express condition that
Lessor shall not be liable for, or suffer loss by reason of injury to person or
property, from whatever cause, which in any way may be connected with the use,
condition or occupancy of the Premises or personal property located herein,
except to the extent caused by the sole negligence or willful misconduct of
Lessor or Lessor's Agents. The provisions of this Lease permitting Lessor to
enter and inspect the Premises are for the purpose of enabling Lessor to become
informed as to whether Lessee is complying with the terms of this Lease and
Lessor shall be under no duty to enter, inspect or to perform any of Lessee's
covenants set forth in this Lease. Lessee shall further indemnify, defend and
hold harmless Lessor from and against any and all claims arising from any
breach or default in the performance of any obligation to Lessee's part to be
performed under the terms of this Lease. The provisions of Section 38 shall
survive the Lease Term or earlier termination of this Lease with respect to any
damage, injury or death occurring during the Lease Term.
39. LESSOR'S LIABILITY: If Lessee should recover a money judgment against
Lessor arising in connection with this Lease, the judgment shall be satisfied
only out of the Lessor's interest in the Premises and neither Lessor or any of
its partners shall be liable personally for any deficiency.
PAGE 19
<PAGE> 20
40. MISCELLANEOUS PROVISIONS: All rights and remedies hereunder are cumulative
and not alternative to the extent permitted by law and are in addition to all
other rights or remedies in law and in equity.
41. CHOICE OF LAW: This lease shall be construed and enforced in accordance
with the substantive laws of the State of California. The language of all
parts of this lease shall in all cases be construed as a whole according to its
fair meaning and not strictly for or against either Lessor or Lessee.
42. ENTIRE AGREEMENT: This Lease is the entire agreement between the parties,
and there are no agreements or representations between the parties except as
expressed herein. Except as otherwise provided for herein, no subsequent
change or addition to this Lease shall be binding unless in writing and signed
by the parties hereto.
IN WITNESS WHEREOF, Lessor and Lessee have executed these presents, the day and
year first above written.
<TABLE>
<CAPTION>
LESSOR LESSEE
BERG & BERG DEVELOPERS DATUM, INC.
<S> <C>
By: By:
---------------------------------- ----------------------------------
signature of authorized representative signature of authorized representative
- -------------------------------------- --------------------------------------
printed name printed name
- -------------------------------------- --------------------------------------
title title
- -------------------------------------- --------------------------------------
date date
</TABLE>
PAGE 20
<PAGE> 21
Exhibit B
Lessor and Lessee hereby agree as follows with regard to Lessee Improvements
and Lessor to complete the following modifications to the Premises:
1. Floor plan as shown on Exhibit B.1.
2. Securely install plywood over grating in storage room.
3. Provide doors as shown on Exhibit B.1.
4. Paint all interior walls.
5. Replace damaged and stained ceiling tiles.
6. Remove temporary power poles as shown on Exhibit B.1.
7. Remove T-bar ceiling and raise fire sprinklers in shipping &
receiving area as shown on Exhibit B.1.
8. Install 24 hour HVAC unit and VCT tile in computer room as shown on
Exhibit B.1.
9. Engineering area to include ten (10) 12' x 12' private offices
with side lights and new carpet.
10. Repair/replace VCT tile where demolition of walls is done and
repair tile as needed.
11. Sweep and stripe Datum's portion of parking area. Stripe two
visitors spaces next to existing handicap space.
12. Replace two exterior glass panes where bullet holes exist.
13. Install covers in place of grates on floor drains in manufacturing
area.
PAGE 21
<PAGE> 1
EXHIBIT 11
DATUM INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Primary earnings:
Net Income $ 60,000 $ 936,000 $ 72,000
---------- ---------- ----------
Weighted average number of
common shares outstanding 3,713,710 2,628,727 2,558,356
Effect of common stock equivalents 240,597 104,085
---------- ---------- ----------
Weighted average common shares
outstanding as adjusted 3,954,307 2,732,812 2,558,356
---------- ---------- ----------
Primary earnings per common share $ .02 $ .34 $ .03
========== ========== ==========
Assuming full dilution:
Net income $ 60,000 $ 936,000 $ 72,000
---------- ---------- ----------
Weighted average number of
common shares outstanding 3,713,710 2,628,727 2,558,356
Effect of common stock equivalents 253,157 126,706
---------- ---------- ----------
Weighted average common shares
outstanding as adjusted 3,966,867 2,755,433 2,558,356
---------- ---------- ----------
Earnings per common share assuming
full dilution $ .02 $ .34 $ .03
========== ========== ==========
</TABLE>
<PAGE> 1
DATUM INC. AND SUBSIDIARIES
EXHIBIT 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
State or Other Jurisdiction
Name of Incorporation
---- ----------------------------
<S> <C>
Datum International Sales Corporation California
Datum International Incorporated California
Frequency and Time Systems, Inc. Delaware
Austron, Inc. Texas
Efratom Time & Frequency Products, Inc. Colorado
Efratom Electronik GmbH Germany
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-8 (Nos. 2-96564,
33-10035 and 33-41709) of Datum Inc. of our report dated March 11, 1996
appearing on page F-1 of this Form 10-K.
/s/ PRICE WATERHOUSE LLP
- ------------------------
PRICE WATERHOUSE LLP
Costa Mesa, California
March 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 587
<SECURITIES> 0
<RECEIVABLES> 13,638
<ALLOWANCES> 68
<INVENTORY> 20,161
<CURRENT-ASSETS> 36,525
<PP&E> 22,809
<DEPRECIATION> 7,155
<TOTAL-ASSETS> 66,137
<CURRENT-LIABILITIES> 23,532
<BONDS> 8,621
0
0
<COMMON> 1005
<OTHER-SE> 30,308
<TOTAL-LIABILITY-AND-EQUITY> 66,137
<SALES> 67,257
<TOTAL-REVENUES> 67,257
<CGS> 40,010
<TOTAL-COSTS> 65,393
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,650
<INCOME-PRETAX> 214
<INCOME-TAX> 154
<INCOME-CONTINUING> 60
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
