UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number: 0-8125
----------------------------
DETECTION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
State of New York 16-0958589
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
130 Perinton Parkway, Fairport, New York 14450
(Address of principal executive offices) (Zip Code)
(716) 223-4060
(Registrant's telephone number, including area code)
----------------------------
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
the filing requirements for the past 90 days. Yes __X__ No _____
As of November 12, 1996, there were outstanding 2,967,944 shares of the
registrant's common stock, par value $.05 per share.
PART I FINANCIAL INFORMATION
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited)
ASSETS Sept. 30, 1996 March 31, 1996
Current Assets: -------------- --------------
Cash & cash equivalents $ 1,293,053 $ 913,716
Short-term investments, at cost, which
approximates market value 16,460 16,296
Accounts receivable, less allowance
for doubtful accounts of $100,000 13,203,918 10,482,660
Inventories 17,429,201 14,065,843
Income tax receivable 783,904 532,895
Deferred income tax charges 1,554,900 1,554,900
Prepaid expenses and other assets 1,665,082 860,018
--------- -----------
Total Current Assets 35,946,518 28,426,328
Fixed assets at cost 17,839,061 16,767,326
Less accumulated depreciation 10,867,269 9,681,969
---------- ----------
6,971,792 7,085,357
Property under capital lease 4,714,854 4,760,810
Less accumulated depreciation 2,319,789 2,269,335
--------- -----------
2,395,065 2,491,475
Deferred Income Taxes 3,983,200 3,983,200
Goodwill and other intangibles 3,937,289 3,762,327
Other assets 237,034 148,891
---------- ----------
Total Assets 53,470,898 45,897,578
LIABILITIES
Current Liabilities
Current portion of long-term debt
and capital lease obligations 123,502 559,860
Accounts payable 9,059,150 6,231,737
Accrued payroll & benefits 2,320,643 1,566,777
Short term borrowings 3,757,450 1,183,750
Other accrued liabilities 3,115,079 3,171,914
---------- ----------
Total Current Liabilities 18,375,824 12,714,038
Obligations under capital leases 125,285 186,471
Other long term liabilities 1,931,900 1,931,900
Long term debt 17,750,000 17,750,000
Deferred compensation 1,889,811 1,745,886
Shareholders' Equity
Common stock, par value $.05 per share
Authorized 12,000,000 shares, Issued
2,853,015 shares at 9/30/96 and 2,811,361
at 3/31/96 142,841 140,568
Capital in excess of par value 7,400,474 6,972,431
Retained earnings 6,287,437 4,869,022
--------- -----------
13,830,752 11,982,021
Less: Treasury stock, 1,658 shares at 9/30/96
at cost and 2,207 shares at 3/31/96 at cost) (38,777) (12,363)
Notes receivable for stock purchases (393,897) (392,514)
Cumulative translation adjustment 0 (7,861)
---------- ----------
13,398,078 11,569,283
---------- ----------
Total Liabilities & Shareholders' Equity $53,470,898 $45,897,578
========== ==========
See accompanying notes to financial information.
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Income Statement (Unaudited)
For the Three Months Ended: Sept. 30, 1996 Sept. 30, 1995
(Current Year) (Preceding Year)
-------------- ----------------
Gross sales less discounts,
returns and allowances $24,865,642 $ 9,299,261
Other revenue 32,427 64,000
---------- ----------
Total revenue 24,898,069 9,363,261
Costs and expenses:
Production 16,577,368 5,919,231
Development 1,997,484 1,007,809
Marketing, administrative & general 4,778,247 2,340,390
Interest expenses 512,838 49,999
--------- -----------
Total costs and expenses 23,865,937 9,317,429
Income before taxes 1,032,132 45,832
Provision for taxes 238,000 115,000
---------- ----------
Net (loss) income 794,132 (69,168)
Retained earnings at beginning of period $5,493,305 $12,887,647
Dividends none none
Retained earnings at end of period $6,287,437 $12,818,479
Net (Loss) Income Per Share $0.26 ($0.02)
===== =====
(See accompanying notes to financial information)
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Income Statement (Unaudited)
For the Six Months Ended: Sept. 30, 1996 Sept. 30, 1995
(Current Year) (Preceding Year)
-------------- ----------------
Gross sales less discounts,
returns and allowances $48,043,965 $18,090,725
Other revenue 51,769 166,507
---------- ----------
Total revenue 48,095,734 18,257,232
Costs and expenses:
Production 31,943,190 11,142,693
Development 3,757,415 1,997,142
Marketing, administrative & general 9,469,901 4,499,645
Interest expenses 867,813 97,491
---------- ----------
Total costs and expenses 46,038,319 17,736,971
Income before taxes 2,057,415 520,261
Provision for taxes 639,000 426,000
---------- ----------
Net income 1,418,415 94,261
Retained earnings at beginning of period $ 4,869,022 $12,724,218
Dividends none none
Retained earnings at end of period $6,287,437 $12,818,479
========== ==========
Net Income Per Share $0.47 $0.04
==== ====
(See accompanying notes to financial information)
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
For the Six Months Ended September 30, 1996 1995
---- ----
Cash Flows from Operating Activities:
Net Income $1,418,415 $ 94,214
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,361,051 762,142
Fixed asset retirements 45,956 2,682
Change in land reserve (107,000) 0
Deferred compensation 143,925 168,506
Change in assets and liabilities:
Accounts receivable (2,721,258) (1,172,965)
Inventories (3,363,358) (2,244,862)
Income tax receivable (251,009) (411,133)
Prepaid expenses and other assets (805,064) (582,273)
Accounts payable 2,827,413 907,610
Accrued payroll and benefits 753,866 (440,420)
Other accrued liabilities (56,835) 26,840
Deferred income taxes (61,900)
Goodwill and other assets (281,402)
---------- ----------
Total adjustments (2,453,715) (3,045,773)
---------- ----------
Net cash used in operating
activities (1,035,300) (2,951,559)
Cash flows from investing activities:
Capital expenditures (1,071,735) (1,611,021)
Short-term investments (164) 460,798
---------- ----------
Net cash used in investing activities (1,071,899) (1,150,223)
Cash flows from financing activities:
Proceeds from short term borrowings 2,573,700 500,000
Principal payments on long-term debt and
capital lease obligations (497,544) (226,973)
Common stock transactions 410,380 109,651
---------- ----------
Net cash provided by financing activities 2,486,536 382,678
Net increase(decrease) in cash and cash
equivalents 379,337 (3,719,104)
Cash and cash equivalents at beginning of period 913,716 4,580,751
---------- ----------
Cash and cash equivalents at end of period $1,293,053 $861,647
========== ==========
Cash paid during the period for:
Interest 484,429 32,078
Income taxes 567,297 882,807
Noncash transactions:
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents.
See accompanying notes to financial information.
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SIX-MONTH PERIOD ENDED
September 30, 1996
(Unaudited)
BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include
all information and footnotes which are normally included in Form 10-K and
the annual report to shareholders. The financial statements reflect all
adjustments which, in the opinion of management, are necessary for a fair
statement of results for the interim periods.
INVENTORIES
Major classifications of inventory follow:
Sept. 30 1996 March 31, 1996
------------- --------------
Component Parts 10,027,093 6,408,670
Work In Process 1,265,648 705,473
Finished Products 6,136,460 6,951,700
--------- ---------
17,429,201 14,065,843
========== =========
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Late in fiscal 1996, Detection Systems purchased Radionics, Inc. for
approximately $18 million. The acquisition of Radionics had a significant
impact on the comparative information for the three and six month periods
ended September 30, 1996 versus the same periods ended September 30, 1995,
both for the results of operations as well as for asset and liability
balances.
Net sales for the three and six month periods ended September 30, 1996
increased $15.6 million and $30.0 million, respectively, as compared to the
same periods one year ago. Net sales for the three and six month periods
ended September 30, 1995, as compared to September 30, 1994 increased $.6
million and $1.2 million, respectively. The acquisition of Radionics, Inc.
accounts for $13.1 million and $26.3 million, respectively, of the 1996
increases. The increases in 1995 as compared to 1994 were primarily
attributable to increased sales in most product categories. International
sales also increased by $1.1 million and $3.2 million for the three and six
month periods ended September 30, 1996 as compared with the same periods one
year ago. Sales have also benefited from the Company's broader customer
base. International sales for the 3 and 6 months periods ended September
30, 1995 as compared to September 30, 1994 increased $1.3 million and $1.7
million, respectively.
The change in gross profit margins on sales for the three and six month
periods ended September 30, 1996 as compared with the three and six month
periods ended September 30, 1995 result from manufacturing transition
inefficiencies.
Gross profit margins on sales for the quarter ended September 30, 1995 fell
by approximately 2 percentage points as compared with the September 30, 1994
quarter. This was attributable to increased labor costs associated with the
buildup of inventory levels to support increased international sales. Gross
profit margins remained consistent during the 6 month period ended September
30, 1995 versus the period ended September 30, 1994.
Other income declined by approximately $32,000 and $115,000 for the three
and six month periods ended September 30, 1996 as compared with the same
periods one year ago. The decreases were attributable to reductions in
amounts available for investments. Other income decreased for the 3 and 6
months periods ended September 30, 1995 as compared with the same periods
ended September 30, 1994 due to decreases in funds available for investment.
Production expenses increased $10.7 million and $20.8 million for the three
and six months ended September 30, 1996 as compared to the three and six
months ended September 30, 1995. These increases were primarily
attributable to the addition of Radionics' cost of sales and other
manufacturing costs. The transitioning of manufacturing between the
Company's three manufacturing facilities has increased total production
costs. These costs should diminish as the transition is completed.
Product expenses for the 3 months ended September 30, 1995 increased 11.5%
as compared with the same 3 months period ended September 30, 1994. This
increase was attributable to the Southeast Asia manufacturing facility
startup. Production expenses for the 6 month period ended September 30,
1995 increased at a rate consistent with sales activity as compared with the
period ended September 30, 1994.
Development expenses increased $1.0 million and $1.8 million for the three
and six month periods ended September 30, 1996 as compared with the same
periods one year ago. These increases are primarily attributable to the
Company's R&D efforts in all product categories during the three and six
month periods. The three months ended September 30, 1996 development
expenses also reflect certain costs associated with transferring the
California-based engineering function to the Company's corporate
headquarters located in Fairport, New York. The Company expects to spend
between $7.0 million and $8.0 million on research and development efforts in
fiscal 1997.
Development efforts for the 3 and 6 month periods ended September 30, 1995
remained consistent with that of the same periods ended September 30, 1994.
Marketing, administrative and general expenses for the three and six months
periods ended September 30, 1996 versus the same three and six months
periods ended September 30, 1995 increased by $2.4 million and $5.0 million,
respectively. These increases were primarily due to the acquisition of
Radionics, and to a lesser extent, the impact of the Company's international
sales efforts.
Marketing, administrative and general expenses increased $.6 million and
$1.3 million in the 3 and 6 months period ended September 30, 1995 as
compared to the same periods ended September 30, 1994. These increases were
primarily due to the startup of the Company's international sales efforts.
Interest expense increased approximately $.5 million and $.8 million for the
three and six month periods ended September 30, 1996 as compared with the
same periods one year ago. These increases were due to the debt financing
associated with the Radionics' acquisition. In addition, during the second
fiscal quarter, the Company increased inventory levels to better meet
customer demands, which was partially financed through borrowings from the
Company's line of credit. Interest expenses remained constant for the 3 and
6 months periods ended September 30, 1995 versus the periods ended September
30, 1994.
Income before taxes were $1,032,000, $46,000 and $719,000 for the 3 month
periods ended September 30, 1996, 1995 and 1994, respectively. For the 6
months ended September 30, 1996, 1995 and 1994, income before taxes were
$2,057,000, $520,000 and $1,450,000. Results in 1996 improved compared with
the comparable period in 1995 as a result of higher sales volume and reduced
costs associated with international operations. Results in the 1995 period
as compared to 1994 decreased primarily due to the full expensing of the
Company's international startup costs.
The Company's effective tax rate for the three and six months ended
September 30, 1996 were 23% and 31%, respectively. The lower tax rates
represent more favorable tax rates associated with the Company's Southeast
Asia operations. The comparative effective tax rate for the three and six
months ended September 30, 1995 were 251% and 82%, respectively. These
higher rates are reflective of the Company's inability to utilize certain
subsidiary losses during consolidation. The comparative effective tax rate
for the three and six months ended September 30, 1994 were 36% and 36.7%,
respectively. These rates reflect R&D tax credits.
FINANCIAL CONDITION
At September 30, 1996, the Company had net working capital of $17.6 million,
including approximately $1.3 million in cash, cash equivalents and short
term investments. This compares to net working capital of approximately
$15.7 million including $.9 million in cash, cash equivalents and short term
investments at March 31, 1996. Operations for the six month period ended
September 30, 1996 used net cash of approximately $1.0 million.
The Company has a $6.5 million bank commitment for a revolving line of
credit facility that extends into fiscal 1999. This commitment includes an
interest rate based on the London Interbank Offered Rate plus applicable
points based on the Company's performance. The balance becomes fully due
and payable on May 31, 1998. At September 30, 1996, the Company had short
term borrowings of $3.8 million under this line of credit. The Company
believes that current levels of cash, cash equivalents and short term
investments, together with its available line of credit, will meet its
foreseeable working capital needs.
The Company expects to continue expenditures on the development of new
products and markets. These expenditures will include continued investment
in security detection, fire detection, security, fire and access control
products. The Company's effort to market its products internationally will
continue as well.
To meet customer demand for its products, the Company added a third
production line to its Southeast Asia manufacturing facility in October of
1996 and expects to add a fourth production line by December 31, 1996.
Funding for these expenditures have and will be financed through the
Company's revolving line of credit facility.
At September 30, 1996, accounts receivable increased 26.0% from the March
31, 1996 level. This increase was attributable to the higher sales volume
achieved during the second fiscal quarter. The Company's standard credit
terms are net 30 days, with variations depending on volume, pricing and
prepayment discounts.
Inventories increased 23.9% at September 30, 1996 as compared to March 31,
1996. This increase was attributable to the continued shifting of
manufacturing to the Company's Southeast Asia facility. In addition, the
Company has initiated an inventory buildup plan which will allow it to
better meet its customer's increasing needs.
Prepaid expenses and other assets increased by approximately $800,000 from
the March 31, 1996 level. This increase was attributable to prepayment of
premiums for certain benefits.
At September 30, 1996, accounts payable increased 45.4% as compared to the
March 31, 1996 level. This increase is the result of tighter cash
management objectives and payment terms more reflective of the industry
average.
Accrued payroll and benefits increased by $754,000 at September 30, 1996
versus the March 31, 1996 level. This increase was attributable to the
accrual of performance bonuses for fiscal 1997.
Other accrued liabilities at September 30, 1996, remained consistent with
the March 31, 1996 level.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders held on August 20, 1996, the
following individuals were elected to the Board of Directors:
Nominated Director FOR WITHHELD ABSTAINED
------------------ --------- -------- ---------
Donald R Adair 2,437,858 31,045 0
Mortimer B Fuller III 2,437,748 31,155 0
Karl H Kostusiak 2,437,391 31,512 0
David B Lederer 2,437,858 31,045 0
Edward C McIrvine 2,437,858 31,045 0
The following proposal was also approved:
FOR WITHHELD ABSTAINED
--------- -------- ---------
Ratify the appointment of
Price Waterhouse as independent
auditors for the fiscal year
ending March 31, 1997. 2,451,533 9,001 8,369,00
Item 5. Other matters
In October of 1996, the Company sold approximately 114,000 common
shares for $2.0 million to five corporate pension funds. The proceeds
of this private placement will be used for working capital.
On November 7, 1996, the Company's Board of Directors approved a 3 for
2 stock split in the form of a stock distribution of one share for
every two shares owned. The stock distribution will be made on
December 17, 1996 to shareholders of record as of November 27, 1996.
Fractional shares will be paid in cash. After the split,
approximately 4,450,000 shares of common stock will be outstanding.
Item 6. Exhibits and Reports for Form 8-K.
A. Exhibits
See Exhibit Index
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DETECTION SYSTEMS, INC.
Registrant
DATE: November 14, 1996 By:
/s/ Karl H. Kostusiak, President
By:
/s/ Frank J. Ryan, Vice President,
Secretary and Treasurer
(Chief Financial & Accounting
Officer)
EXHIBIT INDEX
(3i) Text of the Certification of Incorporation, as amended.
Incorporated by reference to Exhibit 3a to the registrants
Form 10-K dated June 25, 1993.
(3i) Certificate of Amendment of Certificate of Incorporation
as filed with New York Secretary of State. Incorporated
by reference to Exhibit 3a to the registrants Form 10-K
dated June 25, 1993.
(3ii) The text of the registrant's By-laws, as amended, are
incorporated by reference to Exhibit 3b to the Company's
Report on Form 10-K dated June 25, 1993.
(10) Executive Employment Agreements are incorporated by
reference to Exhibit 10 of the registrant's Report on Form
10-K/A dated July 12, 1996.
(11) Statement regarding computation of per share earnings.
See Exhibit 11.
(27) Financial data schedule. Included as Exhibit 27 to
electronic Edgar filing only.
Exhibit 11
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Computation of Net Income Per Common
And Common Equivalent Share
For the Three Months Ended: Sept. 30, 1996 Sept. 30, 1995
Net Income $794,132 ($69,168)
ADD - Interest on deferred compensation 16,686 15,061
------- --------
Adjusted net income applicable to common stock $810,818 ($54,061)
Number of Shares:
Weighted average number of shares 2,847,860 2,791,987
Common Stock equivalent due to
assumed exercise of stock options
and warrants 10,642 0
Common Stock equivalents due to
assumed conversion of deferred compensation
plan shares 233,606 0
--------- ---------
3,092,108 2,791,987
Net Income per Common and Common
Equivalent share $0.26 ($0.02)
For the Six Months Ended: Sept. 30, 1996 Sept. 30,1995
Net Income $1,418,415 $ 94,261
ADD - Interest on deferred compensation 32,526 35,142
------- ---------
Adjusted net income applicable to
common stock $1,450,941 $129,403
Number of Shares:
Weighted average number of shares 22,840,170 2,789,354
Common Stock equivalent due to
assumed exercise of stock options
and warrants 6,219 238,564
Common Stock equivalents due to
assumed conversion of deferred compensation
plan shares 233,606 0
--------- ---------
3,079,995 3,027,918
Net Income per Common and Common
Equivalent share $0.47 ($0.04)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 1,293,053
<SECURITIES> 0
<RECEIVABLES> 13,203,918
<ALLOWANCES> (100,000)
<INVENTORY> 17,429,201
<CURRENT-ASSETS> 35,946,518
<PP&E> 22,553,915
<DEPRECIATION> 13,187,058
<TOTAL-ASSETS> 53,470,898
<CURRENT-LIABILITIES> 18,375,824
<BONDS> 0
0
0
<COMMON> 7,110,641
<OTHER-SE> 6,287,437
<TOTAL-LIABILITY-AND-EQUITY> 53,470,898
<SALES> 24,865,642
<TOTAL-REVENUES> 24,898,069
<CGS> 16,577,368
<TOTAL-COSTS> 23,353,099
<OTHER-EXPENSES> 6,775,731
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 512,838
<INCOME-PRETAX> 1,032,132
<INCOME-TAX> 238,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 794,132
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
