10-K405 1 doc.txt FORM 10-K FOR PERIOD ENDED MARCH 31, 2001 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, 2001 Number 0-7445 DATRON SYSTEMS INCORPORATED (Exact name of registrant as specified in its charter) Delaware 95-2582922 (State of Incorporation) (I.R.S. Employer Ident. No.) 3030 Enterprise Court, Vista, California 92083-8347 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (760) 734-5454 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 12, 2001 was $31.8 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 12, 2001 was: Common Stock, par value $0.01 -- 2,748,287 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 14, 2001 are incorporated by reference into Part III of this report. 2. Items contained in the above-referenced documents that are not specifically incorporated by reference are not included in this report. DATRON SYSTEMS INCORPORATED FORM 10-K FISCAL YEAR 2001 TABLE OF CONTENTS PART I 1 Item 1. Business 1 Item 2. Properties 7 Item 3. Legal Proceedings 7 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 7A. Quantitative and Qualitative Disclosures About Market Risk 9 Item 8. Financial Statements and Supplementary 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 1 PART I Item 1. Business. Company Overview Datron Systems Incorporated and its wholly owned subsidiaries (the "Company") provide products and services for emerging satellite and radio communication markets. The Company is a leading supplier of tracking antenna products that can provide television, Internet and other broadband communication connections to the land, sea and air mobile markets. Major products include remote sensing satellite earth stations, satellite communication systems, mobile satellite television reception systems, and voice and data communication radios that are sold to worldwide commercial and governmental 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. The Company operates its business through two subsidiaries. In October 1985, the Company acquired its wholly owned subsidiary, Datron World Communications Inc., formerly known as Trans World Communications, Inc. ("DWC"). DWC conducts the Company's Communication Products business. In June 1990, the Company acquired its wholly owned subsidiary, Datron Advanced Technologies Inc., formerly known as Datron/Transco Inc. ("DAT"). DAT conducts the Company's Antenna and Imaging Systems business. 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; Worldwide Economic Downturns and Currency Devaluations Sales to foreign customers accounted for 58%, 55% and 55% of consolidated sales in fiscal 2001, 2000 and 1999, respectively. Sales of Communication Products have been even more highly concentrated with foreign customers: 96%, 89% and 93% in fiscal 2001, 2000 and 1999, 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, economic downturns and currency devaluations could have a significant negative impact on future Company sales and income. 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 business segment, two customers accounted for 36% and 29% of that segment's net sales in fiscal 2001. In fiscal 2000, two customers accounted for 44% and 11% of that segment's net sales. 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 net 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. 2 Timely Development and Customer Acceptance of New Products The Company's products are subject to obsolescence. To prevent this from occurring, the Company has an ongoing new product development program to keep the technologies employed in its products current and to introduce new products that meet changing market requirements. Lack of timely development of new technologies and new products, or lack of acceptance of new products by the Company's customers could have a negative impact on future sales and income. U.S. Government Export Restrictions Some of the Company's products are subject to export licensing approval by agencies of the U.S. Government. U.S. security concerns and human rights issues as well as foreign political instability or unrest can affect the licensing process. The requirement to obtain export licenses for Company products has prevented only one sale to date; however, it has on occasion delayed shipments of some products and in some cases has placed the Company at a competitive disadvantage. There can be no assurances that future shipments may not likewise be delayed or that U.S. security concerns or other regulatory issues may result in the denial of export licenses or the loss of sales opportunities for some Company products. Fixed Price Development Contracts The Company often accepts fixed-price contracts that require custom engineering, custom software or the development of new features and capabilities. Such contracts usually include the sale of standard products and components, but not always. Although engineering cost estimates are prepared as a basis for quoting such contracts, there can be no assurance the Company will be able to develop the required features, capabilities or software within established cost budgets. Should development costs exceed established budgets, as they occasionally have in the past, the result could have a material adverse effect on earnings. Consumer Products and Markets In November 1995, the Company introduced its first consumer product, a mobile direct broadcast satellite ("DBS") television reception system for recreational vehicles and buses. 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 have subsequently been introduced, including a marine product line, antenna systems for large business jets and commercial jets, and a low-profile system intended for SUVs and van conversions. Selling a consumer product requires a different approach than selling the Company's traditional products. For its DBS products, the Company has established a factory direct-to-dealer distribution system and also sells directly to original equipment manufacturers and after- market distributors. These sales methods are currently effective, but there can be no assurance they will continue to be so in the future or that consumer demand for its DBS products will be as large as the Company anticipates. Changes in or Unavailability of Products and Services Offered by Satellite Service Providers All consumer products currently sold or under development by the Company operate with programming or data transmission services from satellite service providers or their related suppliers. The Company is not affiliated with any satellite service provider and is unable to control the content and availability of the products and services they offer. Although the Company has established good working relationships with many satellite service providers to ensure product compatibility, changes in or unavailability of products and services offered by the satellite service providers could have an adverse effect on the Company's business. There can be no assurances that such changes will not be made or that anticipated future services will be offered. 3 Competitors The Company has competitors for all the products 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 $40.8 million in fiscal 1992 to $9.0 million in fiscal 2001, primarily due to completion of long-term DoD contracts that have not been replaced with new orders. Although there are indications from the U.S. government that defense spending may increase in the near future, 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. General The Company operates in two business segments: Antenna and Imaging Systems, whose business is conducted by DAT, and Communication Products, whose business is conducted by DWC. Antenna and Imaging Systems This business segment designs and manufactures satellite communication systems, subsystems and antennas that are sold worldwide to commercial and governmental customers, including the DoD. Its major product lines are (i) satellite tracking antenna systems used for telemetry, tracking and control, remote sensing and satellite communication purposes by government and commercial users, and (ii) mobile broadband communication systems for airlines, military transports and mobile land and marine DBS television users. Descriptions of the two major product lines follow: Satellite Tracking Antenna Systems. The Company is a 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 and a subcontractor for shipboard antenna systems used by the U.S. Navy. More recently, the Company has been developing airborne antenna systems for the U.S. Air Force. Telemetry, tracking and control 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. The remote sensing 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 ground antennas 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 offers its customers complete remote sensing earth stations, including image processing capability. 4 The Company previously designed and manufactured broad bandwidth microwave antennas for the aerospace industry that are used on high performance aircraft, missiles and space launch vehicles. That product line was sold in the third quarter of fiscal 2001. Mobile Broadband Communication Systems. The Company is an industry leader in designing and marketing mobile broadband communication systems. In fiscal 1996, the Company introduced its first DBS antenna product that allows a recreational vehicle owner 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, and RVs and buses on the open road. Also during fiscal 1997, the Company was first to demonstrate live DBS television on a commercial airliner, and in fiscal 1998, was first to obtain Federal Aviation Administration certification of an airborne DBS system designed for large business jets. In fiscal 2000, the Company licensed the manufacturing rights to its DBS-2100T tail-mounted antenna for business jets to Airshow Inc. and announced it intended to concentrate its airborne efforts on the commercial airline market. That decision resulted from the estimated $500 million size of that market and from, in the opinion of the Company, the superiority and cost effectiveness of the Company's patented Luneburg lens antenna. Customers and Marketing Sales of Antenna and Imaging Systems' products have historically been concentrated with the DoD, which accounted for 24% of this business segment's fiscal 2001 sales and 32% of its fiscal 2000 sales. Marketing and sales activities for its DoD customers and other non-defense governmental agencies are conducted by internal sales and engineering personnel. Most customers for the remote sensing business are foreign government space and communications agencies. Marketing and sales activities for those products are usually conducted through independent sales representatives in Europe, South America and Asia. Introduction of mobile DBS television systems required the establishment of new distribution methods to sell these consumer products. The Company's initial approach of using exclusive national distributors was not effective and the Company is now selling its DBS products direct to dealers and original equipment manufacturers, as well as through select distributors and agents. Company employees provide sales and marketing support and installation training for the dealers. In fiscal 2001, the Company was awarded development and study contracts by the two largest companies seeking to provide broadband communications to the airlines. These companies intended to supply real-time, high-speed Internet, video and other data to airline cabins and cockpits. One of these companies, Rockwell Collins, also placed an order with the Company for nine flight-test units. However, in April 2001, Rockwell Collins announced they no longer intended to participate in their In-Flight Network joint venture with News Corporation and issued the Company a stop-work order on the contract for nine flight-test units. The other offeror of broadband services to the airlines, Boeing, remains committed to the market through its Connection by BoeingSM service. The Company satisfactorily completed its study contract with Boeing and maintains an ongoing relationship with it. The Company remains committed to this market, although now believes it will take longer to develop than originally anticipated. Manufacturing, Assembly and Sources of Supply Products for the Company's Antenna and Imaging Systems business 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. 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 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 high speeds, the frequency at which they are transmitted. This technology utilizes 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 are often concentrated with a small number of customers. In fiscal 2001, two Asian customers accounted for 36% and 29% of this business segment's sales. In fiscal 2000, an African customer accounted for 44% of this business segment's sales and a European customer accounted for 11% of its sales. And, in fiscal 1999, another African customer accounted for 20% of this business segment's sales and an Asian customer accounted for 13% of its 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 when practical. In March 2001, the Company introduced its new GuardianTM family of radios intended to address the estimated $800 million federal public safety wireless network ("PSWN") market. This is a domestic market the Company has not previously served. It is being driven by a federal government mandate that requires all [non-military] VHF radios to comply with certain radio spectrum utilization and interoperability standards by 2005. Although initial reaction from potential customers to the Guardian radio has been positive, market acceptance of the radio is uncertain. Customers and Marketing Sales to foreign customers accounted for 96% of this business segment's fiscal 2001 sales and 89% of its fiscal 2000 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. 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 products. Sales are denominated in U.S. Dollars. 6 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 products 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 Vista, 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. 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:
2001 2000 Antenna and Imaging Systems $14,249,000 $24,293,000 Communication Products 1,784,000 1,702,000 ----------- ----------- Total $16,033,000 $25,995,000
The 41% decrease in Antenna and Imaging Systems' backlog at March 31, 2001 compared with March 31, 2000 was primarily due to continued softness in the markets for antenna systems and remote sensing earth stations and to the absence of microwave product orders due to the sale of that product line in the third quarter of fiscal 2001. The Company has responded by cutting costs at this business segment; however, because of the low beginning backlog and softness in the remote sensing market that is expected to continue for at least two more quarters, the Company expects reduced performance in the first half of fiscal 2002. Communication Products' backlog at March 31, 2001 was 5% higher than at March 31, 2000 due to a stronger market for traditional radio products, which resulted in an 18% increase in bookings during fiscal 2001 compared with fiscal 2000. This segment's business has historically been driven by one or two large contracts each fiscal year. As a result, financial performance from quarter-to-quarter is often uneven. Because of a relatively low order backlog at March 31, 2001 compared with recent fiscal year sales, fiscal 2002 financial performance in this segment is expected to be driven by second half results, much as has been the case the previous two fiscal years. Also, the second half may be heavily influenced by market acceptance of the new Guardian radio for the federal PSWN market. 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 that 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. 7 Patents, Trademarks, Copyrights and Licenses The Company has applied for several patents related to its mobile broadband products. However, the Company believes that patents are not generally 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), DBS-2100(r), DBS-2400(r), DBS-3000(r), DBS-4000(r), VI2STA(r) and CruiseTV(r) are registered trademarks of the Company. Guardian(Tm), DBS-5000(TM), GSC-NET(Tm), First In Motion(TM), Whisperdrive(T) and We Cover the Global Spectrum(TM) are trademarks of the Company by application for registration with the U.S. Patent and Trademark Office. 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. It has also obtained a license for certain technology used in its Guardian radio. Employees The Company employed approximately 305 employees at the end of fiscal 2001 compared with approximately 334 employees at the end of fiscal 2000. A decrease primarily in engineering and manufacturing personnel at the Antenna and Imaging Systems business segment was partially offset by an increase in engineering personnel at the Communication Products business segment. 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 9 of the Notes to Consolidated Financial Statements. See Part II, Item 8. Item 2. Properties. DWC leases approximately 70,000 square feet of office, engineering and manufacturing space in Vista, California. The lease commenced on March 26, 1999 and expires on April 30, 2009 and contains a renewal option of five years. DWC and the Company's corporate headquarters operate from that facility. The Company relocated from Escondido, California to Vista, California in April 1999. DAT owns through a subsidiary, Datron Resources Inc., a 110,000 square foot office, engineering and manufacturing building located on a nine-acre site in Simi Valley, California. DAT conducts operations from that facility. Information with respect to obligations for lease rentals is included in Note 8 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 Vista and Simi Valley are being fully utilized during a single shift with the exception of approximately 5,000 square feet of manufacturing space in the Vista facility, which is reserved for future growth. 8 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 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. On June 14, 2000, the district court issued an order awarding ATACS and AIRTACS damages of $30,075 including prejudgment interest. On July 12, 2000, ATACS and AIRTACS appealed the district court's judgment to the U.S. Court of Appeals. 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. In December 2000, Datron World Communications Inc. (DWC), a wholly owned subsidiary of the Company, was named as defendant in a lawsuit filed by Jose Maria Santos Ramos, an individual, and Tecserve (Private) Limited trading as Vista Communications. In the lawsuit, plaintiffs allege that DWC breached a representative agreement and that plaintiffs are entitled to payment of a commission in the amount of $3,750,000 based on the alleged agreement. DWC denies that it breached the agreement and/or that it owes any commissions to plaintiffs. 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 4. Submission of Matters to a Vote of Security Holders. None. Executive Officers of the Registrant David A. Derby, 59, has been President and Chief Executive Officer of the Company since May 1982, and Chairman of the Board since April 1998. William L. Stephan, 55, 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. 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 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company does not currently use derivative financial instruments for speculative purposes that expose the Company to market risk. The Company is exposed to cash flow and fair value risk due to changes in interest rates with respect to its long-term debt. At March 31, 2001, the Company had outstanding a promissory note to a life insurance company in the amount of $3,080,000 pursuant to a loan agreement under which the Company borrowed $3,300,000 on August 7, 1998. 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 as determined at that time. 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, 2001 and 2000 and for each of the three years in the period ended March 31, 2001 and the Independent Auditors' Report appearing on pages 12 through 24 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, 2001, 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. 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 Tuesday, August 14, 2001 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. 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 2001 Annual Report (1) Financial Statements: Consolidated Balance Sheets at March 31, 2001 and 2000 12 Consolidated Statements of Operations for the Years Ended March 31, 2001, 2000 and 1999 13 Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 2001, 2000 and 1999 14 Consolidated Statements of Cash Flows for the Years Ended March 31, 2001, 2000 and 1999 15 Notes to Consolidated Financial Statements 16-23 Independent Auditors' Report 24 (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) Reports on Form 8-K. On May 4, 2001, the Registrant filed a Form 8-K reporting that its chairman, president and chief executive officer, David A. Derby, had responded to the letter dated April 24, 2001 from Duncan Soukup, managing director of Acquisitor plc, previously made public by Acquisitor. (c) Exhibits. The following exhibits are filed as part of this report: Exhibit Number Description 3.1 Certificate of Incorporation.(1) 3.2 Amended and Restated Bylaws as of August 29, 2000.(16) 4.15 Stockholder Rights Agreement dated August 21, 1990.(4) 4.16 First Amendment to Stockholder Rights Agreement dated as of October 29, 1993.(5) 12 4.17 Second Amendment to Stockholder Rights Agreement dated February 23, 2000.(13) 4.18 Stockholder Rights Agreement dated as of September 5, 2000.(15) 10.5 1988 Key Employee Stock Purchase Plan.(2) 10.36 Amended and Restated 1985 Stock Option Plan.(3) 10.48 Agreement and Plan of Merger between Datron Telecommunications International Inc. and Trans World Communications, Inc. dated as of March 14, 1995.(6) 10.53 Datron Systems Incorporated Supplemental Executive Profit Sharing Plan (Effective as of April 1, 1994).(7) 10.58 Datron Systems Incorporated Employee Stock Purchase Plan (Adopted Effective July 1, 1997).(8) 10.61 Datron World Communications Inc. Lease Agreement dated as of February 13, 1998.(9) 10.65 Loan Agreement between Datron Resources Inc. and Jackson National Life Insurance Company dated August 7, 1998.(10) 10.66 Datron Systems Incorporated Profit Sharing and Savings Plan (Amended and Restated as of April 1, 1998).(10) 10.67 Credit Agreement between Datron World Communications Inc., Datron/Transco Inc. and Comerica Bank-California dated March 24, 1999.(11) 10.68 Borrower Agreement between Datron/Transco Inc. and Comerica Bank-California dated March 24, 1999.(11) 10.69 Guaranty of Datron Systems Incorporated of the indebtedness of Datron World Communications Inc. and Datron/Transco Inc. to Comerica Bank- California dated March 24, 1999.(11) 10.70 Severance Agreement between the Registrant and William L. Stephan.(11) 10.71 Amended and Restated 1995 Stock Option Plan.(12) 10.72 Amended and Restated Employment Agreement between the Registrant and David A. Derby.(12) 10.74 First Amendment to Credit Agreement between Datron World Communications Inc., Datron/Transco Inc. and Comerica Bank- California dated April 12, 2000.(14) 10.75 Borrower Agreement between Datron/Transco Inc. and Comerica Bank-California dated April 12, 2000.(14) 13 10.76 Amended and Restated Guaranty of Datron Systems Incorporated of the indebtedness of Datron World Communications Inc. and Datron/Transco Inc. to Comerica Bank-California dated April 12, 2000.(14) 10.77 Asset Purchase Agreement by and among Datron/Transco Inc., Datron Systems Incorporated and Nurad Technologies, Inc. dated as of November 3, 2000.(17) 10.78 Credit Agreement between Datron Systems Incorporated and U.S. Bank National Association dated May 23, 2001. 10.79 Security Agreement between U.S. Bank National Association and Datron Systems Incorporated dated May 23, 2001. 10.80 Security Agreement between U.S. Bank National Association and Datron Advanced Technologies Inc. dated May 23, 2001. 10.81 Security Agreement between U.S. Bank National Association and Datron World Communications Inc. dated May 23, 2001. 10.82 Continuing Guaranty between Datron Advanced Technologies Inc. and U.S. Bank National Association dated May 23, 2001. 10.83 Continuing Guaranty between Datron World Communications Inc. and U.S. Bank National Association dated May 23, 2001. 13 Certain portions of Registrant's Annual Report to Stockholders for the fiscal year ended March 31, 2001 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 Tuesday, August 14, 2001 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 LLP. 24 Power of Attorney (on signature page 16). 99 Annual Report of the Datron Systems Incorporated Employee Stock Purchase Plan. _____________________ (1) 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. (2) Incorporated by this reference to the Registration Statement on Form S-8 of the Registrant filed March 22, 1988. (3) Incorporated by this reference to the Registration Statement on Form S-8 of the Registrant filed April 16, 1993. 14 (4) Incorporated by this reference to Exhibit I to the Registrant's Registration Statement on Form 8-A filed November 5, 1990. (5) 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. (6) 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. (7) 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. (8) 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, 1997. (9) 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, 1998. (10) 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, 1998. (11) 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, 1999. (12) 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, 1999. (13) Incorporated by this reference to Exhibit 10.73 filed with the Registrant's Report on Form 8-K dated February 23, 2000. (14) 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, 2000. (15) Incorporated by this reference to Exhibit 4.1 filed with the Registrant's Report on Form 8-K dated August 30, 2000. (16) Incorporated by this reference to Exhibit 3(II) filed with the Registrant's Report on Form 8-K/A dated September 7, 2000. (17) 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, 2000. Supplemental Information Copies of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held August 14, 2001 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. 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 13, 2001 DATRON SYSTEMS INCORPORATED By: DAVID A. DERBY DAVID A. DERBY Chairman of the Board, President, Chief Executive Officer and Director P0WER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below appoints 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: Title Date Signature Chairman of the Board, President, Chief Executive By: /s/David A. Derby Officer and David A. Derby Director (Principal June 13,2001 Executive Officer) Vice President, Chief Financial By: /s/ William L. Stephan Officer (Principal William L. Stephan Financial and Accounting Officer) June 13, 2001 By /s/ Kent P. Ainsworth Director June 8, 2001 Kent P. Ainsworth By /s/ Richard W. Flatow Director June 11, 2001 Richard W. Flatow By /s/ Don M. Lyle Director June 8, 2001 Don M. Lyle By /s/ William A. Preston Director June 7, 2001 William A. Preston By /s/ Robert D. Sherer Director June 7, 2001 Robert D. Sherer INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors Datron Systems Incorporated Vista, California We have audited the consolidated financial statements of Datron Systems Incorporated (the "Company") as of March 31, 2001 and 2000, and for each of the three years in the period ended March 31, 2001, and have issued our report thereon dated May 11, 2001; such financial statements and report are included in your 2001 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 11, 2001 S-1
DATRON SYSTEMS INCORPORATED SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 2001, 2000 AND 1999 Balance Balance at at Beginning End of Year Description of Year Additions Write-offs ____________________________________________________________________________ Year ended March 31, 1999 Allowance for doubtful accounts $190,000 $63,000 $66,000 $187,000 Allowance for inventory obsolescence 1,656,000 432,000 708,000 1,380,000 Allowance for warranties 933,000 810,000 890,000 853,000 ---------- ---------- ---------- ---------- $2,779,000 $1,305,000 $1,664,000 $2,420,000 Year ended March 31, 2000 Allowance for doubtful accounts $187,000 $(22,000) $56,000 $109,000 Allowance for inventory obsolescence 1,380,000 340,000 193,000 1,527,000 Allowance for warranties 853,000 1,233,000 1,001,000 1,085,000 ---------- ---------- ---------- ---------- $2,420,000 $1,551,000 $1,250,000 $2,721,000 Year ended March 31, 2001 Allowance for doubtful accounts $109,000 $20,000 $12,000 $117,000 Allowance for inventory obsolescence 1,527,000 417,000 279,000 1,665,000 Allowance for warranties 1,085,000 940,000 946,000 1,079,000 ---------- ---------- ---------- ---------- $2,721,000 $1,377,000 $1,237,000 $2,861,000
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