UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-7445
DATRON SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 95-2582922
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
304 Enterprise Street, Escondido, California 92029-1297
(Address of principal executive offices) (zip code)
(760) 747-3734
(Registrant's telephone number, including area code)
(Former name, former address and formal fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2)
has been subject to such filing requirements for the
past 90 days.
[ X ] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by
Sections 12, 13 or 15 (d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock as of the latest
practicable date.
As of January 22, 1999, the Registrant had only
one class of common stock, par value $0.01, of which
there were 2,693,753 shares outstanding.
<PAGE> 1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
DATRON SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)
Dec 31, March 31
1998 1998
-------- --------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $3,826 $634
Accounts receivable, net 12,865 15,487
Inventories 11,849 14,048
Deferred income taxes 3,502 3,502
Prepaid expenses and other current assets 894 848
-------- --------
Total current assets 32,936 34,519
Property, plant and equipment, net 9,447 10,864
Goodwill, net 5,493 5,646
Other assets 472 255
-------- --------
Total assets $48,348 $51,284
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,127 $8,745
Accrued expenses 3,709 3,932
Customer advances 2,719 965
Income taxes payable 787 203
Current portion of restructuring reserve --- 320
Current portion of long-term debt 83 ---
-------- --------
Total current liabilities 12,425 14,165
Long-term debt 3,191 5,600
Deferred income taxes 1,914 1,914
-------- --------
Total liabilities 17,530 21,679
-------- --------
Stockholders' equity:
Preferred stock -- par value $0.01; authorized
2,000,000 shares, none issued or outstanding --- ---
Common stock -- par value $0.01; authorized
10,000,000 shares, 3,084,532 and 3,070,063 shares
issued in December and March, respectively 31 31
Additional paid-in capital 10,756 10,670
Retained earnings 22,381 21,254
Treasury stock, at cost; 390,779 shares in
December and March (2,106) (2,106)
Stock option plan and stock purchase plan notes rec (244) (244)
-------- --------
Total stockholders' equity 30,818 29,605
-------- --------
Total liabilities and stockholders' equity $48,348 $51,284
======== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>2
<TABLE>
<CAPTION>
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per-share amounts)
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
----------------- ------------------
<S> <C> <C> <C> <C>
Net sales $15,266 $17,081 $44,284 $42,359
Cost of sales 10,486 12,813 31,358 32,125
------- ------ ------- -------
Gross profit 4,780 4,268 12,926 10,234
Selling, general and admin. 3,052 3,143 9,154 8,688
Research and development 815 483 1,778 1,343
------- ------- ------ ------
Operating income 913 642 1,994 203
Interest expense (58) (82) (270) (284)
Interest income 89 6 135 9
Other income (expense) 48 (3) 48 (13)
------- ------- ------ ------
Income (loss) before income taxes 992 563 1,907 (85)
Income taxes (benefit) 407 216 780 (33)
------- ------ ------ -----
Net income (loss) $585 $347 $1,127 ($52)
======= ====== ====== =====
Earnings (loss) per common
share--basic $0.22 $0.13 $0.42 ($0.02)
======= ====== ====== =====
Weighted average number of
common shares outstanding 2,689 2,672 2,685 2,667
======= ====== ====== ======
Earnings (loss) per common
share--diluted $0.22 $0.13 $0.42 ($0.02)
======= ====== ====== ======
Weighted average number of
common and common equivalent
shares outstanding 2,689 2,687 2,686 2,667
======= ====== ====== ======
See notes to consolidated financial statements.
</TABLE>
<PAGE>3
<TABLE>
<CAPTION>
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended
December 31,
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $1,127 ($52)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,821 1,986
Changes in operating assets and liabilities:
Accounts receivable 2,622 (573)
Inventories 2,199 1,190
Prepaid expenses and other assets (279) 509
Accounts payable and accrued expenses (3,841) 2,813
Customer advances 1,754 222
Income taxes payable 584 ---
Restructuring (320) (748)
--------- ---------
Net cash provided by operating activities 5,667 5,347
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (312) (711)
Proceeds from sales of property, plant and equipment 77 ---
--------- ---------
Net cash used in investing activities (235) (711)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in long-term debt 3,274 ---
Decrease in revolving credit facility (5,600) (4,700)
Stock options exercised --- 130
Issuance of common stock 86 45
Purchase of treasury stock --- (53)
--------- ---------
Net cash used in financing activities (2,240) (4,578)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 3,192 58
Cash and cash equivalents at beginning of period 634 1,072
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,826 $1,130
========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>4
Datron Systems Incorporated
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
---------------------
The unaudited consolidated financial statements included
herein contain the accounts of Datron Systems
Incorporated and its wholly owned subsidiaries (the
"Company") and have been prepared in accordance with the
rules and regulations of the Securities and Exchange
Commission. Certain information and footnote
disclosures normally included in financial statements
prepared in accordance with generally accepted
accounting principles have been condensed or omitted
pursuant to such rules and regulations. It is suggested
that these financial statements be read in connection
with the financial statements and notes thereto included
in the Company's annual report on Form 10-K for the
fiscal year ended March 31, 1998.
In the opinion of the Company's management, the
accompanying unaudited financial statements contain all
adjustments, consisting only of normal recurring
adjustments, unless otherwise stated, which are
necessary to present fairly its financial position at
December 31, 1998 and the results of its operations and
its cash flows for the periods presented. Results of
operations for the periods presented herein are not
necessarily indicative of what results will be for the
entire fiscal year. The balance sheet at March 31, 1998
has been derived from audited financial statements.
2. Earnings (Loss) per Share
-------------------------
Effective for the three-month period ended December 31,
1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." This statement provides simplified standards
for the computation and presentation of earnings per
share ("EPS"), making EPS comparable to international
standards. SFAS No. 128 requires dual presentation on
the face of the income statement of "Basic" and
"Diluted" EPS by entities with complex capital
structures, replacing "Primary" and "Fully Diluted" EPS
illustrated under Accounting Principles Board Opinion
No. 15, "Earnings Per Share."
Basic EPS excludes dilution from common stock
equivalents and is computed by dividing income available
to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS
reflects potential dilution from common stock
equivalents, similar to Fully Diluted EPS, but uses only
the average stock price during the period as part of the
computation.
Shares used in computing earnings (loss) per common
share _ diluted include the weighted average of common
stock outstanding plus equivalent shares issuable under
the Company's stock option plans, when such amounts are
dilutive. Options to purchase 314,000 shares of common
stock at prices ranging from $6.50 - $15.73 were not
included in the computation of diluted EPS at December
31, 1998 because the effect of such options would be
anti-dilutive. Such options expire at various dates
from May 16, 1999 to August 4, 2008.
3. Cash Equivalents
----------------
Cash equivalents consist of highly liquid investments
purchased with original maturities of three months or
less and which are readily convertible into cash.
4. Foreign Sales
-------------
All foreign sales are denominated in U.S. Dollars.
<PAGE>5
5. Revenue Recognition
-------------------
Revenue from product sales is recognized at the time of
shipment, except in the case of certain fixed-price
contracts requiring substantial performance over several
periods prior to commencement of deliveries, which are
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.
6. Contingencies
-------------
In the normal course of business, the Company is subject
to claims and litigation that may be raised by
governmental agencies in connection with U.S. government
contracts, U.S. government export control regulations
and other regulatory issues, and civil claims raised by
private parties. At December 31,1998, in the opinion of
management, resolution of all such outstanding claims
will not have a material affect on the consolidated
financial position of the Company or on its results of
operations.
7. Segment Disclosures
-------------------
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement
revises the definition of an operating segment and
requires expanded disclosure of segment operations. The
Company will begin reporting under SFAS No. 131 for the
fiscal year ending March 31, 1999. Because the Company
already reports segment information in a manner
consistent with most of the requirements of SFAS No.
131, implementation of SFAS No. 131 is not expected to
have a material affect on future segment reporting.
8. Accounts Receivable
-------------------
At December 31, 1998 and March 31, 1998, accounts
receivable were as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
----------- -----------
<S> <C> <C>
Billed $10,806,000 $ 8,676,000
Unbilled 2,302,000 7,001,000 -----------
----------- -----------
Subtotal 13,108,000 15,677,000
Allowance for doubtful
accounts (243,000) (190,000)
----------- -----------
Total $12,865,000 $15,487,000
=========== ===========
</TABLE>
9. Inventories
-----------
At December 31, 1998 and March 31, 1998, inventories
were as follows:
<TABLE>
<CAPTION>
December 31, March 31, 1998
1998 1998
----------- ----------
<S> <C> <C>
Raw materials $ 6,985,000 $7,830,000
Work-in-process 3,324,000 4,067,000
Finished goods 1,540,000 2,151,000
----------- ----------
Total $11,849,000 $14,048,000
=========== ==========
</TABLE>
Inventories are presented net of allowances for
obsolescence of $1,828,000 and $1,656,000 at December
31, 1998 and March 31, 1998, respectively.
<PAGE>6
10. Property, Plant and Equipment
-----------------------------
At December 31, 1998 and March 31, 1998, property, plant
and equipment was as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
----------- -----------
<S> <C> <C>
Land and buildings $ 8,736,000 $ 8,557,000
Machinery and equipment 15,135,000 15,201,000
Furniture and office
equipment 1,541,000 1,506,000
Leasehold improvements 817,000 821,000
Construction-in-process 24,000 299,000
----------- ---------
Subtotal 26,253,000 26,384,000
Accumulated depreciation
and amortization (16,806,000) (15,520,000)
----------- ----------
Total $ 9,447,000 $10,864,000
=========== ==========
</TABLE>
11. Long-Term Debt
--------------
On August 7, 1998, the Company issued a promissory note
to a life insurance company in the amount of $3,300,000
pursuant to a loan agreement under which the Company
borrowed the same amount. The note is secured by a
deed of trust on the Company's Simi Valley facility and
has a maturity date of September 1, 2008. Monthly
payments are calculated on a 20-year amortization.
Interest is payable at a rate of 6.76% per annum through
September 1, 2003, at which date the interest rate
becomes variable and tied to LIBOR, adjusting every
quarter for the remainder of the term. On September 1,
2003, the Company may either prepay the note without
penalty or accept the variable rate provisions.
At December 31, 1998 and March 31, 1998, long-term debt
was as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
---------- ----------
<S> <C> <C>
Revolving line of credit at prime
plus 1.50% in December and at
prime plus 0.85% in March,
due April 30, 1999. --- $5,600,000
6.76% note payable due
September 1, 2008 $3,274,000 ---
--------- ---------
Total long-term debt 3,274,000 5,600,000
Less current portion (83,000) ---
---------- ---------
Long-term debt $3,191,000 $5,600,000
========== =========
</TABLE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Datron Systems Incorporated and its wholly owned
subsidiaries (the "Company") report operations in two
business segments: Antenna and Imaging Systems, and
Communication Products and Services. The Antenna and
Imaging Systems business segment designs and
manufactures specialized satellite communication
systems, subsystems and antennas that are sold worldwide
to commercial and governmental customers, including the
U.S. Department of Defense ("DoD"). This segment also
sells remote sensing satellite earth stations to
worldwide commercial, scientific and military
organizations. Another additional market for this
segment is mobile direct broadcast satellite ("DBS")
television reception systems for recreational vehicles,
boats and large business jets. The Communication
Products and Services business segment designs,
manufactures and distributes high frequency and very
high frequency communication radios and accessories for
worldwide military and civilian purposes.
<PAGE>7
This Management's Discussion and Analysis of Financial
Condition and Results of Operations contains "forward-
looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. A variety of factors
could cause the Company's actual results to differ from
the anticipated results expressed in such forward-
looking statements. These include, among others,
uncertainties stemming from the dependence of the
Company on foreign sales and on large orders from a
relatively small number of customers, risks relating to
the decline in the Company's traditional defense
business and the Company's efforts to develop and market
consumer products, lack of timely development or
customer acceptance of new products, worldwide economic
downturns and currency devaluations, restrictions that
may be imposed by the U.S. government on the export of
Company products, and the impact of competition.
Investors are referred to the Company's periodic reports
under the Securities Exchange Act of 1934, including
without limitation, the Investment Considerations set
forth in the Company's Annual Report on Form 10-K.
Results of Operations
Net income for the third quarter of fiscal 1999 was
$585,000, or $0.22 per share, compared with net income
of $347,000, or $0.13 per share, in the third quarter of
fiscal 1998. Net sales in the third quarter of fiscal
1999 were $15,266,000, an 11% decrease from third
quarter net sales last fiscal year of $17,081,000. The
decrease in sales was due to lower sales of radio
products and military antennas, partially offset by
higher sales of remote sensing systems. The increase in
net income was primarily due to higher gross margins,
partially offset by higher research and development
expenses.
Net income for the nine months ended December 31, 1998
was $1,127,000, or $0.42 per share, compared with a net
loss of $52,000, or $0.02 per share, for the comparable
period last fiscal year. Net sales for the nine months
were $44,284,000, a 5% increase from net sales of
$42,359,000 for the first nine months last fiscal year.
The increase in sales was due to higher sales of remote
sensing systems and DBS antenna products, partially
offset by lower sales of military antennas and radio
products. The improvement from a net loss to net income
for the recent nine months was primarily due to higher
gross margins on the higher sales, partially offset by
higher operating expenses.
Operating results for each business segment were as
follows:
Antenna and Imaging Systems
- ---------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $9,670,000 $9,339,000 $29,075,000 $26,327,000
========== ========== =========== ===========
Gross profit $2,763,000 $1,999,000 $7,538,000 $5,234,000
========== ========== =========== ===========
Operating
income
(loss) $728,000 $104,000 $1,827,000 ($4,000)
========== ========== =========== ===========
</TABLE>
Sales of Antenna and Imaging Systems products increased
4% in the third quarter of fiscal 1999 compared with the
third quarter of fiscal 1998. The increase was
primarily due to higher sales of remote sensing systems,
partially offset by lower sales of military antennas
The higher remote sensing sales were partially
attributable to the absence of a $903,000 sale reversal
that occurred in the third quarter of fiscal 1998.
Sales in the first nine months of fiscal 1999 were 10%
higher than in the first nine months of fiscal 1998.
The increase was due to higher sales of remote sensing
systems and DBS antenna products, partially offset by
lower sales of military antennas.
Gross profit percentage on sales of Antenna and Imaging
Systems products was 28.6% in the third quarter of
fiscal 1999 compared with 21.4% in the third quarter
last fiscal year. The increase was primarily due to
production efficiencies and to a more favorable product
mix. Gross profit percentage for the first nine months
of fiscal 1999 was 25.9% of sales compared with 19.9% of
sales for the first nine months of fiscal 1998. The
increase was primarily due to production efficiencies
and to a more favorable product mix during the second
and third quarters of fiscal 1999.
<PAGE>8
Operating income percentage on sales of Antenna and
Imaging Systems products was 7.5% in the third quarter
of fiscal 1999 compared with 1.1% in the third quarter
last fiscal year. The increase resulted from higher
gross profits, partially offset by higher product
development expenses. Operating income percentage for
the first nine months of fiscal 1999 was 6.3% of sales
compared with an operating loss percentage of 0.0% of
sales for the first nine months of fiscal 1998. The
increase was primarily due to higher gross profits.
Communication Products and Services
- -----------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $5,596,000 $7,742,000 $15,209,000 $16,032,000
========= ========= ========== ==========
Gross profit $2,017,000 $2,269,000 $5,388,000 $5,000,000
========= ========= ========= ==========
Operating
income $487,000 $860,000 $1,141,000 $1,241,000
========= ========= ========== ==========
</TABLE>
Sales of Communication Products and Services decreased
28% in the third quarter of fiscal 1999 compared with
the third quarter of fiscal 1998. The decrease was due
to lower order bookings resulting from delays in
anticipated international orders. Sales in the first
nine months of fiscal 1999 were 5% lower than in the
first nine months of fiscal 1998 for the same reason.
Worldwide economic instability continued to be
responsible for the delay of several anticipated orders,
and future anticipated orders may likewise be delayed or
canceled.
Gross profit percentage on sales of Communication
Products and Services was 36.0% in the third quarter of
fiscal 1999 compared with 29.3% in the third quarter
last fiscal year. The increase was primarily due to a
more favorable product mix. Gross profit percentage for
the first nine months of fiscal 1999 was 35.4% of sales
compared with 31.2% of sales for the first nine months
of fiscal 1998. The increase was due to manufacturing
efficiencies and to a more favorable product mix.
Operating income percentage on sales of Communication
Products and Services was 8.7% in the third quarter of
fiscal 1999 compared with 11.1% in the third quarter
last fiscal year. The decrease resulted from higher
selling and product development expenses on a lower
sales base, partially offset by a higher gross profit
percentage. Operating income percentage for the first
nine months of fiscal 1999 was 7.5% of sales compared
with 7.7% of sales for the first nine months of fiscal
1998. Higher selling, product development and
administrative expenses were partially offset by a
higher gross profit percentage.
Consolidated expenses were as follows:
Selling, general and administrative expenses were
$3,052,000 in the third quarter of fiscal 1999, a 3%
decrease compared with third quarter of fiscal 1998
expenses of $3,143,000. The decrease was primarily due
to lower administrative and selling expenses in the
Antenna and Imaging Systems business segment. Selling,
general and administrative expenses for the first nine
months of fiscal 1999 were $9,154,000, a 5% increase
compared with first nine months of fiscal 1998 expenses
of $8,688,000. The increase was in line with the higher
sales level and resulted from higher administrative and
selling expenses at both business segments.
Research and development (R&D) expenses were $815,000 in
the third quarter of fiscal 1999 compared with $483,000
in the third quarter last fiscal year. The 69% increase
resulted primarily from higher spending on development
programs for mobile DBS antenna products and from
programs to improve tracking antenna capabilities. R&D
expenses in the first nine months of fiscal 1999 were
$1,778,000, a 32% increase compared with first nine
months of fiscal 1998 expenses of $1,343,000. The
increase resulted from higher spending on development
programs at both business segments. The Company intends
to continue its higher R&D spending during the last
three months of fiscal 1999.
<PAGE>9
Order backlog at December 31 was as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Antenna and Imaging Systems $22,857,000 $20,860,000
Communication Products and Services 2,460,000 3,381,000
----------- ----------
Total $25,317,000 $24,241,000
=========== ===========
</TABLE>
The 10% increase in Antenna and Imaging Systems backlog
at December 31, 1998 compared with December 31, 1997 was
primarily due to higher order bookings of remote sensing
systems and airborne DBS antenna products, partially
offset by lower bookings of military antenna products,
including the partial cancellation of an order for
shipboard antenna systems for use by the U.S. Navy.
The 27% decrease in Communication Products and Services
backlog at December 31, 1998 compared with December 31,
1997 was primarily due to lower order bookings in the
second and third quarters of fiscal 1999. As previously
noted, worldwide economic instability has been
responsible for the delay of several anticipated orders.
Future results of operations may be adversely affected
if additional orders are likewise delayed or canceled.
Liquidity and Capital Resources
At December 31, 1998, working capital was $20,511,000
compared with $20,354,000 at March 31, 1998, an increase
of $157,000 or 1%. Major changes affecting working
capital during this period were the following: accounts
receivable decreased $2,622,000 due to faster
collections; inventories decreased $2,199,000 due to
better inventory management at both business segments;
accounts payable and accrued expenses decreased
$3,841,000; and customer advances increased $1,754,000.
The Company's cash position at December 31, 1998 was
$3,826,000 compared with $634,000 at March 31, 1998, an
increase of 503%. At December 31, 1998, the Company had
no borrowings against its revolving line of credit.
On August 7, 1998, the Company borrowed $3,300,000 from
a life insurance company in exchange for a promissory
note secured by a deed of trust on the Company's Simi
Valley facility. The promissory note bears interest at
6.76% per annum and has a maturity date of September 1,
2008. See Note 11 to the Consolidated Financial
Statements in Part I, Item 1.
Capital equipment expenditures were $312,000 during the
first nine months of fiscal 1999 compared with $711,000
in the first nine months last fiscal year. The decrease
was due to lower purchases of equipment at both business
segments. The Company anticipates expenditures for
capital equipment will increase during the last three
months of the current fiscal year. Additional
expenditures are planned for improvements to the new
production and office facility the Communication
Products and Services business segment will be moving to
near the end of March 1999.
At December 31, 1998, the Company had a $15,500,000
committed revolving line of credit with its bank, of
which up to $15,000,000 may be used for the issuance of
letters of credit and up to $5,500,000 may be used for
direct working capital advances provided that total
credit extended does not exceed $15,500,000. The
Company believes its existing working capital,
anticipated future cash flows from operations, available
credit with its bank and other financing alternatives
available to the Company are sufficient to finance
presently planned capital and working capital
requirements through the end of June 1999. The Company
is currently in negotiations for a new bank revolving
line of credit and believes it will have a new one in
place before its current line of credit expires in the
first quarter of fiscal 2000. The Company believes
there are alternative sources of financing available
should it not be able to obtain a satisfactory bank line
of credit; however, there can be no assurance the
Company will be able to obtain such financing.
Year 2000 Issues
Some software included in products sold or licensed to
the Company's customers and certain portions of the
Company's internal operating systems may be subject to
failure as a result of what is commonly known as the
Year 2000 date issue (the "Year 2000 issue"). A
discussion of this issue follows:
<PAGE>10
The Company's state of readiness.
The Company believes all systems and products currently
sold and new products under development are Year 2000
compliant. Although the Company's assessment of its
Year 2000 exposure is not complete, the Company
currently believes its potential exposure to problems
arising from the Year 2000 issue lies in three areas:
- Information technology ("IT") previously sold or
licensed to the Company's customers and non-IT
components (such as computer chips imbedded in hardware)
previously sold to the Company's customers.
- IT and non-IT components used in the Company's
internal operating systems.
- Compliance with the Year 2000 issue by third
parties with whom the Company has a material
relationship.
Products sold or licensed to customers:
Most of the Company's antenna and image processing
products and some of its radio communication products
contain IT and non-IT components that may be affected by
the Year 2000 issue. The Company is pursuing a three-
phase program to identify and resolve this exposure:
1. Identify all products that contain IT and non-IT
systems that are not Year 2000 compliant. To the extent
practical, identify all customers who are still using
those products. Status: Estimated 85% complete.
Estimated completion date: March 31, 1999.
2. Determine appropriate solutions to remedy the non-
compliant products and systems. Those solutions may
include software upgrades, replacement of non compliant
components, referral of problems relating to third party-
provided software to the original supplier, or
determination that the age of the product or nature of
the problem is such that replacement of the product or
system is the only practical solution. Status:
Estimated 60% complete. Estimated completion date:
June 30, 1999.
3. Notify all identified customers of the Year 2000
issue associated with their products and systems, and
inform them of the Company's policy regarding their
situation. All products and systems under warranty or
service agreement as of December 31, 1998 will be made
Year 2000 compliant by the Company. Other customers who
have products and systems that can economically be made
Year 2000 compliant will be offered software upgrades
and component replacement for a fee. Customers who have
products or systems that cannot economically be made
Year 2000 compliant will be so notified and informed of
current product alternatives offered by the Company.
Status: Estimated 20% complete. Estimated completion
date: June 30, 1999.
Internal operating systems:
Some of the Company's internal operating systems are
Year 2000 compliant and some are not. The Company is
pursuing a two-phase program to identify and resolve
this exposure:
1. Systematically test and verify internal IT systems
and modules for Year 2000 compliance. To the extent
practical, systematically test and verify equipment and
facility systems that contain non-IT components.
Status: Estimated 70% complete. Estimated completion
date: June 30, 1999.
2. Use internal programmers and outside consultants to
upgrade those internal IT systems and modules that are
not Year 2000 compliant. Replace non-IT components that
are not Year 2000 compliant. Status: Estimated 65%
complete. Estimated completion date: June 30, 1999.
Third party relationships:
Although the Company is rarely dependent on a single
source of supply for IT and non-IT components, the
failure of a selected supplier to timely deliver Year
2000 compliant IT and non-IT components could jeopardize
the Company's ability to meet its required delivery
schedules. (The Company is also dependent on third
party service providers, such as telephone companies,
banks and insurance carriers; however, the Company does
not believe it has significant Year 2000 exposure from
those providers and has not implemented any programs to
assure Year 2000 compliance by them.) The Company is
pursuing a two-phase program to identify and resolve
Year 2000 exposure from third parties:
<PAGE>11
1. Develop a supplier compliance warranty for
incorporation in all purchase orders issued after March
31, 1999. That warranty will require suppliers selling
IT and non-IT components to the Company to certify that
items delivered are Year 2000 compliant and require them
to correct or replace any such item found to be non
compliant. Status: Estimated 20% complete. Estimated
completion date: March 31, 1999.
2. Develop alternative sources for IT and non-IT
components that are Year 2000 compliant in the event
existing suppliers are not able to meet compliance
requirements. Status: Not yet started. Estimated
completion date: September 30, 1999.
Costs to address the Company's Year 2000 issues.
To date, the Company has spent approximately $80,000 in
identifying and fixing Year 2000 issues and estimates it
will incur an additional $200,000 for remediation of its
remaining Year 2000 issues. Because the Company's
assessment of its Year 2000 exposure is not complete, it
is likely that this estimate will change.
Risks of the Company's Year 2000 issues.
The Company believes the most reasonably likely worst
case Year 2000 scenario would include a combination of
some or all of the following:
- - Products sold to some of its customers would fail
to perform some or all of their intended functions. The
Company estimates the maximum number of customers that
may be affected is 75. In such a situation, the
Company's maximum obligation would be to repair or
replace the defective products to the extent the Company
is required to do so under its contracts with its
customers.
- - Internal IT modules or systems may fail to operate
or may give erroneous information. Such failure could
result in production and shipping delays, inability to
generate or delays in generation of financial reports
and statements, and computer network downtime resulting
in numerous inefficiencies and higher payroll expenses.
- - Non-IT components in HVAC, lighting, telephone,
security and similar systems might fail and cause the
entire system to fail. Non-IT components in production
and test equipment might fail, resulting in delays in
production and new product development.
The Company's contingency plans.
The Company believes its plans for addressing the Year
2000 issue as outlined above are adequate to handle the
most reasonably likely worst case scenario. The Company
does not believe it will incur a material financial
impact for the risk of failure, or from the costs
associated with assessing the risks of failure, arising
from the Year 2000 issue. Consequently, the Company
does not intend to create a contingency plan other than
as set forth above.
<PAGE>12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
In August 1992, Trans World Communications, Inc. (Trans
World), a wholly owned subsidiary of the Company and
which was renamed Datron World Communications Inc. on
March 31, 1995, was named as defendant in a lawsuit
filed by ATACS Corporation (ATACS) and AIRTACS
Corporation (AIRTACS) relating to a contract to provide
radio communication shelters. ATACS and AIRTACS contend
that Trans World entered into an agreement to team with
them on the contract and then wrongfully failed to use
them as subcontractors. They seek damages in excess of
$2,000,000. In rulings on May 28, 1997 and September 3,
1997, the court found Trans World in breach of a teaming
agreement and awarded ATACS and AIRTACS one dollar
($1.00) in damages. On September 8, 1998, the appeal
court affirmed the district court's decision except as
to the award of nominal damages, and remanded the matter
to the district court for further hearing on damages.
The Company believes that final resolution of this
matter will not materially affect the consolidated
financial position of the Company or its results of
operations.
Item 2. Changes in Securities.
Pursuant to a business loan agreement with a bank, the
Company must comply with certain financial covenants.
The agreement also prohibits the Company from
declaration or payment of dividends or other
distributions on the Company's stock, except under
certain conditions specified in the agreement. The
Company is in compliance with both requirements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter.
<PAGE>13
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
DATRON SYSTEMS INCORPORATED
Date: January 28, 1999 /s/ WILLIAM L. STEPHAN
Vice President and
Chief Financial Officer
(Principal Financial
and Accounting Officer)
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE REGISTRANT'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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