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, 1998
[ ] 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
incorporation or organization) (I.R.S. Employer 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 23, 1998, the Registrant had only one class of
common stock, par value $0.01, of which there were 2,685,932
shares outstanding.
1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
DATRON SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)
Sept 30, March 31
1998 1998
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $845 $634
Accounts receivable, net 14,259 15,487
Inventories 13,421 14,048
Deferred income taxes 3,502 3,502
Prepaid expenses and other current assets 833 848
-------- --------
Total current assets 32,860 34,519
Property, plant and equipment, net 9,763 10,864
Goodwill, net 5,544 5,646
Other assets 481 255
-------- --------
Total assets $48,648 $51,284
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,264 $8,745
Accrued expenses 3,771 3,932
Customer advances 2,072 965
Income taxes payable 541 203
Current portion of restructuring reserve --- 320
Current portion of long-term debt 1,681 ---
-------- --------
Total current liabilities 13,329 14,165
Long-term debt 3,212 5,600
Deferred income taxes 1,914 1,914
-------- --------
Total liabilities 18,455 21,679
-------- --------
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, 3,076,711 and 3,070,063 shares
issued in September and March, respectively 31 31
Additional paid-in capital 10,716 10,670
Retained earnings 21,796 21,254
Treasury stock, at cost; 390,779 shares in
September and March (2,106) (2,106)
Stock option plan and stock purchase plan notes rec (244) (244)
-------- --------
Total stockholders' equity 30,193 29,605
-------- --------
Total liabilities and stockholders' equity $48,648 $51,284
======== ========
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,
1998 1997 1998 1997
------- -------- -------- --------
Net sales $13,729 $14,937 $29,018 $25,278
Cost of sales 9,661 11,326 20,872 19,312
------- -------- -------- --------
Gross profit 4,068 3,611 8,146 5,966
Selling, general and admin. 2,870 2,797 6,102 5,545
Research and development 513 471 963 860
-------- ------- -------- --------
Operating income (loss) 685 343 1,081 (439)
Interest expense (84) (81) (212) (202)
Interest income 39 --- 46 3
Other expense --- (4) --- (10)
-------- ------- -------- --------
Income (loss) before income taxes 640 258 915 (648)
Income taxes (benefit) 261 109 373 (249)
-------- ------- -------- --------
Net income (loss) $379 $149 $542 ($399)
======== ======= ======== ========
Earnings (loss) per common
share--basic $0.14 $0.06 $0.20 ($0.15)
======= ======== ======== ========
Weighted average number of
common shares outstanding 2,686 2,667 2,684 2,666
======= ======== ======== ========
Earnings (loss) per common
share--assuming dilution $0.14 $0.06 $0.20 ($0.15)
======= ======== ======== ========
Weighted average number of
common and common equivalent
shares outstanding 2,686 2,689 2,684 2,666
======= ======== ======= =========
See notes to consolidated financial statements.
3
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Six Months Ended
September 30,
1998 1997
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $542 ($399)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,238 1,284
Restructuring (320) (452)
Changes in operating assets and liabilities:
Accounts receivable 1,228 1,341
Inventories 627 475
Prepaid expenses and other assets (220) (50)
Accounts payable and accrued expenses (3,642) (689)
Customer advances 1,107 1,757
Income taxes payable 338 ---
--------- ---------
Net cash provided by operating activities 898 3,267
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (102) (436)
Proceeds from sales of property, plant and equipment 76 ---
--------- ---------
Net cash used in investing activities (26) (436)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in long-term debt 3,293 ---
Decrease in revolving credit facility (4,000) (3,600)
Stock options exercised --- 126
Issuance of common stock 46 ---
Purchase of treasury stock --- (53)
--------- ---------
Net cash used in financing activities (661) (3,527)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 211 (696)
Cash and cash equivalents at beginning of period 634 1,072
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $845 $376
========= =========
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, 1998.
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, 1998 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, 1998 has been derived from audited
financial statements.
2. Earnings (Loss) per Share
-------------------------
Effective for the three-month period ended December 31, 1997, the
Company adopted Statement of Financial Accounting Standards
("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 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 317,000 shares of common stock at prices ranging from
$6.50 - $15.73 were not included in the computation of diluted
EPS at September 30, 1998 because the effect of such options
would be anti-dilutive. Such options expire at various dates
from May 16, 1999 to August 4, 2008.
3. 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.
5
4. Accounts Receivable
-------------------
At September 30, 1998 and March 31, 1998, accounts receivable
were as follows:
September 30, March 31,
1998 1998
------------ -----------
Billed $10,085,000 $ 8,676,000
Unbilled 4,485,000 7,001,000
------------ -----------
Subtotal 14,570,000 15,677,000
Allowance for doubtful
accounts ( 311,000) (190,000)
----------- -----------
Total $14,259,000 $15,487,000
=========== ===========
5. Inventories
-----------
At September 30, 1998 and March 31, 1998, inventories were as
follows:
September 30, March 31,
1998 1998
------------ -----------
Raw materials $ 7,419,000 $7,830,000
Work-in-process 3,568,000 4,067,000
Finished goods 2,434,000 2,151,000
------------ -----------
Total $13,421,000 $14,048,000
============ ===========
Inventories are presented net of allowances for obsolescence of
$1,753,000 and $1,656,000 at September 30, 1998 and March 31,
1998, respectively.
6. Property, Plant and Equipment
-----------------------------
At September 30, 1998 and March 31, 1998, property, plant and
equipment was as follows:
September 30, March 31,
1998 1998
------------ -------------
Land and buildings $ 8,643,000 $ 8,557,000
Machinery and equipment 14,966,000 15,201,000
Furniture and office equipment 1,504,000 1,506,000
Leasehold improvements 817,000 821,000
Construction-in-process 113,000 299,000
------------ ------------
Subtotal 26,043,000 26,384,000
Accumulated depreciation and
amortization (16,280,000) (15,520,000)
------------ -----------
Total $ 9,763,000 $10,864,000
============ ===========
7. Long-Term Debt
--------------
On August 7, 1998, the Company issued a promissory note to a life
insurance company in the amount of $3,300,000 pursuant to a loan
agreement under which the Company borrowed the same amount. The
note is secured by a deed of trust on the Company's Simi Valley
facility and has a maturity date of September 1, 2008. Monthly
payments are calculated on a 20-year amortization. Interest is
payable at a rate of 6.76% per annum through September 1, 2003,
at which date the interest rate becomes variable and tied to
LIBOR, adjusting every quarter for the remainder of the term. On
September 1, 2003, the Company may either prepay the note without
penalty or accept the variable rate provisions.
6
At September 30, 1998 and March 31, 1998, long-term debt was as
follows:
September 30, March 31,
1998 1998
------------ ----------
Revolving line of credit at prime plus 1.50%
in September and at prime plus 0.85% in
March, due April 30, 1999. $1,600,000 $5,600,000
6.76% note payable due September 1, 2008 3,293,000 ---
---------- ----------
Total long-term debt $4,893,000 $5,600,000
Less current portion (1,681,000) ---
---------- ----------
Long-term debt $3,212,000 $5,600,000
========== ==========
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. Another additional market
for this segment is mobile direct broadcast satellite ("DBS")
television reception systems for recreational vehicles, boats and
large business jets. 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 "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, worldwide economic downturns
and currency devaluations, 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.
Results of Operations
- ---------------------
Net income for the second quarter of fiscal 1999 was $379,000, or
$0.14 per share, compared with net income of $149,000, or $0.06
per share, in the second quarter of fiscal 1998. Net sales in
the second quarter of fiscal 1999 were $13,729,000, an 8%
decrease from second quarter net sales last fiscal year of
$14,937,000. The decrease in sales was primarily due to lower
sales of remote sensing systems and radio products, partially
offset by higher sales of DBS antenna products. The increase in
net income for the second quarter resulted primarily from higher
gross margins.
Net income for the six months ended September 30, 1998 was
$542,000, or $0.20 per share, compared with a net loss of
$399,000, or $0.15 per share, for the comparable period last
fiscal year. Net sales for the six months were $29,018,000, a
15% increase from net sales of $25,278,000 for the first six
months last fiscal year. All product categories contributed to
the higher sales, including a 51% increase in sales of DBS
products from the first six months last fiscal year. The
improvement from a net loss to net income for the recent six
months was primarily due to higher gross profits on the higher
sales, partially offset by higher operating expenses.
7
Operating results for each business segment were as follows:
Antenna and Imaging Systems
- --------------------------
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 1998 1997
---------- ---------- ----------- -----------
Net sales $9,378,000 $9,769,000 $19,405,000 $16,988,000
========== ========== =========== ===========
Gross profit $2,420,000 $1,876,000 $4,775,000 $3,235,000
========== ========== =========== ===========
Operating income (loss) $749,000 $234,000 $1,099,000 ($108,000)
========== ========== =========== ===========
Sales of Antenna and Imaging Systems products decreased 4% in the
second quarter of fiscal 1999 compared with the second quarter of
fiscal 1998. The decrease was due to lower sales of remote
sensing systems, partially offset by higher sales of DBS antenna
products. Sales in the first six months of fiscal 1999 were 14%
higher than in the first six months of fiscal 1998. The increase
was due to higher sales in all product categories.
Gross profit percentage on sales of Antenna and Imaging Systems
products was 25.8% in the second quarter of fiscal 1999 compared
with 19.2% in the second quarter last fiscal year. The increase
was primarily due to production efficiencies and the absence of
severance costs related to a reduction in personnel in the second
quarter of fiscal 1998. Gross profit percentage for the first
six months of fiscal 1999 was 24.6% of sales compared with 19.0%
of sales for the first six months of fiscal 1998. The increase
was primarily due to production efficiencies and to a more
favorable product mix.
Operating income percentage on sales of Antenna and Imaging
Systems products was 8.0% in the second quarter of fiscal 1999
compared with 2.4% in the second quarter last fiscal year. The
increase resulted from higher gross profits. Operating income
percentage for the first six months of fiscal 1999 was 5.7% of
sales compared with an operating loss percentage of 0.6% of sales
for the first six months of fiscal 1998. The improvement was
primarily due to higher gross profits.
Communication Products and Services
- -----------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net sales $4,351,000 $5,168,000 $9,613,000 $8,290,000
========== ========== ========== ==========
Gross profit $1,648,000 $1,735,000 $3,371,000 $2,731,000
========== ========== ========== ==========
Operating income $285,000 $468,000 $654,000 $381,000
========== ========== ========== ==========
Sales of Communication Products and Services decreased 16% in the
second quarter of fiscal 1999 compared with the second quarter of
fiscal 1998. The decrease was due to lower order bookings
resulting from delays in anticipated international orders. Sales
in the first six months of fiscal 1999 were 16% higher than in
the first six months of fiscal 1998. The increase was primarily
due to a faster turn around of orders in backlog at the beginning
of the fiscal year. Worldwide economic instability has been
responsible for the delay of several anticipated orders, and
future anticipated orders may likewise be delayed.
Gross profit percentage on sales of Communication Products and
Services was 37.9% in the second quarter of fiscal 1999 compared
with 33.6% in the second quarter last fiscal year. The increase
was primarily due to a more favorable product mix. Gross profit
percentage for the first six months of fiscal 1999 was 35.1% of
sales compared with 32.9% of sales for the first six months of
fiscal 1998 due to manufacturing efficiencies related to a higher
level of sales.
8
Operating income percentage on sales of Communication Products
and Services was 6.6% in the second quarter of fiscal 1999
compared with 9.1% in the second quarter last fiscal year. The
decrease was primarily due to higher administrative expenses.
Operating income percentage for the first six months of fiscal
1999 was 6.8% of sales compared with 4.6% of sales for the first
six months of fiscal 1998. The increase was due to higher gross
profits.
Consolidated expenses were as follows:
- -------------------------------------
Selling, general and administrative expenses were $2,870,000 in
the second quarter of fiscal 1999, a 3% increase compared with
second quarter of fiscal 1998 expenses of $2,797,000. The
increase was primarily due to higher administrative expenses at
the Communication Products and Services business segment.
Selling, general and administrative expenses for the first six
months of fiscal 1999 were $6,102,000, a 10% increase compared
with first six months of fiscal 1998 expenses of $5,545,000. The
increase was in line with the higher sales level and resulted
from higher selling and administrative expenses at both business
segments.
Research and development ("R&D") expenses were $513,000 in the
second quarter of fiscal 1999 compared with $471,000 in the
second quarter last fiscal year. The 9% increase resulted from
higher spending on development programs at the Antenna and
Imaging Systems business segment. R&D expenses in the first six
months of fiscal 1999 were $963,000, a 12% increase compared with
first six months of fiscal 1998 expenses of $860,000. The
increase resulted from higher spending on development programs at
both business segments. The Company plans to increase R&D
spending during the last six months of fiscal 1999 to further
improve tracking antenna capabilities and to improve its mobile
DBS television products.
Order backlog at September 30 was as follows:
- --------------------------------------------
1998 1997
----------- -----------
Antenna and Imaging Systems $24,221,000 $23,971,000
Communication Products and
Services 3,866,000 5,988,000
----------- -----------
Total $28,087,000 $29,959,000
=========== ===========
The 1% increase in Antenna and Imaging Systems backlog at
September 30, 1998 compared with September 30, 1997 was primarily
due to a higher order backlog at the beginning of the current
fiscal year, partially offset by higher sales during the first
six months ended September 30, 1998.
The 35% decrease in Communication Products and Services backlog
at September 30, 1998 compared with September 30, 1997 was
primarily due to lower order bookings in the second fiscal
quarter ended September 30, 1998. As previously noted, worldwide
economic instability has been responsible for the delay of
several anticipated orders. Future results of operations may be
adversely affected if additional orders are likewise delayed.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1998, working capital was $19,531,000 compared
with $20,354,000 at March 31, 1998, a decrease of $823,000 or 4%.
Major changes affecting working capital during this period were
the following: accounts receivable decreased $1,228,000 as
collections exceed sales; inventories decreased $627,000 due to
reductions in both antenna and radio products inventories;
accounts payable and accrued expenses decreased $3,642,000; and
customer advances increased $1,107,000. Additionally, borrowings
on the Company's line of credit with its bank in the amount of
$1,600,000 were reclassified as current from long-term because
the Company's credit agreement with its bank is scheduled to
expire in less than one year. The Company's cash position at
September 30, 1998 was $845,000 compared with $634,000 at March
31, 1998, an increase of 33%. At September 30, 1998, the Company
had borrowed $1,600,000 in term debt from its bank to meet
operating cash requirements.
On August 7, 1998, the Company borrowed $3,300,000 from a life
insurance company in exchange for a promissory note secured by a
deed of trust on the Company's Simi Valley facility. The
promissory note bears interest at 6.76% per annum and has a
maturity date of September 1, 2008. See Note 7 to the
Consolidated Financial Statements in Part I, Item 1.
9
Capital equipment expenditures were $102,000 during the first six
months of fiscal 1999 compared with $436,000 in the first six
months last fiscal year. The decrease was due to lower purchases
of equipment at both business segments. The Company anticipates
expenditures for capital equipment will increase during the last
six months of the current fiscal year.
At September 30, 1998, the Company had a $15,500,000 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 $5,500,000 may be used for direct working capital advances
provided that total credit extended does not exceed $15,500,000.
The Company believes its existing working capital, anticipated
future cash flows from operations, available credit with its bank
and other financing alternatives available to the Company 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.
Year 2000 Issues
- ----------------
Some software included in products sold or licensed to the
Company's customers and certain portions of the Company's
internal operating systems may be subject to failure as a result
of what is commonly known as the Year 2000 date issue (the "Year
2000 issue"). A discussion of this issue follows:
The Company's state of readiness.
- --------------------------------
The Company believes all systems and products currently sold and
new products under development are Year 2000 compliant. Although
the Company's assessment of its Year 2000 exposure is not
complete, the Company currently believes its potential exposure
to problems arising from the Year 2000 issue lies in three areas:
- Information technology ("IT") previously sold or licensed to
the Company's customers and non-IT components imbedded in
products previously sold to the Company's customers.
- IT and non-IT components (such as computer chips imbedded in
hardware) used in the Company's internal operating systems.
- Compliance with the Year 2000 issue by third parties with
whom the Company has a material relationship.
Products sold or licensed to customers:
Most of the Company's antenna and image processing products and
some of its radio communication products contain IT and non-IT
components that may be affected by the Year 2000 issue. The
Company is pursuing a three-phase program to identify and resolve
this exposure:
1. Identify all products that contain IT and non-IT systems
that are not Year 2000 compliant. To the extent practical,
identify all customers who are still using those products.
Status: Estimated 80% complete. Estimated completion date:
December 31, 1998.
2. Determine appropriate solutions to remedy the non compliant
products and systems. Those solutions may include software
upgrades, replacement of non compliant components, referral of
problems relating to third party-provided software to the
original supplier, or determination that the age of the product
or nature of the problem is such that replacement of the product
or system is the only practical solution. Status: Estimated 50%
complete. Estimated completion date: March 31, 1999.
3. Notify all identified customers of the Year 2000 issue
associated with their products and systems, and inform them of
the Company's policy regarding their situation. All products and
systems under warranty or service agreement as of December 31,
1998 will be made Year 2000 compliant by the Company. Other
customers who have products and systems that can economically be
made Year 2000 compliant will be offered software upgrades and
component replacement for a fee. Customers who have products or
systems that cannot economically be made Year 2000 compliant will
be so notified and informed of current product alternatives
offered by the Company. Status: Estimated 10% complete.
Estimated completion date: June 30, 1999.
10
Internal operating systems:
Some of the Company's internal operating systems are Year 2000
compliant and some are not. The Company is pursuing a two-phase
program to identify and resolve this exposure:
1. Systematically test and verify internal IT systems and
modules for Year 2000 compliance. To the extent practical,
systematically test and verify equipment and facility systems
that contain non-IT components. Status: Estimated 65% complete.
Estimated completion date: March 31, 1999.
2. Use internal programmers and outside consultants to upgrade
those internal IT systems and modules that are not Year 2000
compliant. Replace non-IT components that are not Year 2000
compliant. Status: Estimated 50% complete. Estimated
completion date: June 30, 1999.
Third party relationships:
Although the Company is rarely dependent on a single source of
supply for IT and non-IT components, the failure of a selected
supplier to timely deliver Year 2000 compliant IT and non-IT
components could jeopardize the Company's ability to meet its
required delivery schedules. (The Company is also dependent on
third party service providers, such as telephone companies, banks
and insurance carriers; however, the Company does not believe it
has significant Year 2000 exposure from those providers and has
not implemented any programs to assure Year 2000 compliance by
them.) The Company is pursuing a two-phase program to identify
and resolve Year 2000 exposure from third parties:
1. Develop a supplier compliance warranty for incorporation in
all purchase orders issued after March 31, 1999. That warranty
will require suppliers selling IT and non-IT components to the
Company to certify that items delivered are Year 2000 compliant
and require them to correct or replace any such item found to be
non compliant. Status: Estimated 10% complete. Estimated
completion date: March 31, 1999.
2. Develop alternative sources for IT and non-IT components
that are Year 2000 compliant in the event existing suppliers are
not able to meet compliance requirements. Status: Not yet
started. Estimated completion date: September 30, 1999.
Costs to address the Company's Year 2000 issues.
- -----------------------------------------------
To date, the Company has spent approximately $50,000 in
identifying and fixing Year 2000 issues and estimates it will
incur an additional $230,000 for remediation of its remaining
Year 2000 issues. Because the Company's assessment of its Year
2000 exposure is not complete, it is likely that this estimate
will change.
Risks of the Company's Year 2000 issues.
- ---------------------------------------
The Company believes the most reasonably likely worst case Year
2000 scenario would include a combination of some or all of the
following:
- - Products sold to some of its customers would fail to perform
some or all of their intended functions. The Company estimates
the maximum number of customers that may be affected is 75. In
such a situation, the Company's maximum obligation would be to
repair or replace the defective products to the extent the
Company is required to do so under its contracts with its
customers.
- - Internal IT modules or systems may fail to operate or may
give erroneous information. Such failure could result in
production and shipping delays, inability to generate or delays
in generation of financial reports and statements, and computer
network downtime resulting in numerous inefficiencies and higher
payroll expenses.
11
- - Non-IT components in HVAC, lighting, telephone, security and
similar systems might fail and cause the entire system to fail.
Non-IT components in production and test equipment might fail,
resulting in delays in production and new product development.
The Company's contingency plans.
- -------------------------------
The Company believes its plans for addressing the Year 2000 issue
as outlined above are adequate to handle the most reasonably
likely worst case scenario. The Company does not believe it will
incur a material financial impact for the risk of failure, or
from the costs associated with assessing the risks of failure,
arising from the Year 2000 issue. Consequently, the Company does
not intend to create a contingency plan other than as set forth
above.
12
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
rulings on May 28, 1997 and September 3, 1997, the court found
Trans World in breach of a teaming agreement and awarded ATACS
and AIRTACS one dollar ($1.00) in damages. On September 8,
1998, the appeal court affirmed the district court's decision
except as to the award of nominal damages, and remanded the
matter to the district court for further hearing on damages. 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 5, 1998, 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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.65 Loan Agreement between Registrant and Jackson
National Life Insurance Company dated August 7,
1998.
10.66 Datron Systems Incorporated Profit Sharing
and Savings Plan (Amended and Restated as of April
1, 1998).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter.
13
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 29, 1998 /s/ WILLIAM L. STEPHAN
Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)