UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Commission File
Ended March 31, 1997 Number 0-7445
DATRON SYSTEMS INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 95-2582922
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(State of Incorporation) (I.R.S. Employer Ident.No.)
304 Enterprise Street, Escondido, California 92029-1297
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (760) 747-3734
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
-----------------------------
(Title of Class)
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. Yes X No__.
Indicate by check mark if disclosure of delinquent filings pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ( X )
The aggregate market value of the voting stock (which consists solely of
shares of Common Stock) held by non-affiliates of the registrant as of
June 17, 1997 was $25.6 million, based on the closing price on that date
on the Nasdaq Stock Market.
The number of shares outstanding of each of the registrant's classes of
common stock as of June 17, 1997 was: Common Stock, par value $0.01 --
2,664,416 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Certain portions of registrant's Annual Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934,
as amended, in connection with the Annual Meeting of Stockholders
of the registrant to be held August 18, 1997 are incorporated by
reference into Part III of this report.
2. Items contained in the above-referenced document which are not
specifically incorporated by reference are not included in this
report.
<PAGE>
DATRON SYSTEMS INCORPORATED
FORM 10-K
FISCAL YEAR 1997
TABLE OF CONTENTS
PART I 1
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II 9
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations 9
Item 8. Financial Statements And Supplemental Data 9
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 9
PART III 10
Item 10. Directors and Executive Officers of the Registrant 10
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners and
Management 10
Item 13. Certain Relationships and Related Transactions 10
PART IV 11
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 11
<PAGE>1
PART I
Item 1. Business.
Company Overview
Datron Systems Incorporated and its wholly owned subsidiaries (the
"Company") provide specialized satellite communication products and
systems and high quality radio communication products and services to
worldwide markets and to several United States Government customers,
including the Department of Defense ("DoD"). The Company was founded in
1969 and became an independent publicly held corporation in 1985.
In October 1985, the Company acquired its wholly owned subsidiary,
Datron World Communications Inc., formerly known as Trans World
Communications, Inc. ("DWC"), through which the business of its
Communication Products and Services segment is conducted. In June 1990,
the Company acquired its wholly owned subsidiary, Datron/Transco Inc.,
formerly known as Transco Communications Inc. ("D/T"), through which the
business of its Antenna and Imaging Systems segment is conducted. In
September 1993, the Company formed a wholly owned subsidiary, Datron
Telecommunications International Inc., to provide private international
telecommunication systems. Datron Telecommunications was merged into
DWC on March 31, 1995. The Company discontinued its private
international telecommunications business in fiscal 1996.
Because of a decline in U. S. defense spending, the Company decided to
streamline and restructure its Antenna and Imaging Systems business
segment. That decision was announced in February 1993 and implemented
in June 1993. As part of the restructuring, the then existing
operations of the Antenna and Imaging Systems segment were physically
consolidated in one location and operating assets and employees of D/T
and the Company's Datron division were combined at D/T. Datron Systems
Incorporated became a holding company owning two operating entities:
DWC and D/T.
In March 1996, D/T consolidated its image processing division in San
Jose, California, which was acquired in August 1994, with its remote
sensing earth station business in Simi Valley, California. In
connection with that consolidation, the Company recorded a restructuring
charge of $1,421,000 ($855,000, or $0.32 per share, after taxes).
Investment Considerations
This report contains certain forward-looking statements that may be used
in evaluating the opportunities and risks associated with future Company
performance. However, actual results could differ materially from those
described in the forward-looking statements due to, among other things,
the following factors:
Dependence on Sales to Foreign Customers
Sales to foreign customers accounted for 49%, 58% and 62% of
consolidated sales in fiscal 1997, 1996 and 1995, respectively. Sales
of Communication Products and Services have been even more highly
concentrated with foreign customers: 94%, 93% and 95% in fiscal 1997,
1996 and 1995, respectively. Sales to foreign customers often involve
risk because of political and economic uncertainties in many foreign
countries, which can result in funding delays or inability of those
customers to obtain financing for anticipated purchases of Company
products. As a result, it is often more difficult to predict order
bookings from foreign customers than it is from domestic customers. In
addition, foreign political unrest, war and economic downturns could
have a significant negative impact on future Company sales and income.
<PAGE>2
Reliance on Large Orders from a Small Number of Customers
A substantial percentage of sales may be heavily concentrated with a
small number of customers. Within the Communication Products and
Services segment, one customer accounted for 31%, 39% and 36% of that
segment's sales in fiscal 1997, 1996 and 1995, respectively. The same
customer accounted for the fiscal 1997 and fiscal 1996 amounts.
Although sales in the Antenna and Imaging Systems business segment have
not been so heavily concentrated with one customer, it is common for a
small number of customers to each account for approximately 5% to 15% of
that segment's sales each year. Because it is unusual to receive large
orders from the same customer in successive years, it is necessary to
find new customers each year to replace the previous year's sales.
There can be no assurance that the Company will be able to do so in the
future. In addition, reliance on large orders can result in financial
performance varying widely from quarter-to-quarter, and also carries
contract cancellation risk that can more adversely affect Company
performance than it would if the Company depended on small orders from a
large number of customers.
New Consumer Product and Market
In November 1995, the Company introduced its first consumer product, a
mobile direct broadcast satellite ("DBS") television reception system
for recreational vehicles and long-haul trucks. This product represents
a departure from the Company's historical business that has focused on
large contracts, relatively small numbers of deliverables and customers
that are primarily government agencies or large corporations. Several
additional DBS antenna products were introduced in fiscal 1997,
including a marine product line, and a production line was established
to meet expected demand for these products. The Company began fiscal
1997 with signed agreements to sell its DBS products through two well-
established consumer electronics distributors. That method of
distribution was not effective and the Company spent the latter part of
fiscal 1997 unwinding the distribution agreements, clearing the
distribution pipeline and establishing a factory direct to dealer
distribution system. The Company does not have previous experience in
building or selling a consumer product. Although it believes it can
produce the DBS products in required quantities, there can be no
assurance it will be able to do so. Also, although the Company believes
its new methods of distribution will improve sales, there can be no
assurance it will or that consumer demand for its DBS products will be
as large as the Company anticipates.
Competitors
The Company has competitors for all the products and services it offers.
The level of competition varies by product line and ranges from many
competitors for its radio products to a few competitors for its tracking
antenna products. The Company could be adversely affected by
competitors' development of new or different products that may provide
or be perceived as providing greater value than the Company's products.
The Company may or may not be successful in developing competing
products. Many of the Company's competitors and potential competitors
have substantially greater resources than the Company and may be more
successful in developing, producing and marketing their products. In
such case, the Company may experience substantial competition, which
could have a material adverse effect on the Company's business.
Declining Sales for the U.S. Department of Defense
In fiscal 1993, the Company restructured its operations in response to
declining DoD spending. Sales for the DoD have declined from $31.9
million in fiscal 1993 to $16.3 million in fiscal 1997, primarily due to
completion of long-term DoD contracts that have not been replaced with
new orders. The Company believes sales for the DoD may continue to
decline in the future, although at a less severe rate than in recent
years. However, those sales are still expected to represent a
significant portion of the Company's consolidated sales. There can be
no assurance that new DoD orders will be received or that the orders
received will be sufficient to meet the Company's sales objectives.
<PAGE>3
General
The Company operates in two business segments: Antenna and Imaging
Systems, which are supplied by D/T, and Communication Products and
Services, which are supplied by DWC.
Antenna and Imaging Systems
This segment designs and manufactures satellite communication terminals,
telemetry tracking and command systems, servo control products and high-
quality microwave antennas. In fiscal 1994, because of a continuing
decline in defense business, the Company began pursuing additional
markets for its products. The primary such market has been remote
sensing satellite earth stations, and the Company now provides earth
station hardware, software and image processing systems to that market.
In fiscal 1996, the Company introduced the DBS-3000, a mobile satellite
television reception system for recreational vehicles and long-haul
trucks. That system was the Company's first consumer product.
The business of this segment was adversely affected in fiscal 1996 by
the cancellation of an $8.8 million remote sensing system order and by
lower than anticipated order bookings and sales of remote sensing
systems. It was these events that led to the consolidation of the
remote sensing business in the fourth fiscal quarter ended March 31,
1996.
Descriptions of the major product areas are as follows:
Satellite Communication (SATCOM) Terminals. The Company is a major
supplier of satellite communication antenna systems and subsystems used
to receive defense-related data and data transmitted through satellites
of other government and commercial organizations. The stabilizing and
automatic tracking capabilities of its antenna systems make them
particularly well suited for use on ships, motor vehicles and other
mobile platforms. Over the past two decades, the Company has been a
prime contractor to the U.S. Navy for shipboard SATCOM antenna systems.
The United States military has developed a SATCOM system known as
MILSTAR. This system is designed to accommodate satellite
communications by the U.S. Army, Navy and Air Force in the EHF
(extremely high frequency) spectrum and is much less vulnerable to
interference or interception than earlier generation military SATCOM
systems. The Company has been a subcontractor of Raytheon in the Navy's
segment of the MILSTAR program known as NESP. Under the subcontract,
the Company developed a pedestal for shipboard antennas that supports
and positions the antenna in response to external commands. Raytheon
was awarded the NESP production contract in November 1986 and the
Company received its first production award from Raytheon in March 1990.
This program was substantially concluded in fiscal 1997.
Telemetry Tracking and Command (TT&C) Systems. TT&C systems monitor and
control vehicles such as satellites, missiles and aircraft. They
receive radio telemetry signals containing vehicle status information,
engage in automatic tracking of the vehicle so contact is maintained and
transmit command signals so vehicle control can be established and
maintained.
Servo Control Products. The Company's involvement with SATCOM and TT&C
markets has required a high capability in radio frequency electronics,
antenna engineering, servo controls and large precision mechanical
systems. The Company has developed a product line of pedestals and
rotators, servo power amplifiers and positioning control units that are
often used as building blocks for specific customer requirements.
<PAGE>4
Microwave Products. The Company designs and manufactures broad
bandwidth microwave antennas for the aerospace industry that are used on
high performance aircraft, missiles and space launch vehicles. The
Company formerly manufactured electromechanical radio frequency switches
for use in high performance aircraft, but sold that business in fiscal
1995.
Remote Sensing Satellite (RSS) Systems. The RSS systems market is a
subset of the broader earth observation market. It involves using
several types of satellites containing optical and radar sensors in
conjunction with specific earth acquisition and data processing
equipment to produce images. The images are in the form of hard copy
and/or digital data that allow the user to study changes on the earth's
surface or environment. Applications include locating minerals,
updating maps, forecasting weather, monitoring crops, studying the
environment, monitoring earth resources and gathering economic or
military intelligence.
The Company has supplied antennas for RSS purposes for several years.
In fiscal 1994, the Company began to focus more attention and resources
on the RSS systems market. As part of this strategy, the Company formed
a joint venture with International Imaging Systems, Inc. (I2S), a
privately-held company in Milpitas, California, to provide complete RSS
systems for the international marketplace. I2S's expertise was in the
fields of digital image processing and photogrammetry. The Company
acquired I2S in fiscal 1995 and is now able to offer its customers
complete RSS earth stations, including image processing capability.
During fiscal 1997, RSS sales accounted for 35% of the Antenna and
Imaging Systems' sales compared with 29% of its sales in fiscal 1996.
Mobile DBS Television Systems. The Company introduced its first DBS
antenna product in fiscal 1996. That product allows a recreational
vehicle owner or trucker to receive DBS television from a parked vehicle
at the touch of a button by automatically locating the satellite.
During fiscal 1997, the Company introduced several additional DBS
antenna products including systems for boats at anchor, boats underway,
RVs and trucks on the open road, and satellite telephone service through
a dual frequency feed that operates simultaneously with the television
system. Also during fiscal 1997, the Company was first to demonstrate
live DBS television on a commercial airliner, and now offers airborne
DBS systems designed for both commercial and business jets.
Customers and Marketing
Sales of Antenna and Imaging Systems' products and services have
historically been concentrated with the DoD, which accounted for 47% of
this segment's fiscal 1997 sales and 55% of its fiscal 1996 sales.
Marketing and sales activities for its DoD customers are conducted by
internal sales and engineering personnel. Most customers for the RSS
systems business are foreign government space and communications
agencies. Marketing and sales activities for those products are
conducted through independent sales representatives in Europe, South
America and Asia.
Introduction of mobile DBS television systems required the Company to
establish new distribution networks to sell these consumer products.
Its initial approach of using exclusive national distributors was not
effective and fiscal 1997 sales of these products did not meet Company
expectations. The Company is now selling its DBS products direct to
dealers and original equipment manufacturers, as well as through select
non exclusive distributors and agents. Company employees provide sales
and marketing support and installation training for the dealers.
Manufacturing, Assembly and Sources of Supply
Products for the Company's Antenna and Imaging Systems segment are
designed, manufactured and assembled at facilities in Simi Valley,
California. The Company purchases certain components and subsystems
from subcontractors and vendors. Some of these items are standard off-
the-shelf components and others are fabricated to Company
specifications. The Company also fabricates electronic assemblies from
purchased electronic components and circuit boards. A production line
for DBS antenna products was established in fiscal 1996 and expanded in
fiscal 1997.
<PAGE>5
The Company is rarely dependent on a single source of supply for
materials, parts or components. However, once a subcontractor is
selected to provide components built to Company specifications, the
Company is often dependent on that subcontractor. Failure of the
subcontractor to perform could jeopardize the ability of the Company to
meet its required delivery schedules.
Communication Products and Services
This business segment designs, manufactures and distributes high
frequency (HF) radios and accessories for over-the-horizon radio
communications and very high frequency (VHF) radios and accessories for
line-of-sight communications. The Company's HF radios operate in the
frequency range of 1.6 to 30 megahertz, where radio waves generated from
the transmitter reflect off the ionosphere back to the point of receipt
on earth. The Company's VHF radio products, which operate in the
frequency range of 30 to 88 megahertz, provide users high-quality
transmission for line-of-sight communications.
In addition to its standard radios, the Company offers frequency hopping
and encryption options to its VHF product line and automatic link
establishment options to its HF product line. Frequency hopping is a
technique that prevents interruption or interception of radio signals by
changing, at very high speeds, the frequency at which they are
transmitted. This technology utilizes advanced synchronized mechanisms
that ensure all radios in a network are synchronized and frequency hop
at the same time. Automatic link establishment, when used in HF radio
equipment, automatically determines the best available frequencies on
which to communicate.
The Company offers a wide range of accessory products to complement the
HF and VHF product lines. These accessory products include antennas and
antenna tuners, power sources, amplifiers, remote control systems,
modems, data communications equipment and audio accessories.
A substantial percentage of sales of Communication Products and Services
are often concentrated with a small number of customers. In fiscal
1997, two Asian customers accounted for 31% and 24% of this segment's
sales. In fiscal 1996, one of the same Asian customers accounted for
39% of this segment's sales. And, in fiscal 1995, an African customer
accounted for 36% of this segment's sales. Because it is unusual to
receive large orders from the same customer in successive years, it is
often necessary to find new customers each year to replace the previous
year's sales. To minimize the impact fluctuating sales may have on the
Company's operations, temporary employees are used whenever possible.
The Federal Communications Commission granted the Company a license to
carry international telephone traffic in May 1993 and the Company began
carrying international telephone traffic to customers in Ukraine and
Latvia in September 1993 and to a customer in Russia during fiscal 1995.
Also in fiscal 1995, the Company established an uplink facility in
California to carry satellite paging traffic for customers in the United
States. However, in fiscal 1996, the Company determined that
significantly larger resources would be required to compete successfully
in these markets and that competition would likely drive margins to an
unacceptably low level. Consequently, the Company withdrew from these
markets during fiscal 1996.
Customers and Marketing
Sales to foreign customers accounted for 94% of this segment's fiscal
1997 sales and 93% of the segment's fiscal 1996 sales. Most of its
international customers are agencies of foreign governments that perform
civil defense, paramilitary and military operations, and foreign
governmental agencies that perform civilian tasks unrelated to military
operations, such as civil aviation agencies, drug interdiction agencies,
embassies and disaster relief organizations. Domestic customers are
primarily various agencies of the United States Government, including
the Drug Enforcement Administration and Department of State.
<PAGE>6
The Company's products are sold in over 80 countries by a network of
independent sales and service representatives, most of whom are non-
exclusive sales agents of the Company. These representatives provide
both pre-sale and post-sale support. Many of them operate service
facilities that offer both warranty and long-term maintenance of the
Company's equipment. Sales are usually denominated in U.S. Dollars.
In addition to direct sales, the Company sometimes sells its radio
products to international suppliers of complementary equipment. It also
sometimes licenses the local manufacturing of its equipment to customers
in certain countries. The latter practice is usually followed where
local regulations discourage the importation of complete units.
Manufacturing, Assembly and Sources of Supply
Communication products are designed and manufactured at facilities in
Escondido, California. Company engineers work closely with
manufacturing and marketing personnel to improve existing designs and to
introduce new products that meet the ever changing demands of the
marketplace. A new family of handheld radios was introduced in fiscal
1997 and introduction of additional new radio products is planned for
fiscal 1998. The Company purchases certain electronic components,
circuit boards and fabricated metal parts, and painting and silk
screening services. Other than when it licenses overseas manufacturing
for a particular local market, the Company performs most other
manufacturing functions necessary for the production of its products.
The Company is rarely dependent on any single source of supply for the
manufacture of its communication products. Although only one supplier
may be used for certain parts, the Company believes that multiple
sources are usually available.
Backlog
Order backlog at March 31 was as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
Antenna and Imaging Systems $13,086,000 $19,321,000
Communication Products and
Services 4,862,000 2,801,000
-----------------------
Total $17,948,000 $22,122,000
=======================
</TABLE>
The 32% decrease in Antenna and Imaging Systems backlog at March 31,
1997 compared with the prior year was primarily due to lower bookings of
remote sensing systems and to a continued decline in long-term DoD
business. The lower bookings of remote sensing systems resulted in part
from delayed awards. Several of those delayed awards were received in
the first quarter of fiscal 1998, and as result order bookings for
remote sensing systems are expected to be higher in fiscal 1998 than
they were in fiscal 1997.
The 74% increase in Communication Products and services backlog at March
31, 1997 compared with the prior year was due to improved order bookings
in the fourth quarter ended March 31, 1997. Although fourth quarter
order bookings were higher than they were in the comparable period last
year, order bookings for Communication Products and Services were lower
in fiscal 1997 than they were in fiscal 1996. There can be no
assurances that order bookings will improve in fiscal 1998.
<PAGE>7
Competition
The Company competes in each of its business segments with several
companies. Depending on the specific product, these companies may be
similar in size to the Company or may be large diversified companies
which at times may also be customers of the Company. The Company
believes its major competitive advantages are the quality of its
products, their cost effective designs, timeliness of delivery, ease of
use and easy serviceability.
Patents, Trademarks, Copyrights and Licenses
The Company has applied for several patents related to its DBS products.
However, the Company believes that patents are not a significant factor
in the Company's business and that the success of the Company depends
primarily on the technical competence and managerial and marketing
ability of the Company's personnel.
DATRON(r) and design, TRANSWORLD(r), I2S(r), PRI2SM(r), OPEN 2000(r),
DBS-2000(r) and DBS-3000(r) are registered trademarks of the Company.
The Company is in process of applying to the U.S. Patent and Trademark Office
to use the trademarks VI2STA(tm) and DBS-4000(tm), based on intent to use.
The Company has obtained licenses for the VHF frequency hopping
technology and for the automatic link establishment technology used in
the Company's VHF and HF radio products, respectively.
Employees
The Company employed approximately 309 employees at the end of fiscal
1997 compared with approximately 345 employees at the end of fiscal
1996. The decrease in employment during fiscal 1997 was primarily due
to reductions in overhead personnel in the Communication Products and
Services segment resulting from a lower sales level in fiscal 1997.
None of the Company's employees are covered by a collective bargaining
agreement and the Company considers its employee relations to be good.
Financial Information
Additional financial information concerning segment, geographic and
major customers is included in Note 10 of the Notes to Consolidated
Financial Statements. See Part II, Item 8.
Item 2. Properties.
DWC leases approximately 63,000 square feet of office, engineering and
manufacturing space in Escondido, California. The lease term expires on
January 31, 1999 with two renewal options of five years each. DWC and
the Company's corporate headquarters operate from that facility.
D/T owns a 110,000 square foot office, engineering and manufacturing
building located on a nine-acre site in Simi Valley, California. D/T
conducts operations from that facility.
<PAGE>8
D/T leases 139,000 square feet of office, engineering and manufacturing
space in Camarillo, California. The term of the lease is seven years
expiring June 28, 1998. In June 1993, the Company moved from that
facility as part of the consolidation of D/T. The Company has sublet
108,100 square feet of the facility to three subtenants whose subleases
expire on June 28, 1998. D/T also leases a 20,000 square foot office,
engineering and manufacturing facility in San Jose, California. That
lease term expires March 31, 1999. The Company has sublet that facility
to a subtenant whose sublease expires March 31, 1999.
Information with respect to obligations for lease rentals is included in
Note 9 of the Notes to Consolidated Financial Statements. See Part II,
Item 8. The Company considers its properties to be suitable and
adequate for its present needs. The facilities in Escondido and Simi
Valley are being fully utilized. The facility in Camarillo is not
needed and a portion of it has been sublet. The facility in San Jose is
not needed and has been sublet.
Item 3. Legal Proceedings.
The Company is not involved in any litigation that is expected to have a
material effect on the Company's business or consolidated financial
position.
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. The Company believes final resolution of this matter
will not materially affect the consolidated financial position of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Executive Officers of the Registrant
Richard W. Pershing, 69, has been Chairman of the Board of Directors of
the Company since September 1984.
David A. Derby, 55, has been President and Chief Executive Officer of
the Company since May 1982.
William L. Stephan, 51, has been Vice President, Chief Financial Officer
and Treasurer of the Company since November 1993.
Executive officers are elected by and serve at the discretion of the
Board of Directors. There are no family relationships among directors
or executive officers of the Company.
<PAGE>9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Information required by Item 5 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned
"Common Stock Activity" on the inside back cover of the Annual Report,
that portion of which is attached hereto as Exhibit 13.
Item 6. Selected Financial Data.
Information required by Item 6 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned
"Datron Systems Incorporated Selected Financial Data" on the inside
front cover of the Annual Report, that portion of which is attached
hereto as Exhibit 13.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Information required by Item 7 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" on pages 8 through 11 of the Annual Report, that portion
of which is attached hereto as Exhibit 13.
Item 8. Financial Statements and Supplementary Data.
Information required by Item 8 of Form 10-K is incorporated herein by
reference from the consolidated financial statements of the Company at
March 31, 1997 and 1996 and for each of the three years in the period
ended March 31, 1997 and the Independent Auditors' Report appearing on
pages 12 through 26 of the Annual Report, that portion of which is
attached hereto as Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During the two most recent fiscal years ended March 31, 1997, there has
not been a change in accountants or a reported disagreement with
accountants on any matter of accounting principles or practices or
financial statement disclosure.
<PAGE>10
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information required by Item 10 of Form 10-K with respect to directors
is incorporated herein by reference from the information contained in
the section captioned "Nomination and Election of Directors" in the
Company's Notice of Annual Meeting of Stockholders to be Held Monday,
August 18, 1997 at 11:00 A.M. and Proxy Statement ("Proxy Statement"), a
copy of which is to be filed as Exhibit 22 within 120 days of the end of
the Registrant's fiscal year.
Information required by Item 10 of Form 10-K with respect to executive
officers is set forth in Part I of this report under the section
captioned "Executive Officers of the Registrant," pursuant to
instruction 3 to paragraph (b) of Item 401 of Regulation S-K.
Item 11. Executive Compensation.
Information required by Item 11 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned
"Executive Compensation" in the Proxy Statement, a copy of which is to
be filed as Exhibit 22 within 120 days of the end of the Registrant's
fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Information required by Item 12 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement, a copy of which is to be filed as Exhibit 22 within 120
days of the end of the Registrant's fiscal year.
Item 13. Certain Relationships and Related Transactions.
Information required by Item 13 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned
"Executive Compensation" in the Proxy Statement, a copy of which is to
be filed as Exhibit 22 within 120 days of the end of the Registrant's
fiscal year.
<PAGE>11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K.
(a) The following documents are filed as part of this report:
Page in 1997
Annual Report
(1) Financial Statements:
Consolidated Balance Sheets at March 31, 1997
and 1996 12
Consolidated Statements of Operations for the Years
Ended March 31, 1997, 1996 and 1995 13
Consolidated Statements of Stockholders' Equity for
the Years Ended March 31, 1997, 1996 and 1995 14-15
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1997, 1996 and 1995 16
Notes to Consolidated Financial Statements 17-25
Independent Auditors' Report 26
(2) Financial Statement Schedules: Page
Independent Auditors' Report on Financial
Statement Schedule S-1
Schedule II. Valuation and Qualifying Accounts S-2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
(c) Exhibits. The following exhibits are filed as part of this
report:
Exhibit
Number Description
3.1 Certificate of Incorporation.<F1>
3.2 Bylaws.<F1>
4.15 Stockholder Rights Agreement dated August 21, 1990.<F7>
4.16 First Amendment to Stockholder Rights Agreement dated as
of October 29, 1993.<F9>
10.5 1988 Key Employee Stock Purchase Plan.<F2>
10.8 Employment Agreement between the Registrant and
David A. Derby.<F3>
10.9 Employment Agreement between the Registrant and
Richard W. Pershing.<F3>
10.31 Lease of Trans World Communications, Inc. facilities
at 298, 302 and 304 Enterprise Street, Escondido,
California.<F4>
10.32 Sublease of Transco Products, Inc. facilities at
1001 Flynn Rd., Camarillo, California.<F5>
10.33 Guaranty of Sublease for Transco Products, Inc.
facilities.<F5>
10.34 Consent and Nondisturbance Agreement.<F5>
10.36 Amended and Restated 1985 Stock Option Plan.<F6>
10.37 First Amendment to Trans World Communications, Inc.
Lease Agreement dated January 15, 1993.<F9>
10.38 Contribution and Assumption Agreement between Datron
Systems Incorporated and Datron/Transco Inc. dated
June 30, 1993.<F9>
10.39 Datron Systems Incorporated Profit Sharing and Savings
Plan (Amended and Restated as of March 1, 1994).<F9>
10.40 Trans World Communications, Inc. 401(k) Plan, as amended
effective April 1, 1994.<F9>
10.41 Credit Agreement and Note between the Registrant and
Union Bank dated May 11, 1994.<F9>
10.46 1995 Stock Option Plan.<F10>
10.47 Second Amendment to Trans World Communications, Inc.
Lease Agreement dated February 8, 1995.<F10>
10.48 Agreement and Plan of Merger between Datron
Telecommunications International Inc. and Trans World
Communications, Inc. dated as of March 14, 1995.<F10>
10.49 First, Second, Third and Fourth Amendments to Credit
Agreement and Note between the Registrant and Union Bank
dated as of October 26, 1994, December 29, 1994, February
28, 1995 and March 31, 1995, respectively.<F10>
10.50 Fifth Amendment to Credit Agreement and Note between the
Registrant and Union Bank dated as of August 17, 1995.<F11>
10.51 Sixth Amendment to Credit Agreement and Note between the
Registrant and Union Bank dated as of January 3, 1996.<F12>
10.52 Seventh Amendment to Credit Agreement and Note between the
Registrant and Union Bank dated as of January 31,1996.<F12>
<PAGE>13
10.53 Datron Systems Incorporated Supplemental Executive Profit
Sharing Plan (Effective as of April 1, 1994)<F13>
10.54 Third Amendment to Trans World Communications, Inc. Lease
Agreement dated May 1, 1995.<F13>
10.55 Eighth Amendment to Credit Agreement and Note between the
Registrant and Union Bank dated as of May 24, 1996<F13>.
10.56 Ninth Amendment to Credit Agreement and Note between the
Registrant and Union Bank of California dated as of
November 25, 1996 <F14>.
10.57 First Amendment of the Datron Systems Incorporated Profit
Sharing and Savings Plan (Amended and Restated as of
March 1, 1994).
10.58 Datron Systems Incorporated Employee Stock Purchase Plan
(Adopted Effective July 1, 1997). (Subject to stockholder
approval at the 1997 annual meeting.)
13 Certain portions of Registrant's Annual Report to
Stockholders for the fiscal year ended March 31, 1997
containing information required by Part I and Part II of
this report.
21 Subsidiaries.
22 Proxy Statement, Notice of Annual Meeting of Stockholders
to be Held Monday, August 18, 1997 at 11:00 A.M. and Form
of Proxy (to be deemed filed only to the extent required
by the instructions to exhibits for reports on Form 10-K)
to be filed within 120 days of the end of the Registrant's
fiscal year.
23 Independent Auditors' Consent -- Deloitte and Touche.
24 Power of Attorney (on signature page 16)
27 Financial Data Schedule.
_____________________
<F1> Incorporated by this reference to the Exhibit bearing the same
number filed with the Registration Statement on Form 8-B of the
Registrant on November 13, 1987.
<F2> Incorporated by this reference to the Registration Statement on
Form S-8 of the Registrant filed March 22, 1988.
<F3> Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1988.
<F4> Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1989.
<F5> Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's report on Form 8-K dated July
13, 1990.
<PAGE>14
<F6> Incorporated by this reference to the Registration Statement on
Form S-8 of the Registrant filed April 16, 1993.
<F7> Incorporated by this reference to Exhibit I to the Registrant's
Registration Statement on Form 8-A filed November 5, 1990.
<F8> Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1993.
<F9> Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994.
<F10>Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1995.
<F11>Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
<F12>Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1995.
<F13>Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1996.
<F14>Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996.
Supplemental Information
Copies of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held August 18, 1997 and copies of the form of proxy
to be used for such Annual Meeting will be furnished to the Securities
and Exchange Commission prior to the time they will be distributed to
Stockholders.
<PAGE>15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: June 26, 1997 DATRON SYSTEMS INCORPORATED
By: /s/ DAVID A. DERBY
David A. Derby
President, Chief Executive
Officer and Director
<PAGE>16
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below appoints Richard W. Pershing, David A. Derby and William
L. Stephan, jointly and severally, as his true and lawful attorney-in-
fact, each with full power of substitution and re-substitution, for him
and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-K, and to file the
same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact, jointly and severally, full power and authority
to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact, jointly and severally, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
By: /s/ RICHARD W. PERSHING Chairman of the Board
Richard W. Pershing of Directors June 26, 1997
President, Chief
Executive
By: /s/ DAVID A. DERBY Officer and Director
David A. Derby (Principal Executive June 26, 1997
Officer)
Vice President, Chief
Financial
By: /s/ WILLIAM L. STEPHAN Officer (Principal
Financial and
William L. Stephan Accounting Officer) June 26, 1997
By: /s/ KENT P. AINSWORTH Director June 19, 1997
Kent P. Ainsworth
By: /s/ MICHAEL F. BIGHAM Director June 14, 1997
Michael F. Bigham
By: /s/ ADRIAN C. CASSIDY Director June 14, 1997
Adrian C. Cassidy
By: /s/ PETER F. SCOTT Director June 16, 1997
Peter F. Scott
By: /s/ ROBERT D. SHERER Director June 16, 1997
Robert D. Sherer
</TABLE>
<PAGE>S-1
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
Board of Directors
Datron Systems Incorporated
Escondido, California
We have audited the consolidated financial statements of Datron Systems
Incorporated (the Company) as of March 31, 1997 and 1996, and for each
of the three years in the period ended March 31, 1997, and have issued
our report thereon dated May 9, 1997; such financial statements and
report are included in your 1997 Annual Report to Stockholders and are
incorporated herein by reference. Our audits also included the
financial statement schedule of the Company listed in Item 14(a)(2).
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as whole, presents fairly in all material respects the information
set forth therein.
DELOITTE & TOUCHE LLP
San Diego, California
May 9, 1997
<PAGE>S-2
DATRON SYSTEMS INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION
Balance at Balance at
Beginning End
Description of Year Additions Write-offs of Year
<S> <C> <C> <C> <C>
Year ended March 31
1995
Allowance for
doubtful accounts $171,000 $79,000 $3,000 $247,000
Allowance for
inventory
obsolescence 1,337,000 323,000 936,000 724,000
Allowance for
warranties 400,000 828,000 479,000 749,000
---------- ---------- ---------- ----------
$1,908,000 $1,230,000 $1,418,000 $1,720,000
========== ========== ========== ==========
Year ended March 31,
1996
Allowance for
doubtful accounts $247,000 $98,000 $98,000 $247,000
Allowance for
inventory
obsolescence 724,000 45,000 60,000 709,000
Allowance for
warranties 749,000 754,000 488,000 1,015,000
---------- ---------- ---------- ----------
$1,720,000 $897,000 $646,000 $1,971,000
========== ========== ========== ==========
Year ended March 31,
1997
Allowance for
doubtful accounts $247,000 $126,000 $157,000 $226,000
Allowance for
inventory
obsolescence 709,000 735,000 94,000 1,350,000
Allowance for
warranties 1,015,000 632,000 940,000 707,000
---------- ---------- ---------- ----------
$1,971,000 $1,503,000 $1,191,000 $2,283,000
========== ========== ========== ==========
</TABLE>
FIRST AMENDMENT OF THE
DATRON SYSTEMS INCORPORATED
PROFIT SHARING AND SAVINGS PLAN
(Amended and Restated as of March 1, 1994)
WHEREAS, the Datron Systems Incorporated Profit Sharing and Savings Plan
(Amended and Restated as of March 1, 1994) (the "Plan") may be amended
by the Board of Directors of Datron Systems Incorporated (the "Board")
under Section 13.1 of the Plan; and
WHEREAS, the Board desires to amend the Plan in certain respects;
NOW, THEREFORE, effective as of April 1, 1997, the Plan is amended as
follows:
1. The last sentence of Section 1.6 is deleted.
2. Section 1.41(a) shall read in full as follows:
"(a) for purposes of determining vesting with respect to periods prior
to April 1, 1991, a Service Anniversary Year during which the Employee
completes at least 1,000 Hours of Service; and"
3. Section 2.1(b) shall read in full as follows:
"(b) Future Participants. Any Employee not described in paragraph (a)
of this Section shall automatically commence participating in the Plan
on the first day of the first pay period next following the date he has
been an Employee for six months and has completed 500 Hours of Service,
provided he is an Eligible Employee on such day. If 500 Hours of
Service are not completed during the first six months of employment,
participation in the Plan shall commence on the first day of the first
pay period next following the expiration of any succeeding six-month
period of employment during which 500 Hours of Service are completed,
provided the Employee is an Eligible Employee on such day. If an
Employee is not an Eligible Employee on such day, he shall automatically
commence participating in the Plan on the day he becomes an Eligible
Employee."
4. Section 3.1(a) shall read in full as follows:
"(a) Written Election. Each Participant may elect to make
Deferred Pay Contributions to the Plan. Such an election must be filed
at least 10 days prior to the desired commencement date."
5. In Section 3.1(b), the maximum amount of Deferred Pay Contributions
is increased from 15% to 20% of Compensation.
6. Section 5.3(a)(1) shall read in full as follows:
"(1) completed at least 500 Hours of Service during such Plan Year and
are Employees on the last day of such Plan Year, or"
7. Section 5.3(b) shall read in full as follows:
"(b) Profit Sharing Contributions and Forfeitures. Any Profit Sharing
Contribution to the Plan by any Participating Employer for any Plan Year
and, except as provided in the last two sentences of Section 6.2(b), any
forfeitures attributable to Employees of such Participating Employer for
such Plan Year, shall be allocated to the Profit Sharing Accounts of:
(1) those Participants who are Employees on the first and last day
of such Plan Year, who were employed by the Participating Employer that
makes the contribution for all or a portion of the relevant Plan Year,
and who completed at least 1,000 Hours of Service during such Plan Year;
and
(2) those Participants or Employees who were Employees on the
first day of such Plan Year and who were employed by the Participating
Employer that makes the contribution for all or a portion of the
relevant Plan Year, but ceased to be Employees during such Plan Year
because of Normal Retirement, Total Disability, or death (without regard
to the number of Hours of Service they completed during such Plan Year).
Such allocation shall be made as of the last day of the Plan Year for
which the Profit Sharing Contribution is made, in the ratio that each
such Participant's or Employee's Compensation for the portion of the
relevant Plan Year that he was both employed by the Participating
Employer that makes the contribution and was an Eligible Employee bears
to the total Compensation of all such Participants or Employees who were
employed by the Participating Employer that makes the contribution for
the portion of such Plan Year that they were Eligible Employees."
8. Section 8.2(b)(2) shall read in full as follows:
"(2) A Participant's Plan Benefit shall be distributed (or distribution
thereof shall commence) by April 1 of the calendar year following the
calendar year in which he attains age 70-1/2 if the Participant is a "5%
owner" (as defined in section 416(i)(1)(B)(i) of the Code)."
TO RECORD THE ADOPTION OF THIS FIRST AMENDMENT OF THE PLAN, the Board of
Directors of Datron Systems Incorporated has caused this document to be
executed by a duly authorized officer.
Datron Systems Incorporated
Dated: May 19, 1997 By WILLIAM L. STEPHAN
DATRON SYSTEMS INCORPORATED
EMPLOYEE STOCK PURCHASE PLAN
Adopted Effective July 1, 1997
Approved by Stockholders ____________, 1997
1. PURPOSE
(a) The purpose of the Employee Stock Purchase Plan (the "Plan")
is to provide a means by which employees of Datron Systems Incorporated,
a Delaware corporation (the "Company"), and its Affiliates, as defined
in subparagraph 1(b), which are designated as provided in subparagraph
2(b), may be given an opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent or
subsidiary corporation of the Company, as those terms are defined in
Section 424 of the Internal Revenue Code of 1986, as amended (the
"Code").
(c) The Company, by means of the Plan, seeks to retain the
services of its employees, to secure and retain the services of new
employees, and to provide incentives for such persons to exert maximum
efforts for the success of the Company.
(d) The Company intends that the rights to purchase stock of the
Company granted under the Plan be considered options issued under an
"employee stock purchase plan" as that term is defined in Section 423(b)
of the Code.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors (the
"Board") of the Company. The Board may delegate administration of the
Plan to a Committee, as provided in subparagraph 2(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) To determine when and how rights to purchase Common
Stock of the Company shall be granted (each such grant of rights, an
"Offering") and the provisions governing each Offering (which need not
be identical).
(ii) To designate from time to time which Affiliates of the
Company shall be eligible to participate in the Plan (each, a
"Participating Affiliate").
(iii) To construe and interpret the Plan and each
Offering, and to establish, amend and revoke rules and regulations for
the administration of the Plan. The Board, in the exercise of this
power, may correct any defect, omission or inconsistency in the Plan or
any Offering, in a manner and to the extent it shall deem necessary or
expedient to make the Plan or any Offering fully effective.
(iv) To amend the Plan as provided in paragraph 11.
(v) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or expedient to promote the best
interests of the Company and its Affiliates and to carry out the intent
that the Plan be treated as an "employee stock purchase plan" within the
meaning of Section 423 of the Code and each Offering be treated as a
grant of options pursuant to such Plan.
(c) The Board may delegate administration of the Plan to a
committee of one or more members of the Board (the "Committee"). If
administration is delegated to a Committee (which may be a newly formed
or pre-existing committee of the Board), the Committee shall have, in
connection with the administration of the Plan, the powers theretofore
possessed by the Board, subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from
time to time by the Board. The Board may at any time revest in the
Board the administration of the Plan and may reverse or override any
decision of the Committee.
3. SHARES SUBJECT TO THE PLAN.
The number of shares of Common Stock that may be sold pursuant
to rights granted under the Plan shall not exceed two hundred thousand
(200,000) (appropriately adjusted for the effect of any stock split,
stock dividend or the like) of the Company's common stock (the "Common
Stock"). If any right granted under the Plan shall for any reason
terminate without having been exercised, the Common Stock not purchased
under such right shall again become available for issuance under the
Plan.
4. GRANT OF RIGHTS; OFFERING.
The Board or the Committee may from time to time provide for an
Offering on a date or dates (the "Offering Date(s)") selected by the
Board or the Committee. Each Offering shall be of rights to purchase
Common Stock, shall be only to Eligible Employees, as defined below,
shall comply with the requirement of Section 423(b)(5) of the Code that
all employees granted rights to purchase stock under the Plan shall have
the same rights and privileges and shall be in such form and shall
contain such terms and conditions as the Board or the Committee shall
deem appropriate, provided, that the terms of any such Offerings shall
be consistent with the Plan (including without limitation the provisions
of paragraphs 5 through 8 hereof). Each Offering shall specify the
period during which the Offering shall be effective, which period shall
not exceed twenty-seven (27) months beginning with the Offering Date.
The terms and conditions of an Offering shall be incorporated by
reference into the Plan and treated as part of the Plan with respect to
such Offering.
5. ELIGIBILITY.
(a) Rights may be granted only to employees of the Company or any
Participating Affiliate. Except as provided in subparagraph 5(b), an
employee of the Company or any Participating Affiliate shall not be
eligible to be granted rights under the Plan unless, on the Offering
Date, such employee has been in the employ of the Company or any
Affiliate for such continuous period preceding such grant as the Board
or the Committee may require for such Offering, but in no event shall
the required period of continuous employment be equal to or greater than
two (2) years. In addition, unless otherwise determined by the Board or
the Committee, no employee of the Company or any Participating Affiliate
shall be eligible to be granted rights under the Plan unless, on the
Offering Date, such employee's customary employment with the Company or
such Affiliate is for at least twenty (20) hours per week and at least
five (5) months per calendar year. Employees who meet the eligibility
requirements for a particular Offering shall be "Eligible Employees" for
purposes of such Offering.
(b) The Board or the Committee may provide in connection with any
Offering that each person who, during the course of such Offering, first
becomes an Eligible Employee, will, on a date or dates specified in the
Offering which occurs on or after the day on which such person becomes
an Eligible Employee, receive a right under that Offering, which right
shall thereafter be deemed to be a part of that Offering. Such right
shall have the same characteristics as any rights originally granted
under that Offering except that:
(i) the date on which such right is granted to such Eligible
Employee shall be the "Offering Date" of such right for all purposes,
including determination of the exercise price of such right;
(ii) the period of the Offering with respect to such right
shall begin on its Offering Date and end coincident with the end of the
then current Offering (or, if there is then more than one current
Offering, the end of the most recently commenced Offering); and
(iii) the Board or the Committee may provide that if each
such person first becomes an Eligible Employee within a specified period
of time before the end of the Offering, he or she will not receive any
right under that Offering.
(c) No employee shall be eligible for the grant of any rights
under the Plan if, immediately after any such rights are granted, such
employee owns stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company or
of any Affiliate. For purposes of this subparagraph 5(c), the rules of
Section 424(d) of the Code shall apply in determining the stock
ownership of any employee, and stock which such employee may purchase
under all outstanding rights and options shall be treated as stock owned
by such employee.
(d) The number of shares of Common Stock an Eligible Employee may
purchase on any Purchase Date in an Offering shall not exceed such
number of shares as has a fair market value (determined as of the
Offering Date for such Offering) equal to (x) $25,000 multiplied by the
number of calendar years in which the right under such Offering has been
outstanding at any time, minus (y) the fair market value of any other
shares of Common Stock (determined as of the relevant Offering Date with
respect to such shares) which, for purposes of the limitation of Section
423(b)(8) of the Code, are attributed to any of such calendar years in
which the right is outstanding. The amount in clause (y) of the
previous sentence shall be determined in accordance with regulations
applicable under Section 423(b)(8) of the Code based on (i) the number
of shares previously purchased with respect to such calendar years
pursuant to such Offering or any other Offering under the Plan, or
pursuant to any other Company plans intended to qualify as "employee
stock purchase plans" under Section 423 of the Code, and (ii) the number
of shares subject to other rights outstanding on the Offering Date for
such Offering pursuant to the Plan or any other such Company plan.
(e) Officers of the Company and any Participating Affiliate shall
be eligible to participate in Offerings under the Plan, provided,
however, that the Board may provide in connection with any particular
Offering that employees who are highly compensated employees within the
meaning of Section 423(b)(4)(D) of the Code shall not be eligible to
participate in such Offering.
6. RIGHTS; PURCHASE PRICE.
(a) On each Offering Date, unless a lesser amount is set by the
Board or Committee for such Offering pursuant to paragraph 6(c) below,
and subject to the maximum set forth in paragraph 5(d) above, each
Eligible Employee for such Offering shall be granted the right to
purchase, for each 1% of such employee's Earnings designated by such
employee pursuant to Section 7 (but not exceeding ten percent (10%), the
number of shares of Company Common Stock determined by dividing $25,000
by the fair market value of a share of Common Stock on the Offering
Date, dividing the result by the maximum number of percentage points of
Earnings that an employee may designate for such Offering, and
multiplying the result by the number of calendar years included in whole
or in part in the period from the Offering Date to the end of the
Offering. The Board or Committee may define "Earnings" for purposes of
any Offering, consistently with the requirements of Section 423 of the
Code.
(b) The Board or the Committee shall establish one or more dates
during an Offering (the "Purchase Date(s)") on which rights granted
under the Plan shall be exercised and purchases of Common Stock carried
out in accordance with such Offering. If no Purchase Date for an
Offering is designated, such Offering shall have one Purchase Date
occurring on the last day that the Company's stock is traded during the
period of the Offering.
(c) In connection with each Offering made under the Plan, the
Board or the Committee may specify a maximum number of shares that may
be purchased by any employee as well as a maximum aggregate number of
shares that may be purchased by all eligible employees pursuant to such
Offering that is less than that provided in clause (a) above. The Board
or Committee may also limit the percentage of Earnings that can be
designated for withholding in connection with any Offering to a
percentage less than ten percent (10%). In addition, in connection with
each Offering that contains more than one Purchase Date, the Board or
the Committee may specify a maximum aggregate number of shares which may
be purchased by all eligible employees on any given Purchase Date under
the Offering. If the aggregate purchase of shares upon exercise of
rights granted under the Offering would exceed any such maximum
aggregate number, the Board or the Committee shall make a pro rata
allocation of the shares available in as nearly a uniform manner as
shall be practicable and as it shall deem to be equitable.
(d) Unless a greater price is specified for an Offering, and
subject to the requirements of the Code in the event the Board or
Committee elects to permit Eligible Employees to receive rights during
an Offering pursuant to paragraph 5(b), the purchase price of stock
acquired pursuant to rights granted under the Plan shall be the lesser
of:
(i) eighty-five (85%) of the fair market value of the stock
on the Offering Date; or
(ii) eighty-five (85%) of the fair market value of the stock
on the Purchase Date.
7. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a) An eligible employee may become a participant in the Plan
pursuant to an Offering by delivering a participation agreement to the
Company within the time specified in the Offering, in such form as the
Company provides. Each such agreement shall authorize payroll
deductions of up to the maximum percentage specified by the Board or the
Committee of such employee's Earnings during the Offering (as defined by
the Board or Committee in each Offering). The payroll deductions made
for each participant shall be credited to an account for such
participant under the Plan and shall be deposited with the general funds
of the Company and shall not bear interest. Participants may reduce
(including to zero) or increase such payroll deductions, and an eligible
employee may begin such payroll deductions, after the beginning of any
Offering only as provided for in the Offering. Participants may make
additional payments into his or her account only if specifically
provided for in the Offering and only if the participant has not had the
maximum amount withheld during the Offering.
(b) At any time during an Offering, a participant may terminate
his or her payroll deductions under the Plan and withdraw from the
Offering by delivering to the Company a notice of withdrawal in such
form as the Company provides. Such withdrawal may be elected at any time
prior to the end of the Offering except as provided by the Board or the
Committee in the Offering. Upon such withdrawal from the Offering by a
participant, the Company shall distribute to such participant all of his
or her accumulated payroll deductions (reduced to the extent, if any,
such deductions have been used to acquire stock for the participant)
under the Offering, without interest, and such participant's interest in
that Offering shall be automatically terminated. A participant's
withdrawal from an Offering will have no effect upon such participant's
eligibility to participate in any other Offerings under the Plan but
such participant will be required to deliver a new participation
agreement in order to participate in subsequent Offerings under the
Plan.
(c) Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon cessation of any participating employee's
employment with the Company and any designated Affiliate, for any
reason, and the Company shall distribute to such terminated employee all
of his or her accumulated payroll deductions (reduced to the extent, if
any, such deductions have been used to acquire stock for the terminated
employee) under the Offering, without interest.
(d) Rights granted under the Plan shall not be transferable by a
participant otherwise than by will or the laws of descent and
distribution, or by a beneficiary designation as provided in paragraph
14 and, otherwise during his or her lifetime, shall be exercisable only
by the person to whom such rights are granted.
8. EXERCISE.
(a) On each Purchase Date specified therefor in the relevant
Offering, each participant's accumulated payroll deductions and other
additional payments specifically provided for in the Offering (without
any increase for interest) will be applied to the purchase of whole
shares of stock of the Company, up to the maximum number of shares
permitted pursuant to the terms of the Plan and the applicable Offering,
at the purchase price specified in the Offering. No fractional shares
shall be issued upon the exercise of rights granted under the Plan. The
amount, if any, of accumulated payroll deductions remaining in each
participant's account after the purchase of shares which is less than
the amount required to purchase one share of stock on the final Purchase
Date of an Offering shall be held in each such participant's account for
the purchase of shares under the next Offering under the Plan, unless
such participant withdraws from such next Offering, as provided in
subparagraph 7(b), or is no longer eligible to be granted rights under
the Plan, as provided in paragraph 5, in which case such amount shall be
distributed to the participant after such final Purchase Date, without
interest. The amount, if any, of accumulated payroll deductions
remaining in any participant's account after the purchase of shares
which is equal to the amount required to purchase whole shares of stock
on the final Purchase Date of an Offering shall be distributed in full
to the participant after such Purchase Date, without interest.
(b) No rights granted under the Plan may be exercised to any
extent unless shares under the Plan are covered by an effective
registration statement pursuant to the Securities Act of 1993, as
amended (the "Securities Act") and the Plan is in material compliance
with all applicable state, foreign and other securities and other laws
applicable to the Plan. If on a Purchase Date in any Offering hereunder
the Plan is not so registered or in such compliance, no rights granted
under the Plan or any Offering shall be exercised on such Purchase Date,
and the Purchase Date shall be delayed until the Plan is subject to such
an effective registration statement and in such compliance, except that
the Purchase Date shall not be delayed more than twelve (12) months and
the Purchase Date shall in no event be more than twenty-seven (27)
months from the Offering Date. If on the Purchase Date of any Offering
hereunder, as delayed to the maximum extent permissible, the Plan is not
registered and in such compliance, no rights granted under the Plan or
any Offering shall be exercised and all payroll deductions accumulated
during the Offering (reduced to the extent, if any, such deductions have
been used to acquire stock) shall be distributed to the participants,
without interest.
(c) Shares of stock of the Company that are purchased may be
registered in the name of the participant or jointly in the name of the
participant and his or her spouse as joint tenants with right of
survivorship or community property or in the name of a living trust that
the participant has established on his own behalf.
9. RIGHTS AS A STOCKHOLDER; NO EFFECT ON EMPLOYMENT AT WILL.
A participant shall not be deemed to be the holder of, or to have
any of the rights of a holder with respect to, any shares subject to
rights granted under the Plan unless and until the participant's
shareholdings acquired upon exercise of rights under the Plan are
recorded in the Stock records of the Company. Nothing herein shall
create any rights on the part of any employee to continuing employment.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or
subject to any rights granted under the Plan (through merger,
consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, or other
transaction not involving the receipt of consideration by the Company),
then, subject to clause (b) below, the Plan and outstanding rights will
be appropriately adjusted in the class(es) and maximum number of shares
subject to the Plan and the class(es) and number of shares and price per
share of stock subject to outstanding rights. Such adjustments shall be
made by the Board or the Committee, the determination of which shall be
final, binding and conclusive. (The conversion of any convertible
securities of the Company or the issuance by or exercise of, options,
warrants or right to acquire Common Stock or convertible securities
shall not be treated as a "transaction not involving the receipt of
consideration by the Company.")
(b) In the event of: (1) a dissolution or liquidation of the
Company; (2) a merger or consolidation in which the Company is not the
surviving corporation; (3) a reverse merger in which the Company is the
surviving corporation but the shares of the Company's Common Stock
outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash
or otherwise; or (4) the acquisition by any person, entity or group
within the meaning of Section 13(d) or 14(d) of the Exchange Act or any
comparable successor provisions (excluding any employee benefit plan, or
related trust sponsored or maintained by the Company or any Affiliate of
the Company) of the beneficial ownership (within the meaning of Rule 13d-
3 promulgated under the Exchange Act, or comparable successor rule) of
securities of the Company representing at least fifty percent (50%) of
the combined voting power entitled to vote in the election of directors,
then, as determined by the Board in its sole discretion (i) any
surviving or acquiring corporation may assume outstanding rights or
substitute similar rights for those under the Plan, (ii) such rights may
continue in full force and effect, or (iii) participants' accumulated
payroll deductions may be used to purchase Common Stock immediately
prior to the transaction described above and the participants' rights
under the ongoing Offering terminated.
11. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the
Plan. However, except as provided in paragraph 12 relating to
adjustments upon changes in stock, no amendment shall be effective
unless approved by the stockholders of the Company within twelve (12)
months before or after the adoption of the amendment, where the
amendment will:
(i) Increase the number of shares reserved for rights under
the Plan;
(ii) Modify the provisions as to eligibility for participation
in the Plan (to the extent such modification requires stockholder
approval in order for the Plan to obtain employee stock purchase plan
treatment under Section 423 of the Code or to comply with the
requirements of Rule 16b-3); or
(iii) Modify the plan in any other way if such
modification requires stockholder approval in order for the Plan to
obtain employee stock purchase plan treatment under Section 423 of the
Code or to comply with the requirements of Rule 16b-3.
It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide eligible
employees with the maximum benefits provided or to be provided under the
provisions of the Code and the regulations promulgated thereunder
relating to employee stock purchase plans and/or to bring the Plan
and/or rights granted under it into compliance therewith.
(b) Subject to paragraph 12, rights granted before amendment of
the Plan shall not be impaired by any amendment of the Plan, except with
the consent of the person to whom such rights were granted, or except as
necessary to comply with any laws or governmental regulations, or except
as necessary to ensure that the Plan and/or rights granted under the
Plan comply with the requirements of Section 423 of the Code.
12. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the participant's
account under the Plan in the event of such participant's death
subsequent to the end of an Offering but prior to delivery to the
participant of such shares and cash. In addition, a participant may
file a written designation of a beneficiary who is to receive any cash
from the participant's account under the Plan in the event of such
participant's death during an Offering.
(b) Such designation of a beneficiary may be changed by the
participant at any time by written notice. In the event of the death of
a participant and in the absence of a beneficiary validly designated
under the Plan who is living at the time of such participant's death,
the Company shall deliver such shares and/or cash to the executor or
administrator of the estate of the participant, or if no such executor
or administrator has been appointed (to the knowledge of the Company),
the Company, in its sole discretion, may deliver such shares and/or cash
to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the
Company, then to such other person as the Company may designate.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board in its discretion, may suspend or terminate the Plan
at any time. No rights may be granted under the Plan while the Plan is
suspended or after it is terminated.
(b) Rights and obligations under any rights granted while the Plan
is in effect shall not be impaired by suspension or termination of the
Plan, except as expressly provided in the Plan or with the consent of
the person to whom such rights were granted, or except as necessary to
comply with any laws or governmental regulation, or except as necessary
to ensure that the Plan and/or rights granted under the Plan comply with
the requirements of Section 423 of the Code.
14. EFFECTIVE DATE OF THE PLAN.
The Plan shall become effective on the date specified by the Board,
but no rights granted under the Plan shall be exercised unless and until
the Plan has been approved by the stockholders of the Company within
twelve (12) months before or after the date the Plan is adopted by the
Board.
CERTAIN PORTIONS OF REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS
FOR THE FISCAL YEAR ENDED MARCH 31, 1997 CONTAINING INFORMATION
REQUIRED BY PART I AND PART II OF THIS REPORT
Information required by Part II, Item 5: Market for Registrant's Common
Equity and Related Stockholder Matters. This information is contained
in the section captioned "Common Stock Activity" on the inside back
cover of the Annual Report.
Common Stock Activity
The common stock of Datron Systems Incorporated is traded on the Nasdaq
National Market tier of the Nasdaq Stock Market under the symbol DTSI.
The following table sets forth the high and low closing sales prices by
quarter for the two most recent fiscal years as reported by Nasdaq:
Fiscal Year 1997
----------------
Quarter Ended High Low
June 30, 1996 $15.50 $11.675
September 30, 1996 $12.313 $8.75
December 31, 1996 $10.375 $6.00
March 31, 1997 $10.063 $6.813
Fiscal Year 1996
----------------
Quarter Ended High Low
June 30, 1995 $12.25 $9.75
September 30, 1995 $17.25 $10.75
December 31, 1995 $19.75 $14.50
March 31, 1996 $19.00 $11.875
On March 31, 1997, there were approximately 1,700 stockholders of the
Company's common stock. The Company has never paid a cash dividend on
its common stock and does not anticipate doing so in the foreseeable
future.
<PAGE>
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.
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Statements of
Operations
Net sales $53,269,000 $61,165,000 $70,033,000 $65,636,000 $54,104,000
Net income 268,000 (1,241,000) 3,920,000 5,251,000 (8,367,000)
(loss)
Income(Loss) $0.10 $(0.46) $1.51 $2.10 $ (3.32)
per share<F1>
Balance Sheets
Working capital $24,756,000 $18,042,000 $14,241,000 $13,540,000 $15,520,000
Total assets 56,476,000 58,459,000 55,944,000 49,488,000 53,592,000
Long-term debt 8,900,000 5,200,000 0 0 8,750,000
Total 23,868,000 26,588,000 23,079,000 20,887,000 30,531,000
liabilities
Stockholders' 32,608,000 31,871,000 32,865,000 28,601,000 23,061,000
equity<F2>
Book value $12.26 $12.24 $12.84 $11.40 $9.33
per share
</TABLE>
<F1>See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the determination of shares used in computing
income(loss)per share.
<F2>No dividends were declared or paid during the years presented.
<PAGE>
Information required by Part II, Item 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations. This
information is contained on pages 8 through 11 of the Annual Report.
Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Overview
Datron Systems Incorporated and its wholly owned subsidiaries (the
"Company") provide products and services that address the needs of
emerging satellite and radio communication markets. It reports
operations in two business segments: Antenna and Imaging Systems, and
Communication Products and Services.
The Antenna and Imaging Systems business segment designs and
manufactures specialized satellite communication systems, subsystems and
antennas that are sold worldwide to commercial and governmental
customers, including the U.S. Department of Defense ("DoD"). Fiscal
1997 sales for this segment were $33,304,000, a 4% increase from fiscal
1996 sales of $31,872,000. The DoD accounted for 47% of this segment's
fiscal 1997 sales and 31% of consolidated sales. During fiscal 1996,
the DoD accounted for 55% of this segment's sales and 30% of
consolidated sales. Because of the decline in U.S. defense spending,
the Company has been pursuing additional markets for this segment's
products. The primary such market has been remote sensing satellite
earth stations. Sales of remote sensing products represented 35% and
29% of this segment's sales in fiscal 1997 and 1996, respectively. In
fiscal 1996, this segment introduced the DBS-3000, a mobile satellite
television reception system for recreational vehicles and long-haul
trucks. This system was the Company's first consumer product. Several
additional direct broadcast satellite ("DBS") antenna products were
introduced during fiscal 1997. Although these new DBS products
contributed to this segment's fiscal 1997 improvement in sales, sales of
DBS products were below the Company's expectations.
The Communication Products and Services business segment designs,
manufactures and distributes high frequency and very high frequency
radios and accessories for worldwide military and civilian purposes.
Fiscal 1997 sales for this segment were $19,965,000, a 32% decrease from
fiscal 1996 sales of $29,293,000. The decrease in sales was primarily
due to delays in new product development. Foreign customers accounted
for 94% of fiscal 1997 sales and 93% of fiscal 1996 sales. During
fiscal 1997, this segment sold radio products to two Asian customers
that accounted for 31% and 24% of this segment's sales and 11% and 9% of
consolidated sales. During fiscal 1996, sales of radio products to one
of the same Asian customers accounted for 39% of this segment's sales
and 19% of consolidated sales.
Consolidated sales for fiscal 1997 were $53,269,000, a 13% decrease from
fiscal 1996 consolidated sales of $61,165,000. The decrease in sales
was primarily due to lower sales of radio products and military
antennas, partially offset by sales of new DBS television antenna
products and by higher sales of remote sensing systems. Net income for
fiscal 1997 was $268,000, or $0.10 per share, compared with a net loss
in fiscal 1996 of $1,241,000, or $0.46 per share. Although gross
profits were lower in fiscal 1997 on the lower sales, the improvement in
net income resulted from the absence of costs associated with
cancellation of an $8.8 million order for a remote sensing system and
associated restructuring charges incurred in fiscal 1996 and from lower
operating expenses in fiscal 1997.
In March 1996, the Company announced its plan to consolidate its image
processing division in San Jose, California with its remote sensing
earth station business in Simi Valley, California. Both of those
functions are part of the Antenna and Imaging Systems business segment.
In connection with the consolidation, the Company recorded a
restructuring charge of $1,421,000 ($855,000, or $0.32 per share, after
taxes). Major categories of costs and expenses included in the
restructuring charge were estimated employee severance, $683,000;
goodwill write-off, $679,000; and estimated future losses on facility
lease, $59,000.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements.
Actual results could differ materially. Reference is hereby made to the
statement of Investment Considerations contained in Part I, Item 1 of
the Company's Form 10-K, which is available from the Company upon
request. The consolidated financial statements and notes thereto that
appear on pages 12 through 25 should be read in conjunction with the
following review.
<PAGE>
Results of Operations
Operating results for the last three fiscal years are presented for each
of the Company's two business segments (in thousands):
<TABLE>
<CAPTION>
ANTENNA AND IMAGING SYSTEMS
Years Ended March 31,
1997 1996 1995
<S> <C> <C> <C>
Net sales $33,304 $31,872 $42,097
Percent of consolidated
net sales 63% 52% 60%
Gross profit $9,923 $8,682 $12,733
Operating expenses before
corporate expenses
and restructuring 8,110 10,341 8,768
Operating income (loss) $1,813 $(1,659) $3,965
Percent of consolidated
operating income before
corporate expenses and
restructuring 80% (137%) 49%
</TABLE>
Sales of Antenna and Imaging Systems increased $1,432,000, or 4%, in
fiscal 1997 compared with fiscal 1996 sales. The increase was primarily
due to sales of new DBS antenna products and to higher sales of remote
sensing systems, partially offset by lower sales for the DoD. Although
sales of DBS antenna products contributed to the sales increase, those
sales were below the Company's expectations. The Company believes sales
were below expectations because of distribution problems with this new
consumer product. Sales of Antenna and Imaging Systems decreased
$10,225,000, or 24%, in fiscal 1996 compared with fiscal 1995 sales.
Lower sales of DoD products and remote sensing systems were responsible
for most of the decrease. The lower sales of remote sensing systems
were due to a canceled order and to delayed awards of several other such
systems.
Gross profit percentage on Antenna and Imaging Systems' sales was 29.8%
in fiscal 1997 compared with 27.2% in fiscal 1996 and 30.2% in fiscal
1995. The increase in fiscal 1997 from fiscal 1996 was primarily due to
the absence of a write-off of non-recoverable costs associated with a
canceled remote sensing order in fiscal 1996. Efficiencies resulting
from the consolidation of the Company's remote sensing business into the
Simi Valley facility and reductions in reserves for contract
contingencies also contributed to the increase. The decrease in fiscal
1996 from fiscal 1995 was primarily due to higher expenses associated
with sales of remote sensing systems and to the write-off of non-
recoverable costs associated with a canceled remote sensing order.
Operating income percentage on sales of Antenna and Imaging Systems was
5.4% in fiscal 1997 compared with an operating loss percentage before
provision for restructuring of 5.2% of sales in fiscal 1996 and compared
with an operating income percentage of 9.4% of sales in fiscal 1995.
The improvement in fiscal 1997 from fiscal 1996 was primarily due to
higher gross profits and to lower research and development, selling and
administrative expenses. The operating loss in fiscal 1996 compared
with fiscal 1995 operating income was primarily due to lower gross
margins, higher new product development expenses and higher selling
expenses resulting from the first full year of consolidation with
International Imaging Systems since its acquisition.
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATION PRODUCTS AND SERVICES
Years Ended March 31,
1997 1996 1995
<S> <C> <C> <C>
Net sales $19,965 $29,293 $27,936
Percent of consolidated
net sales 37% 48% 40%
Gross profit $5,426 $9,531 $9,640
Operating expenses before
Corporate expenses and
restructuring 4,970 6,660 5,486
Operating income $456 $2,871 $4,154
Percent of consolidated
operating income
before corporate expenses
and restructuring 20% 237% 51%
</TABLE>
Sales of Communication Products and Services decreased $9,328,000, or
32%, in fiscal 1997 compared with fiscal 1996 sales. The decrease was
due to lower orders resulting from delays in new product development and
from softness in the worldwide radio market. Sales of radio products to
two Asian customers accounted for $10,885,000, or 55%, of this segment's
fiscal 1997 sales. Sales of Communication Products and Services
increased $1,357,000, or 5%, in fiscal 1996 compared with fiscal 1995
sales. The increase was due to higher sales of standard radio products.
Sales of radio products to one of the same Asian customers accounted for
$11,457,000, or 39%, of this segment's fiscal 1996 sales. One customer
will often account for a large percentage of this segment's annual
sales; however, it is unusual to have large sales from the same customer
in successive years.
Gross profit percentage on Communication Products and Services' sales
was 27.2% in fiscal 1997 compared with 32.5% in fiscal 1996 and 34.5% in
fiscal 1995. The decline in fiscal 1997 from fiscal 1996 was due to
higher labor and overhead costs, production inefficiencies resulting
from a much lower sales level than the previous year and to increases in
the provision for inventory obsolescence. The decline in fiscal 1996
from fiscal 1995 was primarily due to a less favorable mix of products
and services and to higher material costs.
Operating income percentage on sales of Communication Products and
Services was 2.3% in fiscal 1997 compared with 9.8% of sales in fiscal
1996 and 14.9% of sales in fiscal 1995. The decrease in fiscal 1997
compared with fiscal 1996 was due to lower gross profits and higher new
product development expenses, partially offset by lower selling and
administrative expenses. The decrease in fiscal 1996 compared with
fiscal 1995 was due to lower gross profits, higher international selling
expenses, higher new product development expenses and higher
administrative expenses related to the Company's decision not to
continue pursuit of the satellite paging business. Because an operating
loss was incurred in the Antenna and Imaging Systems business segment in
fiscal 1996, 237% of consolidated operating income before corporate
expenses and restructuring was attributed to the Communication Products
and Services business segment in fiscal 1996.
Consolidated expenses were as follows:
Selling, general and administrative ("SG&A") expenses were $11,770,000
in fiscal 1997 compared with $15,101,000 in fiscal 1996 and $14,111,000
in fiscal 1995. Fiscal 1997 SG&A expenses decreased 22% over fiscal
1996 SG&A expenses due to spending reductions at both business segments,
cost reductions related to the Company's fourth quarter fiscal 1996
consolidation and restructuring, and to reductions in reserves for
commitments and contingencies that the Company determined were no longer
necessary. Fiscal 1996 SG&A expenses increased 7% over fiscal 1995 SG&A
expenses due to higher international selling expenses in both business
segments, partially offset by lower administrative expenses.
<PAGE>
Research and development ("R&D") expenses were $2,432,000 in fiscal 1997
compared with $3,280,000 in fiscal 1996 and $1,768,000 in fiscal 1995.
Fiscal 1997 R&D expenses decreased 26% over fiscal 1996 R&D expenses
primarily because of lower spending on development programs for mobile
DBS television reception systems, partially offset by higher spending on
development programs for new radio products. Because most of the
development work for DBS products has been completed, R&D expenditures
are expected to decline further in fiscal 1998. Fiscal 1996 R&D
expenses increased 86% over fiscal 1995 R&D expenses due to acceleration
of development programs for DBS television reception systems for
recreational vehicles, long-haul trucks and commercial aviation, and
also due to development of image processing capabilities for the remote
sensing agricultural services market. The Company is no longer pursuing
the agricultural services market.
Interest expense in fiscal 1997 was $620,000 compared with $238,000 in
fiscal 1996, an increase of 161%. The increase was due to much higher
levels of term debt during fiscal 1997. Interest expense in fiscal 1996
was $238,000 compared with $190,000 in fiscal 1995, an increase of 25%.
The increase was due to higher levels of term debt during fiscal 1996.
The effective income tax provision (benefit) rates for fiscal years
1997, 1996 and 1995 were 51.2%, (39.8%) and 37.8%, respectively. The
high provision rate in fiscal 1997 was due to relatively high
unallowable expenses for tax purposes compared with low fiscal 1997 pre-
tax book income. The higher rate of benefit for fiscal 1996 compared
with the provision rate for fiscal 1995 was primarily due to the new
California investment tax credit.
Order backlog at March 31 was as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Antenna and Imaging Systems $13,086,000 $19,321,000
Communication Products and Services 4,862,000 2,801,000
Total $17,948,000 $22,122,000
</TABLE>
The 32% decrease in Antenna and Imaging Systems backlog at March 31,
1997 compared with the prior year was primarily due to lower bookings of
remote sensing systems and to a continued decline in long-term DoD
business. The lower bookings of remote sensing systems resulted in part
from delayed awards. Several of those delayed awards were received in
the first quarter of fiscal 1998, and as a result order bookings for
remote sensing systems are expected to be higher in fiscal 1998 than
they were in fiscal 1997.
The 74% increase in Communication Products and Services backlog at March
31, 1997 compared with the prior year was due to improved order bookings
in the fourth quarter ended March 31, 1997. Although fourth quarter
order bookings were higher than they were in the comparable period last
year, order bookings for Communication Products and Services were lower
in fiscal 1997 than they were in fiscal 1996. There can be no
assurances that order bookings will improve in fiscal 1998.
Liquidity and Capital Resources
At March 31, 1997, working capital was $24,756,000 compared with
$18,042,000 at March 31, 1996, an increase of $6,714,000 or 37%.
Significant changes affecting working capital during fiscal 1997 were
the following: accounts receivable increased $2,879,000 primarily due
to higher fourth quarter sales in fiscal 1997; inventories decreased
$1,499,000 as decreases in radio product inventories were partially
offset by increases in inventories of new DBS antenna products; prepaid
expenses and other current assets decreased $1,310,000 primarily due to
collection of an income tax refund; accounts payable and accrued
expenses decreased $3,145,000 due to lower recent purchases of materials
and to cost reduction efforts; and customer advances decreased
$2,949,000. The Company's cash position at March 31, 1997 was
$1,072,000 compared with $1,393,000 at March 31, 1996, a decrease of
23%. At March 31, 1997, the Company had borrowed $8,900,000 in term
debt from its bank to meet operating cash requirements. Those
borrowings represented a 71% increase in term debt from the $5,200,000
of borrowings at March 31, 1996.
<PAGE>
Capital expenditures were $891,000 in fiscal 1997 compared with
$2,683,000 in fiscal 1996. Capital expenditures in fiscal 1998 are
expected to be higher than they were in fiscal 1997.
At March 31, 1997, the Company had a $19,500,000 revolving line of
credit with its bank, of which up to $12,000,000 may be used for the
issuance of letters of credit and up to $10,500,000 may be used for
direct working capital advances provided that total credit extended does
not exceed $19,500,000. The Company believes that its existing working
capital, anticipated future cash flows from operations and available
credit with its bank are sufficient to finance its presently planned
capital and working capital requirements.
The Company has never paid a cash dividend on its common stock and does
not anticipate doing so in the foreseeable future. Inflation and
changing prices have not had a significant impact on the Company's
historical operations.
<PAGE>
Information required by part II, Item 8: Financial Statements and
Supplementary Data. This information is contained on pages 12 through
26 of the Annual Report.
<TABLE>
<CAPTION>
DATRON SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
March 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $1,072,000 $1,393,000
Accounts receivable, net 17,896,000 15,017,000
Inventories 14,309,000 15,808,000
Deferred income taxes 2,788,000 2,602,000
Prepaid expenses and other current assets 1,168,000 2,478,000
------------ ------------
Total current assets 37,233,000 37,298,000
Property, plant and equipment, net 12,030,000 13,835,000
Goodwill, net 5,851,000 6,056,000
Investment 1,113,000 890,000
Other assets 249,000 380,000
------------ ------------
Total assets $56,476,000 $58,459,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $7,647,000 $8,490,000
Accrued expenses 3,103,000 5,405,000
Customer advances 744,000 3,693,000
Income taxes payable 194,000 240,000
Current portion of restructuring reserve 789,000 1,428,000
------------ ------------
Total current liabilities 12,477,000 19,256,000
Long-term debt 8,900,000 5,200,000
Restructuring reserve 435,000 1,063,000
Deferred income taxes 2,056,000 1,069,000
------------ ------------
Total liabilities 23,868,000 26,588,000
------------ ------------
Commitments and contingencies -- Note 9
Stockholders' equity:
Preferred stock -- par value $0.01;
authorized 2,000,000 shares, none
issued or outstanding --- ---
Common stock -- par value $0.01;
authorized 10,000,000 shares,
3,063,937 shares issued in 1997
and 1996 31,000 31,000
Additional paid-in capital 10,602,000 10,568,000
Retained earnings 24,417,000 24,149,000
Treasury stock, at cost; 404,521 and
459,745 shares in 1997 and 1996,
respectively (2,198,000) (2,633,000)
Stock option plan and stock purchase
plan notes receivable (244,000) (244,000)
------------ ------------
Total stockholders' equity 32,608,000 31,871,000
------------ ------------
Total liabilities and stockholders' equity $56,476,000 $58,459,000
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $53,269,000 $61,165,000 $70,033,000
Cost of sales 37,920,000 42,952,000 47,660,000
------------ ------------ ------------
Gross profit 15,349,000 18,213,000 22,373,000
Selling, general
and administrative 11,770,000 15,101,000 14,111,000
Research and development 2,432,000 3,280,000 1,768,000
Restructuring --- 1,421,000 ---
------------ ------------ ------------
Operating income (loss) 1,147,000 (1,589,000) 6,494,000
Interest expense (620,000) (238,000) (190,000)
Interest income 13,000 27,000 20,000
Other income (expense) 8,000 (261,000) (22,000)
------------ ------------ ------------
Income (loss) before income
taxes 548,000 (2,061,000) 6,302,000
Income taxes (benefit) 280,000 (820,000) 2,382,000
------------ ------------ ------------
Net income (loss) $268,000 ($1,241,000) $3,920,000
============ ============ ============
Net income (loss) per share $0.10 ($0.46) $1.51
============ ============ ============
Weighted average number of
common and common equivalent
shares outstanding 2,681,000 2,669,000 2,600,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Stock Paid-In Retained Treasury
Shares Par Value Capital Earnings Stock
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1994 2,508,514 $30,000 $10,475,000 $21,470,000 ($3,210,000)
Stock issued in connection
with acquisition of business 20,689 1,000 174,000
Purchase of treasury stock (4,472) (51,000)
Stock options exercised
for treasury stock and
tax benefits 34,892 (62,000) 282,000
Net income 3,920,000
---------------------------------------------------------------
Balance at March 31, 1995 2,559,623 31,000 10,587,000 25,390,000 (2,979,000)
Purchase of treasury stock (4,401) (51,000)
Stock options exercised
for treasury stock and
tax benefits 48,970 (37,000) 397,000
Stock option compensation 18,000
Net loss (1,241,000)
---------------------------------------------------------------
Balance at March 31, 1996 2,604,192 31,000 10,568,000 24,149,000 (2,633,000)
Purchase of treasury stock (8,776) (84,000)
Stock options exercised
for treasury stock and
tax benefits 64,000 (4,000) 519,000
Stock option compensation 38,000
Net income 268,000
---------------------------------------------------------------
Balance at March 31, 1997 2,659,416 $31,000 $10,602,000 $24,417,000 ($2,198,000)
===============================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
1997 1996 1995
<S> <C> <C> <C>
Cash Flows from Operating
Activities
Net income (loss) $268,000 $(1,241,000) $3,920,000
Adjustments to reconcile net
income (loss) to net cash
(used in) provided by operating
activities:
Depreciation and amortization 2,953,000 3,317,000 2,366,000
Restructuring (1,267,000) 588,000 (603,000)
Changes in operating assets and
liabilities:
Accounts receivable (2,879,000) 2,594,000 (293,000)
Inventories 1,499,000 (5,807,000) (1,646,000)
Deferred income taxes 801,000 229,000 (146,000)
Prepaid expenses and other 1,389,000 (1,819,000) (128,000)
assets
Accounts payable and accrued (3,145,000) (754,000) 2,699,000
expenses
Customer advances (2,949,000) 1,236,000 (3,564,000)
Income taxes payable (46,000) (2,311,000) 931,000
Other liabilities --- (23,000) (577,000)
Net cash (used in) provided by (3,376,000) (3,991,000) 2,959,000
operating activities
Cash Flows from Investing
Activities
Additions to property, plant and (891,000) (2,683,000) (2,306,000)
equipment
Purchase of investment (223,000) (890,000) ---
Proceeds from sale of product line --- --- 1,148,000
Acquisition of business --- --- (415,000)
Net cash used in investing
activities (1,114,000) (3,573,000) (1,573,000)
Cash Flows from Financing
Activities
Increase in long-term debt 3,700,000 5,200,000 ---
Stock options exercised and tax 553,000 378,000 220,000
benefits
Purchase of treasury stock (84,000) (51,000) (51,000)
Payment advanced against stock
Option plan note receivable ----- (80,000) ---
Net cash provided by financing
activities 4,169,000 5,447,000 169,000
(Decrease) increase in cash and (321,000) (2,117,000) 1,555,000
cash equivalents
Cash and cash equivalents at 1,393,000 3,510,000 1,955,000
beginning of year
Cash and cash equivalents at end
of year $1,072,000 $1,393,000 $3,510,000
Supplemental Cash Flow
Information:
Interest paid $635,000 $224,000 $248,000
Income tax (refunds received) paid $(1,989,000) $3,306,000 $1,558,000
Schedule of Noncash Investing
Activities Relating to
Acquisition of Business:
Noncash assets acquired --- --- $3,563,000
Liabilities assumed --- --- (2,973,000)
Common stock issued --- --- (175,000)
Cash paid --- --- $415,000
</TABLE>
See notes to consolidated financial statements
<PAGE>
DATRON SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
Datron Systems Incorporated and its wholly owned subsidiaries (the
"Company") provide satellite communication and image processing systems
through its Antenna and Imaging Systems business segment and high-
quality radio and other wireless communication products to a worldwide
market through its Communication Products and Services business segment.
The Antenna and Imaging Systems business segment designs and
manufactures specialized satellite communication systems, subsystems and
antennas that are sold worldwide to commercial and governmental
customers, including the U.S. Department of Defense. It provides earth
station hardware, software and image processing systems for the remote
sensing satellite systems market, and also produces mobile satellite
television reception systems for recreational vehicles, buses, boats and
airplanes. This business segment operates from facilities in Simi
Valley, California. Communication products include HF (high frequency)
and VHF (very high frequency) radio products and communication systems
that are designed and manufactured in Escondido, California. These
products are sold worldwide through a network of Company salespersons
and independent dealers and sales representatives.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, and also affect the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid investments purchased with
original maturities of three months or less and which are readily
convertible into cash.
Inventories
Inventories are carried at the lower of cost (first-in, first-
out) or market (determined on the basis of estimated realizable value).
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation
is provided using the straight-line method over the estimated useful
lives of the assets. Useful lives range from two to ten years for
machinery and equipment and furniture and fixtures, and from twenty to
forty years for buildings and building improvements. Leasehold
improvements are amortized over the related lease term.
Goodwill
<PAGE>
Goodwill represents the excess of the cost of purchased businesses
over the fair value of their net assets at date of acquisition and is
being amortized on a straight-line basis over periods ranging from 20 to
38 years. The recoverability of goodwill is evaluated on a recurring
basis utilizing the fair value methodology. As part of the
restructuring charge at March 31, 1996, $679,000 in goodwill was written
off. See Notes 3 and 4. Accumulated amortization of goodwill was
$1,850,000 at March 31, 1997 and $1,646,000 at March 31, 1996.
Investment
Investment represents preferred stock of EarthWatch Incorporated. It
is being carried at cost, which the Company believes approximates its
fair value based upon other recent sales of similar securities.
Treasury Stock
Repurchased shares of the Company's common stock are included in
treasury stock at cost. Shares issued from treasury stock for exercise
of stock options are issued at original cost on a first-in, first-out
basis.
Revenue Recognition
Revenue from product sales is generally recognized at the time of
shipment. Revenue from certain fixed-price contracts requiring
substantial performance over several periods prior to commencement of
deliveries is accounted for under the percentage-of-completion (cost-to-
cost) method of accounting. Expected profits or losses on these
contracts are based upon the Company's estimates of total sales value
and cost at completion. These estimates are reviewed and revised
periodically throughout the lives of the contracts, and adjustments
resulting from such revisions are recorded in the periods in which
revisions are made. Losses on contracts are recorded in full as they
are identified.
Accounts receivable include unbilled costs and accrued profits related
to contracts accounted for under the percentage-of-completion method of
accounting. There are no material amounts of contract holdbacks or
claims subject to uncertainty of realization. Substantially all amounts
are expected to be collected within one year. Funds received from
customers in advance of contract work are classified as current
liabilities.
Income Taxes
Effective April 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
This statement requires that deferred income taxes be reported in the
Company's financial statements utilizing the asset and liability method.
Under this method, deferred income taxes are determined based on
enacted tax rates applied to the differences between the financial
statement and tax basis of assets and liabilities.
Income (Loss) Per Share
Shares used in computing income (loss) per share include the weighted
average of common stock outstanding plus equivalent shares issuable
under the Company's stock option plans.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share ("EPS"). This statement requires
presentation of income per share to reflect both "Basic EPS" as well as
"Diluted EPS" on the face of the income statement. In general, Basic
EPS excludes dilution created by stock equivalents and is a function of
the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects potential dilution created by stock equivalents as
if such equivalents are converted into common stock and is calculated in
substantially the same manner as Fully Diluted EPS illustrated in
Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per
Share."
<PAGE>
The Company will be required to adopt the new method of reporting
income per share in the three-month period ended December 31, 1997.
Based on the Company's existing capital structure, the anticipated
results of implementing SFAS No. 128 would reflect income per share in
materially the same manner as currently reported.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which was effective
for the Company beginning April 1, 1996. SFAS No. 123 requires expanded
disclosures for stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based
on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No.
25 to its stock based compensation awards to employees and will disclose
the required pro forma effect on net income and income per share. See
Note 8.
NOTE 3. RESTRUCTURING
In March 1996, the Company announced its plan to consolidate its image
processing division in San Jose, California with its remote sensing
earth station business in Simi Valley, California. In connection with
this decision, a restructuring charge in the amount of $1,421,000
($855,000, or $0.32 per share, after taxes) was recorded in the fourth
quarter ended March 31, 1996. The major categories of costs and
expenses included in this restructuring charge are as follows:
Estimated employee severance $ 683,000
Goodwill write-off 679,000
Estimated future losses on
facility lease 59,000
----------
Total $1,421,000
==========
In fiscal 1993, the Company restructured its Antenna and Imaging
Systems business segment. The restructuring reserve at March 31, 1997
and 1996 includes remaining estimated future losses on the Company's
Camarillo, California facility lease of $1,224,000 and $2,166,000,
respectively.
NOTE 4. ACQUISITION OF BUSINESS
On August 11, 1994, the Company acquired the business and assets
of International Imaging Systems, Inc. (I2S), a privately held company
located in Milpitas, California. I2S was the Company's joint venture
partner in DI2S, which was formed in August 1993 to provide complete
remote sensing satellite earth stations. The Company made an initial
payment to I2S of $250,000 for the business and assets, $75,006 in cash
and 20,689 shares of the Company's common stock valued at $8.46 per
share. Terms of the purchase agreement provided for two additional
payments to I2S if the acquired business achieved minimum levels of
profits and bookings during the Company's fiscal years ending March 31,
1995 and March 31, 1996, respectively. No additional amounts were
incurred during either of these periods. The acquisition has been
accounted for as a purchase and the accounts of I2S have been included
in the accompanying financial statements since August 12, 1994. The
$740,000 excess of acquisition costs over fair value of assets acquired
was recorded as goodwill. At March 31, 1996, remaining goodwill from
this acquisition in the amount of $679,000 was written off as part of
the Company's decision to consolidate its remote sensing business. See
Note 3.
<PAGE>
NOTE 5. BALANCE SHEET INFORMATION
Accounts receivable at March 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Billed $14,019,000 $ 6,858,000
Unbilled 4,103,000 8,406,000
----------- -----------
Subtotal 18,122,000 15,264,000
Allowance for doubtful
accounts (226,000) (247,000)
----------- -----------
Total $17,896,000 $15,017,000
=========== ===========
</TABLE>
Inventories at March 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $9,316,000 $ 7,487,000
Work-in-process 2,753,000 5,231,000
Finished goods 2,240,000 3,090,000
----------- -----------
Total $14,309,000 $15,808,000
=========== ===========
</TABLE>
Inventories are presented net of allowances for obsolescence of
$1,350,000 and $709,000 at March 31, 1997 and 1996, respectively.
Property, plant and equipment at March 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land and buildings $ 8,529,000 $ 8,479,000
Machinery and equipment 14,590,000 13,658,000
Furniture and office equipment 1,443,000 1,462,000
Leasehold improvements 815,000 910,000
Construction-in-process 66,000 183,000
---------- ----------
Subtotal 25,443,000 24,692,000
Accumulated depreciation and
amortization (13,413,000) (10,857,000)
----------- -----------
Total $12,030,000 $13,835,000
=========== ===========
</TABLE>
Accrued expenses at March 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Salaries and employee
benefits $ 1,408,000 $ 2,523,000
Warranty allowance 707,000 1,015,000
Commission and service fees 421,000 573,000
Contract loss allowance 87,000 119,000
Other 480,000 1,175,000
----------- -----------
Total $ 3,103,000 $ 5,405,000
=========== ===========
</TABLE>
NOTE 6. LONG-TERM DEBT
At March 31, 1997, the Company had a committed revolving line of
credit with its bank of $19,500,000, of which up to $12,000,000 may be
used for the issuance of letters of credit and up to $10,500,000 may be
used for direct working capital advances. Total credit extended may not
exceed $19,500,000. The line of credit expires on June 30, 1998.
Interest is payable on borrowings under the line of credit at the bank's
prime rate plus 0.50% or at LIBOR plus 1.50%, at the option of the
Company. At March 31, 1997, the bank's prime rate was 8.50%. The line
of credit is secured by assets of the Company and contains certain
financial covenants with which the Company is in compliance. A
commitment fee of 0.25% is payable to the bank on the unused portion of
the working capital facility. At March 31, 1997, there were borrowings
of $8,900,000 under the line and the bank had issued letters of credit
against the line totaling $4,796,000.
<PAGE>
The Company believes the carrying amount of its outstanding long-term
debt at March 31, 1997 and 1996 is a reasonable estimate of its fair
value. This was determined based on a review of borrowing rates
available to the Company at March 31, 1997 and 1996 for loans with
similar terms and maturities.
NOTE 7. INCOME TAXES
Effective April 1, 1993, the Company changed its method of accounting
for income taxes from the provisions of APB Opinion No. 11, "Accounting
for Income Taxes" (Deferred Method) to the provisions of SFAS No. 109,
"Accounting for Income Taxes" (Liability Method).
The Company's deferred income tax assets and liabilities at March 31
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Deferred income tax assets:
Contract loss and other
allowances $1,419,000 $1,690,000 $1,755,000
Restructuring reserve 530,000 1,078,000 1,118,000
Accrued employee benefits 384,000 378,000 434,000
State taxes 133,000 200,000
Investment tax credits 173,000 65,000
Net operating loss carryover 171,000 67,000
Other 111,000 129,000 135,000
---------- ---------- ---------
Total 2,788,000 3,540,000 3,642,000
========== ========== ==========
Deferred income tax liabilities:
Depreciation (1,777,000) (1,790,000) (1,694,000)
State taxes (279,000)
Other (217,000) (186,000)
---------- ---------- ----------
Total (2,056,000) (2,007,000) (1,880,000)
---------- ---------- ----------
Net deferred income tax asset $ 732,000 $1,533,000 $ 1,762,000
========== ========== ==========
</TABLE>
The provision (benefit) for income taxes for the years ended March 31
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ----------- ----------
<S> <C> <C> <C>
Federal:
Current $(599,000) $(1,059,000) $ 1,751,000
Deferred 811,000 335,000 17,000
State:
Current 78,000 10,000 777,000
Deferred (10,000) (106,000) (163,000)
---------- ----------- -----------
Total $ 280,000 $ (820,000) $ 2,382,000
========== ============ ==========
</TABLE>
The provision (benefit) for income taxes differs from the federal
statutory tax rate for the years ended March 31 due to the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ----------- -----------
<S> <C> <C> <C>
Expected tax (benefit) at
statutory rate $ 186,000 $ (701,000) $ 2,143,000
State tax (benefit), net of
federal tax effect 20,000 (63,000) 405,000
Foreign Sales Corporation
earnings (28,000) (116,000) (309,000)
Goodwill amortization 70,000 70,000 70,000
Other differences 32,000 (10,000) 73,000
--------- ----------- -----------
Total $ 280,000 $ (820,000) $ 2,382,000
========= =========== ===========
</TABLE>
<PAGE>
NOTE 8. EMPLOYEE INCENTIVE PLANS
In May 1985, the Company adopted the 1985 Stock Option Plan (1985
Plan). Under the 1985 Plan, as amended, 500,000 shares of common stock
may be issued upon the exercise of options granted to employees of the
Company at not less than the fair market value on the date of grant and
to directors of the Company at not less than 85% of the fair market
value on the date of grant. Options become exercisable ratably over
three years and expire ten years from the date of grant. The 1985 Plan
expired in May 1995. As of March 31, 1997, 15,000 shares of common
stock had been issued in connection with the exercise of an option
granted pursuant to the 1985 Plan for which $80,000 of the exercise
price received was in the form of a secured promissory note. The note
is due June 11, 1998 and bears interest at 6.27% per annum.
In February 1995, the Company adopted the 1995 Stock Option Plan (1995
Plan), which was approved by the Company's stockholders at the 1995
Annual Meeting. The 1995 Plan permits up to 500,000 shares of common
stock to be issued upon the exercise of options granted under the 1995
Plan. However, because the number of shares available for issuance
under the 1995 Plan was reduced by the number of options granted and
outstanding under the 1985 Plan at the time of its expiration in May
1995, the effective number of shares authorized for issuance under the
1995 Plan is 206,700, of which 61,073 were available under the 1985 Plan
at the time of its expiration. Terms of issuance and exercise of
options granted under the 1995 Plan are similar to those under the 1985
Plan.
The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Had compensation
expense for these two fixed stock option plans been determined
consistent with the provisions of SFAS 123 based on the fair value at
date of grant for awards made in fiscal years ended March 31, 1997 and
1996, and an assumed forfeiture rate of 10%, net income and net income
per share would have been reduced to the pro forma amounts indicated
below:
1997 1996
-------- ------------
Net income (loss)
-----------------
As reported $268,000 $(1,241,000)
Pro forma $ 62,000 $(1,532,000)
Net income (loss) per share
---------------------------
As reported $0.10 $(0.46)
Pro forma $0.02 $(0.57)
The pro forma effect on net income for fiscal years 1997 and 1996 is
not representative of the pro forma effect on net income in future years
because it does not take into consideration pro forma compensation
expense related to grants awarded prior to April 1, 1995. The weighted-
average fair value of options granted under the two stock option plans
with exercise prices equal to market price during fiscal years 1997 and
1996 is estimated at $5.44 and $6.81, respectively, and the weighted-
average exercise prices for those options was $11.25 and $14.58,
respectively. The weighted-average fair value of options granted under
the two stock option plans with exercise prices at less than market
price during fiscal years 1997 and 1996 is estimated at $7.06 and $9.45,
respectively, and the weighted-average exercise prices for those options
was $11.26 and $15.73, respectively. These estimates were determined by
using the Black-Scholes option-pricing model with the following weighted-
average assumptions for grants awarded in fiscal years 1997 and 1996,
respectively: dividend yield of 0% and 0%; expected volatility of 45%
and 43%; risk-free rate of return of 6.42% and 6.09%; and expected lives
of 5 years and 5 years. A change in these assumptions could result in a
significant change to the indicated fair value amounts.
<PAGE>
A summary of the status of the Company's two fixed stock option plans
as of March 31, 1997, 1996 and 1995 and activity during the years then
ended is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------- ------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price Shares
------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 270,150 $10.46 247,300 $ 7.98 268,692
Granted 30,500 $11.25 84,500 $14.99 13,500
Canceled (17,070) $12.90 (12,680) $11.77
Exercised (64,000) $ 7.13 (48,970) $5.72 (34,892)
------- ------ ------- -------- -------
Outstanding at
end of year 219,580 $11.35 270,150 $10.46 247,300
======= ======= ======= ======= =======
Options exercisable
at end of year 143,780 $10.30 182,650 $8.66 208,466
======= ======= ======= ======= =======
</TABLE>
Stock option compensation expense related to options granted at
less than fair value on date of grant pursuant to the 1985 Plan and 1995
Plan was $38,000 and $18,000 in fiscal years 1997 and 1996,
respectively.
Information about fixed stock options outstanding at March 31, 1997 is
as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-----------------------------------------------------------
Weighted
Ave. Weighted Weighted
Remaining Ave Ave.
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.50 - $6.50 15,300 1.7 years $6.07 15,300 $6.07
$8.08 - $10.06 86,980 4.9 $8.84 73,647 $8.73
$10.50 - $12.75 65,000 7.5 $11.75 29,833 $11.45
$14.25 - $19.00 52,300 7.6 $16.58 25,000 $16.13
- --------------- ------ ----- ------- ------- ------
$5.50 - $19.00 219,580 6.1 $11.35 143,780 $10.30
============== ======= ===== ====== ======= ======
</TABLE>
At March 31, 1997, 152,450 shares were available for grant under the
1995 Plan.
In March 1988, the Company adopted the 1988 Key Employee Stock
Purchase Plan (Purchase Plan). Under terms of the Purchase Plan, 75,000
shares of common stock may be made available for purchase at fair market
value to key employees as determined by the board of directors. As of
March 31, 1997, 50,000 shares had been purchased pursuant to the
Purchase Plan, and a note receivable in the amount of $164,000 due April
10, 1999 at an interest rate of 4.99% was outstanding.
The Company has a non-contributory qualified profit sharing plan.
Employees are eligible to participate on April 1 following their date of
employment and benefits vest over seven years. Annual contributions are
determined by the board of directors. Such amounts were zero, zero and
$186,000 for the fiscal years ended March 31, 1997, 1996 and 1995,
respectively.
In November 1995, the Company adopted the Supplemental Executive
Profit Sharing Plan, effective as of April 1, 1994. The plan is a
deferred compensation plan intended to provide certain executive
employees with additional funds for their retirement. Terms of
participation and vesting of benefits are similar to those of the
qualified profit sharing plan. Eligibility for participation and annual
contributions are determined by the board of directors. Such amounts
were $56,000, zero and $33,000 for the fiscal years ended March 31,
1997, 1996 and 1995, respectively.
<PAGE>
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company leases certain production and office facilities and
certain equipment under noncancelable operating leases. As a result of
the fiscal year 1993 restructuring, a portion of one of the Company's
production facilities has been subleased to three subtenants whose
subleases expire on June 28, 1998. The Company's San Jose facility has
been subleased to a subtenant whose sublease expires on March 31, 1999.
Future minimum operating lease obligations for each of the years ended
March 31 are as follows:
<TABLE>
<CAPTION>
Total Lease Sublease Net Lease
Year Obligation Income Obligation
---- ----------- -------- ----------
<S> <C> <C> <C>
1998 $ 1,749,000 $ 644,000 $ 1,105,000
1999 835,000 296,000 539,000
2000 65,000 65,000
2001 36,000 36,000
2002 16,000 16,000
----------- --------- -----------
Total $ 2,701,000 $ 940,000 $ 1,761,000
=========== ========= ===========
</TABLE>
Approximately $1,224,000 of this future net lease obligation is
included in the restructuring reserve. See Note 3.
Total rent expense under noncancelable operating leases was $567,000,
$787,000 and $681,000 for the fiscal years ended March 31, 1997, 1996
and 1995, respectively. Additional rent payments in the amounts of
$695,000, $465,000 and $333,000 were charged to the restructuring
reserve during the fiscal years ended March 31, 1997, 1996 and 1995,
respectively.
In the normal course of business, the Company is subject to claims and
litigation that may be raised by governmental agencies in connection
with the Company's long-term contract business. In connection with a
Defense Contract Audit Agency (DCAA) audit of a $9.6 million U.S. Navy
contract completed in 1989, DCAA has submitted a report to the
Contracting Officer alleging deficiencies in the information provided to
the Navy at the time the contract was negotiated and recommending a
reduction in the contract value of $2.7 million. During the fiscal year
ended March 31, 1995, DCAA amended its recommendation to a reduction in
contract value of $1.9 million. The Company is confident that its
actions have been appropriate at all times and believes that the
conclusions in the DCAA report are erroneous; the Company intends to
challenge the report and its conclusions vigorously. Due to extensive
administrative proceedings, the Company does not expect an early
resolution of this matter, and there was no activity on this matter
during fiscal 1997. In the opinion of management, resolution of this
and other such matters would not materially affect the consolidated
financial position of the Company.
In August 1992, Trans World Communications, Inc. (Trans World), a
wholly owned subsidiary of the Company and which was renamed Datron
World Communications Inc. on March 31, 1995, was named as defendant in a
lawsuit filed by ATACS Corporation (ATACS) and AIRTACS Corporation
(AIRTACS) relating to a contract to provide radio communication
shelters. ATACS and AIRTACS contend that Trans World entered into an
agreement to team with them on the contract and then wrongfully failed
to use them as subcontractors. They seek damages in excess of
$2,000,000. Trans World has denied the claims and intends to defend the
lawsuit vigorously. Similar claims originally filed against Datron
Systems Incorporated have been dismissed by the court. In the opinion
of management, resolution of this matter would not materially affect the
consolidated financial position of the Company.
<PAGE>
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:
<TABLE>
<CAPTION>
Years Ended March 31,
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Net sales:
Antenna and Imaging Systems $33,304,000 $31,872,000 $42,097,000
Communication Products and
Services 19,965,000 29,293,000 27,936,000
---------- ----------- ----------
Total $53,269,000 $61,165,000 $70,033,000
=========== =========== ===========
Operating income (loss):
Antenna and Imaging Systems $ 1,813,000 $(1,659,000) $ 3,965,000
Communication Products and
Services 456,000 2,871,000 4,154,000
----------- ----------- -----------
Total 2,269,000 1,212,000 8,119,000
Restructuring (1,421,000)
General corporate expenses (1,122,000) (1,380,000) (1,625,000)
Interest expense-net (607,000) (211,000) (170,000)
Other income (expense) 8,000 (261,000) (22,000)
---------- ----------- -----------
Income (loss) before income
taxes $ 548,000 $(2,061,000) $ 6,302,000
=========== =========== ===========
Identifiable assets:
Antenna and Imaging Systems $26,596,000 $29,076,000 $29,148,000
Communication Products and
Services 24,603,000 22,807,000 18,623,000
Corporate 5,277,000 6,576,000 8,173,000
----------- ----------- -----------
Total $56,476,000 $58,459,000 $55,944,000
=========== =========== ===========
Capital additions:
Antenna and Imaging Systems $ 190,000 $ 1,821,000 $ 1,122,000
Communication Products and
Services 688,000 861,000 1,176,000
Corporate 13,000 1,000 8,000
----------- ----------- -----------
Total $ 891,000 $ 2,683,000 $ 2,306,000
=========== =========== ===========
Depreciation and amortization:
Antenna and Imaging Systems $ 1,791,000 $ 2,141,000 $ 1,469,000
Communication Products and
Services 1,149,000 1,163,000 856,000
Corporate 13,000 13,000 41,000
----------- ----------- -----------
Total $ 2,953,000 $ 3,317,000 $ 2,366,000
=========== =========== ===========
Net sales:
U.S. $27,316,000 $25,697,000 $26,714,000
Asia 18,148,000 20,116,000 13,912,000
South America 2,792,000 3,386,000 4,796,000
Africa 2,484,000 6,493,000 14,529,000
Europe 2,251,000 4,846,000 9,829,000
Other 278,000 627,000 253,000
----------- ----------- -----------
Total $53,269,000 $61,165,000 $70,033,000
=========== =========== ===========
Sales for U.S. Department
of Defense:
Antenna and Imaging Systems $15,787,000 $17,658,000 $24,929,000
Communication Products and
Services 558,000 529,000 822,000
----------- ----------- -----------
Total $16,345,000 $18,187,000 $25,751,000
=========== =========== ===========
</TABLE>
<PAGE>
For the fiscal year ended March 31, 1997, three customers accounted
for 13%, 12% and 11% of Antenna and Imaging Systems net sales and two
customers accounted for 31% and 24% of Communication Products and
Services net sales. For the fiscal year ended March 31, 1996, one
customer accounted for 15% of Antenna and Imaging Systems net sales and
one customer accounted for 39% of Communication Products and Services
net sales. For the fiscal year ended March 31, 1995, one customer
accounted for 10% of Antenna and Imaging Systems net sales and one
customer accounted for 36% of Communication Products and Services net
sales.
NOTE 11. QUARTERLY FINANCIAL DATA - Unaudited
(in thousands, except per-share data)
<TABLE>
<CAPTION>
Fiscal Year 1997
----------------
Net Gross Net Income
Sales Profit Income Per Share
------- ------ ----- ---------
<S> <C> <C> <C> <C>
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
======= ======= ==== =====
</TABLE>
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.
<TABLE>
<CAPTION>
Fiscal Year 1996
----------------
Net Gross Net Income Income(Loss)
Sales Profit (Loss) Per Share
------- ------- ------ --------
<S> <C> <C> <C> <C>
First Quarter $14,356 $ 5,360 $ 415 $0.16
Second Quarter 15,660 4,930 327 0.12
Third Quarter 19,339 5,158 177 0.07
Fourth Quarter 11,810 2,765 (2,160) (0.81)
------- ------- ------- ------
Fiscal Year $61,165 $18,213 $(1,241) $(0.46)
======= ======= ======= ======
</TABLE>
The sequential improvement in net sales from the first through third
quarters was primarily due to increasing sales of radio communication
products. However, net income declined during these three quarters
primarily because of higher research and development expenses, higher
selling expenses and the write-off of non-recoverable expenses
associated with a remote sensing order that the Company canceled in
January 1996 for lack of payment. Net sales declined in the fourth
quarter due to lower sales of both remote sensing systems and radio
communication products. The net loss in the fourth quarter was
primarily due to lower gross profits on the lower sales and to a
restructuring charge of $1,421,000 ($855,000, or $0.32 per share, after
taxes) resulting from the Company's decision to consolidate its image
processing division in San Jose, California with its remote sensing
earth station business in Simi Valley, California.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Datron Systems Incorporated
Escondido, California
We have audited the accompanying consolidated balance sheets of
Datron Systems Incorporated and its subsidiaries as of March 31, 1997
and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended March 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Datron
Systems Incorporated and its subsidiaries as of March 31, 1997 and 1996
and the results of their operations and their cash flows for each of the
three years in the period ended March 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Diego, California
May 9, 1997
DATRON SYSTEMS INCORPORATED
SUBSIDIARIES
MARCH 31, 1997
Percentage of Jurisdiction
Voting Securities in which
Name Owned by Parent Incorporated
- -------------------------------- ----------------- ------------
Datron World Communications Inc. 100% California
Datron/Transco Inc. 100% California
Datron/Trans World Communications 100% U.S. Virgin
Int'l Ltd. (a Foreign Sales Islands
Corporation)
PROXY STATEMENT, NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MONDAY, AUGUST 18, 1997 AT 11:00 A.M. AND FORM OF PROXY
(TO BE DEEMED FILED ONLY TO THE EXTENT REQUIRED BY THE INSTRUCTIONS
TO EXHIBITS FOR REPORTS ON FORM 10-K) TO BE FILED WITHIN 120 DAYS
OF THE END OF THE REGISTRANT'S FISCAL YEAR
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statement Numbers 2-99763, 33-16985 and 33-20785 of Datron Systems
Incorporated on Form S-8 of our reports dated May 9, 1997, appearing in
and incorporated by reference in the Annual Report on Form 10-K of
Datron Systems Incorporated for the year ended March 31, 1997.
DELOITTE & TOUCHE LLP
San Diego, California
June 24, 1997
POWER OF ATTORNEY
(ON SIGNATURE PAGE 16)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,072
<SECURITIES> 0
<RECEIVABLES> 18,122
<ALLOWANCES> 226
<INVENTORY> 14,309
<CURRENT-ASSETS> 37,233
<PP&E> 25,443
<DEPRECIATION> 13,413
<TOTAL-ASSETS> 56,476
<CURRENT-LIABILITIES> 12,477
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 32,577
<TOTAL-LIABILITY-AND-EQUITY> 56,476
<SALES> 53,269
<TOTAL-REVENUES> 53,290
<CGS> 37,920
<TOTAL-COSTS> 37,920
<OTHER-EXPENSES> 14,202
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 620
<INCOME-PRETAX> 548
<INCOME-TAX> 280
<INCOME-CONTINUING> 268
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 268
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
