CERTAIN PORTIONS OF REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS
FOR THE FISCAL YEAR ENDED MARCH 31, 1997 CONTAINING INFORMATION
REQUIRED BY PART I AND PART II OF THIS REPORT
Information required by Part II, Item 5: Market for Registrant's Common
Equity and Related Stockholder Matters. This information is contained
in the section captioned "Common Stock Activity" on the inside back
cover of the Annual Report.
Common Stock Activity
The common stock of Datron Systems Incorporated is traded on the Nasdaq
National Market tier of the Nasdaq Stock Market under the symbol DTSI.
The following table sets forth the high and low closing sales prices by
quarter for the two most recent fiscal years as reported by Nasdaq:
Fiscal Year 1997
----------------
Quarter Ended High Low
June 30, 1996 $15.50 $11.675
September 30, 1996 $12.313 $8.75
December 31, 1996 $10.375 $6.00
March 31, 1997 $10.063 $6.813
Fiscal Year 1996
----------------
Quarter Ended High Low
June 30, 1995 $12.25 $9.75
September 30, 1995 $17.25 $10.75
December 31, 1995 $19.75 $14.50
March 31, 1996 $19.00 $11.875
On March 31, 1997, there were approximately 1,700 stockholders of the
Company's common stock. The Company has never paid a cash dividend on
its common stock and does not anticipate doing so in the foreseeable
future.
Information required by Part II, Item 6: Selected Financial Data. This
information is contained in the section captioned "Datron Systems
Incorporated Selected Financial Data" on the inside front cover of the
Annual Report.
Selected Financial Data.
Fiscal Years Ended March 31,
1997 1996 1995 1994 1993
Statements of
Operations
Net sales $53,269,000 $61,165,000 $70,033,000 $65,636,000 $54,104,000
Net income 268,000 (1,241,000) 3,920,000 5,251,000 (8,367,000)
(loss)
Income(Loss) $0.10 $(0.46) $1.51 $2.10 $ (3.32)
per share<F1>
Balance Sheets
Working capital $24,756,000 $18,042,000 $14,241,000 $13,540,000 $15,520,000
Total assets 56,476,000 58,459,000 55,944,000 49,488,000 53,592,000
Long-term debt 8,900,000 5,200,000 0 0 8,750,000
Total 23,868,000 26,588,000 23,079,000 20,887,000 30,531,000
liabilities
Stockholders' 32,608,000 31,871,000 32,865,000 28,601,000 23,061,000
equity<F2>
Book value $12.26 $12.24 $12.84 $11.40 $9.33
per share
<F1>See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the determination of shares used in computing
income(loss)per share.
<F2>No dividends were declared or paid during the years presented.
Information required by Part II, Item 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations. This
information is contained on pages 8 through 11 of the Annual Report.
Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Overview
Datron Systems Incorporated and its wholly owned subsidiaries (the
"Company") provide products and services that address the needs of
emerging satellite and radio communication markets. It reports
operations in two business segments: Antenna and Imaging Systems, and
Communication Products and Services.
The Antenna and Imaging Systems business segment designs and
manufactures specialized satellite communication systems, subsystems and
antennas that are sold worldwide to commercial and governmental
customers, including the U.S. Department of Defense ("DoD"). Fiscal
1997 sales for this segment were $33,304,000, a 4% increase from fiscal
1996 sales of $31,872,000. The DoD accounted for 47% of this segment's
fiscal 1997 sales and 31% of consolidated sales. During fiscal 1996,
the DoD accounted for 55% of this segment's sales and 30% of
consolidated sales. Because of the decline in U.S. defense spending,
the Company has been pursuing additional markets for this segment's
products. The primary such market has been remote sensing satellite
earth stations. Sales of remote sensing products represented 35% and
29% of this segment's sales in fiscal 1997 and 1996, respectively. In
fiscal 1996, this segment introduced the DBS-3000, a mobile satellite
television reception system for recreational vehicles and long-haul
trucks. This system was the Company's first consumer product. Several
additional direct broadcast satellite ("DBS") antenna products were
introduced during fiscal 1997. Although these new DBS products
contributed to this segment's fiscal 1997 improvement in sales, sales of
DBS products were below the Company's expectations.
The Communication Products and Services business segment designs,
manufactures and distributes high frequency and very high frequency
radios and accessories for worldwide military and civilian purposes.
Fiscal 1997 sales for this segment were $19,965,000, a 32% decrease from
fiscal 1996 sales of $29,293,000. The decrease in sales was primarily
due to delays in new product development. Foreign customers accounted
for 94% of fiscal 1997 sales and 93% of fiscal 1996 sales. During
fiscal 1997, this segment sold radio products to two Asian customers
that accounted for 31% and 24% of this segment's sales and 11% and 9% of
consolidated sales. During fiscal 1996, sales of radio products to one
of the same Asian customers accounted for 39% of this segment's sales
and 19% of consolidated sales.
Consolidated sales for fiscal 1997 were $53,269,000, a 13% decrease from
fiscal 1996 consolidated sales of $61,165,000. The decrease in sales
was primarily due to lower sales of radio products and military
antennas, partially offset by sales of new DBS television antenna
products and by higher sales of remote sensing systems. Net income for
fiscal 1997 was $268,000, or $0.10 per share, compared with a net loss
in fiscal 1996 of $1,241,000, or $0.46 per share. Although gross
profits were lower in fiscal 1997 on the lower sales, the improvement in
net income resulted from the absence of costs associated with
cancellation of an $8.8 million order for a remote sensing system and
associated restructuring charges incurred in fiscal 1996 and from lower
operating expenses in fiscal 1997.
In March 1996, the Company announced its plan to consolidate its image
processing division in San Jose, California with its remote sensing
earth station business in Simi Valley, California. Both of those
functions are part of the Antenna and Imaging Systems business segment.
In connection with the consolidation, the Company recorded a
restructuring charge of $1,421,000 ($855,000, or $0.32 per share, after
taxes). Major categories of costs and expenses included in the
restructuring charge were estimated employee severance, $683,000;
goodwill write-off, $679,000; and estimated future losses on facility
lease, $59,000.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements.
Actual results could differ materially. Reference is hereby made to the
statement of Investment Considerations contained in Part I, Item 1 of
the Company's Form 10-K, which is available from the Company upon
request. The consolidated financial statements and notes thereto that
appear on pages 12 through 25 should be read in conjunction with the
following review.
Results of Operations
Operating results for the last three fiscal years are presented for each
of the Company's two business segments (in thousands):
ANTENNA AND IMAGING SYSTEMS
Years Ended March 31,
1997 1996 1995
Net sales $33,304 $31,872 $42,097
Percent of consolidated
net sales 63% 52% 60%
Gross profit $9,923 $8,682 $12,733
Operating expenses before
corporate expenses
and restructuring 8,110 10,341 8,768
Operating income (loss) $1,813 $(1,659) $3,965
Percent of consolidated
operating income before
corporate expenses and
restructuring 80% (137%) 49%
Sales of Antenna and Imaging Systems increased $1,432,000, or 4%, in
fiscal 1997 compared with fiscal 1996 sales. The increase was primarily
due to sales of new DBS antenna products and to higher sales of remote
sensing systems, partially offset by lower sales for the DoD. Although
sales of DBS antenna products contributed to the sales increase, those
sales were below the Company's expectations. The Company believes sales
were below expectations because of distribution problems with this new
consumer product. Sales of Antenna and Imaging Systems decreased
$10,225,000, or 24%, in fiscal 1996 compared with fiscal 1995 sales.
Lower sales of DoD products and remote sensing systems were responsible
for most of the decrease. The lower sales of remote sensing systems
were due to a canceled order and to delayed awards of several other such
systems.
Gross profit percentage on Antenna and Imaging Systems' sales was 29.8%
in fiscal 1997 compared with 27.2% in fiscal 1996 and 30.2% in fiscal
1995. The increase in fiscal 1997 from fiscal 1996 was primarily due to
the absence of a write-off of non-recoverable costs associated with a
canceled remote sensing order in fiscal 1996. Efficiencies resulting
from the consolidation of the Company's remote sensing business into the
Simi Valley facility and reductions in reserves for contract
contingencies also contributed to the increase. The decrease in fiscal
1996 from fiscal 1995 was primarily due to higher expenses associated
with sales of remote sensing systems and to the write-off of non-
recoverable costs associated with a canceled remote sensing order.
Operating income percentage on sales of Antenna and Imaging Systems was
5.4% in fiscal 1997 compared with an operating loss percentage before
provision for restructuring of 5.2% of sales in fiscal 1996 and compared
with an operating income percentage of 9.4% of sales in fiscal 1995.
The improvement in fiscal 1997 from fiscal 1996 was primarily due to
higher gross profits and to lower research and development, selling and
administrative expenses. The operating loss in fiscal 1996 compared
with fiscal 1995 operating income was primarily due to lower gross
margins, higher new product development expenses and higher selling
expenses resulting from the first full year of consolidation with
International Imaging Systems since its acquisition.
COMMUNICATION PRODUCTS AND SERVICES
Years Ended March 31,
1997 1996 1995
Net sales $19,965 $29,293 $27,936
Percent of consolidated
net sales 37% 48% 40%
Gross profit $5,426 $9,531 $9,640
Operating expenses before
Corporate expenses and
restructuring 4,970 6,660 5,486
Operating income $456 $2,871 $4,154
Percent of consolidated
operating income
before corporate expenses
and restructuring 20% 237% 51%
Sales of Communication Products and Services decreased $9,328,000, or
32%, in fiscal 1997 compared with fiscal 1996 sales. The decrease was
due to lower orders resulting from delays in new product development and
from softness in the worldwide radio market. Sales of radio products to
two Asian customers accounted for $10,885,000, or 55%, of this segment's
fiscal 1997 sales. Sales of Communication Products and Services
increased $1,357,000, or 5%, in fiscal 1996 compared with fiscal 1995
sales. The increase was due to higher sales of standard radio products.
Sales of radio products to one of the same Asian customers accounted for
$11,457,000, or 39%, of this segment's fiscal 1996 sales. One customer
will often account for a large percentage of this segment's annual
sales; however, it is unusual to have large sales from the same customer
in successive years.
Gross profit percentage on Communication Products and Services' sales
was 27.2% in fiscal 1997 compared with 32.5% in fiscal 1996 and 34.5% in
fiscal 1995. The decline in fiscal 1997 from fiscal 1996 was due to
higher labor and overhead costs, production inefficiencies resulting
from a much lower sales level than the previous year and to increases in
the provision for inventory obsolescence. The decline in fiscal 1996
from fiscal 1995 was primarily due to a less favorable mix of products
and services and to higher material costs.
Operating income percentage on sales of Communication Products and
Services was 2.3% in fiscal 1997 compared with 9.8% of sales in fiscal
1996 and 14.9% of sales in fiscal 1995. The decrease in fiscal 1997
compared with fiscal 1996 was due to lower gross profits and higher new
product development expenses, partially offset by lower selling and
administrative expenses. The decrease in fiscal 1996 compared with
fiscal 1995 was due to lower gross profits, higher international selling
expenses, higher new product development expenses and higher
administrative expenses related to the Company's decision not to
continue pursuit of the satellite paging business. Because an operating
loss was incurred in the Antenna and Imaging Systems business segment in
fiscal 1996, 237% of consolidated operating income before corporate
expenses and restructuring was attributed to the Communication Products
and Services business segment in fiscal 1996.
Consolidated expenses were as follows:
Selling, general and administrative ("SG&A") expenses were $11,770,000
in fiscal 1997 compared with $15,101,000 in fiscal 1996 and $14,111,000
in fiscal 1995. Fiscal 1997 SG&A expenses decreased 22% over fiscal
1996 SG&A expenses due to spending reductions at both business segments,
cost reductions related to the Company's fourth quarter fiscal 1996
consolidation and restructuring, and to reductions in reserves for
commitments and contingencies that the Company determined were no longer
necessary. Fiscal 1996 SG&A expenses increased 7% over fiscal 1995 SG&A
expenses due to higher international selling expenses in both business
segments, partially offset by lower administrative expenses.
Research and development ("R&D") expenses were $2,432,000 in fiscal 1997
compared with $3,280,000 in fiscal 1996 and $1,768,000 in fiscal 1995.
Fiscal 1997 R&D expenses decreased 26% over fiscal 1996 R&D expenses
primarily because of lower spending on development programs for mobile
DBS television reception systems, partially offset by higher spending on
development programs for new radio products. Because most of the
development work for DBS products has been completed, R&D expenditures
are expected to decline further in fiscal 1998. Fiscal 1996 R&D
expenses increased 86% over fiscal 1995 R&D expenses due to acceleration
of development programs for DBS television reception systems for
recreational vehicles, long-haul trucks and commercial aviation, and
also due to development of image processing capabilities for the remote
sensing agricultural services market. The Company is no longer pursuing
the agricultural services market.
Interest expense in fiscal 1997 was $620,000 compared with $238,000 in
fiscal 1996, an increase of 161%. The increase was due to much higher
levels of term debt during fiscal 1997. Interest expense in fiscal 1996
was $238,000 compared with $190,000 in fiscal 1995, an increase of 25%.
The increase was due to higher levels of term debt during fiscal 1996.
The effective income tax provision (benefit) rates for fiscal years
1997, 1996 and 1995 were 51.2%, (39.8%) and 37.8%, respectively. The
high provision rate in fiscal 1997 was due to relatively high
unallowable expenses for tax purposes compared with low fiscal 1997 pre-
tax book income. The higher rate of benefit for fiscal 1996 compared
with the provision rate for fiscal 1995 was primarily due to the new
California investment tax credit.
Order backlog at March 31 was as follows:
1997 1996
---------------------------
Antenna and Imaging Systems $13,086,000 $19,321,000
Communication Products and Services 4,862,000 2,801,000
Total $17,948,000 $22,122,000
The 32% decrease in Antenna and Imaging Systems backlog at March 31,
1997 compared with the prior year was primarily due to lower bookings of
remote sensing systems and to a continued decline in long-term DoD
business. The lower bookings of remote sensing systems resulted in part
from delayed awards. Several of those delayed awards were received in
the first quarter of fiscal 1998, and as a result order bookings for
remote sensing systems are expected to be higher in fiscal 1998 than
they were in fiscal 1997.
The 74% increase in Communication Products and Services backlog at March
31, 1997 compared with the prior year was due to improved order bookings
in the fourth quarter ended March 31, 1997. Although fourth quarter
order bookings were higher than they were in the comparable period last
year, order bookings for Communication Products and Services were lower
in fiscal 1997 than they were in fiscal 1996. There can be no
assurances that order bookings will improve in fiscal 1998.
Liquidity and Capital Resources
At March 31, 1997, working capital was $24,756,000 compared with
$18,042,000 at March 31, 1996, an increase of $6,714,000 or 37%.
Significant changes affecting working capital during fiscal 1997 were
the following: accounts receivable increased $2,879,000 primarily due
to higher fourth quarter sales in fiscal 1997; inventories decreased
$1,499,000 as decreases in radio product inventories were partially
offset by increases in inventories of new DBS antenna products; prepaid
expenses and other current assets decreased $1,310,000 primarily due to
collection of an income tax refund; accounts payable and accrued
expenses decreased $3,145,000 due to lower recent purchases of materials
and to cost reduction efforts; and customer advances decreased
$2,949,000. The Company's cash position at March 31, 1997 was
$1,072,000 compared with $1,393,000 at March 31, 1996, a decrease of
23%. At March 31, 1997, the Company had borrowed $8,900,000 in term
debt from its bank to meet operating cash requirements. Those
borrowings represented a 71% increase in term debt from the $5,200,000
of borrowings at March 31, 1996.
Capital expenditures were $891,000 in fiscal 1997 compared with
$2,683,000 in fiscal 1996. Capital expenditures in fiscal 1998 are
expected to be higher than they were in fiscal 1997.
At March 31, 1997, the Company had a $19,500,000 revolving line of
credit with its bank, of which up to $12,000,000 may be used for the
issuance of letters of credit and up to $10,500,000 may be used for
direct working capital advances provided that total credit extended does
not exceed $19,500,000. The Company believes that its existing working
capital, anticipated future cash flows from operations and available
credit with its bank are sufficient to finance its presently planned
capital and working capital requirements.
The Company has never paid a cash dividend on its common stock and does
not anticipate doing so in the foreseeable future. Inflation and
changing prices have not had a significant impact on the Company's
historical operations.
Information required by part II, Item 8: Financial Statements and
Supplementary Data. This information is contained on pages 12 through
26 of the Annual Report.
DATRON SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
March 31,
1997 1996
------------ ------------
ASSETS
Current assets:
Cash $1,072,000 $1,393,000
Accounts receivable, net 17,896,000 15,017,000
Inventories 14,309,000 15,808,000
Deferred income taxes 2,788,000 2,602,000
Prepaid expenses and other current assets 1,168,000 2,478,000
------------ ------------
Total current assets 37,233,000 37,298,000
Property, plant and equipment, net 12,030,000 13,835,000
Goodwill, net 5,851,000 6,056,000
Investment 1,113,000 890,000
Other assets 249,000 380,000
------------ ------------
Total assets $56,476,000 $58,459,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $7,647,000 $8,490,000
Accrued expenses 3,103,000 5,405,000
Customer advances 744,000 3,693,000
Income taxes payable 194,000 240,000
Current portion of restructuring reserve 789,000 1,428,000
------------ ------------
Total current liabilities 12,477,000 19,256,000
Long-term debt 8,900,000 5,200,000
Restructuring reserve 435,000 1,063,000
Deferred income taxes 2,056,000 1,069,000
------------ ------------
Total liabilities 23,868,000 26,588,000
------------ ------------
Commitments and contingencies -- Note 9
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 1997
and 1996 31,000 31,000
Additional paid-in capital 10,602,000 10,568,000
Retained earnings 24,417,000 24,149,000
Treasury stock, at cost; 404,521 and
459,745 shares in 1997 and 1996,
respectively (2,198,000) (2,633,000)
Stock option plan and stock purchase
plan notes receivable (244,000) (244,000)
------------ ------------
Total stockholders' equity 32,608,000 31,871,000
------------ ------------
Total liabilities and stockholders' equity $56,476,000 $58,459,000
============ ============
See notes to consolidated financial statements.
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31,
1997 1996 1995
------------ ------------ ------------
Net sales $53,269,000 $61,165,000 $70,033,000
Cost of sales 37,920,000 42,952,000 47,660,000
------------ ------------ ------------
Gross profit 15,349,000 18,213,000 22,373,000
Selling, general
and administrative 11,770,000 15,101,000 14,111,000
Research and development 2,432,000 3,280,000 1,768,000
Restructuring --- 1,421,000 ---
------------ ------------ ------------
Operating income (loss) 1,147,000 (1,589,000) 6,494,000
Interest expense (620,000) (238,000) (190,000)
Interest income 13,000 27,000 20,000
Other income (expense) 8,000 (261,000) (22,000)
------------ ------------ ------------
Income (loss) before income
taxes 548,000 (2,061,000) 6,302,000
Income taxes (benefit) 280,000 (820,000) 2,382,000
------------ ------------ ------------
Net income (loss) $268,000 ($1,241,000) $3,920,000
============ ============ ============
Net income (loss) per share $0.10 ($0.46) $1.51
============ ============ ============
Weighted average number of
common and common equivalent
shares outstanding 2,681,000 2,669,000 2,600,000
============ ============ ============
See notes to consolidated financial statements.
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Stock Paid-In Retained Treasury
Shares Par Value Capital Earnings Stock
---------------------------------------------------------------
Balance at April 1, 1994 2,508,514 $30,000 $10,475,000 $21,470,000 ($3,210,000)
Stock issued in connection
with acquisition of business 20,689 1,000 174,000
Purchase of treasury stock (4,472) (51,000)
Stock options exercised
for treasury stock and
tax benefits 34,892 (62,000) 282,000
Net income 3,920,000
---------------------------------------------------------------
Balance at March 31, 1995 2,559,623 31,000 10,587,000 25,390,000 (2,979,000)
Purchase of treasury stock (4,401) (51,000)
Stock options exercised
for treasury stock and
tax benefits 48,970 (37,000) 397,000
Stock option compensation 18,000
Net loss (1,241,000)
---------------------------------------------------------------
Balance at March 31, 1996 2,604,192 31,000 10,568,000 24,149,000 (2,633,000)
Purchase of treasury stock (8,776) (84,000)
Stock options exercised
for treasury stock and
tax benefits 64,000 (4,000) 519,000
Stock option compensation 38,000
Net income 268,000
---------------------------------------------------------------
Balance at March 31, 1997 2,659,416 $31,000 $10,602,000 $24,417,000 ($2,198,000)
===============================================================
See notes to consolidated financial statements.
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
1997 1996 1995
Cash Flows from Operating
Activities
Net income (loss) $268,000 $(1,241,000) $3,920,000
Adjustments to reconcile net
income (loss) to net cash
(used in) provided by operating
activities:
Depreciation and amortization 2,953,000 3,317,000 2,366,000
Restructuring (1,267,000) 588,000 (603,000)
Changes in operating assets and
liabilities:
Accounts receivable (2,879,000) 2,594,000 (293,000)
Inventories 1,499,000 (5,807,000) (1,646,000)
Deferred income taxes 801,000 229,000 (146,000)
Prepaid expenses and other 1,389,000 (1,819,000) (128,000)
assets
Accounts payable and accrued (3,145,000) (754,000) 2,699,000
expenses
Customer advances (2,949,000) 1,236,000 (3,564,000)
Income taxes payable (46,000) (2,311,000) 931,000
Other liabilities --- (23,000) (577,000)
Net cash (used in) provided by (3,376,000) (3,991,000) 2,959,000
operating activities
Cash Flows from Investing
Activities
Additions to property, plant and (891,000) (2,683,000) (2,306,000)
equipment
Purchase of investment (223,000) (890,000) ---
Proceeds from sale of product line --- --- 1,148,000
Acquisition of business --- --- (415,000)
Net cash used in investing
activities (1,114,000) (3,573,000) (1,573,000)
Cash Flows from Financing
Activities
Increase in long-term debt 3,700,000 5,200,000 ---
Stock options exercised and tax 553,000 378,000 220,000
benefits
Purchase of treasury stock (84,000) (51,000) (51,000)
Payment advanced against stock
Option plan note receivable ----- (80,000) ---
Net cash provided by financing
activities 4,169,000 5,447,000 169,000
(Decrease) increase in cash and (321,000) (2,117,000) 1,555,000
cash equivalents
Cash and cash equivalents at 1,393,000 3,510,000 1,955,000
beginning of year
Cash and cash equivalents at end
of year $1,072,000 $1,393,000 $3,510,000
Supplemental Cash Flow
Information:
Interest paid $635,000 $224,000 $248,000
Income tax (refunds received) paid $(1,989,000) $3,306,000 $1,558,000
Schedule of Noncash Investing
Activities Relating to
Acquisition of Business:
Noncash assets acquired --- --- $3,563,000
Liabilities assumed --- --- (2,973,000)
Common stock issued --- --- (175,000)
Cash paid --- --- $415,000
See notes to consolidated financial statements
DATRON SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
Datron Systems Incorporated and its wholly owned subsidiaries (the
"Company") provide satellite communication and image processing systems
through its Antenna and Imaging Systems business segment and high-
quality radio and other wireless communication products to a worldwide
market through its Communication Products and Services business segment.
The Antenna and Imaging Systems business segment designs and
manufactures specialized satellite communication systems, subsystems and
antennas that are sold worldwide to commercial and governmental
customers, including the U.S. Department of Defense. It provides earth
station hardware, software and image processing systems for the remote
sensing satellite systems market, and also produces mobile satellite
television reception systems for recreational vehicles, buses, boats and
airplanes. This business segment operates from facilities in Simi
Valley, California. Communication products include HF (high frequency)
and VHF (very high frequency) radio products and communication systems
that are designed and manufactured in Escondido, California. These
products are sold worldwide through a network of Company salespersons
and independent dealers and sales representatives.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, and also affect the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid investments purchased with
original maturities of three months or less and which are readily
convertible into cash.
Inventories
Inventories are carried at the lower of cost (first-in, first-
out) or market (determined on the basis of estimated realizable value).
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation
is provided using the straight-line method over the estimated useful
lives of the assets. Useful lives range from two to ten years for
machinery and equipment and furniture and fixtures, and from twenty to
forty years for buildings and building improvements. Leasehold
improvements are amortized over the related lease term.
Goodwill
Goodwill represents the excess of the cost of purchased businesses
over the fair value of their net assets at date of acquisition and is
being amortized on a straight-line basis over periods ranging from 20 to
38 years. The recoverability of goodwill is evaluated on a recurring
basis utilizing the fair value methodology. As part of the
restructuring charge at March 31, 1996, $679,000 in goodwill was written
off. See Notes 3 and 4. Accumulated amortization of goodwill was
$1,850,000 at March 31, 1997 and $1,646,000 at March 31, 1996.
Investment
Investment represents preferred stock of EarthWatch Incorporated. It
is being carried at cost, which the Company believes approximates its
fair value based upon other recent sales of similar securities.
Treasury Stock
Repurchased shares of the Company's common stock are included in
treasury stock at cost. Shares issued from treasury stock for exercise
of stock options are issued at original cost on a first-in, first-out
basis.
Revenue Recognition
Revenue from product sales is generally recognized at the time of
shipment. Revenue from certain fixed-price contracts requiring
substantial performance over several periods prior to commencement of
deliveries is accounted for under the percentage-of-completion (cost-to-
cost) method of accounting. Expected profits or losses on these
contracts are based upon the Company's estimates of total sales value
and cost at completion. These estimates are reviewed and revised
periodically throughout the lives of the contracts, and adjustments
resulting from such revisions are recorded in the periods in which
revisions are made. Losses on contracts are recorded in full as they
are identified.
Accounts receivable include unbilled costs and accrued profits related
to contracts accounted for under the percentage-of-completion method of
accounting. There are no material amounts of contract holdbacks or
claims subject to uncertainty of realization. Substantially all amounts
are expected to be collected within one year. Funds received from
customers in advance of contract work are classified as current
liabilities.
Income Taxes
Effective April 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
This statement requires that deferred income taxes be reported in the
Company's financial statements utilizing the asset and liability method.
Under this method, deferred income taxes are determined based on
enacted tax rates applied to the differences between the financial
statement and tax basis of assets and liabilities.
Income (Loss) Per Share
Shares used in computing income (loss) per share include the weighted
average of common stock outstanding plus equivalent shares issuable
under the Company's stock option plans.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share ("EPS"). This statement requires
presentation of income per share to reflect both "Basic EPS" as well as
"Diluted EPS" on the face of the income statement. In general, Basic
EPS excludes dilution created by stock equivalents and is a function of
the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects potential dilution created by stock equivalents as
if such equivalents are converted into common stock and is calculated in
substantially the same manner as Fully Diluted EPS illustrated in
Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per
Share."
The Company will be required to adopt the new method of reporting
income per share in the three-month period ended December 31, 1997.
Based on the Company's existing capital structure, the anticipated
results of implementing SFAS No. 128 would reflect income per share in
materially the same manner as currently reported.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which was effective
for the Company beginning April 1, 1996. SFAS No. 123 requires expanded
disclosures for stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based
on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No.
25 to its stock based compensation awards to employees and will disclose
the required pro forma effect on net income and income per share. See
Note 8.
NOTE 3. RESTRUCTURING
In March 1996, the Company announced its plan to consolidate its image
processing division in San Jose, California with its remote sensing
earth station business in Simi Valley, California. In connection with
this decision, a restructuring charge in the amount of $1,421,000
($855,000, or $0.32 per share, after taxes) was recorded in the fourth
quarter ended March 31, 1996. The major categories of costs and
expenses included in this restructuring charge are as follows:
Estimated employee severance $ 683,000
Goodwill write-off 679,000
Estimated future losses on
facility lease 59,000
----------
Total $1,421,000
==========
In fiscal 1993, the Company restructured its Antenna and Imaging
Systems business segment. The restructuring reserve at March 31, 1997
and 1996 includes remaining estimated future losses on the Company's
Camarillo, California facility lease of $1,224,000 and $2,166,000,
respectively.
NOTE 4. ACQUISITION OF BUSINESS
On August 11, 1994, the Company acquired the business and assets
of International Imaging Systems, Inc. (I2S), a privately held company
located in Milpitas, California. I2S was the Company's joint venture
partner in DI2S, which was formed in August 1993 to provide complete
remote sensing satellite earth stations. The Company made an initial
payment to I2S of $250,000 for the business and assets, $75,006 in cash
and 20,689 shares of the Company's common stock valued at $8.46 per
share. Terms of the purchase agreement provided for two additional
payments to I2S if the acquired business achieved minimum levels of
profits and bookings during the Company's fiscal years ending March 31,
1995 and March 31, 1996, respectively. No additional amounts were
incurred during either of these periods. The acquisition has been
accounted for as a purchase and the accounts of I2S have been included
in the accompanying financial statements since August 12, 1994. The
$740,000 excess of acquisition costs over fair value of assets acquired
was recorded as goodwill. At March 31, 1996, remaining goodwill from
this acquisition in the amount of $679,000 was written off as part of
the Company's decision to consolidate its remote sensing business. See
Note 3.
NOTE 5. BALANCE SHEET INFORMATION
Accounts receivable at March 31:
1997 1996
----------- -----------
Billed $14,019,000 $ 6,858,000
Unbilled 4,103,000 8,406,000
----------- -----------
Subtotal 18,122,000 15,264,000
Allowance for doubtful
accounts (226,000) (247,000)
----------- -----------
Total $17,896,000 $15,017,000
=========== ===========
Inventories at March 31:
1997 1996
----------- -----------
Raw materials $9,316,000 $ 7,487,000
Work-in-process 2,753,000 5,231,000
Finished goods 2,240,000 3,090,000
----------- -----------
Total $14,309,000 $15,808,000
=========== ===========
Inventories are presented net of allowances for obsolescence of
$1,350,000 and $709,000 at March 31, 1997 and 1996, respectively.
Property, plant and equipment at March 31:
1997 1996
----------- -----------
Land and buildings $ 8,529,000 $ 8,479,000
Machinery and equipment 14,590,000 13,658,000
Furniture and office equipment 1,443,000 1,462,000
Leasehold improvements 815,000 910,000
Construction-in-process 66,000 183,000
---------- ----------
Subtotal 25,443,000 24,692,000
Accumulated depreciation and
amortization (13,413,000) (10,857,000)
----------- -----------
Total $12,030,000 $13,835,000
=========== ===========
Accrued expenses at March 31:
1997 1996
----------- -----------
Salaries and employee
benefits $ 1,408,000 $ 2,523,000
Warranty allowance 707,000 1,015,000
Commission and service fees 421,000 573,000
Contract loss allowance 87,000 119,000
Other 480,000 1,175,000
----------- -----------
Total $ 3,103,000 $ 5,405,000
=========== ===========
NOTE 6. LONG-TERM DEBT
At March 31, 1997, the Company had a committed revolving line of
credit with its bank of $19,500,000, of which up to $12,000,000 may be
used for the issuance of letters of credit and up to $10,500,000 may be
used for direct working capital advances. Total credit extended may not
exceed $19,500,000. The line of credit expires on June 30, 1998.
Interest is payable on borrowings under the line of credit at the bank's
prime rate plus 0.50% or at LIBOR plus 1.50%, at the option of the
Company. At March 31, 1997, the bank's prime rate was 8.50%. The line
of credit is secured by assets of the Company and contains certain
financial covenants with which the Company is in compliance. A
commitment fee of 0.25% is payable to the bank on the unused portion of
the working capital facility. At March 31, 1997, there were borrowings
of $8,900,000 under the line and the bank had issued letters of credit
against the line totaling $4,796,000.
The Company believes the carrying amount of its outstanding long-term
debt at March 31, 1997 and 1996 is a reasonable estimate of its fair
value. This was determined based on a review of borrowing rates
available to the Company at March 31, 1997 and 1996 for loans with
similar terms and maturities.
NOTE 7. INCOME TAXES
Effective April 1, 1993, the Company changed its method of accounting
for income taxes from the provisions of APB Opinion No. 11, "Accounting
for Income Taxes" (Deferred Method) to the provisions of SFAS No. 109,
"Accounting for Income Taxes" (Liability Method).
The Company's deferred income tax assets and liabilities at March 31
are as follows:
1997 1996 1995
--------- ---------- ----------
Deferred income tax assets:
Contract loss and other
allowances $1,419,000 $1,690,000 $1,755,000
Restructuring reserve 530,000 1,078,000 1,118,000
Accrued employee benefits 384,000 378,000 434,000
State taxes 133,000 200,000
Investment tax credits 173,000 65,000
Net operating loss carryover 171,000 67,000
Other 111,000 129,000 135,000
---------- ---------- ---------
Total 2,788,000 3,540,000 3,642,000
========== ========== ==========
Deferred income tax liabilities:
Depreciation (1,777,000) (1,790,000) (1,694,000)
State taxes (279,000)
Other (217,000) (186,000)
---------- ---------- ----------
Total (2,056,000) (2,007,000) (1,880,000)
---------- ---------- ----------
Net deferred income tax asset $ 732,000 $1,533,000 $ 1,762,000
========== ========== ==========
The provision (benefit) for income taxes for the years ended March 31
are as follows:
1997 1996 1995
--------- ----------- ----------
Federal:
Current $(599,000) $(1,059,000) $ 1,751,000
Deferred 811,000 335,000 17,000
State:
Current 78,000 10,000 777,000
Deferred (10,000) (106,000) (163,000)
---------- ----------- -----------
Total $ 280,000 $ (820,000) $ 2,382,000
========== ============ ==========
The provision (benefit) for income taxes differs from the federal
statutory tax rate for the years ended March 31 due to the following:
1997 1996 1995
--------- ----------- -----------
Expected tax (benefit) at
statutory rate $ 186,000 $ (701,000) $ 2,143,000
State tax (benefit), net of
federal tax effect 20,000 (63,000) 405,000
Foreign Sales Corporation
earnings (28,000) (116,000) (309,000)
Goodwill amortization 70,000 70,000 70,000
Other differences 32,000 (10,000) 73,000
--------- ----------- -----------
Total $ 280,000 $ (820,000) $ 2,382,000
========= =========== ===========
NOTE 8. EMPLOYEE INCENTIVE PLANS
In May 1985, the Company adopted the 1985 Stock Option Plan (1985
Plan). Under the 1985 Plan, as amended, 500,000 shares of common stock
may be issued upon the exercise of options granted to employees of the
Company at not less than the fair market value on the date of grant and
to directors of the Company at not less than 85% of the fair market
value on the date of grant. Options become exercisable ratably over
three years and expire ten years from the date of grant. The 1985 Plan
expired in May 1995. As of March 31, 1997, 15,000 shares of common
stock had been issued in connection with the exercise of an option
granted pursuant to the 1985 Plan for which $80,000 of the exercise
price received was in the form of a secured promissory note. The note
is due June 11, 1998 and bears interest at 6.27% per annum.
In February 1995, the Company adopted the 1995 Stock Option Plan (1995
Plan), which was approved by the Company's stockholders at the 1995
Annual Meeting. The 1995 Plan permits up to 500,000 shares of common
stock to be issued upon the exercise of options granted under the 1995
Plan. However, because the number of shares available for issuance
under the 1995 Plan was reduced by the number of options granted and
outstanding under the 1985 Plan at the time of its expiration in May
1995, the effective number of shares authorized for issuance under the
1995 Plan is 206,700, of which 61,073 were available under the 1985 Plan
at the time of its expiration. Terms of issuance and exercise of
options granted under the 1995 Plan are similar to those under the 1985
Plan.
The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Had compensation
expense for these two fixed stock option plans been determined
consistent with the provisions of SFAS 123 based on the fair value at
date of grant for awards made in fiscal years ended March 31, 1997 and
1996, and an assumed forfeiture rate of 10%, net income and net income
per share would have been reduced to the pro forma amounts indicated
below:
1997 1996
-------- ------------
Net income (loss)
-----------------
As reported $268,000 $(1,241,000)
Pro forma $ 62,000 $(1,532,000)
Net income (loss) per share
---------------------------
As reported $0.10 $(0.46)
Pro forma $0.02 $(0.57)
The pro forma effect on net income for fiscal years 1997 and 1996 is
not representative of the pro forma effect on net income in future years
because it does not take into consideration pro forma compensation
expense related to grants awarded prior to April 1, 1995. The weighted-
average fair value of options granted under the two stock option plans
with exercise prices equal to market price during fiscal years 1997 and
1996 is estimated at $5.44 and $6.81, respectively, and the weighted-
average exercise prices for those options was $11.25 and $14.58,
respectively. The weighted-average fair value of options granted under
the two stock option plans with exercise prices at less than market
price during fiscal years 1997 and 1996 is estimated at $7.06 and $9.45,
respectively, and the weighted-average exercise prices for those options
was $11.26 and $15.73, respectively. These estimates were determined by
using the Black-Scholes option-pricing model with the following weighted-
average assumptions for grants awarded in fiscal years 1997 and 1996,
respectively: dividend yield of 0% and 0%; expected volatility of 45%
and 43%; risk-free rate of return of 6.42% and 6.09%; and expected lives
of 5 years and 5 years. A change in these assumptions could result in a
significant change to the indicated fair value amounts.
A summary of the status of the Company's two fixed stock option plans
as of March 31, 1997, 1996 and 1995 and activity during the years then
ended is as follows:
1997 1996 1995
------------------ ------------------- ------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price Shares
------ -------- ------ -------- ------
Outstanding at
beginning of year 270,150 $10.46 247,300 $ 7.98 268,692
Granted 30,500 $11.25 84,500 $14.99 13,500
Canceled (17,070) $12.90 (12,680) $11.77
Exercised (64,000) $ 7.13 (48,970) $5.72 (34,892)
------- ------ ------- -------- -------
Outstanding at
end of year 219,580 $11.35 270,150 $10.46 247,300
======= ======= ======= ======= =======
Options exercisable
at end of year 143,780 $10.30 182,650 $8.66 208,466
======= ======= ======= ======= =======
Stock option compensation expense related to options granted at
less than fair value on date of grant pursuant to the 1985 Plan and 1995
Plan was $38,000 and $18,000 in fiscal years 1997 and 1996,
respectively.
Information about fixed stock options outstanding at March 31, 1997 is
as follows:
Options Outstanding Options Exercisable
-----------------------------------------------------------
Weighted
Ave. Weighted Weighted
Remaining Ave Ave.
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ----------------------------------------------------------------------------
$5.50 - $6.50 15,300 1.7 years $6.07 15,300 $6.07
$8.08 - $10.06 86,980 4.9 $8.84 73,647 $8.73
$10.50 - $12.75 65,000 7.5 $11.75 29,833 $11.45
$14.25 - $19.00 52,300 7.6 $16.58 25,000 $16.13
- --------------- ------ ----- ------- ------- ------
$5.50 - $19.00 219,580 6.1 $11.35 143,780 $10.30
============== ======= ===== ====== ======= ======
At March 31, 1997, 152,450 shares were available for grant under the
1995 Plan.
In March 1988, the Company adopted the 1988 Key Employee Stock
Purchase Plan (Purchase Plan). Under terms of the Purchase Plan, 75,000
shares of common stock may be made available for purchase at fair market
value to key employees as determined by the board of directors. As of
March 31, 1997, 50,000 shares had been purchased pursuant to the
Purchase Plan, and a note receivable in the amount of $164,000 due April
10, 1999 at an interest rate of 4.99% was outstanding.
The Company has a non-contributory qualified profit sharing plan.
Employees are eligible to participate on April 1 following their date of
employment and benefits vest over seven years. Annual contributions are
determined by the board of directors. Such amounts were zero, zero and
$186,000 for the fiscal years ended March 31, 1997, 1996 and 1995,
respectively.
In November 1995, the Company adopted the Supplemental Executive
Profit Sharing Plan, effective as of April 1, 1994. The plan is a
deferred compensation plan intended to provide certain executive
employees with additional funds for their retirement. Terms of
participation and vesting of benefits are similar to those of the
qualified profit sharing plan. Eligibility for participation and annual
contributions are determined by the board of directors. Such amounts
were $56,000, zero and $33,000 for the fiscal years ended March 31,
1997, 1996 and 1995, respectively.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company leases certain production and office facilities and
certain equipment under noncancelable operating leases. As a result of
the fiscal year 1993 restructuring, a portion of one of the Company's
production facilities has been subleased to three subtenants whose
subleases expire on June 28, 1998. The Company's San Jose facility has
been subleased to a subtenant whose sublease expires on March 31, 1999.
Future minimum operating lease obligations for each of the years ended
March 31 are as follows:
Total Lease Sublease Net Lease
Year Obligation Income Obligation
---- ----------- -------- ----------
1998 $ 1,749,000 $ 644,000 $ 1,105,000
1999 835,000 296,000 539,000
2000 65,000 65,000
2001 36,000 36,000
2002 16,000 16,000
----------- --------- -----------
Total $ 2,701,000 $ 940,000 $ 1,761,000
=========== ========= ===========
Approximately $1,224,000 of this future net lease obligation is
included in the restructuring reserve. See Note 3.
Total rent expense under noncancelable operating leases was $567,000,
$787,000 and $681,000 for the fiscal years ended March 31, 1997, 1996
and 1995, respectively. Additional rent payments in the amounts of
$695,000, $465,000 and $333,000 were charged to the restructuring
reserve during the fiscal years ended March 31, 1997, 1996 and 1995,
respectively.
In the normal course of business, the Company is subject to claims and
litigation that may be raised by governmental agencies in connection
with the Company's long-term contract business. In connection with a
Defense Contract Audit Agency (DCAA) audit of a $9.6 million U.S. Navy
contract completed in 1989, DCAA has submitted a report to the
Contracting Officer alleging deficiencies in the information provided to
the Navy at the time the contract was negotiated and recommending a
reduction in the contract value of $2.7 million. During the fiscal year
ended March 31, 1995, DCAA amended its recommendation to a reduction in
contract value of $1.9 million. The Company is confident that its
actions have been appropriate at all times and believes that the
conclusions in the DCAA report are erroneous; the Company intends to
challenge the report and its conclusions vigorously. Due to extensive
administrative proceedings, the Company does not expect an early
resolution of this matter, and there was no activity on this matter
during fiscal 1997. In the opinion of management, resolution of this
and other such matters would not materially affect the consolidated
financial position of the Company.
In August 1992, Trans World Communications, Inc. (Trans World), a
wholly owned subsidiary of the Company and which was renamed Datron
World Communications Inc. on March 31, 1995, was named as defendant in a
lawsuit filed by ATACS Corporation (ATACS) and AIRTACS Corporation
(AIRTACS) relating to a contract to provide radio communication
shelters. ATACS and AIRTACS contend that Trans World entered into an
agreement to team with them on the contract and then wrongfully failed
to use them as subcontractors. They seek damages in excess of
$2,000,000. Trans World has denied the claims and intends to defend the
lawsuit vigorously. Similar claims originally filed against Datron
Systems Incorporated have been dismissed by the court. In the opinion
of management, resolution of this matter would not materially affect the
consolidated financial position of the Company.
NOTE 10. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in two business segments: Antenna and Imaging
Systems, and Communication Products and Services. See Note 1. The
following table contains certain segment, geographic and customer
information about the Company's business:
Years Ended March 31,
1997 1996 1995
----------- ----------- ---------
Net sales:
Antenna and Imaging Systems $33,304,000 $31,872,000 $42,097,000
Communication Products and
Services 19,965,000 29,293,000 27,936,000
---------- ----------- ----------
Total $53,269,000 $61,165,000 $70,033,000
=========== =========== ===========
Operating income (loss):
Antenna and Imaging Systems $ 1,813,000 $(1,659,000) $ 3,965,000
Communication Products and
Services 456,000 2,871,000 4,154,000
----------- ----------- -----------
Total 2,269,000 1,212,000 8,119,000
Restructuring (1,421,000)
General corporate expenses (1,122,000) (1,380,000) (1,625,000)
Interest expense-net (607,000) (211,000) (170,000)
Other income (expense) 8,000 (261,000) (22,000)
---------- ----------- -----------
Income (loss) before income
taxes $ 548,000 $(2,061,000) $ 6,302,000
=========== =========== ===========
Identifiable assets:
Antenna and Imaging Systems $26,596,000 $29,076,000 $29,148,000
Communication Products and
Services 24,603,000 22,807,000 18,623,000
Corporate 5,277,000 6,576,000 8,173,000
----------- ----------- -----------
Total $56,476,000 $58,459,000 $55,944,000
=========== =========== ===========
Capital additions:
Antenna and Imaging Systems $ 190,000 $ 1,821,000 $ 1,122,000
Communication Products and
Services 688,000 861,000 1,176,000
Corporate 13,000 1,000 8,000
----------- ----------- -----------
Total $ 891,000 $ 2,683,000 $ 2,306,000
=========== =========== ===========
Depreciation and amortization:
Antenna and Imaging Systems $ 1,791,000 $ 2,141,000 $ 1,469,000
Communication Products and
Services 1,149,000 1,163,000 856,000
Corporate 13,000 13,000 41,000
----------- ----------- -----------
Total $ 2,953,000 $ 3,317,000 $ 2,366,000
=========== =========== ===========
Net sales:
U.S. $27,316,000 $25,697,000 $26,714,000
Asia 18,148,000 20,116,000 13,912,000
South America 2,792,000 3,386,000 4,796,000
Africa 2,484,000 6,493,000 14,529,000
Europe 2,251,000 4,846,000 9,829,000
Other 278,000 627,000 253,000
----------- ----------- -----------
Total $53,269,000 $61,165,000 $70,033,000
=========== =========== ===========
Sales for U.S. Department
of Defense:
Antenna and Imaging Systems $15,787,000 $17,658,000 $24,929,000
Communication Products and
Services 558,000 529,000 822,000
----------- ----------- -----------
Total $16,345,000 $18,187,000 $25,751,000
=========== =========== ===========
For the fiscal year ended March 31, 1997, three customers accounted
for 13%, 12% and 11% of Antenna and Imaging Systems net sales and two
customers accounted for 31% and 24% of Communication Products and
Services net sales. For the fiscal year ended March 31, 1996, one
customer accounted for 15% of Antenna and Imaging Systems net sales and
one customer accounted for 39% of Communication Products and Services
net sales. For the fiscal year ended March 31, 1995, one customer
accounted for 10% of Antenna and Imaging Systems net sales and one
customer accounted for 36% of Communication Products and Services net
sales.
NOTE 11. QUARTERLY FINANCIAL DATA - Unaudited
(in thousands, except per-share data)
Fiscal Year 1997
----------------
Net Gross Net Income
Sales Profit Income Per Share
------- ------ ----- ---------
First Quarter $12,457 $ 3,456 $ 29 $0.01
Second Quarter 14,620 3,909 155 0.06
Third Quarter 12,923 3,612 20 0.01
Fourth Quarter 13,269 4,372 64 0.02
------- ------- ---- -----
Fiscal Year $53,269 $15,349 $268 $0.10
======= ======= ==== =====
Net sales, gross profits and net income were relatively consistent
from quarter-to-quarter, and generally lower than they were in fiscal
1996. Lower sales of radio communication products were primarily
responsible for the decline, partially offset by lower operating
expenses. Third quarter net income reflects a $552,000 ($330,000, or
$0.12 per share, after taxes) reduction in reserves for commitments and
contingencies. Fourth quarter net sales reflect $666,000 in sales
returns of DBS antenna products from a former distributor. Gross profit
for the fourth quarter reflects a $605,000 increase in the Company's
provision for inventory obsolescence.
Fiscal Year 1996
----------------
Net Gross Net Income Income(Loss)
Sales Profit (Loss) Per Share
------- ------- ------ --------
First Quarter $14,356 $ 5,360 $ 415 $0.16
Second Quarter 15,660 4,930 327 0.12
Third Quarter 19,339 5,158 177 0.07
Fourth Quarter 11,810 2,765 (2,160) (0.81)
------- ------- ------- ------
Fiscal Year $61,165 $18,213 $(1,241) $(0.46)
======= ======= ======= ======
The sequential improvement in net sales from the first through third
quarters was primarily due to increasing sales of radio communication
products. However, net income declined during these three quarters
primarily because of higher research and development expenses, higher
selling expenses and the write-off of non-recoverable expenses
associated with a remote sensing order that the Company canceled in
January 1996 for lack of payment. Net sales declined in the fourth
quarter due to lower sales of both remote sensing systems and radio
communication products. The net loss in the fourth quarter was
primarily due to lower gross profits on the lower sales and to a
restructuring charge of $1,421,000 ($855,000, or $0.32 per share, after
taxes) resulting from the Company's decision to consolidate its image
processing division in San Jose, California with its remote sensing
earth station business in Simi Valley, California.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Datron Systems Incorporated
Escondido, California
We have audited the accompanying consolidated balance sheets of
Datron Systems Incorporated and its subsidiaries as of March 31, 1997
and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended March 31, 1997. 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 in accordance with generally accepted
auditing standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Datron
Systems Incorporated and its subsidiaries as of March 31, 1997 and 1996
and the results of their operations and their cash flows for each of the
three years in the period ended March 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Diego, California
May 9, 1997