ITEM 1
General Description of Business
The Company was founded in 1963 to provide near earth tracking analysis of spacecraft for NASA. Over the ensuing years, DBA has been predominantly involved in providing hardware and software systems for applications in the military defense industry. In April 1984, the Company temporarily broadened its base of business into the commercial graphic arts, remote sensing and medical imaging markets. With the sale of these commercial businesses during fiscal year 1988, DBA re-focused on its traditional capabilities and markets. DBA is now principally engaged in the defense mapping, charting & geodesy and electronics business and has re-entered the medical imaging and commercial imaging markets. DBA provides specialized products and services in two major areas of concentration: Imaging Systems and Electro-Optical Systems.
Imaging Systems' scope of activity includes the acquisition of image data, the processing, manipulation and exploitation of that data, its dissemination in either electronic or hard copy form, and the development of derivative products from imagery. Applications of DBA's imaging technologies include development and support of precise mapping and targeting systems, development and support of imagery intelligence systems, development of geographic information systems and their data bases, and development of products to convert images from the hard copy to digital form and output digital images in hard copy form.
Electro-Optical Systems encompasses DBA's design, development and manufacture of electronic products and systems. This equipment is primarily used in the test and evaluation of weapons systems and are employed in both test and training environments. Specific products include automatic video trackers for use in precision test range applications and tactical fire control systems and infrared sources used in the calibration of infrared images and heat seeking missiles. Systems include range systems for crew and system training against high fidelity replications of air defense threats in simulations as well as test range command and control systems for evaluation of crew and system effectiveness.
Products designed and developed for production are manufactured at the Melbourne manufacturing facility and include video trackers, IR test sets, high resolution image scanners, telemetry systems and missile simulators.
The following table reflects the revenues recorded by the above areas of concentration during the prior three fiscal years:
Imaging Systems
The Company continues to face the challenge of increased competition for declining defense dollars in its traditional business areas. Consequently, the Company remain vigilant for opportunities to expand our product and service lines and markets. Our continuing goal of participating in larger programs has caused us to intensify our efforts to develop strategic alliances with major firms that can utilize DBA's leading-edge imaging technology to complement their resources and strengthen their overall competitive position. Additionally, the Company has continued its research and development efforts directed toward new digital-imaging technologies, including the development of low-cost, high resolution digitizers; data compression techniques, and other technologies targeted to government and commercial markets.
Product Enhancements
Considerable interest has been demonstrated by foreign governments for an enhanced capability to exploit multisource softcopy imagery. In response to that interest, we are exploring the possibility of providing a commercial imagery exploitation system which will provide imagery enhancement and manipulation. This concept also lends itself to the incorporation of the unique Russian imagery data, which we have access to, as imagery source materials. These source materials offer DBA an accessible, unclassified, high resolution, multisensor data set from which valuable information can be acquired and exploited. This combination of enhanced imagery exploitation capabilities and source material provides an attractive capability to foreign governments to enable them to acquire information in numerous and varied areas of interest.
A future threat simulation and training product currently being researched for possible future development is the Universal Man-Portable Air Defense System (MANPADS). This system would greatly increase the flexibility of the current PADS by permitting the operations of multiple systems with the same scoring package while at the same time allowing the incorporation of new systems.
Several potential product enhancements are being explored in conjunction with the continuing development of the Prompting Mammography (PROMAM) system. In addition to expanding its applications within the field of mammography itself, opportunities appear to exist in other medical diagnostic applications, e.g. x-ray, and possibly spinning off PROMAM techniques to other business areas such as non-destructive testing (NDT).
Finally, we are exploring several enhancements in our video trackers and electronic systems product lines which will increase their flexibility in terms of data processing while at the same time making them more competitive in terms of state-of-the-art technology and cost.
Proprietary Imaging
This business area originated in the late 1960's and early 1970's from research and development efforts of the Company which were associated with the exploitation of large area photographic imagery. These activities led to several multimillion dollar contract awards. DBA's expertise resides in the development of the mathematical techniques, systems design and software used to analyze imagery in support of creating large area, geometrically- precise data bases. These programs typically involve one-of-a-kind systems comprised of DBA-developed scientific applications software and mainframe or super-mini computer hardware configurations. Development extends over several years with DBA proceeding through various formal customer design reviews and factory and final acceptance reviews. Subsequent to delivery, DBA often provides operations and maintenance support throughout the system life cycle. In December 1995 DBA received a two-year O&M (Operations and Maintenance) contract extension in this area for $12.8 million. Included in the negotiations was an option for a third year at $7.3 million. Additionally, a study concerning softcopy applications was initiated with completion scheduled for September 1996. The results of this study are expected to lead to a major hardware and software upgrade over and above the current contract value.
Tactical Imagery Exploitation
During fiscal year 1996, DBA successfully completed the production and delivery of the third Modernized Imagery Exploitation System (MIES) for the U.S. Army. Additionally, the Company successfully delivered several enhancements to the MIES to include the Requirements Management System (RMS), large format printer vans and vans for field service representatives. In recognition of its expertise and past success on the MIES program, DBA was awarded an $8.8 million contract to perform modifications to the MIES to bring the systems into conformance with the recently adopted acquisition standards for the Common Imagery Ground/Surface System (CIGSS). These important and significant modifications are designed to facilitate migration of existing imagery systems to a common interoperable baseline. Moreover, the program will provide for a family of scaleable, extensible and interoperable image processing and exploitation systems which will provide the warfighter rapid remote access to airborne and national imagery and imagery products.
System Engineering and Development
System Engineering and Development (SED) Division has a thirty year record of technological leadership in the development of electro-optical systems designed to provide real-time tracking and evaluation of complex military systems. The business area has evolved and expanded to encompass advanced test, threat simulation and training instrumentation for air, space, naval and ground test range environments. These systems provide evaluation of both crew and weapons systems effectiveness.
The Company's threat simulation activities focus on the development of replicas of foreign weapon systems that threaten all branches of the U.S. military forces. DBA's air defense weapon simulators give U.S. pilots the opportunity to engage realistic threats during training and operational exercises. This type of training results in increased survivability and fewer casualties. DBA was awarded a three year $9.4 million Time and Material (T&M) Contract in support of the Threat Simulator Management Office (TSMO) and continues to receive Tasking Orders from the TSMO program office. In fiscal year 1996, over $2 million in Tasking Orders were received.
SED Division continues to perform very successfully, both as the prime contractor and as a subcontractor, in the provision of Infrared Target Simulators (IRTS) to both the U.S. Air Force and U.S. Navy. The IRTS provides simulated infrared targets for operational testing of the Maverick, GBU-15 and AGM-130 missiles. In addition, DBA technology from the IRTS program has been used in support of the SLAM and Harpoon programs and to develop TV, laser and other simulators for other U.S. and foreign consumers. The progression of target simulators and missiles over the past 15 years has resulted in contracts with value in excess of $21 million to customers world wide. Moreover, current prospects for sales in the coming fiscal year are encouraging, with a number of Foreign Military Sales (FMS) identified.
DBA's international business in the SED area has partially offset the impact of the continuing decline in U.S. defense spending. Anticipating this change of market emphasis over two years ago, the Company has placed increased focus on the development of export business opportunities and the creation of products for the commercial market in the SED area.
Electro-Optical Tracking Systems
SED produces Electro-Optical Tracking Systems for use by U.S. and foreign test ranges. These systems are mobile, turn-key range units designed to support both developmental and operational weapon system testing requirements. Capable of infrared and visual tracking, annotation and recording, these Electro-Optical Tracking systems provide manual and automatic tracking of selected targets, including aircraft, rockets, missiles, and land vehicles. Test data is recorded locally at the system control console and also transmitted in real-time to remote test control facilities for display and recording.
DBA continues to deliver to the Kollmorgen Corporation automatic video trackers for the U.S. Navy's Optical Director Program. These sophisticated autotracker systems, which employ state-of-the-art correlation and target tracking algorithms, are being installed on guided missile destroyers. They provide passive target positioning to fire control computers to allow precision pointing of the ship's guns systems without alerting the enemy.
Air Defense Autotrackers
SED Division has enjoyed enviable success in developing and producing the Automatic Video Tracker to Boeing for the U.S. Army's Pedestal Mounted Stinger Air Defense System, also known as the Avenger program. SED efforts on this program caused DBA to be nominated for and selected to receive the prestigious award as the Small Business Administration Subcontractor of the Year Award for Region IV.
The Boeing built Avenger is the U.S. Army's line-of-sight rear area defense system. It carries eight Stinger missiles ready for rapid firing from a gyroscope stabilized turret. The Army's "HUMMER" is the primary Avenger Platform; however, it is also designed to operate in a stand-alone configuration. The Avenger was developed using principally off-the-shelf components existing in the Army's inventory, such as the DBA Autotracker. The U.S. Congress has pointed to the Avenger as an example of a cost effective system procurement by the virtue of its off-the-shelf, non-developmental nature, thus saving the government millions of development dollars. DBA continues to produce video trackers for Avenger systems for employment by U.S. military forces. Moreover, prospects for foreign military sales (FMS) over the next two fiscal years appear to be positive. DBA's performance on the Avenger program has resulted in a number of follow-on awards. Most notable was DBA's selection to develop, in conjunction with the Army, a Depot Level Repair facility allowing Army personnel to maintain the fielded Avenger systems. In addition, 16 contracts for spare trackers and boards totaling over $1.1 million were awarded.
Medical Autotracker
DBA has migrated autotracker technology, developed for tactical and range applications, into the personal computer (PC) environment. This transition has opened a number of potential markets for both clinical and research applications. During fiscal year 1996, DBA was awarded and completed a Phase I, Small Business Innovative Research (SBIR) grant to investigate the feasibility of developing a Video Photorefractometer to determine near and far sightedness in infants and non-cooperative subjects. A Phase II SBIR application is being prepared which, if awarded, will allow development of a prototype instrument for clinical testing.
Another Phase I SBIR, for an Infant Binocular Test system allowing non- intrusive detection of eye disorders in infants, is to be awarded in fiscal year 1997.
Both systems utilize DBA's PC tracker to acquire the real-time parametric data required to implement the two requirements.
Another application is in the area of human factors research. DBA successfully delivered to the Department of Transportation an automatic Video Data Reduction system, as part of a Phase II SBIR award. The system is structured around DBA's PC tracker and provides precise vehicle position relative to the road lane markers. The system is used to evaluate a driver's response to external stimulus, in designing safer roads and cars.
Customers and Suppliers
During the fiscal years which ended June 30, 1996, 1995 and 1994, approximately 95%, 88% and 92% respectively, of the Company's revenues were derived from contracts with agencies of the U.S. Government and from subcontracts with Government prime contractors. The Company performs work under fixed-price, time and material and cost-plus-fee contracts. Contracts performed for the Government are generally terminable at the will of the Government or subject to re-negotiation at the election of the Government. Future revenues and income of the Company could be materially affected by changes in Government procurement policies or a reduction in Government expenditures for services of the type provided by the Company. The Company is not dependent on any one supplier in connection with the development or manufacture of its products and services. For the fiscal year which ended June 30, 1996, less than 17% of the Company's revenues were dependent upon sole source suppliers.
Research and Development
DBA's business generally involves the application of existing technology to solve specific customer problems. As a result, most of DBA's research and development efforts emphasize applied research rather than pure research into new technological frontiers. Accordingly, research and development activities selected by DBA's management are a major factor in securing a continuous flow of business. It is critical that DBA stays abreast of technology relating to its products and services. Additionally, a substantial amount of DBA's research and development activity occurs in connection with specific orders placed by its Government customers.
The following table reflects the independent research and development funds not specifically related to particular contracts expended by the Company over the last three fiscal years:
Backlog
The Company's backlog of unfilled orders at June 30, 1996 was approximately $28.4 million as compared to $16.9 million at June 30, 1995. Approximately $22.9 million of the June 30, 1996 backlog is expected to be converted into revenues during the fiscal year ending June 30, 1997. An order is entered into backlog only when the Company receives a definite commitment from a customer.
The Company's backlog is typically subject to a number of contingencies due to various factors. Such factors include funding constraints, cancellation or modification of Government programs and changes in allocation of work between prime and subcontractors. Therefore, the amount of backlog should not be viewed as the sole determinant of future contract revenues. Consequently, the dollar amount of the backlog is not necessarily indicative of the future revenue of the Company. 					 Competition
DBA experiences substantial competition in its markets and believes its principal competitive advantages to be its reputation and experience in its selected technical areas, creativity in applying existing technology to new applications, technical assistance to customers, price and adherence to delivery schedules. DBA's systems address a market of high-end applications in which there are a limited number of competitors. Much of the Company's business requires highly skilled and experienced technical personnel with high level U.S. Government security clearances. The Company believes that the technical expertise and stability of its staff have been a significant factor in the development of DBA's business and its ability to compete to date. As the Department of Defense experiences overall budget restraints, DBA expects the competition for its products and services to significantly intensify. As a result, there is no assurance the Company can maintain its current revenue volume. If sufficient new business cannot be procured, the Company may be forced to downsize to maintain a work force commensurate with its business size.
Divisions of certain large industrial concerns with financial resources and facilities substantially greater than those of DBA, such as E-Systems, General Dynamics, Intergraph, Lockheed-Martin, TRW, Westinghouse and Contraves, are active in fields similar to those of the Company. DBA also experiences competition from other specialized firms, such as Morpho, Autometrics, SAIC, Synectics and Metric.
DBA's future success will depend upon, among other things, its ability to withstand competition from larger companies, to obtain and retain competent personnel to successfully accomplish its obligations under its various contracts and to productively extend its technological expertise to new applications. All of these factors are subject to uncertainty.
Patents
The Company holds, and is also licensed, under a number of U.S. and foreign product and process patents which extend through 2006 and has filed applications for other such patents that are pending. The Company follows the practice of obtaining patents on new developments whenever advisable. While the Company considers that in the aggregate its patents and licenses are valuable, it does not believe that its business is materially dependent on its patents or licenses or any group of them. In DBA's opinion, engineering and production skills and experience are more important to its market position than are patents or licenses.
Employees
As of June 30, 1996, the Company had 207 full-time employees. The Company is not subject to any collective bargaining agreements with its employees.
ITEM 2
ITEM 2	PROPERTIES
DBA Systems, Inc. is headquartered in Melbourne, Florida. The Corporate offices occupy approximately 3,300 square feet in a 64,000 square foot building located at 1200 South Woody Burke Road in Melbourne.
The leased facilities are occupied under leases for terms ranging from 1 to 40 years, a majority of which can be terminated or renewed at no longer than five-year intervals at DBA's option. DBA considers its facilities to be suitable and adequate for the purposes of which they are used. Following are details of the properties occupied by DBA.
ITEM 3.
ITEM 3.	LEGAL PROCEEDINGS
From time to time, as is normal with respect to the nature and kind of business in which DBA is engaged, various claims, charges and litigation are asserted or commenced against DBA arising from or related to product liability, patent, breach or warranty, contractual relations or employee relations. The amounts claimed in such litigation may be substantial but may not bear any reasonable relationship to the merits of the claim or the extent of any real risk of court awards. In the opinion of management, final judgments, if any, which might be rendered against DBA in potential or pending litigation, would not have a material adverse effect on its assets or business.
The Company maintains officers' and directors' liability insurance which insures individual officers and directors of the Company against certain claims as well as attorney's fees and related expenses incurred in connection with the defense of such claims.
ITEM 4.
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 	
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year through solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5.	MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY
A.	DBA common stock, par value $.10, is currently traded on NASDAQ/NMS. The high and low closing price for each quarterly period during the last two fiscal years is as follows:
B.	The number of record holders of DBA Systems, Inc. common stock as of June 30, 1996 and 1995 was 614 and 695, respectively.
C. As of June 30, 1996, DBA Systems, Inc. has not declared nor paid dividends. Although the Company intends to continue to invest any future earnings in its business, it may determine at some future date the payment of cash dividends would be desirable. The payment of such dividends would depend, among other things, upon the earnings and financial condition of the Company.
D.	Convertible Subordinated Debentures
During November, 1985, DBA sold $34,000,000 of Convertible Subordinated Debentures, due November 1, 2010 (the "Old Debentures"), which generated proceeds of approximately $33,000,000 net of closing costs. The debentures pay interest semi-annually at an interest rate of 8.25% and are convertible into DBA common stock at $19.50 per share, subject to adjustments in certain events. As of June 30, 1996, $1,926,000 of the Old Debentures were outstanding.
On April 30, 1991, the Company completed an exchange offer for its Convertible Subordinated Debentures. The exchange offer, announced on March 12, 1991 and amended on April 16, 1991, permitted holders of the Old Debentures to exchange each $1,000 principal amount of Old Debentures for 9.50% Convertible Subordinated Debentures due November 1, 2003 with a principal amount of $500 (the "New Debentures"). The New Debentures are initially convertible into 125 shares of the Company's common stock for each $500 principal amount, which represents a conversion price of $4.00 per share.
	 On July 17, 1992, the Company completed an offering (the "Offer") to issue and deliver to each holder of its 9.50% Convertible Subordinated Debentures due 2003 an additional five (5) shares of the Company's common stock for each $1,000 principal amount of its New Debentures tendered. Approximately $3,956,000 or 75% of the New Debentures were tendered and accepted by the Company for conversion. The Company issued approximately 1,010,000 shares of its common stock as a result of the conversions.
On December 2, 1993, the Company called all of its outstanding 9.50% Convertible Subordinated Debentures in the amount of $1,311,000 for redemption. The Debentures were convertible into common stock of the Company at a conversion price of $4.00 per share. Debentures not converted into common stock were redeemed for $21,000 cash. Approximately $1,290,000 Debentures were submitted for conversion into 322,500 shares of the Company's common stock. 	 Detailed information concerning the Old Debentures is contained in the Company's Form S-2 Registration Statement filed with the Securities & Exchange Commission (the "SEC") on September 25, 1985, as amended by Amendment No. 1 filed October 18, 1985, as amended by Amendment No. 2 filed November 14, 1985. Detailed information concerning the New Debentures is contained in the Company's Form 13E-4 filed with the SEC on March 12, 1991, as amended by Amendment No. 1 filed April 9, 1991, as amended by Amendment No. 2 filed April 16, 1991, as amended by Amendment No. 3 filed April 23, 1991, as amended by Amendment No. 4 filed May 8, 1991. Detailed information concerning the Offer is contained in the Company's Form 13E-4 filed with the SEC on June 22, 1992 as amended by Amendment No. 1 filed on July 24, 1992. All of the above documents are incorporated herein by reference.
ITEMS 6, 7 AND 8
The information called for by Items 6, 7 and 8, inclusive of Part II of this form, is contained in the following sections of this Report at the pages indicated below:
ITEM 9.
ITEM 9. 	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable
PART III
The information required to be set forth herein, Item 10, "Directors and Executive Officers of the Registrant"; Item 11, "Executive Compensation"; Item 12, "Security Ownership of Certain Beneficial Owners and Management"; and Item 13, "Certain Relationships and Related Transactions", is included in a definitive Proxy Statement pursuant to Regulation 14A, which is incorporated herein by reference, filed with the Securities & Exchange Commission not later than 120 days after close of the fiscal year ended June 30, 1996.
PART IV
ITEM 14.
ITEM 14.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A-1	Financial Statements
A list of the financial statements included herein is set forth in the Index to Financial Statements, Schedules and Exhibits submitted as a separate section of this Report.
A-2	Financial Statement Schedules
A list of financial statement schedules included herein is contained in the accompanying Index to Financial Statements, Schedules and Exhibits submitted as a separate section of this Report.
A-3	Exhibits required to be filed by Item 601(a) of Regulation S-K are included as exhibits to this Report as follows:
3(i)	Articles of Incorporation of the Registrant, as amended, are included as an exhibit to this Report. (Incorporated by reference to Registrant's 1985 Form 10-K.)
3(ii)	By-Laws of the Registrant, as amended, are included as an exhibit to this Report. (Incorporated by reference to Registrant's 1985 Form 10-K.)
4(a)	Form S-2 Registration Statement (Convertible Subordinated Debenture Offering) filed with the SEC on September 25, 1985, as amended by Amendment No. 1, filed October 18, 1985, as amended by Amendment No. 2, filed November 14, 1985, all of which are incorporated herein by reference.
4(b)	Form S-8 Registration Statement (Employee Incentive Stock Option Plan-1982, Directors' Stock Option Plan-1982, and Directors' Stock Option Plan-1987) filed with the SEC on June 17, 1988 are incorporated herein by reference.
4(c)	Form 13E-4 filed with the SEC on March 12, 1991, as amended by Amendment No. 1 filed April 9, 1991, as amended by Amendment No. 2 filed April 16, 1991, as amended by Amendment No. 3 filed April 23, 1991, as amended by Amendment No. 4 filed May 8, 1991 is incorporated herein by reference.
4(d)	Form 13E-4 filed with the SEC on June 22, 1992, as amended by Amendment No. 1 filed on July 24, 1992, is incorporated herein by reference. 4(e)	Form S-8 Registration Statement (Employee Incentive Stock Option Plan-1992, and Directors' Stock Option Plan-1993), filed with the SEC on February 18, 1994 are incorporated herein by reference.
10(a)	Lease dated July 9, 1981, between the Registrant and City of Melbourne Airport Authority. (Incorporated by reference to Registrant's 1982 Form 10-K.)
10(b)	Employee Retirement Plan and Trust. (Incorporated by reference to the 1979 Definitive Proxy Statement of the Company.)
10(e)	Bonus agreement dated August 10, 1989 between DBA Systems, Inc. and John L. Slack. (Incorporated by reference to the Registrant's 1990 Form 10-K.)
10(f)	Lease agreement executed on June 24, 1993 between the registrant and the Equitable Life Assurance Society of the United States.
10(g)	1992 Employee Incentive Stock Option Plan. (Incorporated by reference to the 1992 Proxy Statement of the Company.)
10(h)	1993 Directors' Stock Option Plan. (Incorporated by reference to the 1993 Proxy Statement of the Company.)
11	Computation of Earnings per Share.
21	Subsidiaries of the Registrant.
Registrant agrees to furnish the Commission, upon request, a copy of each instrument with respect to issues of long-term debt. The principal amount of any individual instrument, which has not been previously filed, does not exceed ten percent of the total assets of the Registrant and its subsidiaries on a consolidated basis.
B.	Reports on Form 8-K
The Company had no filings on Form 8-K during the fourth quarter of the fiscal year ending June 30, 1996.
Pursuant to the requirement 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. 						DBA SYSTEMS, INC. 					 	(Registrant)
DATED:	September 16, 1996
						By________________________ (signature) 				 							John L. Slack 							Chairman of the Board, President, 							Treasurer, Acting, & 							Chief Executive Officer
						
						By_________________________ (signature) 				 							Charles B. Robertson 							Vice President of Administration 							Corporate Secretary
						 						By________________________ (signature) 				 							Edward M. Bielski 							Corporate Controller
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been executed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS Page(s) in this Report The following documents are filed as part of this Report:
(1)	Financial Statements:
	Selected Financial Data	15
	Management's Discussion and Analysis	15-19
	Quarterly Financial Data (Unaudited)	20 	 	Consolidated Statements of Income for the 	 years ended June 30, 1996, 1995 and 1994	21
	Consolidated Balance Sheets at June 30, 1996 and 	 June 30, 1995	22-23 	 	Consolidated Statements of Cash Flows for the years ended 	 June 30, 1996, 1995 and 1994	24-25
	Consolidated Statements of Stockholders' Equity for the years 		ended June 30, 1996, 1995 and 1994	26
	Notes to Consolidated Financial Statements 	27-34
	Independent Auditors' Report 	35
(2)	Valuation and Qualifying Accounts
	II	Allowance for Doubtful Accounts on Accounts Receivable	36
(3)	Exhibits
	11	Computation of Earnings per Share	38
	21	Subsidiaries of the Registrant	39
All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. DBA Systems, Inc. and Subsidiaries
SELECTED FINANCIAL DATA (In Thousands, Except Per Share Information)
Management's Discussion and Analysis
Business Environment
The defense industry continues to experience numerous mergers and consolidations of companies doing business with the Federal Government, and this trend is expected to continue for the immediate future. In addition, the Federal Government continues to decrease in size, it is increasing the scrutiny of its spending in the high technology and defense areas. Therefore, competition for available contracts remains intense. In response, the Company has aggressively managed its costs, focusing resources on new business opportunities with the greatest promise of success. Current and long-term liabilities remain at very low levels in order to position the Company to take advantage of market opportunities. Indirect costs have been maintained at historically all-time-low levels to enhance competitiveness in the fierce marketplace. The Company will continue to maintain this posture as it marches through the challenging transition period of capturing commercial markets.
Reduction in the Department of Defense budget, continued Congressional and regulatory oversight of the Government procurement process, increased competition within the Company's traditional market niches, and the current Government procurement policy to award contracts based primarily on price and not exclusively on technical capabilities are all factors which may have a material effect on the Company's future operating revenues and profit margins. The Government's decisions reguarding options presently held by the Company under existing contracts may also have an impact on the Company. These trends may result in delays in previously anticipated contracts or the loss of anticipated business to competitors. As a result, the reported financial information may not necessarily be indicative of the Company's future operating results or financial condition.
Results of Operations
The following table sets forth, for the periods indicated, the percentage that certain items in the Company's Consolidated Statements of Income bear to revenues and the annual percentage change of such items for the period indicated:
During the years ended June 30, 1996, 1995 and 1994, approximately 95%, 88% and 92%, respectively, of the Company's revenues were derived from contracts with agencies of the U.S. Government and from subcontracts with government prime contractors. Future revenues and income of the Company could be materially affected by changes in Government procurement policies or a Reduction in Government expenditures for services of the type provided by the Company. The Company's business is performed under cost reimbursement, fixed price and fixed rate time and material contracts.
Significant Event
The Company has a $12.5 million contract with Advanced Medical Management Systems, Inc. (AMMS) for the production and exclusive worldwide distribution of its ImagClear (TM) medical digitizers. On August 10, 1995, the Company filed suit in the U.S. District Court to recover liquidated damages which arose from non-performance of the contract by AMMS. Six defendants were named in the lawsuit: AMMS, Manatee Insurance Company (guarantor of the contract), Mr. Gary Long (director of Manatee), Johnston & Kent Securities, Inc. (brokers), Mr. George Johnston and Mr. Bob Wilson. As of August 1996, Manatee Insurance Company and Mr. Wilson had been served with a Summons and Complaint.
At this time, the Company is not able to assess the probability of recovering any damages resulting from this contract default.
Fiscal Year 1996 Compared with Fiscal Year 1995
Revenues for the fiscal year ending June 30, 1996 were approximately $20,470,000 a decrease of $9,226,000 or 31.1% when compared to the $29,696,000 recorded in the prior fiscal year. The decrease in revenues was attributable to default of the AMMS production contract and loss of expected competitively bid government proposals. The Company recorded approximately $32,100,000 in new bookings during fiscal 1996 as compared to approximately $23,000,000 during fiscal 1995. Increased bookings in fiscal year 1996 were due mainly to follow-on procurements of Proprietary Imagery Exploitation and Tactical Imagery Exploitation which occur every two years. Costs and expenses decreased from approximately $28,021,000 for the fiscal year ending June 30, 1995 to approximately $19,330,000 for the fiscal year ending June 30, 1996. The decrease in costs and expenses was attributable to lower levels of direct contract activity. Indirect support costs were reduced by approximately $9,000 or 0.1% from fiscal 1995 to fiscal 1996. 						 Interest expense for fiscal 1996 was $175,000 as compared to $199,000 during fiscal 1995. The reduction in interest expense was primarily attributable to advance payment of the Company's Industrial Development Revenue Bonds in 1995.
As a result of the above factors net income of $1,161,000 was earned during fiscal 1996 as compared to $1,502,000 in the prior fiscal year.
Fiscal Year 1995 Compared with Fiscal Year 1994
Revenues for the fiscal year ending June 30, 1995 were approximately $29,696,000, an increase of $5,380,000 or 22.1% when compared to the $24,316,000 recorded in the prior fiscal year. The increase in revenues was attributable to favorable bookings during fiscal year 1994 and 1995 as well as increased levels of government and commercial contract activity throughout the year. The Company recorded approximately $23,000,000 in new bookings during fiscal 1995 as compared to approximately $28,300,000 during fiscal 1994. Decreased bookings in fiscal year 1995 were due to rescheduling of certain Government procurements into the Company'S 1996 fiscal year.
The Company has entered into certain contracts with The Sokol Group, Inc., whose President and CEO is a DBA director. Under such contracts, the Company recognized revenues of approximately $128,000 and $315,000 for the fiscal years ending June 30, 1995 and 1994, respectively.
Costs and expenses increased from approximately $23,085,000 for the fiscal year ending June 30, 1994 to approximately $28,021,000 for the fiscal year ending June 30, 1995. The increase in costs and expenses was attributable to heightened levels of direct contract activity. Indirect support costs were reduced by approximately $3,030,000 or 24.5% from fiscal 1994 to fiscal 1995. 						 Interest expense for fiscal 1995 was $199,000 as compared to $355,000 during fiscal 1994. The reduction in interest expense was primarily attributable to advance payment of the Company's Industrial Development Revenue Bonds. A secondary factor was the reduction of other interest costs and financing fees as a result of active management of the Company's treasury function. The Company has approximately $1,843,000 of federal net operating loss carryforwards as of June 30, 1995.
As a result of the above factors net income of $1,502,000 was earned during fiscal 1995 as compared to $837,000 in the prior fiscal year.
Fiscal Year 1994 Compared with Fiscal Year 1993
Revenues for the fiscal year ending June 30, 1994 were approximately $24,316,000, a decline of $8,982,000 or 27% when compared to the $33,298,000 recorded in the prior fiscal year. The decline in revenues was attributable to delays in the procurement cycle of anticipated new business and increased competition which resulted in a loss of certain new business opportunities to competitors. The Company recorded approximately $28,300,000 in new bookings during fiscal 1994 as compared to approximately $26,100,000 during fiscal 1993.
The Company entered into certain contracts with The Sokol Group, Inc., whose President and CEO is a DBA director. Under such contracts, the Company recognized revenues of approximately $315,000 and $235,000 for the fiscal years ending June 30, 1994 and 1993, respectively. Costs and expenses decreased from approximately $30,251,000 for the fiscal year ending June 30, 1993 to approximately $23,085,000 for the fiscal year ending June 30, 1994. The reduction in costs and expenses was attributable to the reduction in revenues mentioned above. Additionally, indirect support costs were reduced by approximately $1,274,000 or 9.3% from fiscal 1993 to fiscal 1994. 						 Interest expense for fiscal 1994 was $355,000 as compared to $449,000 during fiscal 1993. The reduction in interest expense was primarily attributable to repayment of the Chrysler Capital note and the calling of the Company's Convertible Subordinated Debenture conversion described herein.
The Company has approximately $3,463,000 of federal net operating loss carryforwards as of June 30, 1994.
As a result of the above factors net income of $837,000 was earned during fiscal 1994 as compared to $2,209,000 in the prior fiscal year.
Liquidity and Capital Resources
At June 30, 1996, the Company had working capital of approximately $18,215,000 as compared to approximately $15,998,000 at June 30, 1995. The current ratio on June 30, 1996 was approximately 5.44:1 versus 5.15:1 on June 30, 1995. The Company has retained a very strong cash position and remains financially flexible.
The Company has a $4,000,000 unsecured line of credit with a bank which expires January 31, 1997. Amounts drawn on this line of credit accrue interest at either the bank's prime rate or the bank's LIBOR plus 2.5%, as selected by the Company upon the utilization of any portion of the line of credit. The Company had no borrowings against the line of credit at June 30, 1996.
During the year ended June 30, 1996, the Company incurred capital expenditures of approximately $333,000 for manufacturing equipment, test fixtures and office equipment which were financed from working capital. The Company believes capital requirements for fiscal 1997 can be internally generated from working capital. The Company anticipates that capital requirements for fiscal 1997 will include manufacturing equipment, test fixtures and office equipment and will be comparable or less than the amounts incurred during fiscal 1996. The Company believes its capital requirements in the foreseeable future will be similar to those experienced in the recent past and will be funded through working capital or lease financing arrangements.
The only long-term liability outstanding, consists of Convertible Subordinated Debentures of $1,926,000.
In connection with the sale of the Company's commercial operations to an unrelated entity (the "Buyer") in 1987, the Company was named as a guarantor under a mortgage assumed by the Buyer. The mortgage was collateralized by a building which the Buyer sold for less than the mortgage value during October 1994. In exchange for settlement of the mortgage, the Company received a promissory note from the Buyer in the amount of $250,000, plus interest at the prime lending rate plus 1.50%. The note is payable in quarterly installments of $16,666 which began March 31, 1995 and concludes March 31, 1997. On June 30, 1996, the balance outstanding on the promissory note was $66,664. On July 17, 1992, DBA completed its offer (the "Offer") to issue and deliver to each holder of its 9.5% Convertible Subordinated Debentures due 2003 (the "New Debentures") an additional five (5) shares of the Company's common stock for each $1,000 principal amount of its New Debentures tendered for conversion into common stock. The New Debentures are convertible at the option of the holder, at the conversion price of $4.00 per share, into 250 shares of common stock for each $1,000 principal amount of Debentures. The Offer was subject to the terms and conditions of the Company's Offering Circular dated June 19, 1992.
Prior to the Offer, the Company had $5,272,000 aggregate principal amount of New Debentures outstanding. Approximately $3,956,000 or 75% of the New Debentures were tendered and accepted by the Company for conversion. The Company issued approximately 1,010,000 shares of DBA common stock as a result of the conversions.
On December 2, 1993, the Company called all of its outstanding 9.5% Convertible Subordinated Debentures in the amount of $1,311,000 for redemption. The Debentures were convertible into common stock of the Company at a conversion price of $4.00 per share. Debentures not converted into stock were redeemed for $21,000 cash. Approximately $1,290,000 Debentures were submitted for conversion into 322,500 shares of the Company's common stock.
DBA Systems, Inc. and Subsidiaries
QUARTERLY FINANCIAL DATA (Unaudited) (In Thousands, Except Per Share Information)
Selected quarterly financial data is summarized as follows:
DBA Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share information)
See accompanying Notes to Consolidated Financial Statements DBA Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (In Thousands)
See accompanying Notes to Consolidated Financial Statements DBA Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (In Thousands) 	
See accompanying Notes to Consolidated Financial Statement DBA Systems, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
DBA Systems, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental Disclosure of Non-Cash Investing and Financing Activities (In Dollars):
For the years ended June 30, 1996 and 1995, the Company transferred assets of approximately $10,000 and $72,000, respectively, from inventory to property.
On December 2, 1993, DBA called all of its outstanding 9.50% Convertible Subordinated Debentures. The Debentures were convertible into common stock at a conversion price of $4.00 per share. Approximately $1,290,000 in debentures were submitted for conversion into 322,500 shares of the Company's common stock.
During the year ended June 30, 1996, property with a net book value of $4,436,000 was reclassified as real estate held for sale.
Supplemental Disclosure of Cash Flow Information (In Thousands):
See accompanying Notes to Consolidated Financial Statements
DBA Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In Thousands)
See accompanying Notes to Consolidated Financial Statements
DBA Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Description of Business and Major Customer
DBA Systems, Inc. and subsidiaries ("DBA" or the "Company") operate in a single line of business. DBA is principally engaged in developing and manufacturing computerized image processing and electro-optical systems for a variety of defense electronics applications. Approximately 95%, 88% and 92% of DBA's fiscal 1996, 1995 and 1994 revenues from continuing operations, respectively, were derived from contracts with the U.S. Government, or agencies thereof.
Principles of Consolidation
The consolidated financial statements include the accounts of DBA Systems, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Revenue and Cost Recognition
Revenues and costs from government fixed-priced and time-and-material contracts are recognized on the Percentage-of-completion method, measured by the percentage of total costs incurred to date to total estimated costs for each contract. This method is used because management considers total expended costs to be the best available measure of progress on these contracts. Revenues from cost-plus-fee Government contracts are recognized on the basis of costs incurred during the period plus the fee earned measured by the same method. Total expended costs as used to compute revenues exclude, especially during early stages of a contract, all or a portion of the costs of such materials or subcontracts if, in the opinion of management, it appears that such an exclusion would result in a more accurate measurement of the level of work performed towards contract completion. Estimates of the effect of changes in total estimated contract costs are recognized in the period determined. At the time a loss on a contract becomes known, the entire amount of the estimated loss on the contract is accrued.
Government contract costs include all direct material and labor costs and those indirect costs related to contract performance such as indirect labor, supplies, repairs and depreciation costs. General and administrative expenses (including bid and proposal expenses and independent research and development costs) allowable in accordance with United States Government procurement practices are included in contract costs because they are identifiable with contract revenue and are reimbursable under the contracts.
The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. The Company progress bills its customers monthly as the work is in progress.
Use of Estimates in Preparation of the Financial Statements
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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Property
DBA amortizes the cost of depreciable properties over their estimated service lives. Expenditures for maintenance, repairs and minor renewals are charged against operations. Interest cost is capitalized for qualifying assets during the assets' acquisition periods.
The approximate annual rates of depreciation and the methods of application are as follows:
Real Estate Held for Sale
Real estate held for sale is carried at the lower of cost or fair value less estimated costs to sell. The value of such real estate is periodically reviewed and reduced if appropriate.
Income Taxes
Deferred income taxes are provided on items which are recognized in different years for tax and financial reporting purposes. The Company accounts for income taxes using the liability method of computing deferred income taxes. Deferred tax assets and liabilities are recognized for the future consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Differences between income for financial and tax reporting purposes arise primarily from the use of accelerated depreciation as required for income tax purposes and recording of estimated losses on uncompleted contracts for financial reporting purposes. Also, under the liability method, deferred tax assets and liabilities are measured using estimated tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Inventory
Inventories are valued at the lower of cost (weighted average) or market and include applicable material, labor and overhead costs. During the years ending June 30, 1996, 1995 and 1994, approximately $274,000, $110,000 and $67,000, respectively, in general and administrative costs were charged to inventory. As of June 30, 1996 and 1995, approximately $403,000 and $101,000, respectively, in general and administrative costs were included in inventory.
Leases
Leases which meet certain criteria are classified as capital leases, and assets and liabilities are recorded at amounts equal to the lesser of the present value of the minimum lease payments or the fair value of the leased properties at the beginning of the respective lease terms. Such assets are amortized over their economic useful life on a straight-line basis. Leases which do not meet such criteria are classified as operating leases and related rentals are charged to expense as incurred. 							
Cost in Excess of Value of Net Assets of Businesses Acquired
The cost in excess of the value of net assets of businesses acquired is amortized using the straight-line method over forty years. Management evaluates the recoverability of such assets quarterly and annually based on current operating trends in relation to the recorded values of such assets.
Research and Development Costs
Research and development costs associated with product development programs are expensed as incurred. Research and development expenditures incurred by the Company and not expressly reimbursed pursuant to contracts with customers were approximately $424,000 in fiscal 1996, $331,000 in fiscal 1995 and $206,000 in fiscal 1994.
Cash and Cash Equivalents
Cash equivalents consist of financial instruments which are readily convertible to cash and mature less than three months after the date of acquisition.
Investments
The Company does not invest in securities as its primary business and does not maintain a trading account. Occasionally, however, the Company purchases financial instruments with maturities greater than three months from the date of acquisition. Such securities are classified as either "available for sale" or "held to maturity" as required by Statement of Financial Accounting Standards No. 115 (FAS 115) "Accounting for Certain Investments in Debt and Equity Securities" which the Company adopted as of June 30, 1994. As of June 30, 1996 and 1995, all such investment securities owned by the Company mature in one year or less, were classified as "available for sale," and were carried at their current market value, which approximates their cost, as required by FAS 115.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" effective for fiscal years beginning after December 15, 1995. Management believes that the adoption of SFAS No. 121 will not have a material impact on the Company's consolidated financial statements.
Also in 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation', which requires companies to measure employee stock compensation plans based on the fair value method of accounting or to continue to apply APB No. 25. "Accounting for Stock Issued to Employees", and provide pro forma footnote disclosures under the fair value method in SFAS No. 123. The Company will continue to apply the principles of APB No. 25 and provide pro forma fair value disclosures starting in the 1997 consolidated financial statements.
Reclassification
Certain amounts have been reclassified in the prior years' financial statements to conform with the current year presentation.
2.	COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
As of June 30, 1996 and 1995, the amounts billed but not paid under contract retainage provisions were approximately $65,000 and $1,130,000, respectively. Such retainage amounts are expected to be collected within one year. Amounts included in Costs and Estimated Earnings on Uncompleted Contracts which are subject to future negotiation were approximately $574,000 as of June 30, 1996 and 1995.
3.	LONG-TERM DEBT
Long-term debt at June 30, 1996 and 1995 consisted of $1,926,000 of 8.25% Convertible Subordinated Debentures, $1,000 par value, mature on November 1, 2010 and pay interest semi-annually on November 1 and May 1. The debentures may be converted at any time up to maturity into shares of DBA common stock at a price of $19.50 per share (subject to adjustments).
The Company has a $4,000,000 unsecured line of credit with a bank which expires January 31, 1997. Amounts drawn on this line of credit accrue interest at either the bank's prime rate or the bank's LIBOR plus 2.5%, as selected by the Company upon the utilization of any portion of the line of credit. The Company had no borrowings against the line of credit at June 30, 1996.
4.	STOCKHOLDERS' EQUITY
The 1992 Employee Incentive Stock Option Plan which will expire on November 12, 2002, provided for the issuance of up to 500,000 shares of the Company's common stock. Options may be granted only to employees of DBA and its subsidiaries at an option price not less than the fair market value of DBA common stock on the date of grant. At June 30, 1996, 297,085 of these shares were under option.
The 1993 Directors' Stock Option Plan which will expire on November 17, 1998, provided for the issuance of up to 200,000 shares of DBA's common stock. Options can only be granted to members of the Board of Directors at an option price not less than the fair market value of DBA's common stock on the date of grant. At June 30, 1996, 30,000 of these shares were under option.
DBA also grants options not pursuant to a formal plan to officers, directors and key employees at the discretion of the Board of Directors. Options are granted at an option price not less than the fair market value of DBA's common stock on the date of grant. At June 30, 1996, options for 25,000 shares were outstanding. The following is a summary of the activity in all of DBA's Option Plans for the three year period ended June 30, 1996:
5.	COMMITMENTS AND CONTINGENCIES
DBA leases land, office space, manufacturing facilities and various equipment under non-cancelable operating leases. The leased facilities are occupied under leases with escalation clauses and terms ranging from one to forty years, a majority of which can be terminated or renewed at no longer than five (5) year intervals at the Company's option.
Total rent expense charged to operations for all operating leases was approximately $422,000 in 1996, $396,000 in 1995, and $488,000 in 1994.
Future minimum payments under all operating leases having a remaining non-cancelable term of more than one year are approximately as follows:
In connection with the sale of the Company's commercial operations to an unrelated entity (the "Buyer") in 1987, the Company was named as a guarantor under a mortgage assumed by the Buyer. The mortgage was collateralized by a building which the Buyer sold for less than the mortgage value during October 1994. In exchange for settlement of the mortgage, the Company received a promissory note from the Buyer in the amount of $250,000, plus interest at the prime lending rate plus 1.50%. The note is payable in quarterly installments of $16,666 which began March 31, 1995 and conclude March 31, 1997. On June 30, 1996, the balance outstanding on the promissory note was $66,664.
As a normal consequence of the Company's business, contract claims against the U.S. Government, or agencies thereof, can arise. Contract claims are comprised of costs which the Company has incurred and expects to recover from the U.S. Government. The Company had various claims pending against the U.S. Government at June 30, 1996 and 1995.
6.	INCOME TAXES
The components of the provision for income taxes are as follows:
DBA's effective tax rate differs from the statutory federal income tax rate for the following reasons:
The tax effect of temporary differences that give rise to deferred tax assets and deferred tax liabilities at June 30, 1996 and 1995 are presented below:
DBA has approximately $114,000 of federal net operating loss carryforwards and $399,000 of minimum tax credits remaining at June 30, 1996 which give rise to a deferred tax asset. Management believes that the inability to utilize net operating loss carryforwards and minimum tax credits to offset future taxable income within the carryforward periods under existing tax laws and regulations is more likely than not. Therefore, a valuation allowance against the deferred tax asset of approximately $354,000 has been recorded as of June 30, 1995. The valuation allowance was reversed during the year ended June 30, 1996 as the net operating loss carryforwards were utilized. The net operating loss carryforwards expire in 2006. The minimum tax credits do not expire.
7.	EARNINGS PER SHARE
Earnings per common share and common equivalent share are computed by dividing net income by the weighted average number of common shares and common equivalent shares outstanding during the period. Common equivalent shares consist of common stock which may be issued upon exercise of outstanding stock options. Weighted shares used in 1996, 1995 and 1994 were approximately 4,493,000, 4,460,000 and 4,210,000, respectively.
As to common stock equivalents, consideration is given to the additional dilutive effect which results from year-end market prices exceeding the average market price during the period. Weighted shares used in 1996, 1995 and 1994 were approximately 4,493,000, 4,480,000 and 4,210,000, respectively.
8.	EMPLOYEE BENEFIT PLANS
Effective July 1, 1981 and most recently amended August 5, 1995, the Company adopted a qualified retirement plan (the "Plan") covering all employees who meet the eligibility requirement of one month of service. The Plan has a profit-sharing component to which DBA makes contributions equal to amounts determined by the Board of Directors. Expense for the profit-sharing component for 1996, 1995 and 1994 was $150,000, $150,000 and $150,000, respectively. Effective July 1, 1989, the Company adopted a qualified 401(k) component to which the Company has agreed to contribute an amount equal to 50% of a participant's contributions up to the lessor of 3% of the employee's aggregate compensation or $750. Expense for the 401(k) component for 1996, 1995 and 1994 was approximately $114,000, $119,000 and $136,000, respectively. Effective July 1, 1988 and most recently restated May 7, 1995, the Company adopted an Employee Stock Ownership Plan (the "ESOP"). Contributions to the ESOP are at the discretion of the Board of Directors. During the fiscal years 1996, 1995 and 1994, accrued towards stock contributions was $100,000, $100,000 and $100,000, respectively. The actual contributions of stock are made from Treasury Stock.
9.	OTHER EXPENSE-NET
The components of other expense-net are as follows:
10.	LITIGATION
From time to time, as is normal with respect to the nature and kind of business in which DBA is engaged, various claims, charges and litigation are asserted or commenced against DBA arising from or related to product liability, patent, breach of warranty, contractual relations or employee relations. The amounts claimed in such litigation may be substantial but may not bear any reasonable relationship to the merits of the claim or the extent of any real risk of court awards. In the opinion of management, final judgments, if any, which might be rendered against DBA in potential or pending litigation, would not have a material adverse effect on its assets or business.
The Company maintains officers' and directors' liability insurance which insures individual officers and directors of the Company against certain claims as well as attorney's fees and related expenses incurred in connection with the defense of such claims.
11.	FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments: cash and cash equivalents, investments, receivables, accrued expenses and accounts payable, approximate their estimated fair values at June 30, 1996. INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of DBA Systems, Inc.:
We have audited the accompanying consolidated balance sheets of DBA Systems, Inc. and subsidiaries (the "Company") as of June 30, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14. The financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule 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 the Company at June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP Orlando, Florida September 9, 199 											SCHEDULE II
DBA Systems, Inc. and Subsidiaries
DBA SYSTEMS, INC. EXHIBIT INDEX
					 	Page No.	
Exhibit 11 - Computation of earnings per share 	38
Exhibit 21 - Subsidiaries of the Registrant	 39