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 September 30, 1997
[ ] 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 95-2582922
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
304 Enterprise Street, Escondido, California 92029-1297
- ------------------------------------------------------------
(Address of principal executive offices) (zip code)
(760) 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 October 24, 1997, the Registrant had only one class
of common stock, par value $0.01, of which there were 2,669,858 shares
outstanding.
1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
DATRON SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)
Sept 30, March 31
1997 1997
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash $376 $1,072
Accounts receivable, net 16,555 17,896
Inventories 13,834 14,309
Deferred income taxes 2,788 2,788
Prepaid expenses and other current assets 1,254 1,168
-------- --------
Total current assets 34,807 37,233
Property, plant and equipment, net 11,293 12,030
Goodwill, net 5,749 5,851
Investment 1,113 1,113
Other assets 204 249
-------- --------
Total assets $53,166 $56,476
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $7,263 $7,647
Accrued expenses 2,798 3,103
Customer advances 2,501 744
Income taxes payable 194 194
Current portion of restructuring reserve 592 789
-------- --------
Total current liabilities 13,348 12,477
Long-term debt 5,300 8,900
Restructuring reserve 180 435
Deferred income taxes 2,056 2,056
-------- --------
Total liabilities 20,884 23,868
-------- --------
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 September and March 31 31
Additional paid-in capital 10,610 10,602
Retained earnings 24,018 24,417
Treasury stock, at cost; 394,079 and 404,521
shares in September and March, respectively (2,133) (2,198)
Stock option plan and stock purchase plan notes rec (244) (244)
-------- --------
Total stockholders' equity 32,282 32,608
-------- --------
Total liabilities and stockholders' equity $53,166 $56,476
======== ========
See notes to consolidated financial statements.
2
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per-share amounts)
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 1997 1996
----------------- ------------------
Net sales $14,937 $14,620 $25,278 $27,077
Cost of sales 11,326 10,711 19,312 19,712
----------------- ------------------
Gross profit 3,611 3,909 5,966 7,365
Selling, general and admin. 2,797 2,991 5,545 5,722
Research and development 471 482 860 1,040
----------------- ------------------
Operating income (loss) 343 436 (439) 603
Interest expense (81) (177) (199) (294)
Other expense (4) --- (10) ---
----------------- ------------------
Income (loss) before income taxes 258 259 (648) 309
Income taxes (benefit) 109 104 (249) 125
----------------- ------------------
Net income (loss) $149 $155 ($399) $184
================= ==================
Net income (loss) per share $0.06 $0.06 ($0.15) $0.07
================= ==================
Weighted average number of
common and common equivalent
shares outstanding 2,689 2,681 2,677 2,687
================= ==================
See notes to consolidated financial statements.
3
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Six Months Ended
September 30,
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income ($399) $184
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,284 1,429
Restructuring (452) (801)
Changes in operating assets and liabilities:
Accounts receivable 1,341 (3,458)
Inventories 475 517
Prepaid expenses and other assets (50) 1,712
Accounts payable and accrued expenses (689) (2,444)
Customer advances 1,757 406
Income taxes payable --- 121
--------- ---------
Net cash provided by (used in) operating activities 3,267 (2,334)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (436) (194)
Purchase of investment --- (223)
--------- ---------
Net cash used in investing activities (436) (417)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in long-term debt (3,600) 1,400
Stock options exercised 126 264
Purchase of treasury stock (53) ---
--------- ---------
Net cash (used in) provided by financing activities (3,527) 1,664
--------- ---------
DECREASE IN CASH (696) (1,087)
Cash at beginning of period 1,072 1,393
--------- ---------
CASH AT END OF PERIOD $376 $306
========= =========
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, 1997.
In the opinion of the Company's management, 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 September 30, 1997 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, 1997 has been derived from audited
financial statements.
2. 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 when such
amounts are dilutive. 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 ending December 31,
1997. Based on the Company's existing capital structure,
implementation of SFAS No. 128 is not expected to have a
material effect on the Company's income (loss) per share.
3. Accounts Receivable
-------------------
At September 30, 1997 and March 31, 1997, accounts receivable
were as follows:
September 30, March 31,
1997 1997
------------- -----------
Billed $11,749,000 $14,019,000
Unbilled 5,032,000 4,103,000
------------- -----------
Subtotal 16,781,000 18,122,000
Allowance for doubtful accounts (226,000) (226,000)
------------ -----------
Total $16,555,000 $17,896,000
============ ===========
5
4. Inventories
-----------
At September 30, 1997 and March 31, 1997, inventories were as
follows:
September 30, March 31,
1997 1997
------------- -------------
Raw materials $ 9,193,000 $ 9,316,000
Work-in-process 3,516,000 2,753,000
Finished goods 1,125,000 2,240,000
------------ ------------
Total $13,834,000 $14,309,000
============ ============
Inventories are presented net of allowances for obsolescence of
$1,453,000 and $1,350,000 at September 30, 1997 and March 31,
1997, respectively.
5. Property, Plant and Equipment
-----------------------------
At September 30, 1997 and March 31, 1997, property, plant and
equipment was as follows:
September 30, March 31,
1997 1997
-------------- --------------
Land and buildings $ 8,529,000 $ 8,529,000
Machinery and equipment 14,981,000 14,590,000
Furniture and office equipment 1,457,000 1,443,000
Leasehold improvements 820,000 815,000
Construction-in-process 66,000 66,000
------------ -------------
Subtotal 25,853,000 25,443,000
Accumulated depreciation and
amortization (14,560,000) (13,413,000)
------------ -------------
Total $11,293,000 $12,030,000
============ =============
6. Long-Term Debt
--------------
On August 8, 1997, the Company amended and restated its credit
agreement and note with its bank. Under the amended agreement,
the Company has a committed revolving line of credit with the
bank of $19,500,000, of which up to $15,000,000 may be used for
letters of credit and up to $9,500,000 may be used for direct
working capital advances. Total credit extended may not exceed
$19,500,000. The letter of credit facility expires on June 30,
1999 and the working capital facility expires on December 31,
1998. Interest is payable on borrowings under the working
capital line at the bank's prime rate plus 0.85% or at LIBOR plus
1.85% at the option of the Company. At September 30, 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% per annum is payable to the bank on the unused portion of
the working capital facility. At September 30,1997, there were
borrowings of $5,300,000 under the working capital line and the
bank had issued letters of credit against the line totaling
$7,255,000.
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:
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). This segment also sells remote
sensing satellite earth stations to worldwide commercial,
scientific and military organizations. 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 in fiscal 1997. 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.
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.
Results of Operations
- ---------------------
Net income for the second quarter of fiscal 1998 was $149,000, or
$0.06 per share, compared with net income of $155,000, or $0.06
per share, in the second quarter of fiscal 1997. Net sales in
the second quarter of fiscal 1998 were $14,937,000, a 2% increase
from second quarter net sales last fiscal year of $14,620,000.
The increase in sales was primarily due to higher sales of
military antennas and remote sensing systems, partially offset by
lower sales of direct broadcast satellite (DBS) antenna products.
Although net income in the recent quarter was not materially
different from net income in the second quarter last fiscal year,
the Company experienced lower gross profits in the recent
quarter, partially offset by lower selling, administrative and
interest expenses.
Net loss for the six months ended September 30, 1997 was
$399,000, or $0.15 per share, compared with net income of
$184,000, or $0.07 per share, for the comparable period last
fiscal year. Net sales for the six months were $25,278,000, a 7%
decrease from net sales of $27,077,000 for the first six months
last fiscal year. The decrease in sales was primarily due to
lower sales of DBS antenna products and radio products. The net
loss resulted from lower gross profits on the lower sales,
partially offset by lower operating and interest expenses.
Operating results for each business segment were as follows:
Antenna and Imaging Systems
- ---------------------------
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 1997 1996
----------- ---------- ----------- -----------
Net sales $9,769,000 $9,377,000 $16,988,000 $17,761,000
========== ========== =========== ===========
Gross profit $1,876,000 $2,493,000 $3,235,000 $4,587,000
========== ========== =========== ===========
Operating income
(loss) $234,000 $556,000 ($108,000) $560,000
========== ========== =========== ==========
Sales of Antenna and Imaging Systems products increased 4% in the
second quarter of fiscal 1998 compared with the second quarter of
fiscal 1997. The increase was due to higher sales of military
antennas and remote sensing systems, partially offset by lower
sales of DBS antenna products. Sales in the first six months of
fiscal 1998 were 4% lower than in the first six months of fiscal
1997. The decrease was primarily due to lower sales of DBS
antenna products, partially offset by higher sales of military
antennas.
Gross profit percentage on sales of Antenna and Imaging Systems
products was 19.2% in the second quarter of fiscal 1998 compared
with 26.6% in the second quarter last fiscal year. The decrease
was primarily due to higher engineering costs, manufacturing
inefficiencies and severance costs associated with a reduction in
personnel. Gross profit percentage for the first six months of
fiscal 1998 was 19.0% of sales compared with 25.8% of sales for
the first six months of fiscal 1997. The decrease was primarily
due to higher engineering costs and manufacturing inefficiencies.
Several personnel changes were made in the second quarter of
fiscal 1998 in an effort to improve operational efficiencies. A
short-term effect of these changes was to increase expenses.
7
Operating income percentage on sales of Antenna and Imaging
Systems products was 2.4% in the second quarter of fiscal 1998
compared with 5.9% in the second quarter last fiscal year. The
decrease resulted from lower gross profits, partially offset by
lower selling, product development and administrative expenses.
Operating loss percentage for the first six months of fiscal 1998
was 0.6% of sales compared with an operating income percentage of
3.2% of sales for the first six months of fiscal 1997. The
decrease was primarily due to lower gross profits, partially
offset by lower product development, selling and administrative
expenses.
Communication Products and Services
- -----------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 1997 1996
---------- ---------- ----------- ----------
Net sales $5,168,000 $5,243,000 $8,290,000 $9,316,000
========== ========== =========== ==========
Gross profit $1,735,000 $1,416,000 $2,731,000 $2,778,000
========== ========== =========== ==========
Operating income $468,000 $222,000 $381,000 $777,000
========== ========== =========== ==========
Sales of Communication Products and Services decreased 1% in the
second quarter of fiscal 1998 compared with the second quarter of
fiscal 1997. The difference in sales between the two periods is
not meaningful. Sales in the first six months of fiscal 1998
were 11% lower than in the first six months of fiscal 1997. The
decrease was primarily due to low sales of radio products in the
first quarter of fiscal 1998 resulting from low order bookings
due to delays in new product introduction. The Company
introduced two new radio products in the latter part of fiscal
1997 and an additional new radio was introduced in the second
quarter of fiscal 1998.
Gross profit percentage on sales of Communication Products and
Services was 33.6% in the second quarter of fiscal 1998 compared
with 27.0% in the second quarter last fiscal year. The increase
was primarily due to labor efficiencies and to a more favorable
product mix. Gross profit percentage for the first six months of
fiscal 1998 was 32.9% of sales compared with 29.8% of sales for
the first six months of fiscal 1997 for the same reason.
Operating income percentage on sales of Communication Products
and Services was 9.1% in the second quarter of fiscal 1998
compared with 4.2% in the second quarter last fiscal year. The
increase resulted primarily from higher gross profits, partially
offset by higher product development expenses. Operating income
percentage for the first six months of fiscal 1998 was 4.6% of
sales compared with 8.3% of sales for the first six months of
fiscal 1997. The decrease was primarily due to higher
administrative and product development expenses, partially offset
by higher gross profits.
Consolidated expenses were as follows:
Selling, general and administrative expenses were $2,797,000 in
the second quarter of fiscal 1998, a 6% decrease compared with
second quarter of fiscal 1997 expenses of $2,991,000. The
decrease was primarily due to lower selling and administrative
expenses at the Antenna and Imaging Systems business segment.
Selling, general and administrative expenses for the first six
months of fiscal 1998 were $5,545,000, a 3% decrease compared
with first six months of fiscal 1997 expenses of $5,722,000. The
decrease was primarily due to lower selling expenses, partially
offset by higher administrative expenses.
Research and development (R&D) expenses were $471,000 in the
second quarter of fiscal 1998 compared with $482,000 in the
second quarter last fiscal year. The 2% decrease resulted from
lower spending on development programs for mobile DBS antenna
products being almost offset by increased spending on development
programs for new radio products. R&D expenses in the first six
months of fiscal 1998 were $860,000, a 17% decrease compared with
first six months of fiscal 1997 expenses of $1,040,000. The
decrease resulted from lower spending on development programs for
mobile DBS antenna products, partially offset by increased
spending on development programs for new radio products.
8
Order backlog at September 30 was as follows:
1997 1996
------------ -----------
Antenna and Imaging Systems $23,971,000 $18,589,000
Communication Products and Services 5,988,000 4,519,000
------------ -----------
Total $29,959,000 $23,108,000
=========== ===========
The 29% increase in Antenna and Imaging Systems backlog at
September 30, 1997 compared with September 30, 1996 was primarily
due to higher order bookings for remote sensing systems and
military antennas.
The 33% increase in Communication Products and Services backlog
at September 30, 1997 compared with September 30, 1996 was
primarily due to improved order bookings in the fourth fiscal
quarter ended March 31, 1997.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1997, working capital was $21,459,000 compared
with $24,756,000 at March 31, 1997, a decrease of $3,297,000 or
13%. Major changes affecting working capital during this period
were the following: accounts receivable decreased $1,341,000 as
collections exceed sales; inventories decreased $475,000
primarily due to reductions in radio products inventories;
accounts payable and accrued expenses decreased $689,000; and
customer advances increased $1,757,000. The Company's cash
position at September 30, 1997 was $376,000 compared with
$1,072,000 at March 31, 1997, a decrease of 65%. At September
30, 1997, the Company had borrowed $5,300,000 in term debt from
its bank to meet operating cash requirements. These borrowings
represent a 40% decrease in term debt from the $8,900,000 of
borrowings at March 31, 1997.
Capital equipment expenditures were $436,000 during the first six
months of fiscal 1998 compared with $194,000 in the first six
months last fiscal year. The increase was primarily due to
higher purchases of equipment for the Antenna and Imaging Systems
business segment.
At September 30, 1997, the Company had a $19,500,000 committed
revolving line of credit with its bank, of which up to
$15,000,000 may be used for the issuance of letters of credit and
up to $9,500,000 may be used for direct working capital advances
provided that total credit extended does not exceed $19,500,000.
See Note 6 to Consolidated Financial Statements. 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.
9
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
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. In
a May 28, 1997 ruling, the court found Trans World in breach of a
teaming agreement but was not able to determine what damages, if
any, were incurred by ATACS and AIRTACS. The court ordered both
parties to submit supplemental findings to support their
positions regarding damages. On September 3, 1997, the court
awarded ATACS and AIRTACS one dollar ($1.00) in damages. ATACS
and AIRTACS have appealed the court's decision. The Company
has taken a cross appeal with respect to the issue of whether
the Company was in breach of any teaming agreement. The Company
believes that final resolution of this matter will not materially
affect the consolidated financial position of the Company.
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 4. Submission of Matters to a Vote of Security Holders
On August 18, 1997, the Company held its annual meeting of
stockholders, proxies for which were solicited pursuant to
Regulation 14a under the Act. All existing directors were re-
elected. The stockholders also approved the Company's Employee
Stock Purchase Plan, voting on which as follows:
Votes for the plan 1,257,157
Votes against the plan 72,392
No. of abstentions 13,272
No. of non-votes 1,092,975
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.59 Amended and Restated Credit Agreement and Note
between the Registrant and Union Bank of California
dated August 8, 1997.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter.
10
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 October 28, 1997 By: /s/ WILLIAM L. STEPHAN
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)