EXHIBIT 13
CERTAIN PORTIONS OF REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS
FOR FISCAL YEAR ENDED MARCH 31, 1998 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 1998
Quarter Ended High Low
-------- -------
June 30, 1997 $10.625 $ 9.00
September 30, 1997 $12.9375 $ 9.75
December 31, 1997 $11.625 $10.125
March 31, 1998 $10.375 $7.50
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
On March 31, 1998, 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,
----------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------
Statements of
Operations
Net sales $54,628,000 $53,269,000 $61,165,000 $70,033,000 $65,636,000
Net income (loss) (3,163,000) 268,000 (1,241,000) 3,920,000 5,251,000
Earnings (loss)per
share assuming
dilution<F1> $(1.18) $0.10 $(0.48) $1.51 $2.10
Balance Sheets
Working capital $20,354,000 $24,756,000 $18,042,000 $14,241,000 $13,540,000
Total assets 51,284,000 56,476,000 58,459,000 55,944,000 49,488,000
Long-term debt 5,600,000 8,900,000 5,200,000 0 0
Total liabilities 21,679,000 23,868,000 26,588,000 23,079,000 20,887,000
Stockholders'
equity<F2> 29,605,000 32,608,000 31,871,000 32,865,000 28,601,000
Book value
per share $11.05 $12.26 $12.24 $12.84 $11.40
[FN]
<F1> See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the determination of shares used in computing earnings
(loss) per share.
<F2> No dividends were declared or paid during the years presented.
</FN>
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 6 through 9 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
1998 sales for this segment were $33,789,000, a 1% increase from
fiscal 1997 sales of $33,304,000. The DoD accounted for 31% and 47%
of this segment's sales in fiscal 1998 and 1997, respectively.
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 33% and 35% of this segment's
sales in fiscal 1998 and 1997, respectively. Sales of antenna systems
for non-defense governmental agencies accounted for 18% and 4% of this
segment's sales in fiscal 1998 and 1997, respectively. Another
additional market is mobile direct broadcast satellite ("DBS")
television reception systems for recreational vehicles, boats and
large business jets. Sales of DBS products represented 18% and 14% of
this segment's sales in fiscal 1998 and 1997, respectively.
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 1998 sales for this segment were $20,839,000, a 4% increase
from fiscal 1997 sales of $19,965,000. Foreign customers accounted
for 88% of fiscal 1998 sales and 94% of fiscal 1997 sales. During
fiscal 1998, this segment sold radio products to an Asian customer
that accounted for 24% of this segment's sales and 9% of consolidated
sales. During fiscal 1997, sales of radio products to the same Asian
customer accounted for 30% of this segment's sales and 11% of
consolidated sales.
Consolidated sales for fiscal 1998 were $54,628,000, a 3% increase
from fiscal 1997 consolidated sales of $53,269,000. The increase in
sales was primarily due to higher sales of DBS antennas and radio
products, partially offset by lower sales of products for the DoD.
Net loss for fiscal 1998 was $3,163,000, or $1.18 per share, compared
with net income in fiscal 1997 of $268,000, or $0.10 per share. The
net loss was primarily due to low gross margins resulting from cost
overruns at the Antenna and Imaging Systems business segment. The net
loss also included the write-off of the Company's investment in
EarthWatch Incorporated of $1,113,000, or $0.42 per share. The
investment in EarthWatch was made as part of a contract to supply
earth station antennas in 1995 in support of EarthWatch's plans to be
the first to launch a high-resolution, commercial remote sensing
satellite. Although EarthWatch launched their first satellite in
December 1997, communication with the satellite was subsequently lost
and EarthWatch will need to raise new financing to achieve a longer
term objective. Consequently, the decision was made to write off the
investment.
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 "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. A variety of
factors could cause the Company's actual results to differ from the
anticipated results expressed in such forward-looking statements.
These include, among others, uncertainties stemming from the
dependence of the Company on foreign sales and on large orders from a
relatively small number of customers, risks relating to the decline in
the Company's traditional defense business and the Company's efforts
to develop and market consumer products, lack of timely development or
customer acceptance of new products, and the impact of competition.
Investors are referred to the Company's periodic reports under the
Securities Exchange Act of 1934, including without limitation, the
Investment Considerations set forth in the Company's Annual Report on
Form 10-K.
The consolidated financial statements and notes thereto that appear on
pages 10 through 23 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,
---------------------
1998 1997 1996
------- ------- -------
Net sales $33,789 $33,304 $31,872
======= ======= =======
Percent of consolidated
net sales 62% 63% 52%
=== === ===
Gross profit $4,963 $9,923 $8,682
Operating expenses before
corporate expenses and
restructuring 7,472 8,110 10,341
------ ------ ------
Operating income
(loss) $(2,509) $1,813 $(1,659)
====== ===== ======
Percent of consolidated
operating income (loss)
before corporate expenses
and restructuring 179% 80% (137%)
==== === ====
Sales of Antenna and Imaging Systems increased $485,000, or 1%, in
fiscal 1998 compared with fiscal 1997 sales. The increase was
primarily due to higher sales of DBS antenna products, partially
offset by lower sales for the DoD and similar customers and by lower
sales of remote sensing systems. Although sales for the DoD were 34%
lower in fiscal 1998 than in fiscal 1997, higher sales of similar
antenna products to other customers made up for most of the decline.
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.
Gross profit percentage on Antenna and Imaging Systems' sales was
14.7% in fiscal 1998 compared with 29.8% in fiscal 1997 and 27.2% in
fiscal 1996. The decrease in fiscal 1998 from fiscal 1997 was
primarily due to cost overruns resulting from the necessity to
substantially increase cost estimates to complete several projects.
The Company periodically reviews and revises these costs. The need
for increased expenditures was identified in the fourth quarter when
those projects were undergoing final integration and testing. Several
projects had design defects requiring redesign and rework. 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.
Operating loss percentage on sales of Antenna and Imaging Systems'
products was 7.4% in fiscal 1998 compared with an operating income
percentage of 5.4% of sales in fiscal 1997 and an operating loss
percentage before provision for restructuring of 5.2% of sales in
fiscal 1996. The decrease in fiscal 1998 from fiscal 1997 was
primarily due to lower gross margins, partially offset by lower new
product development and selling expenses. 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.
COMMUNICATION PRODUCTS AND SERVICES
Years Ended March 31,
---------------------
1998 1997 1996
------- ------ -------
Net sales $20,839 $19,965 $29,293
======= ====== ======
Percent of consolidated
net sales 38% 37% 48%
=== === ===
Gross profit $6,404 $5,426 $9,531
Operating expenses before
corporate expenses and
restructuring 5,293 4,970 6,660
------ ----- -----
Operating income $1,111 $456 $2,871
====== ===== ======
Percent of consolidated
operating income (loss)
before corporate
expenses and
restructuring (79%) 20% 237%
=== === ====
Sales of Communication Products and Services increased $874,000, or
4%, in fiscal 1998 compared with fiscal 1997 sales. The increase in
sales was primarily due to a higher backlog of orders at the beginning
of fiscal 1998 than at the beginning of fiscal 1997. Sales of radio
products to two Asian customers accounted for $7,181,000, or 34%, of
this segment's fiscal 1998 sales. 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 the same two Asian
customers accounted for $10,885,000, or 55%, of this segment's fiscal
1997 sales. 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 30.7% in fiscal 1998 compared with 27.2% in fiscal 1997 and 32.5%
in fiscal 1996. The improvement in fiscal 1998 from fiscal 1997 was
due to production efficiencies resulting from lower labor and overhead
costs, partially offset by higher materials costs resulting from a
less favorable product mix. 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.
Operating income percentage on sales of Communication Products and
Services was 5.3% in fiscal 1998 compared with 2.3% of sales in fiscal
1997 and 9.8% of sales in fiscal 1996. The increase in fiscal 1998
compared with fiscal 1997 was due to higher gross margins, partially
offset by higher administrative and new product development expenses.
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. Because
operating losses were incurred in the Antenna and Imaging Systems
business segment in fiscal 1998 and 1996, and because a consolidated
operating loss before corporate expenses and restructuring was
incurred in fiscal 1998 and consolidated operating income before
corporate expenses and restructuring was incurred in fiscal 1996,
operating income attributable to the Communication Products and
Services business segment was (79%) and 237% of consolidated operating
income (loss) before corporate expenses and restructuring in fiscal
1998 and 1996, respectively.
Consolidated expenses were as follows:
Selling, general and administrative ("SG&A") expenses were $12,179,000
in fiscal 1998 compared with $11,770,000 in fiscal 1997 and
$15,101,000 in fiscal 1996. Fiscal 1998 SG&A expenses increased 3%
over fiscal 1997 SG&A expenses primarily because of higher
administrative expenses at the Communication Products and Services
business segment and because of increases in reserves for commitments
and contingencies at the Antenna and Imaging Systems business segment.
Selling expenses declined at both business segments. 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.
Research and development ("R&D") expenses were $1,987,000 in fiscal
1998 compared with $2,432,000 in fiscal 1997 and $3,280,000 in fiscal
1996. Fiscal 1998 R&D expenses decreased 18% over fiscal 1997 R&D
expenses because of lower spending on development programs for mobile
DBS products, partially offset by higher spending on development
programs for new radio products. The Company expects to increase
spending on new product development programs in fiscal 1999. Most of
the anticipated increase will be for programs to enhance tracking
antenna capabilities. Fiscal 1997 R&D expenses decreased 26% over
fiscal 1996 R&D expenses primarily because of lower spending on
development programs for mobile DBS products, partially offset by
higher spending on development programs for new radio products.
Interest expense was $373,000 in fiscal 1998 compared with $607,000 in
fiscal 1997 and $211,000 in fiscal 1996. The 39% decrease in fiscal
1998 was due to lower levels of term debt during fiscal 1998. The
188% increase in fiscal 1997 from fiscal 1996 was due to much higher
levels of term debt during fiscal 1997.
The effective income tax provision (benefit) rates for fiscal years
1998, 1997 and 1996 were (26.4%), 51.1% and (39.8%), respectively.
The low benefit rate in fiscal 1998 was due to the Company's inability
to take a deduction for the write-off of its investment in EarthWatch
Incorporated because of a lack of offsetting capital gains. 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.
Order backlog at March 31 was as follows:
1998 1997
----------- -----------
Antenna and Imaging Systems $19,949,000 $13,086,000
Communication Products and
Services 5,494,000 4,862,000
----------- -----------
Total $25,443,000 $17,948,000
=========== ===========
The 52% increase in Antenna and Imaging Systems backlog at March 31,
1998 compared with March 31, 1997 was primarily due to higher bookings
of remote sensing systems and antennas for the DoD and other non-
defense governmental customers.
The 13% increase in Communication Products and Services backlog at
March 31, 1998 compared with March 31, 1997 was due to improved order
bookings in the third and fourth quarters of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURES
At March 31, 1998, working capital was $20,354,000 compared with
$24,756,000 at March 31, 1997, a decrease of $4,402,000 or 18%.
Significant changes affecting working capital during fiscal 1998 were
as follows: accounts receivable decreased $2,409,000 primarily due to
good collections and low fourth quarter sales in fiscal 1998;
inventories decreased $261,000 primarily due to an increase in the
provision for inventory obsolescence; accounts payable and accrued
expenses increased $1,927,000. The Company's cash position at March
31, 1998 was $634,000 compared with $1,072,000 at March 31, 1997, a
decrease of 41%. At March 31, 1998, the Company had borrowed
$5,600,000 in term debt from its bank to meet operating cash
requirements. Those borrowings represented a 37% decrease in term
debt from the $8,900,000 of borrowings at March 31, 1997.
Capital expenditures were $1,125,000 in fiscal 1998 compared with
$891,000 in fiscal 1997. Capital expenditures in fiscal 1999 are
expected to be higher than they were in fiscal 1998.
At March 31, 1998, the Company had a $19,500,000 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. The letter of credit facility expires on
June 30, 1999 and the working capital facility expires on April 30,
1999. In April 1998, the Company amended its revolving line of credit
with its bank. Under the amended agreement, effective July 31, 1998,
the Company will have a committed revolving line of credit in the
amount of $15,500,000, of which up to $15,000,000 may be used for the
issuance of letters of credit and up to $5,500,000 may be used for
direct working capital advances. Total credit extended may not exceed
$15,500,000. The Company believes 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 through the end of fiscal 1999. Certain
business opportunities could arise that would require working capital
and credit availability for the issuance of letters of credit in
amounts that exceed current credit limits with its bank. The Company
believes there are alternative sources of financing available that
would provide the necessary credit in that event; however, there can
be no assurance the Company will be able to obtain such financing.
Certain portions of the Company's internal operating systems and some
software included in products sold to its customers are subject to
failure as a result of the Year 2000 date issue (the "Year 2000
issue"). The Company is addressing this issue by examining those
systems and software programs where there may be a risk of failure
resulting from the Year 2000 issue, and determining an appropriate
course of action to remedy identified problems in a timely fashion.
In addition, the Company is in process of communicating with suppliers
and others with whom it conducts business to assess whether they are
Year 2000 compliant, and if not, to gain assurance they are taking
appropriate steps to become compliant. The Company does not believe
it will incur a material financial impact from the risk of failure, or
from the costs associated with assessing the risk of failure, arising
from the Year 2000 issue.
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 10 through
24 of the Annual Report.
DATRON SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
March 31,
1998 1997
------------------------
ASSETS
Current assets:
Cash $634,000 $1,072,000
Accounts receivable, net 15,487,000 17,896,000
Inventories 14,048,000 14,309,000
Deferred income taxes 3,502,000 2,788,000
Prepaid expenses and other current assets 848,000 1,168,000
-----------------------
Total current assets 34,519,000 37,233,000
Property, plant and equipment, net 10,864,000 12,030,000
Goodwill, net 5,646,000 5,851,000
Investment --- 1,113,000
Other assets 255,000 249,000
------------------------
Total assets $51,284,000 $56,476,000
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $8,745,000 $7,647,000
Accrued expenses 3,932,000 3,103,000
Customer advances 965,000 744,000
Income taxes payable 203,000 194,000
Current portion of restructuring reserve 320,000 789,000
------------------------
Total current liabilities 14,165,000 12,477,000
Long-term debt 5,600,000 8,900,000
Restructuring reserve --- 435,000
Deferred income taxes 1,914,000 2,056,000
------------------------
Total liabilities 21,679,000 23,868,000
------------------------
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,
3,070,063 and 3,063,937 shares issued
in 1998 and 1997, respectively 31,000 31,000
Additional paid-in capital 10,670,000 10,602,000
Retained earnings 21,254,000 24,417,000
Treasury stock, at cost; 390,779 and
404,521 shares in 1998 and 1997,
respectively (2,106,000) (2,198,000)
Stock option plan and stock purchase
plan notes receivable (244,000) (244,000)
------------------------
Total stockholders' equity 29,605,000 32,608,000
------------------------
Total liabilities and stockholders' equity $51,284,000 $56,476,000
========================
See notes to consolidated financial statements.
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31,
1998 1997 1996
------------------------------------
Net sales $54,628,000 $53,269,000 $61,165,000
Cost of sales 43,261,000 37,920,000 42,952,000
------------------------------------
Gross profit 11,367,000 15,349,000 18,213,000
Selling, general
and administrative 12,179,000 11,770,000 15,101,000
Research and development 1,987,000 2,432,000 3,280,000
Restructuring --- --- 1,421,000
------------------------------------
Operating income (loss) (2,799,000) 1,147,000 (1,589,000)
Interest expense (373,000) (607,000) (211,000)
Other income (expense) (1,126,000) 8,000 (261,000)
------------------------------------
Income (loss) before income
taxes (4,298,000) 548,000 (2,061,000)
Income taxes (benefit) (1,135,000) 280,000 (820,000)
------------------------------------
Net income (loss) ($3,163,000) $268,000 ($1,241,000)
====================================
Earnings (loss) per common share ($1.18) $0.10 ($0.48)
====================================
Weighted average number of
common shares outstanding 2,670,000 2,629,000 2,591,000
====================================
Earnings (loss) per common share
-- assuming dilution ($1.18) $0.10 ($0.48)
====================================
Weighted average number of
common and common equivalent
shares outstanding 2,670,000 2,676,000 2,591,000
====================================
See notes to consolidated financial statements.
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Stock Option Plan
Common Stock Additional and Stock Purchase
Par Paid-In Retained Treasury Plan Notes
Shares Value Capital Earnings Stock Receivable Total
-----------------------------------------------------------------------------------------
Balance at April 1, 1995 2,559,623 $31,000 $10,587,000 $25,390,000 ($2,979,000) ($164,000) $32,865,000
Purchase of treasury stock (4,401) (51,000) (51,000)
Stock options exercised
for treasury stock and
tax benefits 48,970 (37,000) 397,000 (80,000) 280,000
Stock option compensation 18,000 18,000
Net loss (1,241,000) (1,241,000)
--------------------------------------------------------------------------------------------
Balance at March 31, 1996 2,604,192 31,000 10,568,000 24,149,000 (2,633,000) (244,000) 31,871,000
Purchase of treasury stock (8,776) (84,000) (84,000)
Stock options exercised
for treasury stock and
tax benefits 64,000 (4,000) 519,000 515,000
Stock option compensation 38,000 38,000
Net income 268,000 268,000
-------------------------------------------------------------------------------------------
Balance at March 31, 1997 2,659,416 31,000 10,602,000 24,417,000 (2,198,000) (244,000) 32,608,000
Stock issued under employee
stock purchase plan 6,126 45,000 45,000
Purchase of treasury stock (4,058) (53,000) (53,000)
Stock options exercised
for treasury stock and
tax benefits 17,800 4,000 145,000 149,000
Stock option compensation 19,000 19,000
Net loss (3,163,000) (3,163,000)
--------------------------------------------------------------------------------------------
Balance at March 31, 1998 2,679,284 $31,000 $10,670,000 $21,254,000 ($2,106,000) ($244,000) $29,605,000
============================================================================================
See notes to consolidated financial statements.
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
1998 1997 1996
------------------------------------
Cash Flows from Operating Activities
Net income (loss) ($3,163,000) $268,000 ($1,241,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,513,000 2,953,000 3,317,000
Restructuring (904,000) (1,267,000) 588,000
Loss on investment 1,113,000 --- ---
Changes in operating assets and liabilities:
Accounts receivable 2,409,000 (2,879,000) 2,594,000
Inventories 261,000 1,499,000 (5,807,000)
Deferred income taxes (856,000) 801,000 229,000
Prepaid expenses and other assets 297,000 1,389,000 (1,819,000)
Accounts payable and accrued expenses 1,927,000 (3,145,000) (754,000)
Customer advances 221,000 (2,949,000) 1,236,000
Income taxes payable 9,000 (46,000) (2,311,000)
Other liabilities --- --- (23,000)
------------------------------------
Net cash provided by (used in) operating activities 3,827,000 (3,376,000) (3,991,000)
------------------------------------
Cash Flows from Investing Activities
Additions to property, plant and equipment (1,125,000) (891,000) (2,683,000)
Purchase of investment --- (223,000) (890,000)
------------------------------------
Net cash used in investing activities (1,125,000) (1,114,000) (3,573,000)
------------------------------------
Cash Flows from Financing Activities
(Decrease) increase in long-term debt (3,300,000) 3,700,000 5,200,000
Stock options exercised and tax benefits 213,000 553,000 378,000
Purchase of treasury stock (53,000) (84,000) (51,000)
Payment advanced against stock option
plan note receivable --- --- (80,000)
------------------------------------
Net cash provided by (used in) financing activities (3,140,000) 4,169,000 5,447,000
------------------------------------
Decrease in cash (438,000) (321,000) (2,117,000)
Cash at beginning of year 1,072,000 1,393,000 3,510,000
------------------------------------
Cash at end of year $634,000 $1,072,000 $1,393,000
====================================
Supplemental Cash Flow Information:
Interest paid $384,000 $635,000 $224,000
Income tax paid (refunds received) ($367,000)($1,989,000) $3,306,000
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.
This business segment also provides earth station hardware, software
and image processing systems for the remote sensing satellite systems
market, and produces mobile satellite television reception systems for
recreational vehicles, 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 contingent assets and liabilities at the date of
the financial statements. These estimates and assumptions also affect
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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 $2,055,000 at March 31, 1998 and $1,850,000 at March 31, 1997.
Investment
Investment represents preferred stock in EarthWatch Incorporated.
There is no public market for any of EarthWatch's securities. On
December 24, 1997, EarthWatch launched its first remote sensing
satellite and subsequently lost communications with it. EarthWatch
management has indicated they need to raise additional financing to
achieve a longer term objective. Because there can be no assurance
EarthWatch will be able to raise additional financing or achieve their
objectives, the investment of $1,113,000 was written off in the fourth
quarter of fiscal 1998.
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.
Earnings (Loss) Per Share
Effective for the three-month period ended December 31, 1997, the
Company adopted SFAS No. 128, "Earnings Per Share." This statement
provides simplified standards for the computation and presentation of
earnings per share ("EPS"), making EPS comparable to international
standards. SFAS No. 128 requires dual presentation on the face of the
income statement of "Basic" and "Diluted" EPS by entities with complex
capital structures, replacing "Primary" and "Fully Diluted" EPS
illustrated under Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share."
Basic EPS excludes dilution from common stock equivalents and is
computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted EPS reflects potential dilution from common stock equivalents,
similar to Fully Diluted EPS, but uses only the average stock price
during the period as part of the computation.
Shares used in computing earnings (loss) per common share -
assuming dilution include the weighted average of common stock
outstanding plus equivalent shares issuable under the Company's stock
option plans, when such amounts are dilutive. Options to purchase
320,000 shares of common stock at prices ranging from $6.50 - $16.00
were not included in the computation of diluted EPS at March 31, 1998
because the effect of such options would be anti-dilutive. Such
options expire at various dates from February 20, 1999 to March 22,
2008.
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 earnings 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, 1998
and 1997 includes remaining estimated future losses on the Company's
Camarillo, California facility lease of $320,000 and $1,224,000,
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. 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:
1998 1997
------------ -----------
Billed $ 8,676,000 $14,019,000
Unbilled 7,001,000 4,103,000
------------ -----------
Subtotal 15,677,000 18,122,000
Allowance for doubtful
accounts (190,000) (226,000)
------------ ----------
Total $15,487,000 $17,896,000
============ ===========
Inventories at March 31:
1998 1997
------------ ----------
Raw materials $ 7,830,000 $9,316,000
Work-in-process 4,067,000 2,753,000
Finished goods 2,151,000 2,240,000
------------ -----------
Total $14,048,000 $14,309,000
============ ===========
Inventories are presented net of allowances for obsolescence of
$1,656,000 and $1,350,000 at March 31, 1998 and 1997, respectively.
Property, plant and equipment at March 31:
1998 1997
------------ -----------
Land and buildings $ 8,557,000 $ 8,529,000
Machinery and equipment 15,201,000 14,590,000
Furniture and office equipment 1,506,000 1,443,000
Leasehold improvements 821,000 815,000
Construction-in-process 299,000 66,000
----------- -----------
Subtotal 26,384,000 25,443,000
Accumulated depreciation
and amortization (15,520,000) (13,413,000)
------------ -----------
Total $10,864,000 $12,030,000
============ ===========
Accrued expenses at March 31:
1998 1997
---------- -----------
Salaries and employee benefits $1,731,000 $1,408,000
Warranty allowance 933,000 707,000
Commission and service fees 519,000 421,000
Contract loss allowance 87,000
Other 749,000 480,000
---------- ----------
Total $3,932,000 $3,103,000
========== ==========
NOTE 6. LONG-TERM DEBT
At March 31, 1998, the Company had a committed revolving line of
credit with its bank of $19,500,000, 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. 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 April 30, 1999.
Interest is payable on borrowings under the line of credit at the
bank's prime rate plus 0.85% or at LIBOR plus 1.85%, at the option of
the Company. At March 31, 1998, 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, 1998, there were
borrowings of $5,600,000 under the line and the bank had issued
letters of credit against the line totaling $7,408,000.
On April 30, 1998, the Company amended its credit agreement and
note with its bank. Under the amended agreement, effective July 31,
1998, the Company will have a committed revolving line of credit with
the bank of $15,500,000, of which up to $15,000,000 may be used for
the issuance of letters of credit and up to $5,500,000 may be used for
direct working capital advances. Total credit extended may not exceed
$15,500,000. Interest is payable on borrowings under the line of
credit at the bank's prime rate plus 1.50% or at LIBOR plus 2.50%, at
the option of the Company.
The Company believes the carrying amount of its outstanding long-
term debt at March 31, 1998 and 1997 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, 1998 and 1997 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:
1998 1997
---------- ----------
Deferred income tax assets:
Contract loss and other allowances $1,652,000 $1,419,000
Alternative minimum tax credits 557,000
Accrued employee benefits 424,000 384,000
Net operating loss carryover 369,000 171,000
Investment tax credits 207,000 173,000
Restructuring reserve 137,000 530,000
Other 156,000 111,000
--------- ---------
Total 3,502,000 2,788,000
--------- ---------
Deferred income tax liabilities:
Depreciation (1,639,000) (1,777,000)
State taxes (275,000) (279,000)
--------- ---------
Total (1,914,000) (2,056,000)
--------- ---------
Net deferred income tax asset $1,588,000 $ 732,000
========= =========
As of March 31, 1998, the Company had $294,000 and $3,039,000 of
federal and California net operating loss carryforwards, respectively.
In addition, the Company had $557,000 and $207,000 of federal and
California credit carryforwards, respectively. The federal net
operating loss carryforwards expire in 2013, and the California net
operating loss carryforwards expire from 2001 to 2003. There is no
expiration date for the federal credit carryforwards. The California
credit carryforwards expire from 2004 to 2006. In the event of
certain ownership changes, the Tax Reform Act of 1986 imposes certain
restrictions on the amount of net operating loss carryforwards which
may be used in any year by the Company.
The provision (benefit) for income taxes for the years ended March
31 are as follows:
1998 1997 1996
----------- --------- -----------
Federal:
Current $ (280,000) $(599,000) $(1,059,000)
Deferred (694,000) 811,000 335,000
State:
Current 78,000 10,000
Deferred (161,000) (10,000) (106,000)
----------- --------- ----------
Total $(1,135,000) $ 280,000 $ (820,000)
=========== ========= ==========
The provision (benefit) for income taxes differs from the federal
statutory tax rate for the years ended March 31 due to the following:
1998 1997 1996
----------- --------- -----------
Expected tax (benefit)
at statutory rate $(1,461,000) $ 186,000 $ (701,000)
Disallowed capital loss 378,000
State tax (benefit), net
of federal tax effect (103,000) 20,000 (63,000)
Foreign Sales Corporation
earnings (70,000) (28,000) (116,000)
Goodwill amortization 70,000 70,000 70,000
Other differences 51,000 32,000 (10,000)
----------- --------- ----------
Total $(1,135,000) $ 280,000 $ (820,000)
=========== ========= ==========
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, 1998, 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 the Company's two fixed stock option plans (the 1985 Plan
and 1995 Plan) been determined consistent with the provisions of SFAS
No. 123 based on the fair value at date of grant for awards made in
fiscal years ended March 31, 1998, 1997 and 1996, and assumed
forfeiture rates of 12%, 10% and 10%, respectively, net income (loss)
and earnings (loss) per share would have been reduced to the pro forma
amounts indicated below:
1998 1997 1996
----------- -------- -----------
Net income (loss)
- -----------------
As reported $(3,163,000) $268,000 $(1,241,000)
Pro forma $(3,601,000) $ 62,000 $(1,532,000)
Earnings (loss) per
common share
- -------------------
As reported $(1.18) $0.10 $(0.48)
Pro forma $(1.35) $0.02 $(0.59)
Earnings (loss) per
common share -
assuming dilution
- -------------------
As reported $(1.18) $0.10 $(0.48)
Pro forma $(1.35) $0.02 $(0.59)
The pro forma effect on net income (loss) for fiscal years 1998,
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 1998, 1997 and 1996 is estimated at $4.17, $5.44
and $6.81, respectively, and the weighted-average exercise prices for
those options was $8.92, $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 1998, 1997 and 1996 is estimated at $4.36, $7.06 and
$9.45, respectively, and the weighted-average exercise prices for
those options was $7.23, $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 1998, 1997 and 1996, respectively: dividend
yield of 0%, 0% and 0%; expected volatility of 44%, 45% and 43%; risk-
free rate of return of 5.81%, 6.42% and 6.09%; and expected lives of 5
years, 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, 1998, 1997 and 1996 and activity during the
years then ended is as follows:
1998 1997 1996
------------------ ----------------- ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 219,580 $11.35 270,150 $10.46 247,300 $7.98
Granted 164,000 $8.81 30,500 $11.25 84,500 $14.99
Canceled (45,820) $13.42 (17,070) $12.90 (12,680) $11.77
Exercised (17,800) $7.67 (64,000) $7.13 (48,970) $5.72
------- ------ ------- ------ ------- ------
Outstanding at
end of year 319,960 $9.96 219,580 $11.35 270,150 $10.46
======= ===== ======= ====== ======= ======
Options exercisable
at end of year 145,293 $10.86 143,780 $10.30 182,650 $8.66
======= ===== ======= ====== ======= ======
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 $19,000, $38,000 and $18,000 in fiscal years 1998, 1997
and 1996, respectively.
Information about fixed stock options outstanding at March 31, 1998
is as follows:
Options Outstanding Options Exercisable
----------------------------------- ------------------------
Weighted-
Ave Weighted- Weighted-
Range of Remaining Ave Ave
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- -------
$6.50 - $7.23 15,000 7.4 years $6.98 5,000 $6.50
$8.08 - $9.50 199,500 7.3 $8.60 73,167 $8.71
$10.00 - $12.88 67,460 7.8 $11.41 37,460 $11.81
$14.25 - $16.00 38,000 6.2 $15.68 29,666 $15.67
- --------------- ------- --- ------ ------- ------
$6.50 - $16.00 319,960 7.3 years $9.96 145,293 $10.86
=============== ======= === ====== ======= ======
At March 31, 1998, 34,270 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, 1998, 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 zero for the fiscal years ended March 31, 1998,
1997 and 1996, 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.
Contributions for the fiscal years ended March 31, 1998, 1997, and
1996, were zero, $56,000 and zero, respectively.
In August 1997, the Company adopted the Employee Stock Purchase
Plan, effective as of July 1, 1997. Employees are eligible to
participate in the plan if they have been employed a minimum of six
months and work at least 20 hours per week. Eligible employees may
use funds from accumulated payroll deductions to purchase shares of
Company common stock at the end of six-month offering periods. They
may contribute up to 10% of gross earnings toward such purchases, not
to exceed $12,500 per offering period, and may purchase a maximum of
1,000 shares per offering period. The purchase price for the shares
is 85% of the lesser of the fair market value of the common stock at
the beginning of the offering period or at the end of the offering
period. Shares purchased must be held for a minimum of three months
before they can be sold. At the end of the first offering period on
December 31, 1997, the Company issued 6,126 shares of common stock to
employees at a purchase price of $7.33 per share. A total of 200,000
shares has been authorized for issuance under the Employee Stock
Purchase Plan.
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. In March 1998, the Company signed a new ten-year
lease for a production and office facility located in Vista,
California. That lease commences February 1, 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
- ---------- ----------- -------- ----------
1999 $945,000 $296,000 $649,000
2000 667,000 667,000
2001 649,000 649,000
2002 632,000 632,000
2003 630,000 630,000
Thereafter 3,973,000 3,973,000
--------- -------- ---------
Total $7,496,000 $296,000 $7,200,000
========= ======== =========
Approximately $320,000 of this future net lease obligation is
included in the restructuring reserve. See Note 3.
Total rent expense under noncancelable operating leases was
$618,000, $567,000 and $787,000 for the fiscal years ended March 31,
1998, 1997 and 1996, respectively. Additional rent payments in the
amounts of $638,000, $695,000 and $465,000 were charged to the
restructuring reserve during the fiscal years ended March 31, 1998,
1997 and 1996, 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 and other
civil claims by private parties. 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. During the
fiscal year ended March 31, 1998, the Company had several discussions
with the Contracting Office regarding this matter. In the opinion of
management, resolution of this matter 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. 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.
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,
-----------------------------------------
1998 1997 1996
-----------------------------------------
Net sales:
Antenna and Imaging Systems $33,789,000 $33,304,000 $31,872,000
Communication Products and
Services 20,839,000 19,965,000 29,293,000
----------- ----------- -----------
Total $54,628,000 $53,269,000 $61,165,000
=========== =========== ===========
Operating income (loss):
Antenna and Imaging Systems $(2,509,000) $ 1,813,000 $(1,659,000)
Communication Products and
Services 1,111,000 456,000 2,871,000
---------- ---------- ----------
Total (1,398,000) 2,269,000 1,212,000
Restructuring (1,421,000)
General corporate expenses (1,401,000) (1,122,000) (1,380,000)
Interest expense (373,000) (607,000) (211,000)
Other income (expense) (1,126,000) 8,000 (261,000)
---------- ----------- ----------
Income (loss) before income
taxes $(4,298,000) $ 548,000 $(2,061,000)
=========== =========== ===========
Identifiable assets:
Antenna and Imaging Systems $24,891,000 $26,596,000 $29,076,000
Communication Products and
Services 20,286,000 24,603,000 22,807,000
Corporate 6,107,000 5,277,000 6,576,000
----------- ----------- -----------
Total $51,284,000 $56,476,000 $58,459,000
=========== =========== ===========
Capital additions:
Antenna and Imaging Systems $ 655,000 $ 190,000 $ 1,821,000
Communication Products and
Services 456,000 688,000 861,000
Corporate 14,000 13,000 1,000
---------- ----------- -----------
Total $1,125,000 $ 891,000 $ 2,683,000
========== =========== ===========
Depreciation and amortization:
Antenna and Imaging Systems $1,658,000 $ 1,791,000 $ 2,141,000
Communication Products and
Services 837,000 1,149,000 1,163,000
Corporate 18,000 13,000 13,000
---------- ----------- -----------
Total $2,513,000 $ 2,953,000 $ 3,317,000
========== =========== ===========
Net sales:
U.S. $24,589,000 $27,316,000 $25,697,000
Asia 16,104,000 18,148,000 20,116,000
Europe 4,923,000 2,251,000 4,846,000
South America 4,547,000 2,792,000 3,386,000
Africa 3,979,000 2,484,000 6,493,000
Other 486,000 278,000 627,000
----------- ----------- -----------
Total $54,628,000 $53,269,000 $61,165,000
=========== =========== ===========
Sales for U.S. Department of
Defense:
Antenna and Imaging Systems $10,386,000 $15,787,000 $17,658,000
Communication Products and
Services 1,682,000 558,000 529,000
----------- ----------- -----------
Total $12,068,000 $16,345,000 $18,187,000
=========== =========== ===========
For the fiscal year ended March 31, 1998, two customers accounted for
17% and 15% of Antenna and Imaging Systems net sales and three customers
accounted for 24%, 12% and 10% of Communication Products and Services net
sales. 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.
NOTE 11. QUARTERLY FINANCIAL DATA - Unaudited
(in thousands, except per-share data)
Fiscal Year 1998
Earnings
(Loss)
Per Share
Net Gross Net Assuming
Sales Profit Income (Loss) Dilution
------- ------ ------------- --------
First Quarter $10,341 $2,355 $(548,000) $(0.21)
Second Quarter 14,937 3,611 149,000 0.06
Third Quarter 17,081 4,268 347,000 0.13
Fourth Quarter 12,269 1,133 (3,111,000) (1.16)
------- ------- ----------- -------
Fiscal Year $54,628 $11,367 $(3,163,000) $(1.18)
======= ======= =========== =======
First quarter results reflect low sales of radio communication products
and military antennas. Sales of both radio communication products and
military antennas increased in the second and third quarters, however, the
improvement in net income during those quarters was primarily due to higher
gross profits on the higher radio communication product sales. Low gross
margins on sales of antenna and imaging systems products during the first
three quarters, resulting from higher engineering costs and improperly bid
contracts, were a major factor contributing to the cumulative net loss
through the third quarter. The lower fourth quarter net sales and large net
loss were primarily due to cost overruns at the Company's Datron/Transco
Inc. subsidiary resulting from increases in estimates to complete several
projects that required redesign and rework. Also included in the fourth
quarter net loss was a $1,113,000 ($0.42 per share) write-off of the
Company's investment in EarthWatch Incorporated.
Fiscal Year 1997
Earnings
Per Share
Net Gross Net Assuming
Sales Profit Income Dilution
------- ------ ------ --------
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.
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, 1987
and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in
the period ended March 31, 1998. 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, 1998 and
1997 and the results of their operations and their cash flows for each
of the three years in the period ended March 31, 1998 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
San Diego, California
May 8, 1998