UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-7445
DATRON SYSTEMS INCORPORATED
- - ------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
- - --------------------------------------
(State or other jurisdiction of incorporation or organization)
95-2582922
- - -----------------------------------
(I.R.S. Employer Identification No.)
304 Enterprise Street, Escondido, California 92029-1297
- - ---------------------------------------------------------
(Address of principal executive offices) (zip code)
(619) 747-3734
- - ----------------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and formal fiscal year, if changed
since last report)
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.
[ X ] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or 15
(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
As of February 9, 1996, the Registrant had only one class of
common stock, par value $0.01, of which there were 2,602,692 shares
outstanding.
1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
DATRON SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In Thousands)
Dec 31, March 31
1995 1995
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $814 $3,510
Accounts receivable, net 24,062 17,611
Inventories 14,731 10,001
Deferred income taxes 2,579 2,579
Prepaid expenses and other current assets 987 635
-------- --------
Total current assets 43,173 34,336
Property, plant and equipment, net 13,701 14,155
Goodwill, net 6,795 6,977
Investment 890 ---
Other assets 429 476
-------- --------
Total assets $64,988 $55,944
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $11,245 $8,909
Accrued expenses 5,636 5,740
Customer advances 3,168 2,457
Income taxes payable 505 2,551
Current portion of restructuring reserve 1,211 438
-------- --------
Total current liabilities 21,765 20,095
Long-term debt 7,400 ---
Restructuring reserve 1,111 2,144
Deferred income taxes 817 817
Other liabilities --- 23
-------- --------
Total liabilities 31,093 23,079
-------- --------
Stockholders' equity:
Preferred stock -- par value $0.01; authorized
2,000,000 shares, none issued or outstanding --- ---
Common stock -- par value $0.01; authorized
10,000,000 shares, 3,063,937 shares issued
in December and March 31 31
Additional paid-in capital 10,464 10,587
Retained earnings 26,309 25,390
Treasury stock, at cost; 463,745 and 504,314
shares in December and March, respectively (2,665) (2,979)
Stock option plan and stock purchase
plan notes receivable (244) (164)
-------- --------
Total stockholders' equity 33,895 32,865
-------- --------
Total liabilities and stockholders' equity $64,988 $55,944
======== ========
See notes to consolidated financial statements.
2
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per-share amounts)
Three Months Ended Nine Months Ended
December 31, December 31,
1995 1994 1995 1994
------------------ ------------------
Net sales $19,339 $18,151 $49,355 $46,371
Cost of sales 14,181 12,618 33,907 32,087
------------------ ------------------
Gross profit 5,158 5,533 15,448 14,284
Selling, general and admin. 3,812 3,710 11,215 9,785
Research and development 746 294 2,445 997
------------------ ------------------
Operating income 600 1,529 1,788 3,502
Interest expense (68) (48) (104) (149)
Interest income 6 3 25 15
Other expense (260) (16) (260) (16)
------------------ ------------------
Income before income taxes 278 1,468 1,449 3,352
Income taxes 101 542 530 1,260
------------------ ------------------
Net income $177 $926 $919 $2,092
================== ==================
Net income per share $0.07 $0.36 $0.34 $0.81
================== ==================
Weighted average number of
common and common equivalent
shares outstanding 2,679 2,608 2,663 2,595
================== ==================
See notes to consolidated financial statements.
3
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended
December 31,
1995 1994
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $919 $2,092
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 2,677 1,639
Restructuring (260) (489)
Changes in operating assets and liabilities:
Accounts receivable (6,451) (2,392)
Inventories (4,730) (3,828)
Deferred income taxes --- 160
Prepaid expenses and other assets (359) 20
Accounts payable and accrued expenses 2,232 2,385
Customer advances 711 (2,261)
Income taxes payable (2,046) 129
Other liabilities (23) (535)
--------- ---------
Net cash used in operating activities (7,330) (3,080)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (1,987) (1,753)
Proceeds from sale of product line --- 1,148
Purchase of investment (890) ---
Acquisition of business --- (415)
--------- ---------
Net cash used in investing activities (2,877) (1,020)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in long-term debt 7,400 2,400
Stock options exercised 242 110
Purchase of treasury stock (51) ---
Payment advanced against stock option
plan note receivable (80) ---
--------- ---------
Net cash provided by financing activities 7,511 2,510
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (2,696) (1,590)
Cash and cash equivalents at beginning of period 3,510 1,955
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $814 $365
========= =========
See notes to consolidated financial statements.
4
Datron Systems Incorporated
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The unaudited consolidated financial statements included herein
contain the accounts of Datron Systems Incorporated and its wholly
owned subsidiaries (the "Company") and have been prepared in
accordance with the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. It is suggested
that these financial statements be read in connection with the
financial statements and notes thereto included in the Company's
annual report on Form 10-K for the fiscal year ended March 31,
1995.
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments, consisting only of normal
recurring adjustments, unless otherwise stated, which are necessary
to present fairly its financial position at December 31, 1995 and
the results of its operations and its cash flows for the periods
presented. Results of operations for the periods presented herein
are not necessarily indicative of what results will be for the
entire fiscal year. The balance sheet at March 31, 1995 has been
derived from audited financial statements.
2. Income per Share
Shares used in computing income per share include the weighted
average of common stock outstanding plus equivalent shares issuable
under the Company's stock option plan.
3. Accounts Receivable
At December 31, 1995 and March 31, 1995, accounts receivable were
as follows:
December 31, March 31,
1995 1995
----------- -----------
Billed $17,244,000 $ 7,363,000
Unbilled 7,044,000 10,495,000
----------- -----------
Subtotal 24,288,000 17,858,000
Allowance for doubtful accounts (226,000) (247,000)
----------- -----------
Total $24,062,000 $17,611,000
=========== ===========
4. Inventories
At December 31, 1995 and March 31, 1995, inventories were as
follows:
December 31, March 31,
1995 1995
----------- -----------
Raw materials $ 8,424,000 $ 4,038,000
Work-in-process 5,429,000 3,779,000
Finished goods 878,000 2,184,000
---------- ----------
Total $14,731,000 $10,001,000
=========== ===========
5
5. Property, Plant and Equipment
At December 31, 1995 and March 31, 1995, property, plant and
equipment was as follows:
December 31, March 31,
1995 1995
---------- -----------
Land and buildings $8,469,000 $ 8,406,000
Leasehold improvements 858,000 706,000
Machinery and equipment 12,865,000 11,627,000
Furniture and office equipment 1,373,000 1,365,000
Construction-in-process 642,000 404,000
----------- -----------
Subtotal 24,207,000 22,508,000
Accumulated depreciation and
amortization (10,506,000) (8,353,000)
----------- ----------
Total $13,701,000 $14,155,000
=========== ===========
6. Investment
The Company invested $890,000 in preferred stock of EarthWatch
Incorporated during the third quarter of fiscal 1996. This
investment is being carried at cost which the Company believes
approximates its fair value.
7. Long-Term Debt
On August 17, 1995, the Company increased the limit of its
revolving credit line with its bank to $26,535,000, comprised of
$18,000,000 for the issuance of letters of credit and $8,535,000
for direct working capital advances. Maturity of the credit line
was extended to December 31, 1997 and interest payable on
borrowings under the line of credit was reduced to the bank's prime
rate plus 0.50% or to LIBOR plus 1.50%, at the option of the
Company.
In January 1996, the Company and its bank amended the revolving
credit line to increase the limit for direct working capital
advances to $10,535,000 and to reduce the limit for issuances of
letters of credit to $16,000,000. This increase in working capital
credit is temporary to meet short-term cash requirements, and
expires on March 31, 1996.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Datron Systems Incorporated and its wholly owned subsidiaries (the
"Company") report operations in two business segments:
Communication Products and Services (formerly called the Radio
Communication Products business segment), and Antenna and Imaging
Systems (formerly called the Antenna and Satellite Communication
Systems business segment). The Communication Products and Services
business segment designs, manufactures and distributes high
frequency and very high frequency radios and accessories. The
Antenna and Imaging Systems business segment designs and
manufactures specialized satellite communication systems,
subsystems and antennas, and provides ground station hardware,
software and image processing systems for the remote sensing
market.
6
Order Cancellation
In the third quarter of fiscal 1996, the Company learned that its
customer for an $8.8 million remote sensing satellite (RSS) image
processing facility intended for installation in the Middle East
was not able to obtain funding for the order. The Company had
booked and announced this order in July 1995 and commenced work on
it shortly thereafter. The Company's customer, who is acting as
prime contractor for a larger project that includes the RSS
facility, has not been able to obtain funding from its customer for
the image processing facility. Because the order was conditioned
upon funding, and after an extensive assessment of its likelihood
of being funded, the Company canceled the order in January 1996 for
lack of payment. Negotiations to reinstate the order are underway,
but it is not possible as of the date of this filing to determine
the outcome.
After a careful examination of the facts and circumstances, the
Company concluded, because the RSS order was conditioned upon
funding that has not been obtained, that its financial statements
for the second quarter ended September 30, 1995 required
restatement to remove from net sales for the quarter $1,785,000
attributable to the order and originally included in net sales
using the percentage completion method of accounting. The canceled
RSS order also had a significant impact on financial results for
the third quarter of fiscal 1996. The discussion that follows
includes the effects of the RSS order cancellation on third quarter
financial results.
Results of Operations
Net income for the third quarter of fiscal 1996 decreased 81% to
$177,000 or $0.07 per share compared with net income of $926,000 or
$0.36 per share in the third quarter of fiscal 1995. Net sales in
the third quarter of fiscal 1996 were $19,339,000, a 7% increase
from net sales of $18,151,000 in the third quarter last fiscal
year. The increase in sales was due to higher sales of radio
products, partially offset by lower sales of remote sensing
systems. The decrease in net income resulted primarily from the
write-off of non recoverable expenses associated with the canceled
RSS order, higher research and development expenses and higher
selling expenses.
Net income for the nine months ended December 31, 1995 decreased
56% to $919,000 or $0.34 per share compared with net income of
$2,092,000 or $0.81 per share for the comparable period last fiscal
year. Net sales for the nine months were $49,355,000, a 6%
increase from net sales of $46,371,000 for the first nine months
last fiscal year. The increase in sales was primarily due to
higher sales of radio products, partially offset by lower sales of
remote sensing systems. The decrease in net income resulted
primarily from higher research and development expenses, higher
selling expenses and the write-off of non recoverable expenses
associated with the canceled RSS order, partially offset by higher
gross profits on the higher sales.
Operating results for each business segment were as follows:
Communication Products and Services
Three Months Ended Nine Months Ended
December 31, December 31,
1995 1994 1995 1994
----------- ---------- ----------- -----------
Net sales $11,617,000 $5,737,000 $24,621,000 $15,878,000
=========== ========== =========== ===========
Gross profit $ 4,069,000 $1,852,000 $ 8,227,000 $ 5,332,000
=========== ========== =========== ===========
Operating income $ 2,267,000 $ 622,000 $ 3,273,000 $ 1,693,000
=========== ========== =========== ===========
Sales of Communication Products and Services increased 102% in the
third quarter of fiscal 1996 compared with the third quarter of
fiscal 1995. The increase was due to the shipment of an $8.3
million radio products order to a customer in Asia. Sales in the
first nine months of fiscal 1996 were 55% higher than in the first
nine months of fiscal 1995. The increase was due to the $8.3
million sale and to a faster turn around of new order bookings for
standard radio products.
7
Gross profit on sales of Communication Products and Services was
35.0% in the third quarter of fiscal 1996 compared with 32.3% in
the third quarter last fiscal year. The increase in the recent
quarter was primarily due to a more favorable mix of products and
services. Gross profit for the first nine months of fiscal 1996
was 33.4% of sales compared with 33.6% of sales for the first nine
months of fiscal 1995. The difference is not meaningful.
Operating income from sales of Communication Products and Services
was 19.5% in the third quarter of fiscal 1996 compared with 10.8%
in the third quarter last fiscal year. The increase resulted
primarily from higher gross profits on the higher sales. Operating
income for the first nine months of fiscal 1996 was 13.3% of sales
compared with 10.7% of sales for the first nine months of fiscal
1995. Although selling, administrative, and research and
development expenses increased in the recent nine-month period,
they declined as a percentage of the higher sales, resulting in the
higher operating income percentage.
Antenna and Imaging Systems
Three Months Ended Nine Months Ended
December 31, December 31,
1995 1994 1995 1994
---------- ----------- ----------- -----------
Net sales $7,722,000 $12,414,000 $24,734,000 $30,493,000
=========== =========== =========== ===========
Gross profit $1,089,000 $ 3,681,000 $ 7,221,000 $ 8,952,000
=========== =========== =========== ===========
Operating (loss)
income ($1,343,000) $ 1,268,000 ($443,000) $2,946,000
=========== =========== =========== ===========
Sales of Antenna and Imaging Systems products decreased 38% in the
third quarter of fiscal 1996 compared with the third quarter of
fiscal 1995. The decrease was primarily due to lower sales of
remote sensing satellite systems, including sales not realized as a
result of the RSS order cancellation referred to above. The awards
of several orders for such systems have been delayed. It is
uncertain whether these delayed orders will be awarded and whether
the Company will receive those orders if they are awarded. Sales
in the first nine months of fiscal 1996 were 19% lower than in the
first nine months of fiscal 1995. The decrease was primarily due
to lower sales of remote sensing satellite systems.
Gross profit on sales of Antenna and Imaging Systems products was
14.1% in the third quarter of fiscal 1996 compared with 29.7% in
the third quarter last fiscal year. The decrease was primarily due
to higher expenses associated with sales of remote sensing systems
and to the write-off of non recoverable expenses associated with
the canceled RSS order. Gross profit for the first nine months of
fiscal 1996 was 29.2% of sales compared with 29.4% of sales for the
first nine months of fiscal 1995. The higher expenses incurred in
the third quarter of fiscal 1996 were offset by lower manufacturing
costs associated with a more favorable mix of profitable contracts
during the first six months of fiscal 1996.
An operating loss from sales of Antenna and Imaging Systems
products of 17.4% was incurred in the third quarter of fiscal 1996
compared with operating income of 10.2% in the third quarter last
fiscal year. The loss resulted primarily from lower gross profits.
Although other operating expenses for the third quarters of fiscal
1996 and fiscal 1995 were comparable, they increased as a
percentage of the lower sales in the third quarter of fiscal 1996,
resulting in a decrease in the operating income percentage. An
operating loss of 1.8% was incurred for the first nine months of
fiscal 1996 compared with operating income of 9.7% for the first
nine months of fiscal 1995. The decrease was primarily due to
higher research and development expenses and higher selling
expenses, partially offset by lower administrative expenses.
8
Consolidated expenses were as follows:
Selling, general and administrative expenses were $3,812,000 in the
third quarter of fiscal 1996, a 3% increase compared with third
quarter of fiscal 1995 expenses of $3,710,000. The increase was
primarily due to higher selling expenses associated with the
Company's focus on international markets in both segments of its
business, partially offset by lower administrative expenses.
Selling, general and administrative expenses for the first nine
months of fiscal 1996 were $11,215,000, a 15% increase compared
with expenses of $9,785,000 for the first nine months of fiscal
1995. The increase was primarily due to higher international
selling expenses.
Research and development (R & D) expenses were $746,000 in the
third quarter of fiscal 1996 compared with $294,000 in the third
quarter last fiscal year. The 154% increase resulted from an
acceleration of development programs for Direct Broadcast Satellite
(DBS) television antennas for recreational vehicles, long-haul
trucks and commercial aviation. R & D expenses in the first nine
months of fiscal 1996 were $2,445,000, a 145% increase from
expenses of $997,000 for the first nine months of fiscal 1995. The
Company has identified the DBS television market for the mobile
user as a potential major new market for its products. R & D
expenditures and new market development expenditures are likely to
increase during the next several quarters as the Company seeks to
establish a dominant position in that market. The Company
estimates that the increased spending will lower fiscal 1996 net
income from what it would otherwise have been without the pursuit
of the DBS market by as much as $1,300,000 or approximately $0.50
per share.
Order backlog at December 31 was as follows:
1995 1994
------------ -----------
Communication Products and Services $ 5,982,000 $15,754,000
Antenna and Imaging Systems 16,116,000 29,740,000
---------- -----------
Total $22,098,000 $45,494,000
=========== ===========
The 62% decrease in Communication Products and Services backlog at
December 31, 1995 was due to the absence of a $10 million radio
order that was in backlog a year ago and which shipped in the
fourth quarter of fiscal 1995. As a result, sales of Communication
Products and Services in the fourth quarter of fiscal 1996 are
likely to be lower than they were in the fourth quarter of fiscal
1995. The 46% decrease in Antenna and Imaging Systems backlog at
December 31, 1995 was primarily due to the previously mentioned RSS
order cancellation, continued customer delays in the award of
several anticipated international orders for remote sensing systems
and to a continued decline in U.S Department of Defense business.
Primarily due to the RSS order cancellation and to delayed remote
sensing system orders, sales of Antenna and Imaging Systems in the
fourth quarter of fiscal 1996 are likely to be lower than they were
in the fourth quarter of fiscal 1995.
Liquidity and Capital Resources
At December 31, 1995, working capital was $21,408,000 compared with
$14,241,000 at March 31, 1995, an increase of $7,167,000 or 50%.
Major changes affecting working capital during this period were the
following: accounts receivable increased $6,451,000 primarily due
to strong third quarter radio sales; inventories increased
$4,730,000 to meet production requirements for anticipated orders;
income taxes payable decreased $2,046,000; and accounts payable and
accrued expenses increased $2,232,000. The Company borrowed
$7,400,000 in term debt from its bank during the first nine months
to meet the resulting cash requirement.
Capital equipment expenditures were $1,987,000 during the first
nine months of fiscal 1996 compared with $1,753,000 for the first
nine months last fiscal year. The increase was primarily due to
purchases of equipment related to the DBS antenna business and to
higher leasehold improvements.
9
On August 17, 1995, the Company increased the limit of its
revolving credit line with its bank to $26,535,000, comprised of an
$18,000,000 credit limit for the issuance of letters of credit and
an $8,535,000 credit limit for direct working capital advances. In
January 1996, the Company and its bank amended the revolving credit
line to increase the limit for direct working capital advances to
$10,535,000 and to reduce the limit for issuances of letters of
credit to $16,000,000. This increase in working capital credit is
temporary to meet short-term cash requirements, and expires on
March 31, 1996. The Company believes that its existing working
capital, anticipated future cash flows from operations and
available credit with its bank are sufficient to finance presently
planned capital and working capital requirements.
10
PART II -- OTHER INFORMATION
Item 2. Changes in Securities.
Pursuant to a business loan agreement with a bank, the Company must
comply with certain financial covenants. The agreement also
prohibits the Company from declaration or payment of dividends or
other distributions on the Company's stock, except under certain
conditions specified in the agreement. The Company is in
compliance with both requirements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.51 Sixth Amendment to Credit Agreement and Note between
the Registrant and Union Bank dated as of January 3, 1996.
10.52 Seventh Amendment to Credit Agreement and Note between
the Registrant and Union Bank dated as of January 31, 1996.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DATRON SYSTEMS INCORPORATED
Date: February 13, 1996 By: /s/WILLIAM L. STEPHAN
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)