<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 19, 1997
REGISTRATION NO. 333-31951
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
DETECTION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 16-0958589
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
130 PERINTON PARKWAY
FAIRPORT, NEW YORK 14450
716-223-4060
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
FRANK J. RYAN, VICE PRESIDENT
130 PERINTON PARKWAY, FAIRPORT, NEW YORK 14450
716-223-4060
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS TO:
JUSTIN P. DOYLE, ESQ. R. ALAN HIGBEE, ESQ.
ROGER W. BYRD, ESQ. DAVID M. DONEY, ESQ.
NIXON, HARGRAVE, DEVANS & DOYLE LLP FOWLER, WHITE, GILLEN, BOGGS,
CLINTON SQUARE, SUITE 1300 VILLAREAL AND BANKER, P.A.
ROCHESTER, NEW YORK 14604 501 EAST KENNEDY BLVD., SUITE 1700
TAMPA, FLORIDA 33602
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this Form, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SHARES TO BE AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED BE REGISTERED PER SHARE OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Common Stock, par value
$.05.................. 1,776,750(1) $20.00(2) $33,853,125(2)(3) $10,259(4)
</TABLE>
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(1) Includes 231,750 shares of Common Stock which may be sold by the Company
to cover over-allotments.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457 of the Securities Act of 1933.
(3) Consists of the initial proposed maximum offering price of $28,218,125
plus the offering price of the 281,750 additional shares being registered
($5,635,000).
(4) $8,551 was previously paid.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
PROSPECTUS
1,545,000 SHARES
LOGO DETECTION SYSTEMS, INC. LOGO
COMMON STOCK
----------------
Of the 1,545,000 shares of Common Stock offered hereby, 1,325,000 shares are
being issued and sold by Detection Systems, Inc. (the "Company") and 220,000
shares are being sold by certain shareholders of the Company (the "Selling
Shareholders"). The Company will not receive any of the proceeds from the sale
of Common Stock by the Selling Shareholders. See "Principal and Selling
Shareholders."
The Common Stock is quoted on the Nasdaq National Market under the symbol
"DETC." On September 18, 1997, the last reported bid price of the Common Stock
was $21 3/4 per share.
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
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<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
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<S> <C> <C> <C> <C>
Per Share................... $20.00 $1.30 $18.70 $18.70
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Total(3).................... $30,900,000 $2,008,500 $24,777,500 $4,114,000
- --------------------------------------------------------------------------------
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</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses estimated to be $250,000, which are payable by
the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
231,750 additional shares of Common Stock on the same terms and conditions
as the securities offered hereby, solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$35,535,000, $2,309,775 and $29,111,225, respectively. See "Underwriting."
----------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to certain other conditions including the right of the Underwriters to
withdraw, cancel, modify or reject any order in whole or in part. It is
expected that delivery of the shares will be made on or about September 24,
1997, at the offices of Raymond James & Associates, Inc., St. Petersburg,
Florida.
RAYMOND JAMES & ASSOCIATES, INC. NEEDHAM & COMPANY, INC.
The date of this Prospectus is September 19, 1997
<PAGE>
The Company
manufactures a broad
range of components
and systems for
the electronic
protection industry.
[Full page design featuring certain of the Company's products, people using the
Company's products and environments where the Company's products are used, all
superimposed on a background of stars and pictures of the earth.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID
FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M
UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements, including the notes
thereto (the "Consolidated Financial Statements"), appearing elsewhere in this
Prospectus or incorporated by reference herein. Unless otherwise indicated, all
information set forth herein assumes no exercise of the Underwriters' over-
allotment option, reflects a three-for-two stock split in the form of a stock
dividend distributed on December 17, 1996, and assumes that 221,738 shares of
Common Stock owned by Numerex Corp. (the "Numerex Shares") are repurchased
simultaneously with the closing of this offering. As used herein, the "Company"
means Detection Systems, Inc. and its subsidiaries, except where the context
indicates otherwise, and a "fiscal year" means the twelve-month period ending
on March 31 of the specified year. Easikey(R), Radionics(R), Readykey(R),
TriSense(R) and Security Escort(R) are registered trademarks of the Company.
Other trademarks of the Company referred to in this Prospectus include
Detection Systems(TM), DA Systems(TM), Safecom(TM) and TriTech(TM).
THE COMPANY
The Company is a leading supplier of equipment to the electronic protection
industry. The Company designs, manufactures and markets electronic detection,
control and communication equipment for security, fire protection, access
control and closed circuit television ("CCTV") applications, offering products
primarily for the commercial and mid- to high-end residential portions of the
market. From its founding in 1968 until 1995, the Company was primarily a niche
provider of intrusion detection devices for the domestic market. In 1995, the
Company adopted a strategy designed to substantially expand its product
offerings, establish an international sales presence, increase its
manufacturing capacity and improve its manufacturing cost structure. The
Company has since made five acquisitions, opened sales offices in six countries
and successfully established a manufacturing facility in China. These
initiatives have enabled the Company to significantly expand its product
catalog and market reach and to increase its net sales from $34.3 million in
fiscal 1995 to $101.3 million in fiscal 1997. Excluding amounts attributable to
its acquisitions, the Company's net sales grew by 22.5% in fiscal 1997 versus
fiscal 1996.
The Company manufactures system components for sale to installation
companies, distributors and other equipment manufacturers either as individual
components or, increasingly, bundled with other compatible components to form
an integrated system for a specific customer's application. The Company is not
engaged in the installation or monitoring aspects of the industry. The
Company's primary customers are: (i) national and regional installation
companies such as ADT, Ameritech, Checkpoint, Holmes Protection, Honeywell,
Simplex, Wells Fargo and Westar; (ii) national distributors such as ADI in the
U.S., Efsec in Sweden, Glastrak in the Netherlands and Rimi in Russia; (iii)
original equipment manufacturers ("OEMs") such as Pittway and ITI Technologies
that integrate the Company's components into their finished products and
systems, and (iv) large commercial customers, such as Pepsico, and agencies of
the federal government.
The Company offers products in all four of the principal categories of the
electronic protection equipment market: security, fire, access control and
CCTV. According to industry statistics, combined U.S. wholesale equipment sales
for these four categories were estimated at $5.3 billion in 1996. The Company
believes that there are also significant international markets for each of
these four categories. There are several factors driving the growth of the
private security industry. The perception by Americans that crime is a
significant problem has continued to grow, as evidenced by the focus on crime
in political campaigns and in the media. Insurance companies often provide
incentives to businesses for installing electronic security systems or require
such systems as a condition of insurance coverage. An electronic fire system is
required in commercial facilities in many localities in order to comply with
municipal fire codes. There has been a trend for large commercial customers to
centralize their security function at the corporate level instead of managing
security on an ad hoc site basis which has often resulted in greater attention
to and resources for security solutions. The growth in telecommuting and in-
home offices has created incremental demand for residential security products
by
3
<PAGE>
bringing expensive office equipment into the home. Market penetration has also
been driven by the increased affordability of systems, as advances in
technology and reduced manufacturing costs have increasingly brought high
quality systems into price ranges attractive to residential and small
commercial customers. In addition to new systems, there is ongoing system
replacement in the commercial and mid- to high-end residential markets,
creating significant retrofit opportunities. The Company estimates that
customers in these markets typically upgrade or replace their systems every
seven to ten years.
The scale and product scope of the Company has increased significantly due to
recent acquisitions, particularly the February 1996 acquisition of Radionics,
Inc. ("Radionics"). Based in Salinas, California, Radionics had net sales of
$45.1 million for the year ended December 31, 1995 and was a leading provider
of control panels and related equipment to the electronic protection industry.
Since the Radionics acquisition, the Company has completed four additional
acquisitions: (i) the purchase in July 1996 of certain assets of Senses
International, Inc. ("Senses") which had annual net sales of approximately $2.0
million, (ii) the purchase in May 1997 of Digital Audio Limited ("DA Systems")
which had annual net sales of approximately $10.8 million, (iii) the purchase
in June 1997 of Seriee, S.A. ("Seriee") which had annual net sales of
approximately $6.3 million, and (iv) the purchase in June 1997 of Radio-Active
Systems N.V. ("RAS") which had annual net sales of approximately $9.9 million.
These acquisitions have served to broaden the Company's product lines and
increase its international market penetration.
The Company's goal is to be an international leader in the design,
manufacture and marketing of equipment for the electronic protection industry,
satisfying all of its customers' protection needs with a complete line of high-
quality, technologically advanced products which are distributed by a worldwide
marketing organization and supported by a service-oriented product support
team. Among the principal elements of the Company's strategy are the following:
. Catalog expansion--continuing to expand its product catalog through
internal development, acquisitions and partnering with companies that
have technological capabilities that complement the Company's internal
capabilities. The Company believes that the ability to provide a full
catalog of products will give it competitive advantages over firms which
only provide a small portion of the products regularly required by the
electronic protection industry's customers, and this has been a key
motivation for its recent acquisitions. The Company is promoting the sale
of its fire, access control and other product lines by leveraging the
superior market acceptance it enjoys in the security equipment arena.
. International expansion--continuing to expand its international sales
efforts. The Company's acquisitions of DA Systems, RAS and Seriee have
given the Company access to important European markets. The Company plans
to use the distribution networks of these companies to distribute its
full range of products, as appropriate. In addition, the Company's sales
offices in Asia and Australia have been successful in developing a base
of operations from which the Company can further expand in those markets.
. Technological advancement--continuing to develop technologically advanced
products. The Company utilizes the power of microprocessors and
application-specific integrated circuits to fully exploit available
technology. By using this technology, the Company has developed: (i)
detection products with demonstrably superior signal processing capacity
which optimize the trade-off between false alarms and catch performance,
(ii) control products which generally provide a superior level of
programming flexibility and more sophisticated firmware than competitive
product offerings, and (iii) communication equipment which provides
access to a broad variety of commercially available communication
technologies.
. Market focus--continuing to focus on the installation and service
professionals that service the commercial and mid- to high-end
residential security and fire alarm system markets, who view the features
and quality of the Company's products as providing superior value. The
Company is also increasing its sales efforts directed to the U.S.
government.
4
<PAGE>
. Production efficiencies--increasing utilization of its China facility and
continuing to consolidate the Company's purchasing. The Company's China
facility became operational in October 1995. The Company has been able to
reduce its unit manufacturing costs by transitioning production from its
Fairport, New York and Salinas, California locations to its China
facility and anticipates additional cost savings from continuing this
transition. The Company has also realized cost savings by consolidating
purchasing of components for its worldwide operations.
The address of the Company's principal executive offices is 130 Perinton
Parkway, Fairport, New York 14450, and its telephone number is (716) 223-4060.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.. 1,325,000 shares
Common Stock offered by the Selling 220,000 shares
Shareholders........................
Common Stock to be outstanding after 5,866,764 shares(1)
the offering........................
Use of proceeds...................... To repay indebtedness under the
Company's revolving credit facility, for
working capital and general corporate
purposes, including possible
acquisitions, and to repurchase Common
Stock issued in connection with a recent
acquisition. See "Use of Proceeds."
Nasdaq National Market symbol........ DETC
</TABLE>
- --------
(1) Does not include shares issuable upon the exercise of outstanding options
and warrants or under deferred compensation plans which, as of June 30,
1997, were: (i) an aggregate of 345,220 shares issuable upon the exercise
of currently outstanding options and warrants, (ii) 98,019 shares issuable
under the Company's Deferred Compensation Plan, and (iii) 278,528 shares
issuable under the Company's Deferred Stock Compensation Plan.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------------ ---------------
1993 1994 1995 1996(1) 1997 1996 1997
------- ------- ------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............... $29,432 $31,355 $34,336 $ 41,858 $101,251 $23,178 $28,208
Costs and expenses:
Production............. 18,036 19,541 20,830 27,978 64,916 15,366 17,556
Research and
development........... 3,534 4,161 4,070 4,700 8,115 1,760 2,085
Purchased in-process
research and
development........... -- -- -- 9,350 -- -- --
Marketing,
administrative and
general............... 5,511 6,112 6,789 10,515 21,411 4,691 6,182
------- ------- ------- -------- -------- ------- -------
Operating income
(loss)................. 2,351 1,541 2,647 (10,685) 6,809 1,361 2,385
Interest income......... 239 196 113 340 206 19 14
Interest expense........ 234 166 168 320 1,765 355 637
------- ------- ------- -------- -------- ------- -------
Income (loss) before
taxes and cumulative
effect of a change in
accounting principle... 2,356 1,571 2,592 (10,665) 5,250 1,025 1,762
Provision (benefit) for
taxes.................. 919 426 1,078 (2,810) 1,525 401 629
------- ------- ------- -------- -------- ------- -------
Income (loss) before
cumulative effect of a
change in accounting
principle.............. 1,437 1,145 1,514 (7,855) 3,725 624 1,133
Cumulative effect of a
change in accounting
principle.............. -- 130 -- -- -- -- --
------- ------- ------- -------- -------- ------- -------
Net income (loss)....... $ 1,437 $ 1,275 $ 1,514 $ (7,855) $ 3,725 $ 624 $ 1,133
======= ======= ======= ======== ======== ======= =======
Earnings (loss) per
common and common
equivalent share....... $ .34 $ .30 $ .35 $ (1.83) $ .76 $ .13 $ .22
======= ======= ======= ======== ======== ======= =======
Weighted average number
of shares.............. 4,376 4,407 4,484 4,285 4,934 4,697 5,111
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------
AS
ACTUAL ADJUSTED(2)
------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,907 $ 8,019
Working capital............................................. 35,348 40,460
Total assets................................................ 88,704 93,641
Total debt, including current portion....................... 35,135 19,604
Redeemable common stock(3).................................. 4,060 --
Shareholders' equity........................................ 19,668 44,196
</TABLE>
- --------
(1) In February 1996, the Company acquired Radionics. Purchased in-process
research and development of Radionics, which consisted of products still in
the development stage but not considered to have reached technological
feasibility, was valued at $9.4 million. In accordance with generally
accepted accounting principles, this amount was expensed upon acquisition
in the fourth quarter of fiscal 1996. The Company's fiscal 1996 results
were also adversely affected by $3.9 million in costs associated with the
start-up of the Company's China facility and other international
operations.
(2) Adjusted to reflect the sale of 1,325,000 shares of Common Stock offered by
the Company hereby and the application of the net proceeds therefrom in the
manner described under "Use of Proceeds."
(3) The redeemable common stock consists of the Numerex Shares. The Company
intends to repurchase the Numerex Shares simultaneously with the closing of
this offering.
6
<PAGE>
RISK FACTORS
The shares offered hereby involve a high degree of risk, including the risks
described below. Prospective investors should carefully consider the specific
factors set forth below, as well as the other information contained in this
Prospectus, before deciding whether to invest in the Common Stock offered
hereby.
This Prospectus contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), which represent the Company's expectations or beliefs,
including, but not limited to, statements concerning industry performance, the
Company's operations, performance, financial condition, growth and acquisition
strategies, margins and growth in sales of the Company's products. For this
purpose, any statements contained in this Prospectus that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the generality of the foregoing, words such as "may," "will,"
"expect," "believe," "anticipate," "intend," "could," "can," "estimate" or
"continue" or the negative or other variations thereof or comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties,
certain of which are beyond the Company's control, and actual results may
differ materially depending on a variety of important factors, including those
described below and elsewhere in this Prospectus.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
The success of the Company depends heavily on the business it conducts with
a limited number of significant customers. In fiscal 1997, 10.7%, 10.6% and
6.0% of the Company's net sales were attributable to Pittway, Ameritech and
Honeywell, respectively. Pittway is a competitor of the Company across many of
its product lines and purchases the Company's products to incorporate them
into its products and systems. During October 1996, Ameritech (an established
customer of the Company) began purchasing the Company's products through
Pittway to utilize Pittway's distribution facilities. The Company has had
long-standing relationships with most of its significant customers; however,
it generally does not have supply contracts with them and they may
unilaterally reduce or discontinue their purchases without penalty. The
Company's loss of (or failure to retain a significant amount of business with)
any of these customers could have a material adverse effect on the Company.
See "Business--Marketing."
COMPETITION
The markets in which the Company operates are highly competitive. The
Company's competitors include manufacturers of security and fire alarm
equipment from all over the world. In addition, the Company may face
competition from new entrants into these markets and increased competition
from existing competitors. A number of the Company's competitors have
substantially greater financial and other resources than the Company. In many
cases the Company's competitors are concentrated in one market niche in the
electronic protection industry, allowing them to concentrate their resources
in that niche. The Company competes on the basis of providing superior value
to customers with respect to both products and services. There can be no
assurance that the Company's products and services will continue to be
competitive and accepted by the market in the future. See "Business--
Competition."
IMPACT AND RISKS OF ACQUISITIONS
Between February 1996 and July 1997 the Company made five acquisitions:
Radionics, DA Systems, Senses, Seriee and RAS. Part of the Company's growth
strategy is to expand its product catalog, technologies and markets through
additional acquisitions. There can be no assurance that the Company will be
able to successfully integrate the operations and management of its recent
acquisitions or that the Company will be able to consummate or, if
consummated, successfully integrate the operations and management of future
acquisitions. Acquisitions involve significant risks, including risks
associated with: (i) the diversion of management's attention to the
assimilation of the acquired businesses; (ii) the ability of the acquired
businesses to maintain the quality
7
<PAGE>
of products and services that the acquired business has historically provided;
(iii) the need to integrate financial and other systems with those of the
Company; (iv) the potential loss of key employees of the acquired business
after the acquisition; (v) unforeseen liabilities of the acquired business;
(vi) the dilutive effect of the issuance of additional equity securities;
(vii) the incurrence of additional debt as part of such acquisition or to fund
the operations of the acquired business; and (viii) the amortization of
goodwill and other intangible assets involved in any acquisitions that are
accounted for using the purchase method of accounting. In addition, certain of
the businesses acquired by the Company have been unprofitable and there can be
no assurance that they can be made profitable. There can be no assurance that
future acquisition opportunities will become available, that future
acquisitions can be consummated on favorable terms or that such acquisitions
will contribute to the Company's profitability. Currently, the Company has no
arrangements or understandings with any party with respect to any future
acquisition; however, it continues to investigate and consider acquisition
opportunities. See "Business--Strategy."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company is exposed to risks associated with international operations
because a significant portion of its products are manufactured at its China
facility and it has increasingly significant sales in a number of foreign
countries. Approximately 25% of the Company's manufacturing output during
fiscal 1997 was produced at its China facility, and the Company anticipates
that the percentage of its products manufactured at its China facility will
increase significantly during fiscal 1998. The Company leases its China
facility from the local Chinese government and is dependent on the local
Chinese government for personnel and utilities as well as all other municipal
services. See "Business--Manufacturing." The Company believes that its
relationship with the local Chinese government is good; however, any future
deterioration of such relationship could have a material adverse effect on the
Company's results of operations. Sales of the Company's products outside the
United States accounted for approximately 16% of its net sales during fiscal
1997. One aspect of the Company's business strategy is to increase the sale of
its products in international markets. The Company's international operations
give rise to political and economic uncertainties relating to, among other
things, U.S. and foreign trade restrictions; foreign government stability;
risk of renegotiation or modification of existing agreements or arrangements
with governmental authorities; foreign economic stability; shipping costs and
delays; tariffs; export controls; government regulation; patent and trademark
availability, protection and registration; foreign exchange restrictions which
limit the repatriation of investments and earnings therefrom; changes in
taxation or international tax treaties; military action and other hostilities
or confiscation of property. While the United States imposes quotas and duties
on selected imported products, there are currently no U.S. quotas or duties on
the Company's products.
The Company is subject to currency exchange risks to the extent that its
purchases and sales occur outside the United States and it is unable to
denominate its purchases or sales in U.S. dollars or otherwise shift to its
customers or suppliers the risks of currency exchange rate fluctuations.
Currently, the Company does not engage in currency hedging transactions for
normal operations, although it did engage in a hedging transaction in
connection with its purchase of RAS, and it may do so in the future.
Fluctuations in exchange rates may affect the results of the Company's
international operations reported in U.S. dollars and the value of such
operations' net assets reported in dollars. Additionally, the results of
operations, financial condition and competitive position of the Company may be
affected by the relative strength of the currencies in countries where its
products are sold.
INTELLECTUAL PROPERTY
The Company's ability to compete effectively will depend, in part, on its
ability to protect its intellectual property, including its patents,
trademarks, copyrights and trade secrets, and on its ability to develop and
protect future intellectual property. In addition to patents, the Company
relies on a combination of trademark registrations, copyrights and
confidentiality agreements to protect its proprietary rights in intellectual
property. The Company's ability to compete effectively also depends on its
ability to avoid infringing on the proprietary rights of others. New patent
applications are continually being filed and prosecuted, and pending U.S.
patent applications are confidential until patents are issued. As a result, it
is impossible to anticipate all potential patent infringement issues. There
can be no assurance that the steps taken by the Company to protect its
intellectual property will be adequate to prevent misappropriation or that
others will not independently develop technology
8
<PAGE>
or products that compete with or are superior to the products of the Company.
Likewise, there can be no assurance that the Company will not inadvertently
infringe on the intellectual property rights of others.
RISKS OF TECHNOLOGICAL CHANGE
The electronic protection industry is characterized by continuous
technological advances, frequent new product introductions and enhancements,
declining market prices for similar products over time and changes in customer
requirements. The Company's future success will depend in large part on its
ability to develop new products and technology to meet customer needs as well
as to enhance its existing products and to continually reduce product costs.
Any failure by the Company to anticipate or respond rapidly to technological
advances, new products and enhancements by competitors, or changes in customer
requirements could have a material adverse effect on the Company. See
"Business--Industry Overview" and "Business--Intellectual Property."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the efforts of certain key members of its
senior management team, including Karl H. Kostusiak, President and Chief
Executive Officer. The loss of a key member of the Company's senior management
team could have an adverse effect on the operations of the Company. The
Company does not carry key man life insurance on any of its management, but
has non-competition agreements with certain key officers and technical
personnel. See "Management."
PRODUCT LIABILITY CLAIMS
If an intrusion, fire or other event that the Company's products are
designed to detect occurs in a setting in which the Company's products have
been installed, the Company may be subject to a claim that an error or
omission on the part of the Company contributed to the damages resulting from
such event, which damages could be substantial. Such a claim could be made
whether or not the Company's product performed properly under the
circumstances. From time to time the Company is subject to product liability
claims in the ordinary course of its business. The Company carries product
liability insurance which management believes is adequate; however, a product
liability judgment or settlement in excess of available insurance proceeds
could have a material adverse effect on the financial condition and results of
operations of the Company and any adverse claim or settlement could have an
adverse effect on the availability and cost to the Company of product
liability insurance. The Company does not believe that any pending or
threatened litigation will have a material adverse effect on the financial
condition or results of operation of the Company. See "Business--Legal."
DEPENDENCE ON SUPPLIERS; CONCENTRATION OF MANUFACTURING
While the Company manufactures most of the products it sells, certain of the
components used in its products are purchased from third parties and are
available from a limited number of sources. The loss of any one supplier or an
inability of suppliers to provide the Company with the required quantity or
quality of these components could have an interruptive effect on the Company's
business until such time as an alternative source of supply is found. See
"Business--Manufacturing."
The Company manufactures approximately 85% of the products it markets, and
obtains the other 15% from external suppliers of finished goods. Substantially
all of the products manufactured by the Company are produced at its facilities
in Zhuhai, China or Fairport, New York. Accordingly, any event resulting in
the slowdown or stoppage of either of these manufacturing operations could
have a material adverse effect on the Company.
GOVERNMENT REGULATION AND PRODUCT LISTING
Many of the Company's products require approval by the Federal
Communications Commission ("FCC") before they can be marketed in the United
States. In addition, commercial acceptance of the Company's products is
typically dependent on the listing of such products by Underwriters
Laboratories ("UL"). The Company has successfully obtained FCC approval and UL
listing of its products in the past; however, it cannot predict whether
9
<PAGE>
it will obtain approvals for future products or whether FCC regulations or UL
listing requirements relating to the Company's current or future products
might change. Failure to comply with FCC regulations or UL listing
requirements, an inability to receive approval for products under development
or a change in existing regulations or listing requirements that would make
products non-compliant, could have a material adverse effect on the financial
condition and results of operations of the Company. Most foreign countries
also have similar regulatory agencies and private certification or listing
organizations, the rules, listing requirements and actions of which could have
the same impact on sales of the Company's products within those countries. In
addition to the regulation of its products, the Company is subject to local,
state, federal and foreign laws regarding the discharge of materials into the
environment.
VOLATILITY OF STOCK PRICE
The Common Stock has experienced significant volatility, as well as a
significant increase in market price, since the Company's acquisition of
Radionics in February 1996. The market for securities of technology companies
historically has been more volatile than the market for stocks in general. The
trading price of the Common Stock may be subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, announcement
of future developments including possible acquisitions, introduction of new
products by the Company or its competitors and other events or factors. These
fluctuations may be compounded by the historically low trading volume in the
Common Stock. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations that have particularly affected the
market price for many technology companies and that often have been unrelated
to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Common Stock. See
"Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, the Company will have 5,866,764 shares
of Common Stock outstanding (6,098,514 shares if the Underwriters' over-
allotment option is exercised in full). Of these shares, 4,905,644 shares
(5,137,394 shares if the Underwriters' over-allotment option is exercised in
full), including the shares sold in this offering, will be freely tradeable by
persons other than affiliates of the Company without restriction under the
Securities Act. Of the remaining 961,120 shares, 755,550 shares will be
beneficially owned by persons who are affiliates of the Company which are
eligible for public sale subject to the volume and other limitations of Rule
144, 171,429 shares will be "restricted" securities within the meaning of Rule
144 under the Securities Act which may be sold pursuant to a currently
effective registration statement under the Securities Act or an exemption from
such registration, and 34,141 shares may be sold in compliance with Regulation
S of the Securities Act. The Company, certain shareholders of the Company
selling shares of Common Stock hereunder (the "Selling Shareholders"), and the
Company's executive officers and directors have agreed not to sell, contract
to sell or otherwise dispose of any of their shares for a period of 120 days
after the closing of this offering without the prior written consent of
Raymond James & Associates, Inc. Notwithstanding the foregoing, at any time on
or after the date of this Prospectus, the Company may issue shares pursuant to
the exercise of warrants or employee stock options outstanding on the date of
this Prospectus, which issuances or sales may be effected any time after the
date of this Prospectus. Sales of substantial amounts of shares of Common
Stock in the public market after this offering, including sales pursuant to
Rule 144 or Regulation S, or the perception that such sales could occur, may
adversely affect the market price of the Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company has entered into employment and consulting agreements with
certain officers which provide that upon the occurrence of certain events
following a change in control of the Company, such officers may be entitled to
receive the equivalent of three years' compensation. See "Management--
Employment Agreements." The shares beneficially owned by the Company's
executive officers and directors and the compensation payable to certain
officers following a change in control may have the effect of discouraging
persons from pursuing a non-negotiated takeover of the Company and preventing
certain changes of control. Also, Section 912 of the New York Business
Corporation Law, which is applicable to the Company, contains provisions that
restrict certain business combinations with interested shareholders, which may
have the effect of inhibiting a non-negotiated merger or other business
combination involving the Company.
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,325,000 shares of
Common Stock offered by the Company, after deducting underwriting discounts
and commissions and estimated offering expenses will be approximately $24.5
million (approximately $28.9 million if the Underwriters' over-allotment
option is exercised in full). The Company will use approximately $3.9 million
of the net proceeds from this offering to repurchase the 221,738 Numerex
Shares. The balance of the proceeds will be used to repay approximately $15.5
million under the Company's revolving credit facility, with the remainder
available for working capital and general corporate purposes, including
possible acquisitions. Currently, the Company has no arrangements or
understandings with any party with respect to any future acquisition; however,
it continues to investigate and consider acquisition opportunities. The
revolving credit facility matures on July 31, 1998 and bears interest at a
floating rate which was 9.25% per year as of September 18, 1997. The Company
will not receive any of the proceeds from the sale of Common Stock by the
Selling Shareholders; however, certain of the Selling Shareholders have
advised the Company that they intend to use the proceeds from their sale of
Common Stock to repay stock option loans from the Company.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 and as adjusted to reflect the sale of 1,325,000 shares of Common
Stock offered by the Company hereby at a public offering price of $20 per
share and the application of the net proceeds therefrom in the manner
described under "Use of Proceeds." This table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements.
<TABLE>
<CAPTION>
JUNE 30, 1997
(DOLLARS IN THOUSANDS)
----------------------------
ACTUAL AS ADJUSTED
----------- -------------
(UNAUDITED)
<S> <C> <C>
Current maturities of obligations under capital
leases and long term debt....................... $ 3,351 $ 3,351
=========== ===========
Obligations under capital leases................. $ 26 $ 26
Long term debt................................... 31,758 16,227
Redeemable common stock(1)....................... 4,060 --
Shareholders' equity:
Common stock, par value $.05 per share,
4,745,051 shares issued and outstanding,
5,866,764 shares issued and outstanding as
adjusted(2)................................... 226(3) 293
Capital in excess of par value................. 10,149 34,610
Retained earnings.............................. 9,740 9,740
Treasury stock, at cost........................ (50) (50)
Notes receivable for stock purchases........... (378) (378)
Cumulative translation adjustment.............. (19) (19)
----------- -----------
Total shareholders' equity................... 19,668 44,196
----------- -----------
Total capitalization....................... $ 55,512 $ 60,449
=========== ===========
</TABLE>
- --------
(1) The redeemable common stock consists of the Numerex Shares. The Company
intends to repurchase the Numerex Shares simultaneously with the closing
of this offering.
(2) Does not include shares issuable upon the exercise of outstanding options
and warrants or under deferred compensation plans which, as of June 30,
1997, were: (i) an aggregate of 345,220 shares issuable upon the exercise
of currently outstanding options and warrants, (ii) 98,019 shares issuable
under the Company's Deferred Compensation Plan, and (iii) 278,528 shares
issuable under the Company's Deferred Stock Compensation Plan.
(3) Excludes the par value of the Numerex Shares.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"DETC." The following table sets forth the high and low closing prices of the
Common Stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1995
First Quarter........................................... $ 7 $ 4
Second Quarter.......................................... 6 5/16 4 1/16
Third Quarter........................................... 6 1/4 3 11/16
Fourth Quarter.......................................... 5 5/16 3 3/16
FISCAL YEAR ENDED MARCH 31, 1996
First Quarter........................................... 5 3/16 4 5/16
Second Quarter.......................................... 5 1/8 4 5/16
Third Quarter........................................... 5 1/4 3 15/16
Fourth Quarter.......................................... 6 1/2 3 11/16
FISCAL YEAR ENDED MARCH 31, 1997
First Quarter........................................... 12 5/16 6 5/16
Second Quarter.......................................... 13 13/16 9 11/16
Third Quarter........................................... 20 7/8 10 3/4
Fourth Quarter.......................................... 24 1/2 14 1/2
FISCAL YEAR COMMENCING APRIL 1, 1997
First Quarter........................................... 20 1/4 13 1/2
Second Quarter (through September 18, 1997)............. 22 1/2 17 1/2
</TABLE>
On September 18, 1997, the last reported sale price for the Common Stock as
reported on the Nasdaq National Market was $22 1/2 per share and the number of
shareholders of record was approximately 1,150.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that all of its earnings will be
retained for development and expansion of the Company's business and does not
anticipate paying any cash dividends in the foreseeable future. Any future
determination as to the payment of cash dividends will depend on a number of
factors, including future earnings, capital requirements, the financial
condition and prospects of the Company and any restrictions under credit
agreements existing from time to time, as well as such other factors as the
Company's Board of Directors may deem relevant. Certain financial covenants in
the Company's current credit facility, including a covenant to maintain a
minimum tangible net worth, limit the Company's ability to pay dividends. See
Note 6 of the Notes to the fiscal 1997 Consolidated Financial Statements for a
description of certain terms of the Company's current credit facility.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The selected consolidated financial data presented below has been derived
from the Consolidated Financial Statements. The Consolidated Financial
Statements as of and for the years ended March 31, 1993, 1994, 1995, 1996 and
1997 have been audited by Price Waterhouse LLP, independent accountants. The
selected consolidated financial data as of and for the three months ended June
30, 1996 and 1997 have been derived from the unaudited interim consolidated
financial statements of the Company and reflect, in management's opinion, all
adjustments, consisting only of normally recurring adjustments, necessary for
a fair presentation of the financial position and results of operations for
these periods. Results of operations for interim periods are not necessarily
indicative of results for the full year. The following information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Consolidated Financial Statements
and other consolidated financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------------ -------------------
1993 1994 1995 1996(1) 1997 1996 1997
------- ------- ------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............... $29,432 $31,355 $34,336 $ 41,858 $101,251 $23,178 $28,208
Costs and expenses:
Production............. 18,036 19,541 20,830 27,978 64,916 15,366 17,556
Research and
development........... 3,534 4,161 4,070 4,700 8,115 1,760 2,085
Purchased in-process
research and
development........... -- -- -- 9,350 -- -- --
Marketing,
administrative and
general............... 5,511 6,112 6,789 10,515 21,411 4,691 6,182
------- ------- ------- -------- -------- ------- -------
Operating income
(loss)................. 2,351 1,541 2,647 (10,685) 6,809 1,361 2,385
Interest income......... 239 196 113 340 206 19 14
Interest expense........ 234 166 168 320 1,765 355 637
------- ------- ------- -------- -------- ------- -------
Income (loss) before
taxes and cumulative
effect of a change in
accounting principle... 2,356 1,571 2,592 (10,665) 5,250 1,025 1,762
Provision (benefit) for
taxes.................. 919 426 1,078 (2,810) 1,525 401 629
------- ------- ------- -------- -------- ------- -------
Income (loss) before
cumulative effect of a
change in accounting
principle.............. 1,437 1,145 1,514 (7,855) 3,725 624 1,133
Cumulative effect of a
change in accounting
principle.............. -- 130 -- -- -- -- --
------- ------- ------- -------- -------- ------- -------
Net income (loss)....... $ 1,437 $ 1,275 $ 1,514 $ (7,855) $ 3,725 $ 624 $ 1,133
======= ======= ======= ======== ======== ======= =======
Earnings (loss) per
common and common
equivalent share....... $ .34 $ .30 $ .35 $ (1.83) $ .76 $ .13 $ .22
======= ======= ======= ======== ======== ======= =======
Weighted average number
of shares.............. 4,376 4,407 4,484 4,285 4,934 4,697 5,111
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.............. $ 1,762 $ 3,907 $ 4,597 $ 930 $ 2,244 $ 2,907
Working capital........... 12,205 13,447 14,963 15,712 31,067 35,348
Total assets.............. 22,543 22,780 24,745 45,898 68,276 88,704
Total debt, including
current portion.......... 1,662 1,582 1,181 19,680 29,187 35,135
Redeemable common
stock(2)................. -- -- -- -- -- 4,060
Shareholders' equity...... 16,059 17,492 19,194 11,569 17,831 19,668
</TABLE>
- --------
(1) In February 1996, the Company acquired Radionics. Purchased in-process
research and development of Radionics, which consisted of products still
in the development stage but not considered to have reached technological
feasibility, was valued at $9.4 million. In accordance with generally
accepted accounting principles, this amount was expensed upon acquisition
in the fourth quarter of fiscal 1996. The Company's fiscal 1996 results
were also adversely affected by $3.9 million in costs associated with the
start-up of the Company's China facility and other international
operations.
(2) The redeemable common stock consists of the Numerex Shares. The Company
intends to repurchase the Numerex Shares simultaneously with the closing
of this offering.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading supplier of equipment to the electronic protection
industry. The Company designs, manufactures and markets electronic detection,
control and communication equipment for security, fire protection, access
control and CCTV applications, offering products primarily for the commercial
and mid- to high-end residential portions of the market. From its founding in
1968 until 1995, the Company was primarily a niche provider of intrusion
detection devices for the domestic market. In 1995, the Company adopted a
strategy designed to substantially expand its product offerings, establish an
international sales presence, increase its manufacturing capacity and improve
its manufacturing cost structure. The Company has since made five
acquisitions, opened sales offices in six countries and successfully
established a manufacturing facility in China. These initiatives have enabled
the Company to significantly expand its product catalog and market reach and
to increase its net sales from $34.3 million in fiscal 1995 to $101.3 million
in fiscal 1997.
The Company more than doubled its annualized net sales with its purchase of
Radionics in February 1996. The Radionics acquisition had a significant impact
on the comparative information for fiscal 1996 and 1997 with respect to both
the results of operations as well as asset and liability balances. Radionics
had net sales of $45.1 million for the year ended December 31, 1995. The
Radionics acquisition was funded by borrowings under a commercial credit
facility which caused a significant increase in interest expense for the
periods following the acquisition.
In April 1995, the Company commenced development of a manufacturing facility
in China which became operational in October 1995. This facility has
significantly increased the manufacturing capacity of the Company. The Company
has realized manufacturing efficiencies by transitioning to its China facility
a portion of its domestic manufacturing operations, including substantially
all of the manufacturing operations previously conducted by Radionics. The
Company believes that these efficiencies, coupled with the volume generated by
its expanded product catalog and sales network, may further enable it to
reduce its unit manufacturing costs.
The Company has recently completed four additional acquisitions: (i) the
purchase in July 1996 of certain assets of Senses which had annual net sales
of approximately $2.0 million, (ii) the purchase in May 1997 of DA Systems
which had annual net sales of approximately $10.8 million, (iii) the purchase
in June 1997 of Seriee which had annual net sales of approximately $6.3
million, and (iv) the purchase in June 1997 of RAS which had annual net sales
of approximately $9.9 million. These acquisitions have served both to broaden
the Company's product lines and increase its international presence.
The Company recognizes net sales upon shipment of products to customers.
Production expenses include materials, direct labor and manufacturing overhead
as well as an allocated portion of indirect overhead. Outgoing freight,
customs and other costs associated with delivery of products to customers are
classified under marketing, administrative and general expenses. Research and
development expenses include costs associated with salaries and benefits for
certain engineering employees, supplies, agency approvals, depreciation and
occupancy, as well as charges for independent testing and independent
contractors engaged for specific projects. Marketing, administrative and
general expenses include costs related to the Company's sales efforts and
corporate and general administrative functions, including costs of executive,
administrative and sales personnel, marketing/selling supplies, advertising,
depreciation and professional fees.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
which certain items of income and expense bear to net sales:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED MARCH 31, JUNE 30,
-------------------------------- --------------
1995 1996 1997 1996 1997
--------- --------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales.................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Production................. 60.7 66.9 64.2 66.3 62.2
Research and development... 11.9 11.2 8.0 7.6 7.4
Purchased in-process
research and development.. -- 22.3 -- -- --
Marketing, administrative
and general............... 19.7 25.1 21.1 20.2 21.9
--------- --------- --------- ------ ------
Operating income (loss)...... 7.7 (25.5) 6.7 5.9 8.5
Interest income.............. 0.3 0.8 0.2 0.0 0.0
Interest expense............. 0.5 0.8 1.7 1.5 2.3
--------- --------- --------- ------ ------
Income (loss) before taxes... 7.5 (25.5) 5.2 4.4 6.2
Provision (benefit) for
taxes....................... 3.1 (6.7) 1.5 1.7 2.2
--------- --------- --------- ------ ------
Net income (loss).......... 4.4% (18.8)% 3.7% 2.7% 4.0%
========= ========= ========= ====== ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
The Company's net sales increased 21.7% to $28.2 million in the three months
ended June 30, 1997 (the "1997 period") from $23.2 million in the comparable
period in 1996. The net sales of Senses and DA Systems, which were acquired by
the Company in July 1996 and May 1997, respectively, accounted for $2.5
million of this increase. The remaining $2.5 million increase was attributable
to sales growth from existing operations.
Production expenses increased 14.3% to $17.6 million in the 1997 period from
$15.4 million in the comparable period in 1996. As a percentage of net sales,
production expenses decreased to 62.2% in the 1997 period from 66.3% in the
comparable period in 1996. The increase in production expenses was primarily
due to a corresponding increase in the Company's net sales. The decrease in
production expenses as a percentage of net sales was primarily due to
manufacturing efficiencies achieved by further transitioning of domestic
manufacturing to the Company's China facility during fiscal 1997 and the first
quarter of fiscal 1998. The Company anticipates continued consolidation of its
manufacturing operations during fiscal 1998 and 1999.
Research and development expenses increased 18.5% to $2.1 million in the
1997 period from $1.8 million in the comparable period in 1996. As a
percentage of net sales, research and development expenses decreased to 7.4%
in the 1997 period from 7.6% in the comparable period in 1996. The increase in
research and development expenses was primarily due to the addition of DA
Systems and Senses research and development expenses. The decrease in research
and development expenses as a percentage of net sales was primarily due to
savings achieved from the continued consolidation of certain research and
development efforts of Radionics and the Company.
Marketing, administrative and general expenses increased 31.8% to $6.2
million in the 1997 period from $4.7 million in the comparable period in 1996.
As a percentage of net sales, marketing, administrative and general expenses
increased to 21.9% in the 1997 period from 20.2% in the comparable period in
1996. The increase in marketing, administrative and general expenses was
primarily due to the addition of DA Systems and Senses marketing,
administrative and general expenses as well as the Company's increased
international marketing efforts which, in turn, increased marketing,
administrative and general expenses as a percentage of net sales. This
increase was partially offset by the Company's sale of land resulting in a
pre-tax gain of $205,000.
15
<PAGE>
Interest expense increased to $637,000 in the 1997 period from $355,000 in
the comparable period in 1996. This increase was primarily due to additional
borrowings required to finance the Company's international expansion and
increased inventory levels necessary during the transition of the Radionics
manufacturing operations to the Company's China facility. Interest income
decreased to $14,000 in the 1997 period from $19,000 in the comparable period
in 1996.
Income before income taxes increased 71.9% to $1.8 million in the 1997
period from $1.0 million in the comparable period in 1996. This improvement
was due to the factors described above.
The Company's effective income tax rate for the 1997 period was 35.7%
compared to 39.1% for the comparable period in 1996. The lower effective rate
for the 1997 period reflects the benefits of certain lower foreign income tax
rates associated with the source of the Company's income during such period.
This rate is higher than the annual rate of 29.0% for fiscal 1997 due to the
distribution of pretax income among domestic and international entities.
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
The Company's net sales increased 141.9% to $101.3 million in fiscal 1997
from $41.9 million in fiscal 1996. The acquisition of Radionics in February
1996 accounted for $45.6 million of this increase, while international and
domestic sales growth accounted for $7.2 million and $6.5 million,
respectively. See Note 10 of the Notes to the Consolidated Financial
Statements for information regarding the Company's sales information by
geographic area.
Production expenses increased 132.0% to $64.9 million in fiscal 1997 from
$28.0 million in fiscal 1996. As a percentage of net sales, production
expenses decreased to 64.2% in fiscal 1997 from 66.9% in fiscal 1996. The
increase in production expenses was primarily due to a corresponding increase
in the Company's net sales. The decrease in production expenses as a
percentage of net sales was primarily due to manufacturing efficiencies
achieved by transitioning a portion of its domestic manufacturing to its China
facility during fiscal 1997. This decrease was achieved despite the lower
gross margins experienced by the Company from certain of its initial
international sales.
Research and development expenses increased 72.7% to $8.1 million in fiscal
1997 from $4.7 million in fiscal 1996. As a percentage of net sales, research
and development expenses decreased to 8.0% in fiscal 1997 from 11.2% in fiscal
1996. The increase in research and development expenses was primarily due to
the addition of Radionics' research and development expenses. The decrease in
research and development expenses as a percentage of net sales was primarily
due to savings achieved from the consolidation of certain research and
development efforts of Radionics and the Company.
Marketing, administrative and general expenses increased 103.6% to $21.4
million in fiscal 1997 from $10.5 million in fiscal 1996. As a percentage of
net sales, marketing, administrative and general expenses decreased to 21.1%
in fiscal 1997 from 25.1% in fiscal 1996. The increase in marketing,
administrative and general expenses was primarily due to the addition of
Radionics' operations. The decrease in marketing, administrative and general
expenses as a percentage of net sales was primarily due to savings derived
from the consolidation of Radionics into the Company's organization.
Interest expense increased to $1.8 million in fiscal 1997 from $320,000 in
fiscal 1996. This increase was primarily due to the debt financing associated
with the Radionics acquisition. Interest income decreased to $206,000 in
fiscal 1997 from $340,000 in fiscal 1996.
Income before income taxes was $5.3 million in fiscal 1997 compared to a
loss of $10.7 million for fiscal 1996. The fiscal 1996 results included a $9.4
million non-recurring charge related to in-process research and development
associated with the Radionics acquisition and the expensing of $3.9 million in
costs associated with
16
<PAGE>
the start-up of the Company's China facility and other international
operations. The remainder of the improvement was due to the other factors
described above.
The Company's effective income tax rate for fiscal 1997 was 29.0% compared
to a benefit rate of 26.4% in fiscal 1996. The fiscal 1997 effective rate
reflects the benefits of certain lower foreign income tax rates used to
promote economic growth and the utilization of loss carryforwards from fiscal
1996.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
The Company's net sales increased 21.9% to $41.9 million in fiscal 1996 from
$34.3 million in fiscal 1995. The acquisition of Radionics in February 1996
accounted for $6.0 million of this increase. In addition, international sales
grew by $4.9 million in fiscal 1996 as a result of the Company's international
sales initiative. This increase was partially offset by a $3.4 million decline
in domestic sales primarily attributable to reduced sales to a single domestic
customer. See Note 10 of the Notes to the Consolidated Financial Statements
for information regarding the Company's sales by geographic area and
significant customers.
Production expenses increased 34.3% to $28.0 million in fiscal 1996 from
$20.8 million in fiscal 1995. As a percentage of net sales, production
expenses increased to 66.9% in fiscal 1996 from 60.7% in fiscal 1995. The
increase in production expenses was primarily due to a corresponding increase
in the Company's net sales. The increase in production expenses as a
percentage of net sales was primarily due to the expensing of costs associated
with the start-up of the Company's China facility.
Research and development expenses increased 15.5% to $4.7 million in fiscal
1996 from $4.1 million in fiscal 1995. As a percentage of net sales, research
and development expenses decreased to 11.2% in fiscal 1996 from 11.9% in
fiscal 1995. The increase in research and development expenses was primarily
due to the addition of Radionics' research and development expenses.
Marketing, administrative and general expenses increased 54.9% to $10.5
million in fiscal 1996 from $6.8 million in fiscal 1995. As a percentage of
net sales, marketing, administrative and general expenses increased to 25.1%
in fiscal 1996 from 19.7% in fiscal 1995. The increase in marketing,
administrative and general expenses, both in dollars and as a percentage of
net sales, was primarily due to costs associated with the start-up of foreign
operations and the addition of Radionics' operations.
Interest expense increased to $320,000 in fiscal 1996 from $169,000 in
fiscal 1995, and interest income increased to $340,000 in fiscal 1996 from
$113,000 in fiscal 1995.
The Company incurred a loss before income taxes of $10.7 million in fiscal
1996 compared to income of $2.6 million for fiscal 1995. The fiscal 1996
results included a $9.4 million non-recurring charge related to in-process
research and development associated with the Radionics acquisition and the
expensing of $3.9 million of costs associated with the start-up of foreign
operations. The remainder of the decline was due to the other factors
described above.
The Company's effective income tax rate for fiscal 1996 was a benefit of
26.4% compared to a tax rate of 41.6% in fiscal 1995. The benefit rate for
fiscal 1996 resulted from the Company's inability to fully recognize tax
benefits associated with certain subsidiary losses and certain other items not
deductible for tax purposes. The fiscal 1995 corporate tax rate was consistent
with federal and state income tax rates in effect at that time.
LIQUIDITY AND CAPITAL RESOURCES
The Company considers liquidity to be its ability to meet its long- and
short-term cash requirements. Prior to 1996, those requirements were primarily
met by cash generated by the Company's operating activities and cash reserves.
Since the 1995 implementation of the Company's strategy designed to enhance
its product offerings, manufacturing capacity and international operations,
particularly the acquisition of Radionics and the development of the China
facility, the Company has required external sources of financing to satisfy
its liquidity needs.
17
<PAGE>
Three Months Ended June 30, 1997. During the three months ended June 30,
1997, the Company's operating activities provided $871,000 of operating cash
flow. Net income, depreciation and amortization provided $2.1 million, a
decrease in inventories, excluding the impact of acquisitions provided $1.0
million and an increase in accounts payable provided $243,000. Increases in
prepaid expenses and other assets, accounts receivable and income taxes
receivable used $642,000, $938,000 and $986,000 of operating cash flow,
respectively, and other account changes provided $103,000 of operating cash
flow.
During the three months ended June 30, 1997, cash used for investing
activities was $4.7 million and was utilized for the acquisition of RAS and
capital expenditures, primarily for the development of tooling and fixtures
for new and existing products.
During the three months ended June 30, 1997, cash flows provided by
financing activities were $4.5 million, primarily representing proceeds from
borrowings to finance the acquisition of RAS.
Year Ended March 31, 1997. During fiscal 1997, the Company's operating
activities used $6.6 million. The primary factor contributing to this use of
cash was a $15.9 million increase in inventories, which resulted from the
transition of the manufacturing of the Company's products to the China
facility as well as a strategic decision by the Company to increase
inventories to enable it to improve its delivery and order turnaround
performance. Net income, depreciation and amortization provided $6.5 million
of net operating cash and other account changes contributed $2.9 million to
operating cash flow. The Company believes that the consolidation of its
manufacturing operations will enable the Company to reduce future inventory
levels.
During fiscal 1997, cash used for investing activities was $4.0 million and
was utilized for capital expenditures, primarily for the expansion of the
Company's international operations and production tooling relating to the
Radionics product lines.
During fiscal 1997, cash flows provided by financing activities were $11.9
million. The two primary sources of this cash were: (i) $10.0 million of
borrowings under the Company's revolving credit facility and (ii) receipt of
$2.0 million from a private placement of Common Stock which the Company
completed with five institutional investors in October 1996.
Year Ended March 31, 1996. During fiscal 1996, the Company's operating
activities used $3.4 million. The primary factors contributing to this use of
cash were losses from operations and an increase in inventories of $4.3
million during the year. Sources of operating cash included depreciation and
amortization of $2.0 million and a $9.4 million non-cash charge related to the
write-off of in-process research and development associated with the Radionics
acquisition. Other account changes used $2.7 million of cash.
During fiscal 1996, cash used for investing activities was $18.9 million,
consisting of the purchase of Radionics for $18.0 million (including expenses
and net of cash acquired) and capital expenditures of $3.4 million, offset by
liquidation of short-term investments of $2.4 million.
During fiscal 1996, cash flows provided by financing activities were $18.7
million. The source of this cash was $18.9 million of borrowings under the
Company's commercial credit facilities, offset by principal payments on
capital lease obligations.
Capital Resources. On June 30, 1997, the Company had cash balances of $2.9
million. On that date, the Company had a $17.0 million revolving credit
facility under which it had borrowed $15.7 million. This credit facility bears
interest based on the prime rate or the London Interbank Offered Rate, plus
applicable points based on the Company's degree of financial leverage, and
matures on July 31, 1998.
On June 30, 1997 the Company also had outstanding a term loan from its
commercial lender of approximately $14.4 million which is secured by general
business assets of the Company and matures in April 2003. This loan bears
interest based on the prime rate or the London Interbank Offered Rate, plus
applicable points based on the Company's degree of financial leverage. Monthly
principal payments of $217,000 commence on December 1, 1997 and continue until
April 1, 2003. The Company is currently negotiating with the lender to
restructure the terms of this loan in order to extend the final maturity and
reduce or eliminate amortization requirements in the next three fiscal years.
18
<PAGE>
The Company expects to continue its pursuit of acquisitions and the
development of new products and markets. The Company has budgeted $3.0 million
for capital expenditures during fiscal 1998, excluding any amounts required
for acquisitions. These expenditures will include continued investment in
facilities and equipment necessary to produce and market its security
detection, fire detection, security, fire and access control products as well
as certain new products. The Company also plans to continue its efforts to
market its products internationally.
The Company believes that the combination of its current cash balances, cash
flows from operations and existing credit facilities will be sufficient to
fund its planned operations during fiscal 1998.
Dividend Policy. The Company is dedicated to promoting shareholder value
through long term profitability and growth and believes that continued
investments in future product development are essential to this goal. For this
reason, it has been the Company's policy to not pay cash dividends.
Inflation. During fiscal 1995, 1996 and 1997 and the first quarter of fiscal
1998, inflation did not have a significant impact on the Company's business.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis contain certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act, which
represent the Company's expectations or beliefs, including, but not limited
to, statements concerning the Company's operations, performance, financial
condition, growth and acquisition strategies, margins and growth in sales of
the Company's products. For this purpose, any statements contained therein
that are not statements of historical fact may be deemed to be forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, certain of which are beyond the Company's control, and actual
results may differ materially depending on a variety of important factors
including those described under the caption "Risk Factors" and elsewhere in
this Prospectus.
19
<PAGE>
BUSINESS
THE COMPANY
The Company is a leading supplier of equipment to the electronic protection
industry. The Company designs, manufactures and markets electronic detection,
control and communication equipment for security, fire protection, access
control and CCTV applications, offering products primarily for the commercial
and mid- to high-end residential portions of the market. From its founding in
1968 until 1995, the Company was primarily a niche provider of intrusion
detection devices for the domestic market. In 1995, the Company adopted a
strategy designed to substantially expand its product catalog, establish an
international sales presence, increase its manufacturing capacity and improve
its manufacturing cost structure. The Company has since made five
acquisitions, opened sales offices in six countries and successfully
established a manufacturing facility in China. These initiatives have enabled
the Company to significantly expand its product catalog and market reach and
to increase its net sales from $34.3 million in fiscal 1995 to $101.3 million
in fiscal 1997. Excluding amounts attributable to its acquisitions, the
Company's net sales grew by approximately 22.5% in fiscal 1997 versus fiscal
1996.
INDUSTRY OVERVIEW
The electronic protection industry consists of companies that design,
manufacture, distribute, sell, install, monitor and maintain intrusion, fire
alarm and other electronic protection systems. The Company manufactures system
components for sale to installation companies, distributors, other equipment
manufacturers and, in limited cases, significant commercial or governmental
end-users. The Company is not engaged in the installation or monitoring
aspects of the industry. For many years, the electronic protection industry
was oriented towards the protection of physical assets with simple burglary
detection and alarm equipment. In line with its customers' requirements, the
industry has since broadened in scope to one which not only provides
sophisticated equipment for intrusion detection but additionally provides
important "premises control" functions, such as fire detection, personnel
access control and CCTV monitoring of interior and exterior areas. Equipment
required for these functions is sold as individual components or,
increasingly, bundled with other compatible components to form an integrated
system for a specific customer's application.
The Company offers products in all four of the principal categories of the
electronic protection equipment market: security, fire, access control and
CCTV. According to statistics compiled by the Security Industry Association
(the "SIA") in its 1997 Security Industry Market Overview, combined U.S.
wholesale equipment sales for these four categories were estimated at $5.3
billion in 1996. The Company believes that there are also significant
international markets for each of the four categories. The SIA report contains
various U.S. statistics for each of the four categories, including the
following:
. Security products. This category had an estimated U.S. market size of
$1.8 billion in 1996, with a 7.1% annual growth rate forecasted for the
five-year period ending 2001. This market data includes sales for
commercial and residential alarm systems of all price points. The Company
presently addresses the commercial market and mid- to high-end
residential applications.
. Fire products. This category had an estimated U.S. market size of $1.1
billion in 1996, when considering only equipment sales for commercial
applications. The Company competes primarily in the commercial fire
equipment market and, to a lesser extent, offers products for residential
applications.
. Access control products. This category had an estimated U.S. market size
of $1.6 billion in 1996. The U.S. market for access control equipment is
forecasted to grow at 9.0% each year through the four-year period ending
2000. The most rapidly growing part of the access control market has been
high-technology, PC-based systems for large commercial applications with
multiple entrance and exit points.
. CCTV products. This category had an estimated U.S. market size of $758.0
million in 1996. The U.S. CCTV market is forecasted to grow at a rate of
10.2% each year through the four-year period ending 2000.
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<PAGE>
The SIA study forecasts that the overall U.S. market for all private
security products and services will grow at approximately 8% per year through
2000. There are several factors driving the growth of the private security
industry. The perception by Americans that crime is a significant problem has
continued to grow, as evidenced by the focus on crime in political campaigns
and in the media. Insurance companies often provide incentives to businesses
for installing electronic security systems or require such systems as a
condition of insurance coverage. An electronic fire system is required in
commercial facilities in many localities in order to comply with municipal
fire codes. There has been a trend for large commercial customers to
centralize their security function at the corporate level instead of managing
security on an ad hoc site basis, which has often resulted in greater
attention to and resources for security solutions. The growth in telecommuting
and in-home offices has created incremental demand for residential security
products by bringing expensive office equipment into the home. Market
penetration has also been driven by the increased affordability of systems, as
advances in technology and reduced manufacturing costs have increasingly
brought high quality systems into price ranges attractive to residential and
small commercial customers. In addition to new systems, there is ongoing
system replacement in the commercial and mid- to high-end residential markets,
creating significant retrofit opportunities. The Company estimates that
customers in these markets typically upgrade or replace their systems every
seven to ten years.
The Company believes that equipment manufacturing for the electronic
protection industry is characterized by the following attributes:
. High degree of fragmentation. Equipment manufacturing for the electronic
protection industry is highly fragmented and consists of a broad array of
equipment manufacturers, each of which typically provides only a portion
of the products required to deliver a comprehensive security solution.
The Company believes that there are more than 200 companies engaged in
manufacturing system components in the United States.
. Trends toward consolidation. There have recently been a number of mergers
and acquisitions among manufacturers of products for the electronic
protection industry, including the five acquisitions made by the Company
since 1996. The Company believes that this acceleration in manufacturer
consolidation is based in part on a competitive model that has emerged in
the industry which rewards companies that can offer a full product
catalog across all four of the principal categories of its industry:
security products, fire products, access control products and CCTV
products. The Company believes its customers are seeking vendors which
not only provide a full catalog of products, but can also supply products
for the many electric and electronic standards which exist throughout the
world. The installation and monitoring segment of the industry has also
been consolidating rapidly, with national and regional firms such as ADT,
Ameritech and Entergy regularly acquiring local competitors. The national
and regional consolidators often seek to reduce the number of vendors
required to meet their product needs. The Company believes international
full-catalog equipment suppliers will have advantages over small niche
product suppliers in capturing business from these large installation and
monitoring companies.
. Continuing technological change. Detection, control and communication
equipment are being continuously improved, taking advantage of increasing
capabilities of microprocessors and application- specific integrated
circuits. The improvements are primarily software-based and are generally
directed at increasing system sophistication, reducing false alarms,
reducing installation and service costs and enhancing end-user
convenience. A recent trend has been increased integration of different
types of security and alarm systems. Whereas basic security and fire
alarm systems were once adequate for many customers, many customers now
prefer access control and CCTV systems integrated into a single system
with traditional security and fire capabilities. Despite the
technological advances that occur in the industry, there remains a
certain inertia or loyalty to products that have already been widely
accepted by installation and monitoring companies. It can be expensive
for installation and monitoring companies to adopt new products because
product changes may create new inventory requirements, necessitate re-
training of installation and service personnel and make inventories of
displaced products obsolete. It is often difficult for new products to
gain rapid commercial penetration. For this reason, acquisitions are
often attractive, and sometimes preferred to new product development, as
a means of growth in the Company's industry. This is particularly true
when a niche manufacturer can be purchased that has a significant
existing customer base.
21
<PAGE>
. Digital communications technology. Digital technology has permitted the
consolidation of local security and fire alarm monitoring stations into
large, remote monitoring stations, often hundreds of miles from the end-
user's business or residence. This has driven demand for a whole new
generation of products which take advantage of digital technology and
which utilize non-traditional communication channels such as two-way
radio, derived channel, cellular and satellite communications. Many
times, these communications channels are more reliable, secure and often
lower in cost than traditional communication methods such as telephone
lines.
. False Alarms. The electronic protection industry is increasingly focusing
on false alarms because of the significant burden they impose on the
support infrastructure of police and fire departments and because, over
the long-term, they undermine the protection afforded by electronic
protection systems. Industry associations and manufacturing and
installation companies have been working together in recent years to
develop products and procedures to reduce false alarms.
STRATEGY
The Company's goal is to be an international leader in the design,
manufacture and marketing of equipment for the electronic protection industry,
satisfying all of its customers' protection needs with a complete line of
high-quality, technologically advanced products which are distributed by a
worldwide marketing organization and supported by a service-oriented product
support team. Principal elements of the Company's strategy include:
. Catalog expansion--continuing to expand its product catalog through
internal development, acquisitions and partnering with companies that
have technological capabilities that complement the Company's internal
capabilities. The Company believes that the ability to provide a full
catalog of products will give it competitive advantages over firms which
only provide a small portion of the products regularly required by the
electronic protection industry's customers, and this has been a key
motivation for its recent acquisitions. The Company is promoting the sale
of its fire, access control and other product lines by leveraging the
superior market acceptance it enjoys in the security equipment arena.
. International expansion--continuing to expand its international sales
efforts. The Company's acquisitions of DA Systems, RAS and Seriee have
given the Company access to important European markets. The Company plans
to use the distribution networks of these companies to distribute its
full range of products, as appropriate. In addition, the Company's sales
offices in Asia and Australia have been successful in developing a base
of operations from which the Company can further expand in those markets.
. Technological advancement--continuing to develop technologically advanced
products. The Company utilizes the power of microprocessors and
application-specific integrated circuits to fully exploit available
technology. By using this technology, the Company has developed: (i)
detection products with demonstrably superior signal processing capacity
which optimize the trade-off between false alarms and catch performance,
(ii) control products which generally provide a superior level of
programming flexibility and more sophisticated firmware than competitive
product offerings; and (iii) communication equipment which provides
access to a broad variety of commercially available communication
technologies.
. Market focus--continuing to focus on the installation and service
professionals that service the commercial and mid- to high-end
residential security and fire alarm system markets, who view the features
and quality of the Company's products as providing superior value. The
Company is also increasing its sales efforts directed to the U.S.
government.
. Production efficiency--increasing utilization of its China facility and
continuing to consolidate its purchasing. The Company's China facility
became operational in October 1995. The Company has been able to reduce
its unit manufacturing costs by transitioning production from its
Fairport, New York and Salinas, California locations to its China
facility and anticipates additional cost savings from continuing this
transition. The Company has also realized cost savings by consolidating
purchasing of components for its worldwide operations.
22
<PAGE>
. Customer development--continuing to partner with significant customers to
develop new or enhanced products to meet specific end-user needs.
Products that the Company has jointly developed in the past include a
line of intrusion detectors with self-diagnostics for ADT to work with
its proprietary communication protocol, an integrated control panel for
Honeywell and a long-range photoelectric smoke detector for Simplex.
. Related applications--exploiting opportunities to apply its technologies
in related applications for markets from which it does not currently
generate significant revenues. For example, the Company's Security Escort
product leverages its technological capabilities and has provided it with
an application that is useful in markets such as colleges and prisons,
which are different than those which it has served historically.
ACQUISITIONS
The Company's recent acquisitions demonstrate the implementation of its
primary strategies of catalog and international expansion. These acquisitions
significantly expanded the Company's product catalog while simultaneously
expanding its domestic and international distribution network.
Radionics. In February 1996 the Company acquired all of the outstanding
stock of Radionics, which has generally been regarded as a premier U.S.
manufacturer of security, fire and access control equipment and central
station receivers. Radionics had annual net sales of $45.1 million for
calendar year 1995, and this acquisition more than doubled the Company's net
sales rate. This acquisition gave the Company access to Radionics' network of
over 1,000 dealers. Radionics had a number of advanced products and models
under development which have subsequently been completed by the Company, such
as a 246-zone fully-integrated control panel and a control communicator which
can function as a wired, wireless or hybrid system and can communicate using
BellSouth's Cellemetry(R) technology.
Senses. In July 1996 the Company acquired certain assets of Senses, a
manufacturer of long-range wireless alarm transmission equipment marketed
under the name "Safecom," with annual net sales of approximately $2.0 million.
This acquisition provided the Company with an important new technology, a
patent on the transmission of alarm signals from a digital communicator
through a radio network, and access to dealers who have installed
approximately 150 Safecom radio networks. Safecom networks are operating in 19
countries around the world, with the greatest penetration in South America.
The Safecom products are particularly attractive in markets where the
telephone line infrastructure for more traditional forms of signal
communication do not exist or are unreliable.
DA Systems. In May 1997 the Company acquired all of the outstanding stock of
DA Systems, a leading British manufacturer of security control equipment with
annual net sales of approximately $10.8 million. This acquisition gave the
Company a line of controls and communication devices approved for sale in the
U.K., which has unique requirements for the design of security control and
communication equipment. Approval of future products should be expedited by
having U.K.-based engineers working on such products. DA Systems also provided
the Company with an important new in-building wireless radio technology
believed by the Company to be superior in performance to competitive
offerings.
Seriee. On June 24, 1997 the Company acquired 99.5% of the outstanding stock
of Seriee. Seriee is a leading French manufacturer of electronic control and
communications equipment with net sales of approximately $6.3 million per year
and has the largest security equipment distribution network in France. Like
the U.K., France has unique design requirements and this acquisition provides
the Company with a line of French-approved control panels which, coupled with
Seriee's 10 agency offices located throughout France, give the Company a
significant presence in the French market. Prior to its acquisition, Seriee
was a distributor for certain Company products.
RAS. On June 25, 1997 the Company acquired 98.7% of the outstanding stock of
RAS. RAS, with net sales of approximately $9.9 million per year, has the
largest security equipment distribution network in Belgium, with five regional
sales offices located throughout that country. The Company believes that RAS
has significant
23
<PAGE>
technical expertise in CCTV and access control systems and is strategically
located to service northern European customers by providing convenient
technical support and inventory. RAS had been a distributor for the Company
for over 15 years and, immediately prior to its acquisition, was the Company's
second largest distributor.
PRODUCTS
The Company produces and distributes a wide variety of electronic protection
equipment, offering a single source of products to the professional installers
who provide custom systems for different types of buildings and protection
requirements. The Company's products include security, fire and access control
systems and components, CCTV system components and the Security Escort
multiple user help call system. The Company seeks to be a value leader by
offering high quality and technologically advanced products at competitive
prices. The Company believes that the commercial and mid- to high-end
residential portions of the electronic protection industry recognize the
quality of the Company's products and consider them to offer attractive value.
The following table sets forth the Company's net sales for fiscal 1997 in
each of the primary categories of products offered by the Company:
<TABLE>
<CAPTION>
FISCAL 1997
NET SALES PERCENT
PRODUCT TYPE (IN THOUSANDS) OF TOTAL
------------ -------------- --------
<S> <C> <C>
Security products.................................. $ 77,298 76.3%
Fire products...................................... 13,029 12.9%
Access control products............................ 9,067 9.0%
CCTV products...................................... 1,857 1.8%
-------- -----
Total............................................ $101,251 100.0%
======== =====
</TABLE>
From its inception until 1995, the Company was primarily a niche provider of
intrusion detection devices. Following the shift in the Company's strategy in
1995 to expand the products it offers by acquisition and internal development,
the Company has significantly expanded its product catalog by adding: (i)
control and communication equipment with its purchase of Radionics in February
1996, (ii) wireless radio network products with its purchase of certain assets
of Senses in July 1996, (iii) in-building wireless radio technology with its
purchase of DA Systems in May 1997, and (iv) an additional line of security
control panels with its acquisition of Seriee in June 1997. Since early 1995,
the Company has introduced several internally developed products including,
among others, its TriTech pet avoidance detectors, a control panel that offers
both wired and wireless on-premise communication capability, an enhanced and
broadened line of smoke detectors, a new line of passive infrared intrusion
detectors, and a fire system control and communication product. In addition,
the Company completed Radionics' second generation of integrated panels which
are capable of simultaneously controlling a full-featured alarm system, fire
system and access control system. The Company has also expanded its product
catalog by entering into a number of alliances with partners that have
technological capabilities that complement the Company's internal
capabilities. One recent example of such an alliance brought about the
Company's first entry into the CCTV market in fiscal 1997.
Security Products
Security systems consist of intrusion detectors coupled with control and
communications equipment and, in many cases, notification devices. When a
triggering event occurs, a detector senses the event and notifies the control
equipment, which in turn causes the communications equipment to transmit an
alarm signal to a remote central alarm monitoring service or directly to the
police. The control equipment also activates notification devices such as
strobes, horns and sirens if these options are features of the system.
Detectors. Security detectors are the components of a security system which
sense intrusion into protected areas. The Company markets security detectors
under the brand names Detection Systems, Radionics, TriSense, DA Systems and
Seriee. Security detectors differ in three primary respects: the way they
sense intrusion or another alarm condition, the way they communicate with
control equipment and the type of information they transmit to the control
equipment.
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<PAGE>
The Company offers detectors which use six basic technological approaches
for sensing the existence of an intrusion or other alarm condition:
<TABLE>
<CAPTION>
TYPE OF DETECTOR OPERATION
---------------- ---------
<C> <S>
Passive infrared body heat detection Passive infrared detectors operate by
detecting the change in energy that
occurs when a body of one temperature
passes by a background of another
temperature within the detector's
field of view. Special processing
techniques enable the detector to
determine whether a change in energy
is caused by a person or by some other
false alarm source.
Combination passive infrared and Dual detectors combine passive
microwave detection ("dual detectors") infrared detectors with microwave
detectors. Microwave detectors
generate microwave signals and detect
either a reduction or distortion of
received energy caused by an intruder.
Photoelectric beam interruption Photoelectric beam detectors consist
of a light transmitter and a separate
receiver. The transmitter emits an
invisible infrared beam to the
receiver. If the beam is broken, the
receiver signals an alarm.
Acoustic glass break detection Glass breakage detectors use
microprocessor-based sound analysis
technology to listen for the specific
frequencies associated with breaking
glass. They can be used to detect
breakage of plate, tempered, laminated
and wired glass.
Vibration detection Vibration or seismic detectors use
three distinct detection systems to
protect against attack from heavy
objects, drilling or explosion. They
are designed specifically for
protection of vaults, safes and ATMs,
but also can be used to protect other
reinforced areas such as night deposit
boxes, data storage cabinets and
filing cabinets.
Magnetic contacts Magnetic contacts are used primarily
on doors and windows and signal the
control equipment when an electrical
connection is broken due to a
protected door or window being opened.
</TABLE>
These different types of detectors are needed for different types of
applications in commercial and mid- to high-end residential security systems
and complement each other in their system applications and the types of
environments in which they function best. Many alarm systems incorporate
several different types of detectors in a single alarm system to maximize the
effectiveness of the system.
Detectors can communicate with an alarm system's control equipment directly
(wired), indirectly (wireless) or on a combined or "hybrid" basis (where the
detector communicates via wireless transmission to a peripheral device which
is wired to the control equipment). The Company offers detectors which are
used in each of these types of systems. The information that detectors
communicate to the control equipment ranges from a simple communication that
an alarm event has occurred to, in a multiplex system, the identity of the
detector sensing the alarm condition, the nature of the alarm condition and
diagnostic information about the detector.
The Company believes that for the markets it serves it offers the widest
variety of detectors available from any single supplier and that its detectors
are among the most advanced detectors available from any source. The Company
believes that its detectors generally provide greater features, performance
and reliability than its competitors' products. These characteristics are
attractive to professional installers because they make installation easier,
reduce service calls and expense, minimize false alarms and increase end-user
satisfaction. Specific attributes of the Company's detectors include:
25
<PAGE>
. Features. The Company offers a wide variety of detector types which
incorporate certain special features such as field-interchangeable optic
systems which permit installers to use the same detector for different
coverage patterns by simply adjusting the mirror configuration;
sensitivity controls which allow the installer to adjust the sensitivity
of the detector as appropriate for the application to minimize false
alarms; multiple mounting options to provide more installation
flexibility; pointable optics that permit the coverage pattern to be
directed thereby providing more mounting alternatives and allowing
adjustment for changes in use without re-mounting; and a broad range of
operating voltages for many detectors permitting them to be used in older
or specialized security systems.
. Performance. Some examples of how the Company's products maximize
performance are its patented signalling processing techniques ("motion
analyzer processing") incorporated into its passive infrared and TriTech
detectors which enables them to distinguish between the electronic
signatures of valid and false alarm conditions. The Company's newest dual
detectors can be used in residential or commercial environments to
prevent up to 100-pound animals from causing the detector to detect an
alarm condition but still be tripped by a human weighing less than 100
pounds. The Company's newest passive infrared models can distinguish and
ignore smaller animals, such as rodents. Another example of the Company's
detectors' performance capability is their ability to perform under a
broad range of temperatures from -40(degrees) fahrenheit through
120(degrees) fahrenheit.
. Reliability. Each of the Company's detectors undergoes computer-based
functional testing and in-circuit electrical testing to insure that it
functions as designed. The Company further enhances the reliability of
its more sophisticated detectors by incorporating patented software-based
diagnostic systems in them that confirm the detectors are functioning in
a number of respects and have not been blocked or "masked-off."
Control Equipment. The control components of a security system manage all
the functions of the system and provide the link between the system's
detectors and communications equipment. The Company markets control products
under the brand names Radionics, Detection Systems, DA Systems and Seriee. The
Company's control products include control panels which collect, interpret and
transmit the signals from the detectors and arming stations which are used to
program certain features of the system and to arm and disarm it. The Company's
control and communication product offering was greatly expanded in 1996 by its
acquisition of the Radionics control product line, which had a favorable
industry reputation for alarm control and communication equipment.
The Company's security control product line includes products that are used
in all three types of systems installed by security professionals.
Conventional security systems include wired, wireless and hybrid (combination
wired and wireless) systems and simply communicate that an alarm condition
exists. In the next level, multiplex systems, each sensor is addressable,
which means that the specific location of the alarm condition is reported. At
the highest level, the Company's advanced multiplex systems feature the
capacity to report back addressable test and alarm condition information,
assuring that the system is working properly, and to report whether a detector
has been tampered with.
The Company has a wide range of control panels, ranging from its Detection
Systems' low-cost six-zone panel which can operate six detection device
circuits, to Radionics' recently introduced 246-zone fully integrated
security, fire and access control panel which can operate a combination of up
to 246 intrusion detection, smoke detection and access control circuits and
devices. Features of the Company's control panels that enhance its ability to
market its control panels include: (i) the ability to quickly communicate data
about events occurring in the control system; (ii) the flexibility to select
which information is reported locally and which is transmitted to a central
monitoring station; (iii) the ability to specify how the keypad works for each
user at each location; (iv) "robust" power supplies which ensure adequate
power supply to the detectors, notification devices and other system
components and (v) enhanced transient immunity which protects the system from
power surges and lightning.
26
<PAGE>
Communications Equipment. The Company offers a broad line of communications
equipment, ranging from Radionics' central station receiving equipment, which
performs the function of receiving alarm signals from multiple sources, to
transmission equipment capable of accessing telephone lines, as well as most
of the alternative communication technologies which are commercially
available. One of these technologies is BellSouth's new Cellemetry(R) data
service, which permits wireless transmission of alarm signals to a central
station using existing cellular networks. Another is the ARDIS radio network,
which offers a more secure alternative to telephone lines as the means for
contacting a central monitoring station, and ultimately the police or fire
department. In addition, the Company offers its Safecom long-range wireless
alarm transmission system which allows a monitoring company to establish and
maintain a proprietary two-way radio network to transmit and receive alarm
signals. The Company also offers its Fastlink system which provides one-way
radio communication of alarm signals to a remote monitoring station. The
Company, through its Radionics and DA Systems subsidiaries, is licensed to
manufacture and sell in the U.K. and U.S. derived channel communication
devices that transmit alarm signals over the unused bands of standard
telephone lines. This allows alarm signals to be transmitted at the same time
a telephone line is being used for voice communications.
Security Escort. The Company's Security Escort product is a multiple user
help call system which allows a user to alert appropriate security personnel
as to their location, name, address and any handicap or other special data by
using a palm-size transmitter. Security Escort systems may be enabled to
permit a user to trigger a strobe and sound a siren as well. The primary
components of a Security Escort system are a central command station which is
monitored by security personnel, a Microsoft Windows(R)-based system software
package, transceivers, receivers and individual transmitters. This system uses
a digital micro-cellular architecture which accommodates up to 16 million
individual user ID codes. The system is now available through several regional
and national installation companies. It has been successfully installed in
college, prison, nursing home, psychiatric hospital, parking lot complex and
museum environments.
The Security Escort's advanced design features include: self-supervision of
the system's operational integrity by internally generating and monitoring
test transmissions; testing of transmitters by users; and system-generated
notices regarding system maintenance requirements. Security Escort allows a
user to test the system and his or her transmitter at any time and receive
visual confirmation that both are functioning properly. In addition, the
system software provides for full archiving of all system activity including
victim tracking and alarm map recall.
Fire Products
Fire detection systems work in the same manner as security systems. In fact,
many fire detection systems are operated in tandem with a security system by
the same control equipment. Fire alarm systems range from conventional
systems, which can sense and signal a fire condition or non-condition, to
addressable systems, which permit identification of the triggered detector
within the system, and analog systems, which permit communication of
information regarding the condition of the environment at the detector
location. The Company offers fire detection products under the brand names
Detection Systems and Radionics. The Company's fire detection product line,
which includes products for both residential and commercial applications,
features detection components, dedicated control panels, communication
equipment and notification devices.
Detectors. The Company's fire detection components sense the presence of
smoke and heat by employing a variety of technologies, including beam smoke
detectors, photoelectric spot smoke detectors, ionization spot smoke detectors
and heat probes. The Company's smoke detectors are differentiated by a
patented chamber which provides increased immunity to dust, which is the
leading cause of false fire alarms. The Company also has a patented automatic
test and calibration feature which continuously senses and signals if dust or
other conditions cause the detector's sensitivity to deviate from its
acceptable range. The Company's fire detectors offer many of the same features
as its security detectors and undergo the same stringent testing requirements.
Control Equipment. As described above, many of the Company's control panels
operate both security and fire alarm systems; however, some of the Company's
control panels are designed exclusively for operating fire
27
<PAGE>
alarm systems. The Company originally entered the fire detection business as
an extension of the security products line by providing fire detection
features and accessories through the security control panel. The Company is in
the process of introducing two new control product lines for the dedicated
fire market, a market which the Company has not historically addressed. One of
these products utilizes state-of-the-art analog fire monitoring technology.
Communication Equipment. The technologies the Company's products provide for
communicating fire alarm signals are the same as those provided by its
security alarm communications equipment. In the fire systems market, the
Company's capabilities in communications take on added importance because of
National Fire Protection Association ("NFPA") guidelines requiring all local
fire systems to have communications capability permitting alarm and trouble
conditions to be monitored remotely. The Company was the first to develop a
supplementary communications product specifically designed to permit existing
systems to be updated to comply with NFPA guidelines. The Company's Safecom
long-range wireless system provides fully-supervised two-way fire reporting by
radio which provides enhanced security.
Notification Devices. The Company distributes a full range of notification
devices such as strobes, horns and sirens varying in color and intensity which
fully comply with the Americans with Disabilities Act. These products are
distributed under the Company's name and are supplied by a leading specialty
manufacturer of such products.
Access Control Products
Electronic access control systems consist of equipment that can identify an
authorized individual and permit that person to enter a restricted area. While
intrusion control products protect the property when no one is on-site, access
control products protect the property while it is occupied. The market for
access control systems is divided into three major end-user categories:
industrial, commercial, and governmental. Fear of crime, potential liability
and convenience have created a significant retrofit market for access control
products in addition to the new construction market.
Access control systems can include card-based systems, CCTV-based systems,
audio systems and bar code systems. The Company distributes access control
products on an OEM basis under the brand names Readykey, Easikey and
Radionics. Access control products sold by the Company include control
systems, card readers, cards and detector accessories. Card-based technology
is currently the most attractive option both in terms of price and
reliability, and card-based systems currently dominate the access control
market. Card-based systems are currently in place in a number of non-
residential operations, including office buildings and hotels, and are
becoming more prevalent in residential settings such as college campuses.
CCTV Products
CCTV is a system of relaying video and audio signals from a camera to a
monitor or a recording device. The term CCTV refers to a closed-circuit system
sending signals to select receivers as opposed to a system broadcasting
signals to the general public. The Company distributes CCTV products under the
brand name DS Vision. These products consist of cameras, monitors, recorders,
control units and other accessories. The Company distributes color and black-
and-white as well as both high and low resolution cameras and monitors.
Professional CCTV security and surveillance systems can be simple or
complex. While a convenience store might employ a system consisting of a
single camera and monitor, an airport system would likely include hundreds of
cameras, monitors and video recorders along with computer-based control
equipment and video multiplexers. Professionally installed CCTV systems are
used in retail stores, banks, warehouses, office buildings, industrial sites,
government facilities, casinos, mines, airports, prisons and, increasingly, in
private homes. The Company is promoting a state-of-the-art system to enable
authorized personal computer users to remotely "look in" on the CCTV system
installed at their facility.
28
<PAGE>
MARKETING
The Company's primary customers are: (i) national and regional installation
companies such as ADT, Ameritech, Checkpoint, Holmes Protection, Honeywell,
Simplex, Wells Fargo and Westar; (ii) national distributors such as ADI in the
U.S., Efsec in Sweden, Glastrak in the Netherlands and Rimi in Russia; and
(iii) original equipment manufacturers such as Pittway and ITI Technologies
that integrate the Company's components into their finished products. End-
users of the Company's products include federal and state governments,
Autozone, Boeing, J.C. Penney, Kmart, Northrop Grumman, Pepsico, Tandy and
Wal-Mart. The Company has a sales force of approximately 105 representatives
of which 50 are domestic and 55 are international. The Company presently has
approximately 137 distributors that accounted for 13.4% of the Company's net
sales during fiscal 1997.
The Company's products are installed in industrial, commercial,
institutional and residential buildings, in both new and upgraded system
installations. Radionics and DA Systems sell their products to national
dealer/installer networks which combine their products with those of other
suppliers to form complete systems. Historically, Radionics has sold its
products to installation companies in the high-end commercial, retail and
governmental markets. More recently, Radionics has broadened its product
offering by supplying products suitable for the residential market.
Conversely, DA Systems has historically sold its products to installation
companies and distributors for the small commercial and residential markets.
In connection with the Company's international marketing initiative, it has
opened six international sales offices. The Company's distributors and sales
representatives cover an additional 50 countries. Foreign sales (including
sales to Canada) accounted for approximately 16% of the Company's net sales in
fiscal 1997.
Domestically, large regional and national accounts are supported directly by
regional sales and service managers. The Company's sales managers provide
technical support to customers regarding system design, installation and
service. The Company also conducts regular training programs for its customers
as well as technical seminars at national and regional trade shows. A call to
the Company's 800 sales number typically results in same-day shipment of most
standard products from one of two warehouses. To support the on-site installer
or service person, toll-free 800 lines connect directly to the Technical
Service Department. Detection Systems and Radionics maintain regional
sales/training personnel in 14 states.
The Company markets the Security Escort multiple user help call system in
North America and in Australia. While the system was initially designed for
the protection of individuals on college and university campuses, it is
suitable for many other applications. The Company is seeking additional
distribution relationships to expand the market coverage for the system to
other environments, such as apartment complexes, condominiums, retirement
communities, hospitals, correctional facilities, governmental facilities and
manufacturing facilities.
The success of the Company depends heavily on the business it conducts with
a limited number of significant customers. In fiscal 1997, 10.7%, 10.6% and
6.0% of the Company's net sales were attributable to Pittway, Ameritech and
Honeywell, respectively. Pittway is a competitor of the Company across many of
its product lines and purchases the Company's products to incorporate them
into its products and systems. During October 1996, Ameritech (an established
customer of the Company) began purchasing the Company's products through
Pittway to utilize Pittway's distribution facilities. The Company has had
long-standing relationships with most of its significant customers; however,
it generally does not have supply contracts with them and they may
unilaterally reduce or discontinue their purchases without penalty. The
Company's loss of (or failure to retain a significant amount of business with)
any of these customers could have a material adverse effect on the Company.
The Company's acquisitions, its international marketing initiatives and its
increased use of distributors have reduced the potential for sales
fluctuations associated with the Company's largest customers.
COMPETITION
The markets in which the Company operates are highly competitive. The
Company's competitors include manufacturers of security and fire alarm
equipment from all over the world. The Company believes its three
29
<PAGE>
major competitors are Pittway, the Berwind Group and C&K Systems. In addition,
the Company may face competition from new entrants into these markets and
increased competition from existing competitors. A number of the Company's
competitors have substantially greater financial and other resources than the
Company. In many cases the Company's competitors are concentrated in one
market niche in the electronic protection industry, allowing them to
concentrate their resources in that niche. The Company competes on the basis
of providing superior value to customers with respect to both products and
services. When selecting intrusion and fire detection equipment, professional
installation and service companies consider the breadth of products offered by
manufacturers and distributors, product performance and reliability, as well
as the incorporation of advanced technological features such as automatic
testing, efficiency of delivery, ease of installation and service, sales and
technical support services and price. There can be no assurance that the
Company's products and services will continue to be competitive and accepted
by the market in the future.
MANUFACTURING
The Company has manufacturing facilities in Fairport, New York; Zhuhai,
China; Salinas, California; and Southall, England; although it has ceased
using the Salinas and Southall plants for regular product manufacturing. The
Company is ISO 9002 certified at all four of its manufacturing facilities.
The Company designs its products and prepares specifications for their
component parts. The Company purchases certain components from outside sources
and then assembles them into finished products. Before product assembly,
components are sample tested for compliance with quality control standards and
critical components are individually tested. The Company assembles circuit
boards using both automatic and semi-automatic assembly equipment utilizing
both pin-through-hole and surface-mount technologies. Intermediate quality
control processes are used to evaluate components and products being
transferred between assembly departments. Completed circuit boards are tested
and calibrated against Company-defined performance standards.
The Company's China manufacturing operations, which commenced during fiscal
1996, are conducted in a 70,000 square foot manufacturing facility in Zhuhai,
China. Manufacturing operations and the first product shipments from the
Company's China facility commenced in October 1995. Initially, the Company
duplicated in this facility the proven manufacturing procedures historically
used in its Fairport facility. Subsequently, the Company's management at the
China facility has fine-tuned the manufacturing process to take advantage of
local conditions. The Company has transitioned the manufacturing of many
Detection Systems' motion sensors and most of Radionics' controls to the China
manufacturing facility to take advantage of its lower production costs. The
Company has ceased using the Radionics plant in Salinas, California for
regular product manufacturing and is currently using the production area there
primarily for product configuration. During fiscal 1997, approximately 25% of
the Company's manufacturing output was produced at its China facility. The
Company is in the process of consolidating its purchasing for all its
manufacturing materials, which it expects will result in additional cost
savings.
INTELLECTUAL PROPERTY
The Company has obtained over 40 patents related to its products. While the
Company obtains patents as appropriate and considers certain of its patents
valuable, it does not believe any one of them by itself is crucial to the
successful conduct of its business. The Company relies on a combination of
patents, trademark registrations, copyrights and confidentiality agreements to
protect its intellectual property.
During the fiscal 1995, 1996 and 1997, the Company expended approximately
$4.1 million, $4.7 million and $8.1 million, respectively, on research and
development activities relating to the development of new products and the
improvement of existing products.
30
<PAGE>
SUPPLIERS
The Company purchases raw materials and components worldwide from numerous
suppliers. The vast majority of these materials are generally available from
more than one supplier and the Company has not encountered any serious
shortages or delays. Certain raw materials used in producing some of the
Company's products can be obtained only from one or two suppliers, the
shortage of which could adversely impact production of certain security
equipment by the Company. The Company believes that the loss of any other
single source of supply would not have a material adverse effect on its
overall business.
REGULATION
Many of the Company's products require approval by the FCC before they can
be marketed in the United States. In addition, commercial acceptance of the
Company's products is typically dependent on UL listing. The Company has
successfully obtained FCC approval and UL listing of its products in the past;
however, it cannot predict whether it will obtain approvals for future
products or whether FCC regulations or UL listing requirements relating to the
Company's current or future products might change. Failure to comply with FCC
regulations or UL listing requirements, an inability to receive approval for
products under development or a change in existing regulations or listing
requirements that would make products non-compliant, could have a material
adverse effect on the financial condition and results of operations of the
Company. Most foreign countries have similar agencies and regulations, which
could have the same impact on sales of the Company's products within those
countries. In addition to the regulation of its products, the Company is
subject to local, state, federal and foreign laws regarding the discharge of
materials into the environment.
A number of municipalities have enacted or are considering enacting
legislation which penalizes false alarms which trigger responses by police or
fire departments. The Company is unable to quantify the effects such
legislation may have on the security and fire protection markets as a whole,
but believes that false alarm legislation is causing installation companies
and system buyers to be more inclined toward the use of higher quality
equipment, such as that manufactured and sold by the Company.
Compliance with federal, state and local laws and regulations regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment have not had, and are not expected to have, a
material effect upon the capital expenditures, earnings or competitive
position of the Company.
EMPLOYEES
As of September 18, 1997, the Company directly employed 711 persons
worldwide, including 319 in manufacturing, 87 in engineering and product
development, 66 in customer service, 107 in sales, 105 in management and
administration and 27 in marketing. In addition, the Company's China facility
employs 389 persons who are under the supervision of the Company, including
approximately 331 in manufacturing, 10 in engineering and product development,
three in customer service, six in sales and 39 in management and
administration. None of the Company's employees is represented by a collective
bargaining organization, and the Company's management believes its employee
relations are good.
PROPERTIES
The Company conducts manufacturing, research and general office operations
at its 92,000 square foot facility at 130 Perinton Parkway, Fairport, New
York.
Radionics' research, product configuration and general office operations are
conducted at its 156,000 square foot facility located in Salinas, California,
the lease on which expires in July 1999. The manufacturing of Radionics'
products has been transitioned to the Company's China and Fairport facilities.
The Company's China manufacturing operations are conducted in a 70,000
square foot manufacturing facility in Zhuhai, China. Detection Systems (HK)
Ltd., a subsidiary of the Company ("DS Hong Kong"), leases the facility from
the local Chinese government under a ten-year lease which expires May 31,
2005. DS Hong
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<PAGE>
Kong has also entered into a sub-contracting agreement which runs through June
2000 and provides for the local Chinese government to arrange for personnel
and utilities and for DS Hong Kong to furnish manufacturing equipment, raw
materials and management services. Pursuant to this agreement DS Hong Kong
pays a fee and production expenses to the local Chinese government and makes
payments to the workers at the facility.
LEGAL
The Company experiences routine litigation in the normal course of its
business. The Company occasionally receives, and may receive in the future,
communications from third parties claiming that the Company's products or
technologies infringe on such parties' intellectual property rights. The
Company does not believe that any pending or threatened litigation or
intellectual property claims will have a material adverse effect on the
financial condition or results of operation of the Company.
32
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Karl H. Kostusiak............ 58 Chairman of the Board, Chief Executive
Officer and President
David B. Lederer............. 58 Executive Vice President and Director
Lawrence R. Tracy............ 50 President of Detection Systems International,
Inc. and Radionics, Inc., subsidiaries of
the Company
Frank J. Ryan................ 44 Vice President, Secretary and Treasurer
George E. Behlke............. 39 Vice President, Engineering
Donald R. Adair.............. 53 Director
Mortimer B. Fuller, III...... 55 Director
Edward C. McIrvine........... 63 Director
</TABLE>
Karl H. Kostusiak has been President and Chief Executive Officer of the
Company since its founding in 1968. He has been a director of the Company
since 1968 and also serves as Chairman of the Board. He is a graduate of the
State University of New York at Buffalo with a Bachelor of Science in
Electrical Engineering and of the University of Rochester with a Master of
Science in Electrical Engineering. Mr. Kostusiak is a member of and actively
participates in the American Society for Industrial Security, the Central
Station Alarm Association, the National Burglar and Fire Alarm Association,
the National Fire Protection Association and the Security Industry
Association.
David B. Lederer, one of the founders of the Company, has been Executive
Vice President of the Company since 1981 and a director since 1968. He is a
graduate of the University of Nebraska with a Bachelor of Science and Master
of Science in Electrical Engineering. Mr. Lederer is a member of the American
Society for Industrial Security, the Central Station Alarm Association, the
National Burglar and Fire Alarm Association, the National Electrical
Manufacturers Association and the Security Industry Association.
Lawrence R. Tracy has been President of Detection Systems International,
Inc. ("DSII") since he joined the Company in February 1995 and has been
President of Radionics since March 1996. Both DSII and Radionics are
subsidiaries of the Company. Prior to joining the Company, Mr. Tracy was
President and Chief Executive Officer of C&K Systems, Inc., a position he held
for 13 years. Mr. Tracy is a member of the American Society for Industrial
Security, the Central Station Alarm Association, the National Burglar and Fire
Alarm Association, the National Fire Protection Association and the Security
Industry Association.
Frank J. Ryan has been Vice President of the Company since 1988 and has
served as the Company's Chief Financial Officer since 1982. He is also the
Company's Secretary and Treasurer. He is a graduate of the State University of
New York at Fredonia. Mr. Ryan is a member of the Institute of Management
Accountants, the Central Station Alarm Association and the National
Association of Manufacturing.
George E. Behlke has served as the Company's Vice President, Engineering
since May 1995. Mr. Behlke has been with the Company since 1977 and served as
its Engineering Manager from 1984 until May 1995. His efforts in the
development of intrusion and smoke sensors have resulted in numerous patents
held by the Company. Mr. Behlke is a graduate of Alfred State Agriculture and
Technical College.
33
<PAGE>
Donald R. Adair has been a director of the Company since 1991 and also
serves on the Board's Compensation, Stock Option and Audit Committees. He is
the principal of Adair Law Firm, which was established in 1988 and focuses on
serving businesses in Rochester, New York. He is a graduate of Harvard College
and Cornell Law School. Mr. Adair is also a director of Stone Construction
Equipment, Inc. in Honeoye, New York, and Victor Insulators, Inc. in Victor,
New York.
Mortimer B. Fuller, III has been a director of the Company since 1990 and
also serves on the Board's Compensation, Stock Option and Audit Committees.
Since 1977, he has been President and Chief Executive Officer of Genesee and
Wyoming Industries, Inc., a holding company in Greenwich, Connecticut which
owns and operates regional and short line freight railroads and provides rail
related services to railroads and shippers. He is a graduate of Princeton
University, Boston University School of Law and Harvard Business School.
Mr. Fuller is also a director of Genesee and Wyoming Industries and the
American Short Line Railroad Association. He is a founding member of the
Regional Railroads of America, and serves on that Association's executive
committee. He is also a trustee of the Lawrenceville School.
Edward C. McIrvine has been a director of the Company since 1981 and also
serves on the Board's Compensation, Stock Option and Audit Committees. Since
1987, he has been a self-employed research and development management
consultant and, from 1987 through 1991, he served as Dean of the College of
Graphic Arts and Photography at the Rochester Institute of Technology in
Rochester, New York. He is a graduate of the University of Minnesota and
earned his Ph.D. in Theoretical Physics from Cornell University. He is an
elected Fellow of the American Physical Society and served on the Board of the
American Institute of Physics.
34
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the compensation
of the Company's Chief Executive Officer and certain other executive officers
of the Company (collectively, the "Named Executive Officers") for fiscal years
ended March 31, 1997, 1996 and 1995. The Company did not grant any restricted
stock awards or stock appreciation rights or make any long-term incentive plan
payouts during the years indicated.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
FISCAL COMPEN- OPTIONS/ COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION($) SARS(#) SATION($)(1)
- --------------------------- ------ --------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Karl H. Kostusiak........ 1997 212,100 403,333 --(2) -- 3,266
Chairman, President and
CEO 1996 205,926 1,419 26,186 -- 2,542
1995 196,110 184,746 --(2) -- 2,625
David B. Lederer......... 1997 169,700 322,670 --(2) -- 3,364
Executive Vice President 1996 164,741 1,135 27,956 -- 2,534
1995 156,897 147,794 --(2) -- 2,625
Lawrence R. Tracy........ 1997 148,470 282,377 --(2) 18,775 3,301
President of Detection
Systems 1996 144,148 31,648 --(2) -- --
International, Inc. and
Radionics, Inc. 1995 21,000 102,405 --(2) 60,000 --
George E. Behlke......... 1997 108,150 81,790 24,761(3) 9,650 1,964
Vice President,
Engineering 1996 89,363 723 --(2) -- 2,272
1995 N/A N/A N/A N/A N/A
Gary Holroyd(4).......... 1997 117,636 74,587 --(3) 1,460 238
Vice President, 1996 N/A N/A N/A N/A N/A
Operations 1995 N/A N/A N/A N/A N/A
Frank J. Ryan............ 1997 108,150 59,308 --(2) 2,190 1,973
Vice President,
Secretary and 1996 105,000 723 --(2) -- 2,298
Treasurer 1995 100,000 35,017 --(2) 2,250 2,242
</TABLE>
- --------
(1) Represents contributions by the Company to accounts of the named executive
officers under the Company's 401(k) retirement savings plan.
(2) Values are less than the minimum amount required to be reported.
(3) Includes $21,000 which represents the difference between the market value
and the exercise price for a nonqualified stock option awarded during the
fiscal year.
(4) Mr. Holroyd became an officer of the Company on November 7, 1996 and
resigned effective September 5, 1997.
35
<PAGE>
Option Grants in Last Fiscal Year. The following table sets forth
information with respect to stock options granted to the Named Executive
Officers during fiscal 1997. Each grant was for incentive or nonqualified
stock options to purchase Common Stock under the Company's 1992 Restated Stock
Option Plan. All options are exercisable 40% after one year, 60% after two
years, 80% after three years and 100% after four years. Options awarded prior
to December 17, 1996 were adjusted to reflect the three-for-two stock split
effected on that date. The Company has not granted any stock appreciation
rights.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
NUMBER OF TOTAL EXERCISE PRICE
SECURITIES OPTIONS/SARS OR APPRECIATION FOR
UNDERLYING GRANTED TO BASE MARKET OPTION TERM
OPTION/SARS EMPLOYEE IN PRICE PRICE EXPIRATION ----------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) ($/SH) DATE 5% ($) 10% ($)
- ---- ----------- ------------ -------- ------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
K. Kostusiak............ -- -- -- -- -- -- --
D. Lederer.............. -- -- -- -- -- -- --
L. Tracy................ 6,000 37.5% 10.00 13.50 11/6/06 37,740 95,640
12,775 19.25 19.25 1/21/02 67,963 150,106
G. Behlke............... 6,000 19.2% 10.00 13.50 11/6/06 37,740 95,640
3,650 19.25 19.25 1/21/02 19,418 42,888
G. Holroyd.............. 1,460 2.9% 19.25 19.25 1/21/02 7,767 17,155
F. Ryan................. 2,190 4.4% 19.25 19.25 1/21/02 11,651 25,733
</TABLE>
Option Exercises in Last Fiscal Year and Year-End Option Values. The
following table sets forth information with respect to the Named Executive
Officers concerning the exercise of options during fiscal 1997 and unexercised
options held as of March 31, 1997. The value of the underlying securities was
determined by taking the market value at year-end minus the exercise price.
The market price of the Company's stock on March 31, 1997 was $17.50 per
share.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT MARCH 31, 1997 (#) MARCH 31, 1997 ($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------ ------------ ----------------------------- -------------------------
<S> <C> <C> <C> <C>
K. Kostusiak............ -- -- -- --
D. Lederer.............. -- -- -- --
L. Tracy................ -- -- 36,000/42,775 474,000/338,644
G. Behlke............... 6,444 101,465 0/12,650 0/76,614
G. Holroyd.............. -- -- 3,000/5,960 41,000/58,945
F. Ryan................. 3,240 19,408 1,350/3,090 17,100/7,568
</TABLE>
At March 31, 1997, Messrs. Kostusiak, Lederer and Ryan had stock option
loans outstanding that totaled $169,896, $123,365 and $60,498, respectively.
As of September 18, 1997, the outstanding balances were $163,569, $118,143 and
$57,092, respectively. The loans carry interest rates ranging from 5.54% to
8.42%.
EMPLOYMENT AGREEMENTS
Executive Agreements. The Company has employment agreements with three of
its executive officers, Messrs. Kostusiak, Lederer and Tracy (the "Executive
Agreements"). The Executive Agreements with Messrs. Kostusiak and Lederer are
through August 2002 and the agreement with Mr. Tracy is through February 1999.
The Executive Agreements provide for severance benefits under certain
circumstances. The terms "change of control," "cause" and "disability" are
used in the following description as defined in the Executive Agreements. The
Executive Agreements terminate upon the executive's death or permanent
disability except as described below.
36
<PAGE>
Under the agreements with Messrs. Kostusiak and Lederer, if the Company
terminates the executive's employment without cause, the Company will continue
compensation and benefits to the executive for the then remaining balance of
the term of employment or for a period of three years from the date of
termination, whichever is longer. Under such circumstances, Mr. Tracy's
agreement provides that his compensation will continue for the then remaining
balance of the term of employment or for a period of one year from the date of
termination, whichever is longer. The continuation of compensation and
benefits includes the executive's base salary plus participation in all
applicable executive incentive compensation plans and fringe benefit packages.
Further, if Mr. Kostusiak's or Mr. Lederer's employment is terminated by the
Company without cause after expiration of the agreement but prior to the
Company and the executive reaching agreement with respect to the executive's
retirement benefits, the Company will also continue the executive's
compensation and benefits for a period of two years from the date of
termination.
If the Company terminates Mr. Kostusiak's or Mr. Lederer's employment for
cause, each will receive compensation and benefits for the remaining balance
of the term of employment or for a period of three years from the date of
termination, whichever is longer, provided that this compensation is reduced
by any monetary damage suffered by the Company due to the cause. The same
applies for Mr. Tracy, except that compensation and benefits will continue for
the remaining balance of the term of employment or for a period of one year
from the date of termination, whichever is longer.
If, within four months after a "change in control," as defined in the
Executive Agreements, Mr. Kostusiak's or Mr. Lederer's employment is
terminated by the Company or the executive, each would be entitled to receive:
(a) the base salary through the termination date, as in effect at the time of
termination or at the time the change in control occurs, whichever is higher,
plus any bonus which has been earned but not yet paid; (b) an amount equal to
three times the highest total base salary and bonus compensation paid to him
in any of the Company's preceding three fiscal years; and (c) the continuation
of fringe benefits for three years after termination. No provision relating to
a change of control is included in Mr. Tracy's agreement.
All three agreements restrict the executives from competing with the Company
for various periods subsequent to termination of employment, depending on the
circumstances of the termination.
Pension Provisions. Under the terms of the Executive Agreements, the Company
will pay each of them retirement benefits for his lifetime and for his
spouse's lifetime, if his spouse survives him, as follows: (i) a retirement
wage benefit initially equal to 12% of his base salary on the date of his
retirement or death, increased each year thereafter by any increase, less
0.5%, in the Consumer Price Index (except that the wage benefit shall be 75%
of that amount after executive's death); (ii) continuation of his full health
insurance or similar benefit for him and his spouse; and (iii) continuation of
any other benefit programs that provide continuation pursuant to their terms.
Based on a 5% compounded annual increase in their base compensation, and
assuming that they each retire at age 65, the estimated initial annual benefit
that would be payable to Messrs. Kostusiak and Lederer under the pension plan
provision in their Executive Agreements would be $34,108 and $27,290,
respectively.
The Executive Agreements further provide that: (i) the payment of retirement
benefits may be terminated if an executive has violated the non-competition
provisions of his Executive Agreement, and (ii) the Company will purchase and
maintain life insurance sufficient to fund the estimated benefits for the
spouse (any excess policy proceeds to be available, if agreed, to purchase
shares of the Company's Common Stock held in the executive's estate) and the
policy or policies of such insurance shall be held in a trust designed for
this purpose.
Changes in Mr. Lederer's Employment. Mr. Lederer and the Company have
entered into a part-time employment agreement which will become effective and
supersede his Executive Agreement on April 2, 1998, contingent on Mr. Lederer
being able to sell at least 135,000 shares of Common Stock in this offering.
Mr. Lederer's part-time agreement is identical to his Executive Agreement
except that he only works half time and his compensation and benefits are
adjusted accordingly. Also, if Mr. Lederer is terminated after the expiration
of the agreement he is not entitled to receive compensation and benefits for
two years. The part-time agreement will expire in April 2003.
37
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information concerning the beneficial
ownership of the Common Stock as of September 18, 1997 and as adjusted to
reflect the sale of 1,325,000 shares of Common Stock by the Company and the
sale of 220,000 shares of Common Stock by the Selling Shareholders, by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the outstanding Common Stock, (ii) each of the Selling Shareholders, (iii)
each director of the Company, (iv) each of the Named Executive Officers and
(v) all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING(1) SHARES TO BE OFFERING(1)
------------------------------- SOLD IN ----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERING NUMBER PERCENT
- ------------------------ ----------- --------------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Donald R. Adair......... 1,549(2) * -- 1,549 *
George E. Behlke........ 38,393(3)(4) * -- 38,393 *
Mortimer B. Fuller,
III.................... 3,645 * -- 3,645 *
Karl H. Kostusiak....... 636,161(4) 12.9% 72,000 564,161 9.3%
David B. Lederer........ 451,276(4) 9.2% 130,000 321,276 5.4%
Edward C. McIrvine...... 25,325(5) * -- 25,325 *
Frank J. Ryan........... 80,012(3)(4)(6) 1.7% 8,000 72,012 1.2%
Lawrence R. Tracy....... 100,008(3)(4) 2.1% 10,000 90,008 1.5%
All Directors and
Executive Officers as a
Group (8 persons)...... 1,336,369(2)-(6) 26.1% 220,000 1,116,369 17.9%
Dimensional Fund
Advisors, Inc.......... 253,572 5.3% -- 253,572 4.3%
</TABLE>
- --------
* Percentage of Common Stock owned is less than 1%.
(1) For all shares listed, each person possesses both sole voting and
investment power, except for those shares indicated in notes (2)-(6)
below. The share amounts include the shares of Common Stock actually owned
as of September 18, 1997 and the shares of Common Stock which the person
or group had the right to acquire within 60 days of such date. In
calculating the percentage of ownership, all shares of Common Stock which
the identified person or group had the right to acquire within 60 days of
September 18, 1997 upon the exercise of options or retirement are deemed
to be outstanding for the purpose of computing the percentage of shares of
Common Stock owned by such person or group, but are not deemed to be
outstanding for the purpose of computing the percentage of the shares of
Common Stock owned by any other person.
(2) Includes 1,173 shares held in custodianship for Mr. Adair's children under
the Uniform Gifts to Minors Act of New York for which shares Mr. Adair
disclaims beneficial ownership.
(3) Includes 1,500, 1,800, 36,000 and 39,300 shares which may be acquired upon
exercise of warrants and options held by Messrs. Behlke, Ryan, Tracy and
all directors and executive officers as a group, respectively.
(4) Includes 9,234, 179,840, 117,465, 8,492, 6,488 and 321,519 hypothetical
shares credited to the accounts of Messrs. Behlke, Kostusiak, Lederer,
Ryan, Tracy and all directors and executive officers as a group,
respectively, pursuant to the Company's deferred compensation plans, which
shares may be acquired upon retirement.
(5) Includes 20,300 shares held by Dr. McIrvine's wife for which shares he
disclaims beneficial ownership.
(6) Includes 810 shares held in trust for Mr. Ryan's son under the Uniform
Gifts to Minors Act of New York for which shares Mr. Ryan disclaims
beneficial ownership.
38
<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company consists of 12,000,000 shares of
common stock, par value $0.05 per share (the "Common Stock"). As of the date
of this Prospectus, there are 4,767,932 issued and outstanding shares of
Common Stock. As of such date, there are outstanding options to purchase
320,110 shares of Common Stock pursuant to the Company's 1992 Restated Stock
Option Plan at exercise prices ranging from $3.75 per share to $22.75 per
share with a weighted average exercise price of $6.72 per share. In addition,
the Company has outstanding warrants to purchase 15,000 shares of Common Stock
for $3.83 per share and 1,500 shares of Common Stock for $13.50 per share.
There are also 98,019 shares of Common Stock issuable under the Company's
Deferred Compensation Plan and 278,528 shares of Common Stock issuable under
the Company's Deferred Stock Bonus Plan. The following description of the
Common Stock is qualified in its entirety by reference to the Company's
Certificate of Incorporation and By-laws, which are exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Common Stock possesses ordinary voting rights, and the holders thereof
vote together as a single class for the election of directors and in respect
of other corporate matters. Holders of shares of Common Stock are entitled to
one vote per share, and cumulative voting of shares is not permitted. In the
event of the voluntary or involuntary liquidation, distribution or sale of
assets, dissolution or winding up of the Company, the holders of Common Stock
are entitled to receive and share ratably in all net assets available for
distribution to shareholders after satisfaction of the Company's liabilities.
The Common Stock carries no preemptive rights and is not convertible,
redeemable or assessable. The holders of Common Stock are entitled to such
dividends as may be declared by the Company's Board of Directors and paid out
of funds legally available therefor. See "Dividend Policy."
CERTAIN PROVISIONS OF LAW
The Company is subject to anti-takeover provisions under New York law that
apply to a public corporation organized under New York law unless the
corporation has elected to opt out of such provisions in its Certificate of
Incorporation or, depending on the provision in question, its By-Laws. The
Company has not elected to opt out of these provisions. The Common Stock is
subject to the "affiliated transaction" provisions of Section 912 the New York
Business Corporation Law. These provisions, subject to certain exceptions,
restrict business combinations between the Company and interested shareholders
unless either the business combination or the acquisition of shares making a
person an interested shareholder (the "Triggering Acquisition") is approved by
the Board of Directors prior to the date of the Triggering Acquisition. Once
the provisions are triggered, a business combination must either (i) meet
stringent fairness requirements, or (ii) after five years from the Triggering
Acquisition have elapsed, be approved by the holders of a majority of the
outstanding voting shares of the Company excluding the interested shareholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
39
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through their
representatives, Raymond James & Associates, Inc. and Needham & Company, Inc.
(the "Representatives"), have severally agreed, subject to the terms and
conditions of the underwriting agreement (the "Underwriting Agreement") by and
among the Company, the Selling Shareholders and the Underwriters, to purchase
from the Company and the Selling Shareholders the number of shares of Common
Stock set forth below opposite their respective names, at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Raymond James & Associates, Inc. .................................. 667,500
Needham & Company, Inc. ........................................... 667,500
BT Alex. Brown Incorporated........................................ 30,000
Lehman Brothers Inc. .............................................. 30,000
Oppenheimer & Co., Inc. ........................................... 30,000
J.C. Bradford & Co. ............................................... 15,000
Joseph Charles & Assoc., Inc. ..................................... 15,000
Dain Bosworth Incorporated......................................... 15,000
Essex Capital Markets Inc. ........................................ 15,000
First Albany Corporation........................................... 15,000
Gerard Klauer Mattison & Co., LLC.................................. 15,000
Hoak Breedlove Wesneski & Co. ..................................... 15,000
Piper Jaffray Inc. ................................................ 15,000
---------
TOTAL............................................................ 1,545,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
purchased.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock directly to the public at the public offering price set forth on the
cover page of this Prospectus and to certain dealers, including the
Underwriters, at such price less a concession not in excess of $0.75 per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $0.10 per share to certain other dealers. After the public
offering, the public offering price and other selling terms may be changed by
the Underwriters. The Representatives have informed the Company and the
Selling Shareholders that the Underwriters do not intend to confirm sales to
any accounts over which they exercise discretionary authority.
Certain of the Underwriters and the selling group members that currently act
as market makers for the Common Stock may engage in "passive market making" in
the Common Stock on the Nasdaq National Market in accordance with Rule 103 of
Regulation M under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Rule 103 permits, upon satisfaction of certain conditions,
underwriters and selling group members participating in a distribution that
are also Nasdaq market makers in the security being distributed to engage in
limited market making activity when Rule 101 would otherwise prohibit such
activity. Rule 103 prohibits underwriters and selling group members engaged in
passive market making generally from entering a bid or effecting a purchase at
a price that exceeds the highest bid for those securities displayed on the
Nasdaq National Market by a market maker that is not participating in the
distribution of the Common Stock. Each underwriter or selling group member
engaged in passive market making is subject to a daily net purchase
40
<PAGE>
limitation equal to 30% of such entity's average daily trading volume during
the two full consecutive calendar months immediately preceding the date of the
filing of the Registration Statement of which this Prospectus forms a part.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to an aggregate
of 231,750 additional shares of Common Stock, at the public offering price,
less the underwriting discounts and commissions, set forth on the cover page
of this Prospectus. To the extent that the Underwriters exercise such option,
each of the Underwriters will have a firm commitment to purchase approximately
the same percentage thereof which the number of shares of Common Stock to be
purchased by it shown in the above table bears to the total shown, and the
Company will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise this option only to cover over-
allotments, if any, made in connection with the sale of the shares of Common
Stock offered hereby. If purchased, the Underwriters will sell such additional
shares on the same terms as those on which the shares are being offered.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against, and to contribute to losses arising out of, certain
civil liabilities in connection with this offering, including liabilities
under the Securities Act.
The Company, its officers and directors and the Selling Shareholders have
agreed that for a period of 120 days following the date of this Prospectus,
they will not, except with the prior written consent of Raymond James &
Associates, Inc., acting for the Underwriters, sell, contract to sell or
otherwise dispose of any shares of Common Stock. This restriction does not
apply to shares sold by Selling Shareholders hereunder or certain issuances of
Common Stock by the Company pursuant to its stock option plans. See "Risk
Factors--Shares Eligible for Future Sale."
The foregoing includes a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy
of the Underwriting Agreement that is on file as an exhibit to the
Registration Statement of which this Prospectus forms a part.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company and for the Selling Shareholders by Nixon,
Hargrave, Devans & Doyle Llp, Rochester, New York, and for the Underwriters by
Fowler, White, Gillen, Boggs, Villareal and Banker, P.A., Tampa, Florida.
EXPERTS
The consolidated financial statements and financial statement schedule of
the Company as of March 31, 1995, 1996 and 1997, and for each of the three
fiscal years in the period ended March 31, 1997, included herein and/or
incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended March 31, 1997, have been so included herein and/or
incorporated by reference in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
41
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information filed by the Company may
be inspected and copied (at prescribed rates) at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and at the following regional offices of the
Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. In addition, such reports, proxy statements and other
information can be obtained from the Commission's web site at
http://www.sec.gov. Quotations relating to the Common Stock appear on the
Nasdaq National Market. Such reports, proxy statements and other information
concerning the Company can also be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
The Company has filed with the Commission a Registration Statement on Form
S-2 (the "Registration Statement") under the Securities Act, with respect to
the shares of Common Stock offered hereby. This Prospectus, which is a part of
the Registration Statement, does not contain all the information set forth in,
or annexed as exhibits to, such Registration Statement, certain portions of
which have been omitted pursuant to rules and regulations of the Commission.
For further information with respect to the Company and the shares of Common
Stock offered hereby, reference is hereby made to such Registration Statement,
including the exhibits thereto. Copies of such Registration Statement,
including exhibits, may be obtained from the aforementioned public reference
facilities of the Commission upon payment of the prescribed fees, or may be
examined without charge at such facilities. Statements contained herein
concerning any document filed as an exhibit are not necessarily complete and,
in each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement. Each such statement is qualified in its
entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission under the
Exchange Act are incorporated by reference in and made a part of this
Prospectus:
(a) the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997;
(b) the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, as amended by Form 10-Q/A, filed by the Company with the
Commission on August 19, 1997;
(c) the Company's Proxy Statement relating to its 1997 Annual Meeting of
Shareholders;
(d) the Company's Current Report on Form 8-K dated May 7, 1997 and filed
with the Commission on May 21, 1997; and
(e) the Company's Current Report on Form 8-K dated June 24, 1997 and
filed with the Commission on July 9, 1997.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein, or in any other subsequently filed documents, which also are
incorporated or deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. The Company hereby undertakes to provide,
without charge, to each person, including any beneficial owner, to whom a copy
of this Prospectus is delivered, on the written or oral request of such
person, a copy of any or all of the information incorporated herein by
reference. Exhibits to any of such documents, however, will not be provided
unless such exhibits are specifically incorporated by reference into such
documents. The requests should be addressed to the Company's principal
executive offices: Attn: Secretary, 130 Perinton Parkway, Fairport, New York
14450, telephone number (716) 223-4060.
42
<PAGE>
DETECTION SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets at March 31, 1995, 1996 and 1997............. F-3
Consolidated Statement of Operations and Retained Earnings for the years
ended March 31, 1995, 1996 and 1997..................................... F-4
Consolidated Statement of Cash Flows for the years ended March 31, 1995,
1996 and 1997........................................................... F-5
Notes to Consolidated Financial Statements for the years ended March 31,
1995, 1996 and 1997..................................................... F-6
Consolidated Balance Sheets at March 31, 1997 and June 30, 1997
(unaudited)............................................................. F-18
Consolidated Statement of Operations and Retained Earnings for the three
months ended June 30, 1996 and 1997 (unaudited)......................... F-19
Consolidated Statement of Cash Flows for the three months ended June 30,
1996 and 1997 (unaudited)............................................... F-20
Notes to Consolidated Financial Statements for the three months ended
June 30, 1997........................................................... F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Detection Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Detection
Systems, Inc. and its subsidiaries at March 31, 1995, 1996 and 1997 and the
results of their operations and their cash flows for each of the three years
in the period ended March 31, 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Rochester, New York
June 2, 1997
F-2
<PAGE>
DETECTION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 4,597,047 $ 930,012 $ 2,244,265
Short term investments............... 2,421,546 -- --
Accounts receivable, less allowance
for doubtful accounts ($100,000 in
1995, $235,000 in 1996 and $313,800
in 1997)............................ 4,916,052 10,482,660 15,246,309
Inventories.......................... 5,255,724 14,065,843 29,995,215
Deferred income taxes................ 354,500 1,554,900 2,132,156
Prepaid expenses and other assets.... 408,406 1,392,913 883,137
----------- ----------- -----------
17,953,275 28,426,328 50,501,082
----------- ----------- -----------
Fixed assets, net...................... 3,920,571 7,085,357 11,057,256
Property under capital lease, net...... 2,725,513 2,491,475 190,915
Deferred income taxes.................. -- 3,983,200 3,046,200
Goodwill and other intangibles, net.... -- 3,762,327 2,942,626
Other assets........................... 145,934 148,891 537,772
----------- ----------- -----------
Total assets......................... $24,745,293 $45,897,578 $68,275,851
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable........................ -- $ 1,183,750 --
Current portion of long term debt.... -- -- $ 953,648
Current portion of capital lease
obligation.......................... $ 434,934 559,860 147,574
Accounts payable..................... 1,213,958 6,231,737 12,259,380
Accrued payroll and benefits......... 1,074,103 1,566,777 2,818,487
Other accrued liabilities............ 266,526 3,171,914 3,254,593
----------- ----------- -----------
2,989,521 12,714,038 19,433,682
----------- ----------- -----------
Obligations under capital leases..... 745,733 186,471 54,125
Other long term debt................. -- 17,750,000 28,031,802
Other long term liabilities.......... 1,815,838 3,677,786 2,924,975
Shareholders' equity:
Common stock, par value $.05 per
share
Authorized--12,000,000 shares
Issued--2,792,489 shares in 1995,
2,811,361 shares in 1996 and
4,478,993 shares in 1997........... 139,624 140,568 223,950
Capital in excess of par value....... 6,853,246 6,972,431 9,448,917
Retained earnings.................... 12,724,265 4,869,022 8,594,306
----------- ----------- -----------
19,717,135 11,982,021 18,267,173
Less--Treasury stock, at cost.......... (36,326) (12,363) (52,553)
Notes receivable for stock purchases... (486,608) (392,514) (378,373)
Cumulative translation adjustment...... -- (7,861) (4,980)
----------- ----------- -----------
Total shareholders' equity........... 19,194,201 11,569,283 17,831,267
----------- ----------- -----------
Total liabilities and shareholders'
equity.............................. $24,745,293 $45,897,578 $68,275,851
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DETECTION SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Net sales............................... $34,336,336 $41,857,809 $101,251,380
Costs and expenses:
Production............................ 20,829,843 27,978,460 64,916,410
Research and development.............. 4,070,443 4,699,643 8,114,671
Purchased in-process research and
development.......................... -- 9,350,000 --
Marketing, administrative and
general.............................. 6,788,924 10,514,797 21,411,444
----------- ----------- ------------
31,689,210 52,542,900 94,442,525
----------- ----------- ------------
Operating income (loss)................. 2,647,126 (10,685,091) 6,808,855
Interest income......................... 113,420 340,311 206,049
Interest expense........................ 168,557 320,463 1,764,620
----------- ----------- ------------
Income (loss) before taxes.............. 2,591,989 (10,665,243) 5,250,284
Provision (benefit) for taxes........... 1,077,500 (2,810,000) 1,525,000
----------- ----------- ------------
Net income (loss)....................... 1,514,489 (7,855,243) 3,725,284
Retained earnings at beginning of year.. 11,209,776 12,724,265 4,869,022
----------- ----------- ------------
Retained earnings at end of year........ $12,724,265 $ 4,869,022 $ 8,594,306
=========== =========== ============
Earnings (loss) per common and common
equivalent share....................... $ .35 $ (1.83) $ .76
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DETECTION SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................... $ 1,514,489 $ (7,855,243) $ 3,725,284
----------- ------------ ------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 1,502,516 2,043,373 2,737,438
Purchased in-process research and
development....................... -- 9,350,000 --
Loss (gain) on disposition of fixed
assets............................ 8,561 275,349 (14,670)
Deferred compensation.............. 103,933 218,248 5,395
Deferred income taxes.............. (123,500) (3,536,000) 177,800
Stock based compensation........... 48,800 34,763 146,950
Changes in operating assets and
liabilities:
Accounts receivable................ 480,783 (1,156,325) (4,763,649)
Inventories........................ 590,227 (4,264,805) (15,929,372)
Prepaid expenses and other assets.. 3,069 (634,523) 120,895
Accounts payable................... 514,680 2,354,624 6,027,687
Accrued payroll and benefits....... 102,232 190,159 1,251,710
Other accrued liabilities.......... (62,592) (460,930) (99,684)
----------- ------------ ------------
Total adjustments................ 3,168,709 4,413,933 (10,339,500)
----------- ------------ ------------
Net cash provided by (used in)
operating activities................ 4,683,198 (3,441,310) (6,614,216)
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Radionics net of cash
acquired............................ -- (17,965,381) --
Capital expenditures................. (1,358,009) (3,376,867) (3,968,349)
Short term investments............... (2,437,842) 2,421,546 --
----------- ------------ ------------
Net cash (used in) investing
activities.......................... (3,795,851) (18,920,702) (3,968,349)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable........................ -- 1,183,750 --
Proceeds from long term debt......... -- 17,750,000 10,047,007
Principal payments on long term debt
and capital lease obligations....... (401,815) (434,336) (539,939)
Issuance of common stock............. 140,375 94,295 2,238,805
Stock options exercised.............. 47,733 109,129 148,064
----------- ------------ ------------
Net cash (used in) provided by
financing activities................ (213,707) 18,702,838 11,893,937
----------- ------------ ------------
Effect of exchange rate changes...... -- (7,861) 2,881
Net increase (decrease) in cash and
cash equivalents.................... 673,640 (3,667,035) 1,314,253
Cash and cash equivalents at
beginning of year................... 3,923,407 4,597,047 930,012
----------- ------------ ------------
Cash and cash equivalents at end of
year................................ $ 4,597,047 $ 930,012 $ 2,244,265
=========== ============ ============
Cash paid during the year for:
Interest........................... $ 173,709 $ 226,929 $ 1,574,812
=========== ============ ============
Income taxes....................... $ 1,141,276 $ 1,041,284 $ 1,095,754
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995, 1996 AND 1997
NOTE 1--DESCRIPTION OF OPERATIONS AND ACCOUNTING POLICIES:
DESCRIPTION OF OPERATIONS--
Detection Systems, Inc. (the "Company") designs, manufactures and markets
electronic detection, control and communication equipment for the security,
fire protection, access control and CCTV industries. From its inception in
1968 until 1995, the Company was primarily a niche provider of intrusion
detection devices for the domestic market. In 1995, the Company adopted a
strategy designed to substantially expand its product offerings, establish an
international sales presence, increase its manufacturing capacity and improve
its manufacturing cost structure. The Company has since made five
acquisitions, opened sales offices in six countries and successfully
established a manufacturing facility in China. These initiatives have enabled
the Company to significantly expand its product catalog and market scope.
PRINCIPLES OF CONSOLIDATION--
The consolidated financial statements of the Company include all majority-
owned U.S. and non-U.S. subsidiaries. Intercompany accounts, transactions and
profits are eliminated. Certain amounts in the prior years' financial
statements have been reclassified to conform with the current year's
presentation.
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 at
year-end as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS--
Cash equivalents include time deposits and highly liquid investments with
original maturities of three months or less.
INVESTMENTS--
The Company accounts for its investment securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." All of the Company's
reported investments are classified as available for sale. Accordingly,
unrealized holding gains and losses, net of applicable taxes, are excluded
from income and recognized as a separate component of shareholders' equity
until realized.
INVENTORIES--
Inventories, which include materials, labor and overhead, are recorded at
the lower of cost, determined by the first-in, first-out method, or market
value.
FIXED ASSETS AND PROPERTY UNDER CAPITAL LEASE--
The building and related improvements are depreciated using the straight-
line method over an estimated useful life ranging from 26 to 40 years. Land
improvements, machinery and equipment, production tooling and furniture are
depreciated on the straight-line method over estimated useful lives ranging
from three to ten years. Expenditures for maintenance and repairs are charged
to expense as incurred. Major improvements are capitalized.
F-6
<PAGE>
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GOODWILL AND OTHER INTANGIBLES--
Goodwill and other intangibles represents the excess of the cost of net
tangible assets acquired in business combinations over their fair value.
Goodwill and other intangibles are amortized using the straight-line method
over periods ranging from three to twenty years. The Company evaluates
goodwill and intangibles for impairment at least annually by comparing its
best estimate of undiscounted future cash flows to the respective carrying
amount. Accumulated amortization at March 31, 1996 and 1997 was approximately
$69,000 and $494,000, respectively.
RETIREMENT PLANS--
The Company has two defined contribution pension plans which, in aggregate,
cover substantially all domestic employees. The first plan requires the
Company to match 100% of an employee's contribution up to one percent of the
employee's base salary and 25% of an employee's contribution between two and
four percent of the employee's base salary. The second plan permits employees
to contribute up to 20% of their eligible earnings. Annual contributions by
the Company, out of its net profits, are in amounts approved by the Companys
Board of Directors.
The Company's contributions to these plans were approximately $113,000,
$117,000 and $155,000 in 1995, 1996 and 1997, respectively.
During the first quarter of fiscal 1997 the Company established a defined
benefit pension plan for certain key executives. The plan provides for an
annual benefit of 12% of their ending annual compensation and medical expense
coverage for life after retirement. The liability is being recognized over
their remaining service periods.
REVENUE RECOGNITION--
Revenues are recognized when product is shipped.
RESEARCH AND DEVELOPMENT COSTS--
All product development costs are charged to operations during the period
incurred.
FOREIGN CURRENCY TRANSLATION--
Assets and liabilities of non-U.S. subsidiaries are translated at current
exchange rates, and related revenues and expenses are translated at average
exchange rates in effect during the period. Resulting translation adjustments
are recorded as a separate component of shareholders equity.
STOCK BASED COMPENSATION--
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," which requires compensation cost
to be recognized based on the difference, if any, between the quoted market
price of the stock on the grant date and the amount an employee must pay to
acquire the stock.
INCOME TAXES--
The Company accounts for certain income and expense items differently for
financial reporting and income tax purposes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities applying enacted statutory rates in effect for
the year in which the differences are expected to reverse.
F-7
<PAGE>
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK SPLIT--
On November 7, 1996, a meeting of the Board of Directors was held
authorizing a three-for-two stock split effective December 17, 1996 for
shareholders of record at the close of business on November 27, 1996. All
references in the consolidated financial statements referring to share prices,
per share amounts and stock plans have been adjusted retroactively for the
three-for-two stock split.
EARNINGS PER SHARE--
The computation of earnings (loss) per common and common equivalent share is
based upon the weighted average number of common and common equivalent shares
outstanding during the period. The weighted average common and common
equivalent shares used in this calculation, as adjusted to reflect the three-
for-two stock split, were 4,483,706, 4,285,238 and 4,933,541 in 1995, 1996 and
1997, respectively.
The earnings per share computations do not consider common equivalent shares
when the Company is in a loss position or when the effect of such inclusion is
anti-dilutive. There was no material difference between primary and fully
diluted earnings per share in 1995, 1996 and 1997, respectively.
CONCENTRATION OF CREDIT RISK--
Financial instruments which potentially expose the Company to concentration
of credit risk consist principally of bank deposits, temporary investments and
accounts receivable. The Company performs ongoing credit evaluations of its
customers' financial condition and the Company maintains an allowance for
uncollectible accounts receivable based upon the expected collectibility of
all accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS--
The carrying amount of the Company's financial instruments, including cash
and cash equivalents, short-term investments, accounts receivable and notes
payable, approximates their fair value at March 31, 1996 and 1997 as the
maturity of these instruments is short term. The carrying amount of the
Company's long term debt obligations approximates their fair value as the
interest rates on such obligations approximate the market rate at March 31,
1996 and 1997.
CASH FLOW STATEMENT--
The Company accepted notes receivable from employees for stock purchases in
the amount of $258,071, $13,314 and $22,758 in 1995, 1996 and 1997,
respectively.
NEW ACCOUNTING STANDARDS--
In February 1997, SFAS No. 128, "Earnings Per Share," was issued by the
Financial Accounting Standards Board. SFAS No. 128 specified modifications to
the calculation of earnings per share from that currently used by the Company.
Under SFAS No. 128, "basic earnings per share" is calculated based upon the
weighted average number of common shares actually outstanding, and "diluted
earnings per share" is calculated based upon the weighted average number of
common shares outstanding and other potential common shares (e.g. stock
options and warrants) if they are dilutive. SFAS No. 128 is effective for
periods ending after December 15, 1997 and will be adopted at that time. Had
the Company determined earnings per share in accordance with SFAS No. 128, for
the years ended March 31, 1995, 1996 and 1997, basic pro forma earnings (loss)
per share would have been $.37, ($1.87) and $.85, respectively, and pro forma
diluted earnings (loss) per share would have been $.34, ($1.87) and $.75,
respectively.
F-8
<PAGE>
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--ACQUISITIONS:
In July 1996, the Company acquired certain assets and patent rights of
Senses International, Inc., a manufacturer of long range wireless alarm
transmission equipment. The Company paid approximately $600,000 for these
assets.
In February 1996, the Company acquired all of the stock of Radionics, Inc.
(Radionics) for a total cash purchase price, including expenses, of
approximately $18.2 million. Funding for the acquisition was provided by
borrowings from a commercial bank pursuant to a term loan facility (Note 6).
The acquisition of Radionics was accounted for under the purchase method,
and Radionics' results of operations have been consolidated with the Company's
results of operations effective as of the acquisition date. The Company made a
determination and allocation of the purchase price as of the acquisition date
and finalized this allocation during fiscal 1997. The allocation of purchase
price consisted of the following:
<TABLE>
<S> <C>
Accounts receivable........................................... $ 4,410,300
Inventories................................................... 4,545,300
Other current assets.......................................... 1,638,100
Accounts payable and other current liabilities................ (6,032,000)
-----------
Net working capital acquired.................................. 4,561,700
Fixed assets.................................................. 1,803,600
Purchased in-process research and development................. 9,350,000
Goodwill and other intangibles................................ 3,351,400
Other non-current items, net.................................. (899,500)
-----------
Total purchase price, including expenses.................... $18,167,200
===========
</TABLE>
The valuation of technology, including other intangibles, was accomplished
through the application of an income approach. Projected debt-free income,
revenue net of provision for operating expenses, income taxes and returns on
requisite assets were discounted to a present value. This approach was used
for each of the Radionics product lines. Technology was divided into two
categories: current products and in-process research and development.
Current products included those products currently in the market place as of
the acquisition date and products which, while still in the development stage
at the acquisition date, were technologically feasible. The fair market value
of the purchased current products was determined to be $890,000. This amount
is recorded as an intangible asset and is being amortized on a straight line
basis over three years.
Purchased in-process research and development included the value of products
still in the development stage, but not considered to have reached
technological feasibility. As a result of the valuation, the fair market value
of the purchased in-process research and development was determined to be
$9,350,000. In accordance with generally accepted accounting practice, this
amount was expensed upon acquisition in the fourth quarter of fiscal 1996.
The following table summarizes, on an unaudited, pro forma basis, the
estimated combined results of operations of the Company as though the
acquisition was made at the beginning of 1995 and 1996. For purposes of
preparing the unaudited pro forma information, the results from Detection
Systems' years ended March 31, 1995 and 1996 have been combined with the
results of Radionics' years ended December 31, 1994 and 1995, respectively.
The pro forma amounts do not necessarily reflect the results that actually
would have been obtained
F-9
<PAGE>
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
had the transaction taken place at the beginning of periods indicated, nor are
they intended to be a projection of future results:
<TABLE>
<CAPTION>
1995 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Net revenues.................................... $78,550,000 $ 81,285,000
Costs and expenses.............................. 84,671,000 93,509,000
Loss before taxes............................... (6,121,000) (12,224,000)
Net loss........................................ (3,780,000) (7,706,000)
Net loss per share.............................. ($.88) ($1.80)
</TABLE>
The charge for in process research and development of $9,350,000 is
reflected in the fiscal year 1996 amounts above.
NOTE 3--INVENTORIES:
Major classifications of inventory are as follows.
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Component parts...................... $2,300,894 $ 6,924,870 $20,636,368
Work in process...................... 475,927 705,473 2,697,459
Finished products.................... 2,853,903 7,414,700 8,276,688
---------- ----------- -----------
5,630,724 15,045,043 31,610,515
Less-Reserve for obsolescence........ (375,000) (979,200) (1,615,300)
---------- ----------- -----------
$5,255,724 $14,065,843 $29,995,215
========== =========== ===========
</TABLE>
NOTE 4--FIXED ASSETS:
Major classifications of fixed assets are as follows.
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Land and improvements............. $ 211,735 $ 219,435 $ 714,582
Building and improvements......... 1,503,103 2,490,409 4,001,527
Machinery and equipment........... 7,099,144 9,802,633 14,080,783
Production tooling................ 3,140,152 3,134,229 3,865,900
Furniture......................... 701,142 1,120,620 1,268,455
----------- ----------- ------------
12,655,276 16,767,326 23,931,247
Less--Accumulated depreciation.... (8,734,705) (9,681,969) (12,873,991)
----------- ----------- ------------
$ 3,920,571 $ 7,085,357 $ 11,057,256
=========== =========== ============
</TABLE>
Total depreciation expense on fixed assets was approximately $1,197,700,
$1,711,100 and $2,126,700 in 1995, 1996 and 1997, respectively.
NOTE 5--CAPITAL LEASES:
During 1982, the Company entered into an agreement with a local government
agency under which the agency's bond proceeds of $3,800,000 were used to
purchase land and construct an operating facility for lease to the Company.
These expenditures had been recorded as property under capital lease.
F-10
<PAGE>
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The lease, which required quarterly principal payments of $63,330 plus
interest at two-thirds of a designated bank's prime lending rate, extended to
October 1997. However, all outstanding principal on this obligation was repaid
in June 1996, at which time title to the property passed to the Company.
The Company has various equipment under capital lease agreements which
require payments of principal and interest of $156,117 in 1998; $38,934 in
1999 and $28,682 in 2000.
Property under capital leases consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Land and improvements............... $ 495,147 $ 495,147 --
Building............................ 2,938,072 2,938,072 --
Machinery and equipment............. 1,327,591 1,327,591 $ 1,316,044
----------- ----------- -----------
4,760,810 4,760,810 1,316,044
Less--Accumulated depreciation...... (2,035,297) (2,269,335) (1,125,129)
----------- ----------- -----------
$ 2,725,513 $ 2,491,475 $ 190,915
=========== =========== ===========
</TABLE>
Obligations under capital leases are summarized below:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
1995 1996 1997
---------- --------- ---------
<S> <C> <C> <C>
Operating facility....................... $ 696,830 $ 443,510 --
Production and office equipment.......... 483,837 302,821 $ 201,699
---------- --------- ---------
1,180,667 746,331 201,699
Less--Current portion.................... (434,934) (559,860) (147,574)
---------- --------- ---------
$ 745,733 $ 186,471 $ 54,125
========== ========= =========
</TABLE>
Total depreciation expense on property under capital leases was
approximately $294,800, $263,000 and $185,000 in 1995, 1996 and 1997,
respectively.
NOTE 6--INDEBTEDNESS:
During 1996, the Company had a line of credit secured by general business
assets of the Company allowing borrowings of up to $6,500,000. At March 31,
1996, borrowings on the line of credit aggregated $1,183,750 at approximately
7.4%. The maximum amount of borrowings on the line of credit outstanding
during 1996 was $1,183,750.
During 1997, the Company increased this line of credit to $11,500,000. At
March 31, 1997, borrowings on the line of credit aggregated $11,230,757 at
approximately 9.25%. This line requires interest only payments through July
1998, at which time all outstanding principal is due. Consequently, borrowings
on this line of credit outstanding as of March 31, 1997 are classified as long
term. The maximum amount of borrowings on the line of credit outstanding
during 1997 was $11,230,757.
In connection with the acquisition of Radionics, the Company borrowed
$17,750,000, of which $3,400,000 is secured by certain real estate and matures
in April 2006. The remaining $14,350,000 is secured by general business assets
and matures in April 2003. At March 31, 1997 and 1996, the interest rate on
these borrowings was approximately 7.4%.
F-11
<PAGE>
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest on the outstanding debt accrues based upon either the federal funds
rate, the prime rate or LIBOR, each adjusted by a factor which varies based
upon the rates of funded debt to earnings before interest, tax, depreciation
and amortization.
Pursuant to the terms of the debt agreements for the obligations listed
above, the Company has certain levels and covenants to maintain with respect
to such items as working capital, funded debt and fixed charges. Failure to
comply with these guidelines constitutes default and obligations become
currently due. The Company is in compliance with all covenants and
requirements under the terms of the borrowing agreements.
Annual maturities of the Company's long term debt for the next five years
are approximately: 1998--$953,600; 1999--$14,091,700; 2000--$2,860,900; 2001--
$2,860,900; and 2002--$2,860,900.
NOTE 7--DEFERRED COMPENSATION PLANS:
The Company's deferred compensation plan allows certain employees to defer
the receipt of salary or bonuses which they may be entitled to receive. The
compensation is normally payable at retirement, and is fully vested when
deferred. For salaries or bonuses deferred, the employee elects, at the time
of deferral, to be paid in either stock or cash plus interest which has
accrued from the date of deferral.
Unissued common share equivalents are limited to 145,800 shares under
provisions of the plan. As of March 31, 1995, 1996 and 1997, unissued common
share equivalents of 89,636, 97,537 and 98,019 respectively, existed under the
plan.
The Company's stock bonus plan provides for bonuses payable in stock to
certain officers and key personnel if specified sales growth, pretax profit
growth and earning per share goals are attained. The plan also provides that
recipients may defer receipt of stock bonuses until retirement. The bonus is
fully vested when deferred. Unissued common share equivalents existing under
the plan were 227,610 in 1995, 252,390 in 1996 and 252,390 in 1997.
F-12
<PAGE>
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--SHAREHOLDERS' EQUITY:
The following table presents the changes in shareholders' equity balances
during the three years ended March 31, 1997.
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK CAPITAL IN
------------------ ------------------ EXCESS OF
SHARES AMOUNT SHARES AMOUNT PAR VALUE
--------- -------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balances, March 31, 1994... 2,771,489 $138,574 80,727 $ 322,778 $6,724,970
========= ======== ======= ========= ==========
Distribution of stock
bonuses................... -- -- (6,550) (32,157) 16,643
Exercise of options and
warrants.................. -- -- (69,184) (276,570) (27,692)
Treasury stock purchases... -- -- 2,475 22,275 --
Common stock issued........ 21,000 1,050 -- -- 139,325
--------- -------- ------- --------- ----------
Balances, March 31, 1995... 2,792,489 $139,624 7,468 $ 36,326 $6,853,246
========= ======== ======= ========= ==========
Distribution of stock
bonuses................... 2,400 120 (2,500) (11,953) 22,690
Exercise of options and
warrants.................. 2,972 149 (7,029) (20,313) 2,875
Treasury stock purchases... -- -- 4,268 8,303 --
Common stock issued........ 13,500 675 -- -- 93,620
--------- -------- ------- --------- ----------
Balances, March 31, 1996... 2,811,361 $140,568 2,207 $ 12,363 $6,972,431
========= ======== ======= ========= ==========
Distribution of stock
bonuses................... 11,200 560 -- -- 84,140
Exercise of options and
warrants.................. 39,697 1,986 (7,679) (12,355) 172,127
Treasury stock purchases... -- -- 9,609 52,545 --
Three-for-two stock split.. 1,482,449 74,122 1,786 -- (74,122)
Common stock issued........ 134,286 6,714 -- -- 2,232,091
Other...................... -- -- -- -- 62,250
--------- -------- ------- --------- ----------
Balances, March 31, 1997... 4,478,993 $223,950 5,923 $ 52,553 $9,448,917
========= ======== ======= ========= ==========
</TABLE>
On December 17, 1996, the Company distributed a three-for-two stock split
effected in the form of a stock dividend to shareholders of record on November
27, 1996. This distribution increased the number of shares outstanding by
1,482,449. The amount of $74,122 was transferred from capital in excess of par
to common stock. All per share amounts in this report have been restated to
reflect this stock split.
In October 1996, the Company authorized a private placement offering for the
sale of 114,286 shares from its authorized but unissued shares of common stock
at a pre-split price of $17.50 per share. The Company received approximately
$2,000,000 in cash from this transaction.
In May 1995, the Company's Board of Directors authorized the repurchase of
up to 100,000 shares of its outstanding common stock for issuance in
connection with incentive stock option and stock bonus plans. As of March 31,
1997, the Company had not repurchased any of its outstanding common stock
pursuant to this plan.
The Company has a fixed stock option plan whereby options for a total of
250,000 shares of the Company's common stock may be granted to key employees
or non-employees of the Company by the Board of Directors. The exercise price
of the options must equal or exceed the market value of the Company's common
stock on the date of grant. Options are generally exercisable at a rate of 40%
in the second year after grant, 60% in the third year after grant, 80% in the
fourth year after grant and in full thereafter. Options expire up to ten years
after the date of grant.
F-13
<PAGE>
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma net income and net earnings per share information, as required by
SFAS No. 123, "Accounting for Stock-Based Compensation," has been determined
as if the Company had accounted for employee stock options under SFAS No.
123's fair value method. The fair value of these options was estimated at the
grant date using a Black-Scholes option pricing model with the following
weighted-average assumptions: a risk-free interest rate based on the
anticipated length of time until exercise ranging from 5.06% to 7.66%;
expected life of 4 to 5 years; and an expected volatility of 80%. For purposes
of pro forma disclosures, the estimated fair value of the options is amortized
to expense over the options' vesting period (generally 4 years). The Company's
pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1995 1996 1997
---------- ----------- ----------
<S> <C> <C> <C>
Net income (loss)
As reported........................... $1,514,000 $(7,855,000) $3,725,000
Pro forma............................. $1,263,000 $(8,072,000) $3,439,000
Net earnings (loss) per common and
common equivalent share
As reported........................... $ .35 $ (1.83) $ .76
Pro forma............................. $ .28 $ (1.88) $ .70
</TABLE>
This disclosure is not likely to be representative of the effects on
reported net income and net earnings per common and common equivalent share
for future years, because options vest over four years and additional awards
generally are made each year.
A summary of the status of the Company's stock option plan as of March 31,
1995, 1996 and 1997, and changes during the years ending on those dates, is
presented below:
<TABLE>
<CAPTION>
1995* 1996* 1997
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 144,710 $2.92 227,690 $4.57 362,493 $ 4.45
Granted................. 184,500 4.64 171,825 4.17 50,100 14.54
Exercised............... (95,676) 2.31 (15,002) 3.19 (48,198) 4.65
Forfeited............... (5,844) 4.34 (22,020) 4.75 (25,875) 3.97
-------------------------------------------
Outstanding at end of
year................... 227,690 4.57 362,493 4.45 338,520 5.95
======= ======= =======
Options exercisable at
year-end............... 33,921 3.91 98,568 4.68 140,820 4.51
Weighted-average fair
value of options
granted during the
year................... $2.11 $1.75 $8.18
</TABLE>
- --------
* Amounts have been adjusted to reflect the three-for-two stock split during
fiscal 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------------
WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE WEIGHTED AVERAGE
EXERCISE OUTSTANDING REMAINING AVERAGE NUMBER EXERCISE
PRICES PER AT MARCH 31, CONTRACTUAL EXERCISE PRICE OUTSTANDING AT PRICE PER
SHARE 1997 LIFE YEARS PER SHARE MARCH 31, 1997 SHARE
---------- ------------ ----------- -------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 3 - $ 5 283,420 3.1 $ 4.43 139,270 $4.49
5 - 7 5,000 2.2 5.52 1,550 6.06
10 - 14 29,625 4.5 11.24 -- --
19 - 23 20,475 4.8 19.32 -- --
- -----------------------------------------------------------------------------
$ 3 - $23 338,520 3.3 $ 5.95 140,820 $4.51
======= =======
</TABLE>
F-14
<PAGE>
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of changes in outstanding warrants as of March 31, 1995, 1996 and
1997, and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1995* 1996* 1997
---------------- --------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year....................... 16,200 $4.40 8,100 $4.40 23,100 $ 4.03
Granted..................... -- -- 15,000 3.83 1,500 13.50
Exercised................... (8,100) 4.40 -- -- (8,100) 4.40
-----------------------------------------------
Outstanding at end of year.. 8,100 $4.40 23,100 $4.03 16,500 $ 4.71
====== ====== ======
</TABLE>
- --------
* Amounts have been adjusted to reflect the three-for-two stock split during
fiscal 1997.
NOTE 9--INCOME TAXES:
The provision (benefit) for income taxes consists of the following.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
1995 1996 1997
---------- ----------- ----------
<S> <C> <C> <C>
Federal
Current............................. $ 997,200 $ 594,400 $1,184,000
Deferred............................ (98,800) (2,433,600) (314,300)
State
Current............................. 203,800 131,600 415,500
Deferred............................ (24,700) (728,500) (73,100)
Foreign
Current............................. -- -- 103,300
Deferred............................ -- (373,900) 209,600
---------- ----------- ----------
$1,077,500 $(2,810,000) $1,525,000
========== =========== ==========
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
rate is as follows.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1995 1996 1997
------ ------- ------
<S> <C> <C> <C>
Statutory federal rate........................... 34.0% (34.0)% 34.0%
State taxes, net of federal benefit.............. 7.9 (3.6) 4.5
Write-off of intangibles......................... -- 6.4 --
Foreign tax rate differences..................... -- 2.1 (8.1)
Change in valuation allowances................... -- 2.0 .8
Research and development credits................. (3.0) -- (4.5)
Recapture of subsidiary excess losses............ 6.5 -- --
Foreign sales corporation benefit................ (2.1) (.5) (.6)
Other............................................ (1.7) 1.2 2.9
------ ------- ------
Effective income tax rate........................ 41.6% (26.4)% 29.0%
====== ======= ======
</TABLE>
F-15
<PAGE>
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Book accruals not currently
deductible for tax................ $ 42,200 $ 1,593,500 $ 1,200,900
Deferred compensation.............. 618,200 706,500 733,200
Inventory obsolescence reserve..... 164,100 141,600 467,500
Accrued payroll and related costs.. 119,000 780,300 965,200
State investment tax credit
carryforwards..................... 310,900 303,600 303,600
Subsidiary net operating loss
carryforwards..................... 48,300 741,000 399,800
Tax basis of intangibles in excess
of book........................... -- 2,688,300 2,796,400
Other.............................. 134,000 345,000 161,100
----------- ----------- -----------
Total deferred tax assets........ 1,436,700 7,299,800 7,027,700
----------- ----------- -----------
Depreciation....................... (951,300) (1,016,200) (962,700)
Prepaid assets..................... (34,900) (100,000) (61,500)
Other.............................. (25,000) (66,000) (121,700)
----------- ----------- -----------
Total deferred tax liabilities... (1,011,200) (1,182,200) (1,145,900)
----------- ----------- -----------
Deferred tax asset valuation
reserve........................... (359,200) (579,500) (703,400)
----------- ----------- -----------
Net deferred tax asset............. $ 66,300 $ 5,538,100 $ 5,178,400
=========== =========== ===========
</TABLE>
Realization of the tax loss and credit carryforwards, which expire at
various times between 2002 and 2011, is contingent on future taxable earnings.
Valuation allowances have been recorded for these and other asset items which
may not be realized.
Deferred income taxes have not been provided on the undistributed earnings
of foreign subsidiaries. The amount of such earnings included in consolidated
retained earnings at March 31, 1997 was approximately $1.8 million. These
earnings have been substantially reinvested and the Company does not plan to
initiate any action that would precipitate the payment of income taxes
thereon.
NOTE 10--GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS:
The Company currently operates in one industry segment. During 1995, the
Company established a manufacturing and marketing subsidiary in Hong Kong and
a marketing subsidiary in Australia. The Company also maintains a sales
presence in Canada and Europe.
Net sales by the Company to unaffiliated customers outside the United States
represents 11.3%, 21.0% and 15.7% of consolidated net sales for the years
ended March 31, 1995, 1996 and 1997. Net sales by the Company's domestic
operations to unaffiliated customers outside the United States represent
11.3%, 12.3% and 7.0% of the Company's consolidated net sales for the years
ended March 31, 1995, 1996 and 1997, respectively.
F-16
<PAGE>
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents net sales, income (loss) before income taxes
and identifiable assets of the Company's domestic and foreign operations. Net
sales and income (loss) before income taxes of the Company's domestic
operations include the impact of export sales. Inter-area sales are presented
on a basis intended to reflect the market value of the products as nearly as
possible. Identifiable assets are those assets of the Company that are
identified with the operations in the respective geographic area.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Net sales
United States operations.............. $34,336,336 $ 38,234,057 $ 92,442,003
Foreign operations.................... -- 3,623,752 8,809,377
Inter-area............................ -- 1,394,684 33,956,925
Eliminations.......................... -- (1,394,684) (33,956,925)
----------- ------------ ------------
$34,336,336 $ 41,857,809 $101,251,380
=========== ============ ============
Income (loss) before income taxes
United States operations.............. $ 2,591,989 $ (8,917,291) $ 3,631,097
Foreign operations.................... -- (1,432,217) 2,191,278
Eliminations.......................... -- (315,735) (572,091)
----------- ------------ ------------
$ 2,591,989 $(10,665,243) $ 5,250,284
=========== ============ ============
Identifiable assets
United States operations.............. $24,745,293 $ 40,830,577 $ 48,142,435
Foreign operations.................... -- 5,067,001 20,133,416
----------- ------------ ------------
$24,745,293 $ 45,897,578 $ 68,275,851
=========== ============ ============
</TABLE>
During 1997 sales to the Company's three largest customers accounted for
10.7%, 10.6% and 6.0% of the Company's net sales, respectively. Accounts
receivable from the Company's three largest customers represented 20.0%, 0.9%
and 6.6% of the accounts receivable balances at March 31, 1997, respectively.
During 1996, sales to the Company's two largest customers accounted for 13.8%
and 9.7% of net sales, respectively. During 1995, sales to the Company's two
largest customers accounted for 19.3% and 18.7% of net sales, respectively.
NOTE 11--COMMITMENTS:
The Company leases certain facilities pursuant to operating lease
agreements. Operating lease expense for offices and other equipment was
approximately $16,000 in 1995, $470,000 in 1996 and $1,208,000 in 1997. Future
minimum rental payments under noncancelable operating lease agreements are as
follows: 1998--$1,498,000; 1999--$1,335,000 and 2000--$379,000.
NOTE 12--SUBSEQUENT EVENTS:
On May 8, 1997, the Company announced its purchase of Digital Audio Limited,
(DA Systems), from Numerex Corporation in exchange for 226,168 (subject to
post-closing adjustment) shares of the Company's common stock valued at $3.9
million. The shares are callable, at the Company's option, at $17 per share
plus interest at 8.25% until June 30, 1998, and may be put by Numerex to the
Company at that price after that date.
F-17
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1997 JUNE 30, 1997
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 2,244,265 $ 2,906,543
Accounts receivable, less allowance for doubtful
accounts of $313,800........................... 15,246,309 22,545,395
Inventories..................................... 29,995,215 35,168,061
Income taxes receivable......................... -- 197,962
Deferred income tax charges..................... 2,132,156 2,132,156
Prepaid expenses and other assets............... 883,137 1,613,582
----------- -----------
50,501,082 64,563,699
----------- -----------
Fixed assets, net................................. 11,248,171 12,596,149
Deferred income taxes............................. 3,046,200 3,046,200
Unallocated excess of purchase price over net
assets acquired.................................. -- 4,908,862
Goodwill and other intangibles.................... 2,942,626 2,836,186
Other assets...................................... 537,772 753,241
----------- -----------
Total assets.................................. $68,275,851 $88,704,337
=========== ===========
LIABILITIES
Current liabilities:
Current portion of long term debt............... $ 953,648 1,668,884
Current portion of capital lease obligation..... 147,574 136,450
Short term borrowings........................... -- 1,545,454
Accounts payable................................ 12,259,380 18,388,899
Accrued payroll and benefits.................... 2,818,487 2,849,158
Other accrued liabilities....................... 3,254,593 4,626,978
----------- -----------
19,433,682 29,215,823
----------- -----------
Obligations under capital leases.................. 54,125 25,973
Long term debt.................................... 28,031,802 31,758,004
Other long term liabilities....................... 2,924,975 3,976,068
Redeemable common stock........................... -- 4,060,461
Shareholders' equity:
Common stock, par value $.05 per share;
Authorized--12,000,000 shares; Issued--
4,745,051 shares at June 30, 1997, and
4,478,993 shares at March 31, 1997............. 223,950 226,165
Capital in excess of par value.................... 9,448,917 10,149,258
Retained earnings................................. 8,594,306 9,739,524
----------- -----------
18,267,173 20,114,947
Less--Treasury stock, at cost..................... (52,553) (49,672)
Notes receivable for stock purchases.............. (378,373) (377,937)
Cumulative translation adjustment................. (4,980) (19,330)
----------- -----------
Total shareholders' equity.................... 17,831,267 19,668,008
----------- -----------
Total liabilities and shareholders' equity.... $68,275,851 $88,704,337
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE
30,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Net sales.............................................. $23,178,323 $28,207,788
Costs and expenses:
Production........................................... 15,365,822 17,555,932
Research and development............................. 1,759,931 2,084,958
Marketing, administrative and general................ 4,691,654 6,181,557
----------- -----------
21,817,407 25,822,447
----------- -----------
Operating income....................................... 1,360,916 2,385,341
Interest income........................................ 19,342 14,362
Interest expense....................................... 354,975 637,469
----------- -----------
Income before taxes.................................... 1,025,283 1,762,234
Provision for taxes.................................... 401,000 629,000
----------- -----------
Net income............................................. 624,283 1,133,234
Retained earnings at beginning of period............... 4,869,023 8,594,306
Amortization of redeemable common stock................ -- 11,984
----------- -----------
Retained earnings at end of period..................... $ 5,493,306 $ 9,739,524
=========== ===========
Earnings per common and common equivalent share........ $ .13 $ .22
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 624,283 $ 1,133,234
------------- -------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 744,831 967,801
Deferred compensation......................... 37,048 457,415
Stock based compensation...................... -- 85,975
Gain on sale of land.......................... -- (205,000)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable........................... (1,452,924) (937,778)
Inventories................................... (367,450) 989,194
Prepaid expenses and other assets............. (189,607) (641,538)
Accounts payable.............................. (127,267) 242,736
Accrued payroll and benefits.................. 677,076 (109,412)
Other accrued liabilities..................... 444,900 (126,100)
Income taxes receivable....................... 391,088 (985,669)
------------- -------------
Total adjustments......................... 157,695 (262,376)
Net cash provided by operating activities....... 781,978 870,858
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (500,811) (1,062,147)
Purchase of RAS............................... -- (3,600,933)
------------- -------------
Net cash used in investing activities........... (500,811) (4,663,080)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings...................... 295,180 4,441,438
Principal payments on debt and capital lease
obligations.................................. (473,033) (78,476)
Common stock transactions, net................ 247,340 105,888
------------- -------------
Net cash provided by financing activities....... 69,487 4,468,850
------------- -------------
Effect of exchange rate changes................. -- (14,350)
Net increase in cash and cash equivalents....... 350,654 662,278
Cash and cash equivalents at beginning of
period......................................... 913,716 2,244,265
------------- -------------
Cash and cash equivalents at end of period...... $ 1,264,370 $ 2,906,543
============= =============
CASH PAID DURING THE YEAR FOR:
Interest...................................... $ 103,786 $ 112,763
============= =============
Income taxes.................................. $ 5,897 $ 741,601
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE-MONTH PERIOD ENDED JUNE 30, 1997
(UNAUDITED)
NOTE 1. GENERAL:
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission ("SEC"). The interim consolidated financial statements
include the consolidated accounts of Detection Systems, Inc. and its majority-
owned subsidiaries (collectively, "the Company") with all significant
intercompany transactions eliminated. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the financial position, results of operations and cash flows
for the interim periods presented have been made. Certain footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. These financial statements should
be read in conjunction with the Company's consolidated financial statements at
and for the years ended March 31, 1995, 1996 and 1997.
Cash flow statement--During the first quarter of fiscal 1998, the Company
issued 226,168 and 34,121 shares of common stock in connection with the
acquisitions of DA Systems and Seriee, respectively (see Note 3).
New accounting standards--In February 1997, SFAS No. 128, "Earnings Per
Share," was issued by the Financial Accounting Standards Board. SFAS No. 128
specified modifications to the calculation of earnings per share from that
currently used by the Company. Under SFAS No. 128, "basic earnings per share"
is calculated based upon the weighted average number of common shares actually
outstanding, and "diluted earnings per share" is calculated based upon the
weighted average number of common shares outstanding and other potential
common shares (e.g. stock options and warrants) if they are dilutive. SFAS No.
128 is effective for periods ending after December 15, 1997 and will be
adopted at that time. Had the Company determined earnings per share in
accordance with SFAS No. 128, for the quarters ended June 30, 1996 and 1997,
basic pro forma earnings per share would have been $.14 and $.23,
respectively, and pro forma diluted earnings per share would have been $.13
and $.22, respectively.
NOTE 2. INVENTORIES:
Major classifications of inventory follow:
<TABLE>
<CAPTION>
JUNE 30, 1997 MARCH 31, 1997
------------- --------------
<S> <C> <C>
Component parts............................... $18,094,205 $19,457,368
Work in process............................... 3,123,052 2,697,459
Finished products............................. 13,950,804 7,840,388
----------- -----------
$35,168,061 $29,995,215
=========== ===========
</TABLE>
NOTE 3. ACQUISITIONS:
In May 1997, the Company acquired all of the outstanding stock of DA
Systems, in exchange for 226,168 of its common stock. After taking into
account a purchase price adjustment, the number of these shares that will
remain outstanding will be 221,738. The shares are callable at the Company's
option at $17 per share plus interest at 8.25% until June 30, 1998, and may be
put to the Company at that price after that date. The cost of this acquisition
was approximately $4.0 million. DA Systems is a leading British manufacturer
of security control equipment with annual net sales of approximately $10.8
million.
In June 1997, the Company acquired 99.5% of the outstanding stock of Seriee
of France, in exchange for 34,121 shares of its common stock, valued at
approximately $614,000. Seriee is a leading manufacturer of electronic control
and communication equipment with annual net sales of approximately $6.3
million.
F-21
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In June 1997, the Company acquired 98.7% of the outstanding stock of RAS of
Belgium for approximately $3.6 million in cash. RAS has the largest security
equipment distribution network in Belgium with annual net sales of
approximately $9.9 million.
These transactions have been accounted for as purchases and, accordingly,
the results of DA Systems, Seriee and RAS are included in the consolidated
financial statements since the date of acquisition. The financial statements
reflect the preliminary allocation of purchase price as the purchase price
allocation has not been finalized.
F-22
<PAGE>
[Full page design featuring certain
of the Company's fire products displayed
among fire-related objects.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THIS OFFERING, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REP-
RESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY,
THE SELLING SHAREHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER TO SELL
OR SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY JURISDICTION WHERE,
OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITA-
TION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HERE-
OF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 11
Capitalization........................................................... 11
Price Range of Common Stock.............................................. 12
Dividend Policy.......................................................... 12
Selected Consolidated Financial Data..................................... 13
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 14
Business................................................................. 20
Management............................................................... 33
Principal and Selling Shareholders....................................... 38
Description of Capital Stock............................................. 39
Underwriting............................................................. 40
Legal Matters............................................................ 41
Experts.................................................................. 41
Available Information.................................................... 42
Incorporation of Certain Documents by Reference.......................... 42
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,545,000 SHARES
LOGO
DETECTION
SYSTEMS, INC.
LOGO
COMMON STOCK
----------------
PROSPECTUS
----------------
RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
SEPTEMBER 19, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company will pay all of the expenses incurred in connection with the
offering described in this registration statement. Such expenses are estimated
to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................. $ 10,259
Nasdaq National Market listing fee.................................. 17,500
NASD fee............................................................ 3,886
Legal fees and expenses............................................. 120,000
Printing expenses................................................... 50,000
Accounting fees and expenses........................................ 35,000
Miscellaneous....................................................... 13,355
--------
Total........................................................... $250,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The New York Business Corporation Law (the "BCL") provides that if a
derivative action is brought against a director or officer of a corporation,
the corporation may indemnify him or her against amounts paid in settlement
and reasonable expenses, including attorneys' fees incurred by him or her, in
connection with the defense or settlement of such action, if such director or
officer acted in good faith for a purpose which he or she reasonably believed
to be in the best interests of the corporation, except that no indemnification
shall be made without court approval in respect of a threatened action, or a
pending action settled or otherwise disposed of, or in respect of any matter
as to which such director or officer has been found liable to the corporation.
In a nonderivative action or threatened action, the BCL provides that a
corporation may indemnify a director or officer against judgments, fines,
amounts paid in settlement and reasonable expenses, including attorneys' fees
incurred by him or her in defending such action, if such director or officer
acted in good faith for a purpose which he or she reasonably believed to be in
the best interests of the corporation.
Under the BCL, a director or officer who is successful, either in a
derivative or nonderivative action, is entitled to indemnification as outlined
above. Under any other circumstances, such director or officer may be
indemnified only if certain conditions specified in the BCL are met. The
indemnification provisions of the BCL are not exclusive of any other rights to
which a director or officer seeking indemnification may be entitled pursuant
to the provisions of the certificate of incorporation or the bylaws of a
corporation or, when authorized by such certificate of incorporation or
bylaws, pursuant to a shareholders' resolution, a directors' resolution or an
agreement providing for such indemnification.
The above is a general summary of certain provisions of the BCL and is
subject, in all cases, to the specific and detailed provisions of Sections
721-725 of the BCL.
Article V, Section 2 of the Company's By-Laws contains provisions requiring
indemnification by the Company of its directors and officers against certain
liabilities and expenses which they may incur as directors and officers of the
Company or of certain other entities in accordance with Sections 722-723 of
the BCL.
Section 726 of the BCL also contains provisions authorizing a corporation to
obtain insurance on behalf of any director and officer against liabilities,
whether or not the corporation would have the power to indemnify against such
liabilities. The Company maintains insurance coverage under which the
directors and officers of the Company are insured, subject to the limits of
the policy, against certain losses, as defined in the policy, arising from
claims made against such directors and officers by reason of any wrongful acts
as defined in the policy, in their respective capacities as directors or
officers.
II-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT LOCATION
------- ------- --------
<C> <S> <C>
1 Underwriting Agreement Filed herewith
2(a) Definitive Stock Purchase Incorporated by reference to Exhibit 2
Agreement, dated February to the Company's Form 8-K/A filed April
12, 1996, for purchase of 29, 1996
stock of Radionics, Inc.
2(b) Asset Purchase Agreement, Incorporated by reference to Exhibit
dated July 22, 1996, for 2(b) of the Company's 1997 Annual Report
the purchase of the assets on Form 10-K
of Senses International
2(c) Stock Purchase Agreement, Incorporated by reference to Exhibit 2-1
dated May 7, 1997, for the of the Company's Form 8-K filed May 21,
purchase of the stock of 1997
Digital Audio Limited
2(d) Stock Purchase Agreement, Previously filed
dated June 24, 1997, for
the purchase of shares of
Series SA
2(e) Share Purchase Agreement, Previously filed
dated June 25, 1997, for
the purchase of a portion
of the stock of Radio-
Active Systems.
2(f) Share Purchase Agreement, Previously filed
dated June 25, 1997, for
the purchase of a portion
of the stock of Radio-
Active Systems.
4 Rights of Holders of common Incorporated by reference to Exhibit 4
stock--1981 plan of the Company's 1993 Annual Report on
Form 10-K
5 Opinion of Nixon, Hargrave, Filed herewith
Devans & Doyle LLP
10(a) Non-employee director stock Incorporated by reference to Exhibit
option plan 10(a) of the Company's 1994 Annual
(warrant plan) Report on Form 10-K
10(b) Medical reimbursement plan Incorporated by reference to Exhibit
10(b) of the Company's 1997 Annual
Report on Form 10-K
10(c) Employee stock purchase Incorporated by reference to Exhibit 10
plan of the Company's 1994 Annual Report on
Form 10-K
10(d) Amended & Restated Credit Previously filed
Facility Agreement dated
June 24, 1997 among
Detection Systems, Inc.,
Radionics, Inc. and Fleet
Bank, together with Amended
and Restated Term Loan
Note, Revolving Line Note
and Mortgage Loan Note,
each dated June 24, 1997
10(e) Deferred Compensation Plan Incorporated by reference to Exhibit
and Deferred Bonus Plan, 10(e) of the Company's 1997 Annual
both amended January 1997 Report on Form 10-K
10(f) 1992 Restated Stock Option Incorporated by reference to Exhibit 22
Plan of the Company's 1995 Annual Report on
Form 10-K
10(g) Detection Systems, Inc. Incorporated by reference to Exhibit
Executive Bonus Plan 10(g) of the Company's 1997 Annual
Report on Form 10-K
10(h) Executive employment Incorporated by reference to Exhibit
contract with Karl H. 10(a) of the Company's Form 10-Q for the
Kostusiak quarter ending June 30, 1997
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT LOCATION
------- ------- --------
<C> <S> <C>
10(i) Executive employment
contract and part-time Incorporated by reference to Exhibit
employment contract with 10(b) of the Company's Form 10-Q for the
David B. Lederer quarter ending June 30, 1997
10(j) Executive employment Incorporated by reference to Exhibit 10
contract with Lawrence R. of the Company's 1995 Annual Report on
Tracy Form 10-K
10(k) ECI Amended License and Incorporated by reference to Exhibit
Mfg. Agreement & Amendment 10(k) of the Company's 1996 Annual
No. 1 Report on Form 10-K
10(l) Shareholders Agreements w/ Incorporated by reference to Exhibit 10
ECI of the Company's 1994 Annual Report on
Form 10-K
10(m) Stock Purchase Agreements Incorporated by reference to Exhibit
with Karl H. Kostusiak and 10(n) of the Company's 1997 Annual
David B. Lederer Report on Form 10-K
10(n) Joint Venture Agreement for Incorporated by reference to Exhibit
Establishment of D.S. First 10(o) of the Company's 1996 Annual
Systems (Beijing) Limited Report on Form 10-K
10(o) 1997 Stock Option Plan Previously filed
10(p) Lease for China Facility Filed herewith
dated June 1, 1995
10(q) Sub-Contracting Agreement Filed herewith
dated June 19, 1995
relating to China Facility
11 Statement re: Computation
of Per Share Earnings Previously filed
23(a) Consent of Nixon, Hargrave, Included in Exhibit 5
Devans & Doyle LLP
23(b) Consent of Independent
Accountants Filed herewith
24 Power of Attorney Previously filed
</TABLE>
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT CERTIFIES
THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF ROCHESTER, STATE OF NEW YORK, ON THIS 18TH DAY OF
SEPTEMBER, 1997.
Detection Systems, Inc.
/s/ Frank J. Ryan
By: _________________________________
FRANK J. RYAN VICE PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED:
NAME TITLE DATE
* Chairman, President,
- ------------------------------------- Chief Executive September 18,
KARL H. KOSTUSIAK Officer and 1997
Director
Vice President
/s/ Frank J. Ryan (Principal September 18,
- ------------------------------------- Financial Officer 1997
FRANK J. RYAN and Principal
Accounting Officer)
* Director
- ------------------------------------- September 18,
DONALD R. ADAIR 1997
* Director
- ------------------------------------- September 18,
MORTIMER B. FULLER, III 1997
* Director
- ------------------------------------- September 18,
DAVID B. LEDERER 1997
* Director
- ------------------------------------- September 18,
EDWARD C. MCIRVINE 1997
As Attorney-In-Fact
/s/ Frank J. Ryan September 18,
* By: _______________________________ 1997
FRANK J. RYAN
II-4
<PAGE>
EXHIBIT 1
1,545,000 SHARES
DETECTION SYSTEMS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
St. Petersburg, Florida
September , 1997
RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
As Representatives of the Several Underwriters
c/o Raymond James & Associates, Inc.
880 Carillon Parkway
St. Petersburg, Florida 33716
Dear Sirs:
Detection Systems, Inc., a New York corporation (the "Company"), proposes
to issue and sell and certain persons named in SCHEDULE II hereto (the "Selling
Shareholders") propose to sell to the underwriters named in SCHEDULE I hereto
(the "Underwriters"), an aggregate of 1,545,000 shares of common stock, par
value $0.05 per share (the "Common Stock"), of the Company, of which 1,325,000
shares are to be issued and sold by the Company and an aggregate of 220,000
shares are to be sold by the Selling Shareholders in the respective amounts set
forth in SCHEDULE II hereto, subject to the terms and conditions stated herein.
The aggregate of 1,545,000 shares to be purchased from the Company and the
Selling Shareholders are hereinafter referred to as the "Firm Shares." In
addition, the Company proposes to grant to the Underwriters an option to
purchase up to 231,750 additional shares of Common Stock (the "Additional
Shares"), solely to cover over-allotments by the Underwriters, if any. The
Firm Shares and, to the extent such option is exercised, the Additional Shares
are hereinafter collectively referred to as the "Shares." Raymond James &
Associates, Inc. and Needham & Company, Inc. are acting as the representatives
of the several Underwriters and in such capacity are hereinafter referred to as
the "Representatives."
The Company and the Selling Shareholders wish to confirm as follows their
agreement with you and the other several Underwriters, on whose behalf you are
acting, in connection with the several purchases of the Shares from the Company
and the Selling Shareholders.
SECTION 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-2 (Registration
No. 333-31951), including a prospectus subject to completion, relating to the
Shares. Such registration statement (including all financial schedules and
exhibits and the schedules and reports incorporated in
such registration statement by reference), as amended at the time when it
becomes effective and as thereafter amended by post-effective amendment, is
referred to in this Agreement as the "Registration
<PAGE>
RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
Statement." The term "Prospectus" as used in this Agreement means (i)
the prospectus (including the schedules and reports incorporated in such
prospectus by reference) in the form included in the Registration Statement
on the date upon which the Registration Statement is declared effective by
the Commission, or (ii) if the prospectus (including the schedules and
reports incorporated in such prospectus by reference) included in the
Registration Statement on the date upon which the Registration Statement
is declared effective by the Commission omits information in reliance
upon Rule 430A under the Act and such information is included in a
prospectus filed with the Commission pursuant to Rule 424(b)
under the Act or as part of a post-effective amendment to the Registration
Statement after the Registration Statement becomes effective, the prospectus as
so filed, or (iii) if the prospectus (including the schedules and reports
incorporated in such prospectus by reference) included in the Registration
Statement on the date upon which the Registration Statement is declared
effective by the Commission omits information in reliance upon Rule 430A under
the Act and such information is included in a term sheet (as described in Rule
434(b) under the Act) filed with the Commission pursuant to Rule 424(b) under
the Act, the prospectus included in the Registration Statement and such term
sheet, taken together. The prospectus (including the schedules and reports
incorporated in such prospectus by reference) subject to completion in the form
included in the Registration Statement at the time of the initial filing of
such Registration Statement with the Commission and as such prospectus is
amended from time to time until the date upon which the Registration Statement
is declared effective by the Commission is referred to in this Agreement as the
"Prepricing Prospectus." If the Company files a registration statement to
register the offer and sale of a portion of the Shares and relies upon Rule
462(b) for such registration statement to become effective upon filing with the
Commission (the "Rule 462 Registration Statement"), then any reference herein
to the "Registration Statement" shall be deemed to refer to both the
registration statement referred to above (Registration No. 333-31951) and the
Rule 462 Registration Statement, in each case as amended from time to time.
The schedules and reports incorporated by reference into the Prospectus or any
Prepricing Prospectus pursuant to Item 12 of Form S-2 are hereinafter referred
to as the "Incorporated Reports."
SECTION 2. AGREEMENTS TO SELL AND PURCHASE. Upon the basis of the
representations, warranties and agreements of the Company and the Selling
Shareholders herein contained and subject to all the terms and conditions set
forth herein, the Company hereby agrees to issue and sell 1,325,000 Firm Shares
to the Underwriters, and the Selling Shareholders, severally and not jointly,
hereby agree to sell an aggregate of 220,000 Firm Shares (each to sell the
number of Firm Shares set forth opposite the name of such Selling Shareholder
in SCHEDULE II hereto) to the Underwriters, and each Underwriter agrees,
severally and not jointly, to purchase from the Company and the Selling
Shareholders at a purchase price of $_______ per Share (the "purchase price per
Share"), the number of Firm Shares set forth opposite the name of such
Underwriter in SCHEDULE I hereto (or such number of Firm Shares as adjusted
pursuant to Section 12 hereof).
Upon the basis of the representations, warranties and agreements of the
Company and the Selling Shareholders herein contained and subject to all the
terms and conditions set forth herein, the Company also agrees to issue and
sell up to 231,750 Additional Shares to the Underwriters, and the Underwriters
shall have the one-time right for 30 days from the date upon which the
Registration Statement is declared effective by the Commission to purchase from
the Company up to 231,750 Additional Shares at the purchase price per Share
for the Firm Shares. The Additional Shares may be purchased solely for the
purpose of covering over-allotments made in connection with the offering
and distribution of the Firm Shares. If any Additional Shares are to be
purchased, each Underwriter agrees, severally and not jointly, to purchase
the number of Additional Shares (subject to such adjustments as you may
determine to avoid fractional shares) which bears the same proportion to
the number of Additional Shares to be sold as the number of Firm Shares set
forth opposite the name of such Underwriter in SCHEDULE I hereto (or such
number of Firm Shares as adjusted pursuant to Section 12 hereof) bears to the
total number of Firm Shares.
2
<PAGE>
RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
SECTION 3. TERMS OF PUBLIC OFFERING. The Company and the Selling
Shareholders have been advised by you that the Underwriters propose to make a
public offering of their respective portions of the Shares as soon after the
Registration Statement and this Agreement have become effective as in your
judgment is advisable and initially to offer the Shares upon the terms set
forth in the Prospectus.
SECTION 4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Underwriters of the Firm Shares and payment therefor shall be made at the
offices of Raymond James & Associates, Inc., 880 Carillon Parkway, St.
Petersburg, Florida, at 10:00 a.m., St. Petersburg, Florida time, on the third
business day after the date of this Agreement, or at such time on such other
day, not later than seven full business days after such third business day, as
shall be agreed upon in writing by the Company and the Representatives (the
"Closing Date"). The place of closing for the Firm Shares and the Closing Date
may be varied by agreement between you and the Company.
Delivery to the Underwriters of and payment for any Additional Shares to
be purchased by the Underwriters shall be made at the offices of Raymond James
& Associates, Inc., 880 Carillon Parkway, St. Petersburg, Florida, at 10:00
a.m., St. Petersburg, Florida time, on such date or dates (the "Additional
Closing Date") (which may be the same as the Closing Date but shall in no event
be earlier than the Closing Date nor earlier than three nor later than ten
business days after the giving of the notice hereinafter referred to), as shall
be specified in a written notice from you on behalf of the Underwriters to the
Company, of the Underwriters' determination to purchase a number, specified in
such notice, of Additional Shares. Such notice may be given to the Company by
you at any time within 30 days after the date upon which the Registration
Statement is declared effective by the Commission. The place of closing for
the Additional Shares and the Additional Closing Date may be varied by
agreement between you and the Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 1:00 p.m., St. Petersburg, Florida time, on the
second business day preceding the Closing Date or the Additional Closing Date,
as the case may be. Such certificates shall be made available to you in St.
Petersburg, Florida for inspection and packaging not later than 9:30 a.m., St.
Petersburg, Florida time, on the business day immediately preceding the Closing
Date or the Additional Closing Date, as the case may be. The certificates
evidencing the Firm Shares and any Additional Shares to be purchased hereunder
shall be delivered to you on the Closing Date or the Additional Closing Date,
as the case may be, against payment of the purchase price therefor by certified
or official bank check or checks payable in New York Clearing House (next day)
funds.
SECTION 5. AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters as follows:
(a) The Company will endeavor to cause the Registration Statement to
become effective and will advise you promptly and, if requested by you, will
confirm such advice in writing (i) when the Registration Statement has become
effective and when any post-effective amendment thereto becomes effective, (ii)
if Rule 430A under the Act is employed, when the Prospectus or term sheet (as
described in Rule 434(b) under the Act) has been timely filed pursuant to Rule
424(b) under the Act, (iii) of any request by the Commission for amendments or
supplements to the Registration Statement, any Prepricing Prospectus or the
Prospectus or for additional information, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of the suspension of qualification of the Shares for offering or
sale in any jurisdiction or the initiation (or threatened initiation) of any
proceeding for such purposes, and (v) within the period of time referred to in
Section 5(e) below, of any change in the Company's condition (financial or
other), business, business prospects, properties, net worth
3
<PAGE>
RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
or results of operations, or of any event that comes to the attention of the
Company that makes any statement made in the Registration Statement or the
Prospectus (as then amended or supplemented) untrue in any material respect or
that requires the making of any additions thereto or changes therein in order
to make the statements therein not misleading in any material respect, or of
the necessity to amend or supplement the Prospectus (as then amended or
supplemented) to comply with the Act or any other law. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to
obtain the withdrawal of such order at the earliest possible time.
(b) The Company will furnish to you, without charge, three signed
copies of the Registration Statement as originally filed with the Commission
and of each amendment thereto, including financial statements and all exhibits
thereto, and will also furnish to you, without charge, such number of conformed
copies of the Registration Statement as originally filed and of each amendment
thereto as you may reasonably request.
(c) The Company will not file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus of which you
shall not previously have been advised (with a reasonable opportunity to review
such amendment or supplement) or to which you have reasonably objected after
being so advised.
(d) Prior to the execution and delivery of this Agreement, the Company
has delivered or will deliver to you, without charge, in such quantities as you
have requested or may hereafter reasonably request, copies of each form of the
Prepricing Prospectus. The Company consents to the use, in accordance with the
provisions of the Act and with the securities or Blue Sky laws of the
jurisdictions in which the Shares are offered by the several Underwriters and
by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus
so furnished by the Company.
(e) As soon after the execution and delivery of this Agreement as is
practicable and thereafter from time to time for such period as in the
reasonable opinion of counsel for the Underwriters a prospectus is required by
the Act to be delivered in connection with sales by any Underwriter or a
dealer, the Company will deliver to each Underwriter and each dealer, without
charge, as many copies of the Prospectus (and of any amendment or supplement
thereto) as the Representatives may reasonably request. The Company consents
to the use of the Prospectus (and of any amendment or supplement thereto) in
accordance with the provisions of the Act and with the securities or Blue Sky
laws of the jurisdictions in which the Shares are offered by the several
Underwriters and by all dealers to whom Shares may be sold, both in
connection with the offering and sale of the Shares and for such period
of time thereafter as the Prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer.
If during such period of time any event shall occur
that in the judgment of the Company or in the opinion of counsel for the
Underwriters is required to be set forth in the Prospectus (as then amended or
supplemented) or should be set forth therein in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary to supplement or amend the Prospectus to
comply with the Act or any other law, the Company will forthwith prepare and
file with the Commission an appropriate supplement or amendment thereto, and
will furnish to each Underwriter and to each dealer who has previously been
provided Prospectuses, without charge, a reasonable number of copies thereof.
(f) The Company will cooperate with you and counsel for the
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several Underwriters and by dealers under the
securities or Blue Sky laws of such jurisdictions as you may reasonably
designate and will file such consents to service of process or other documents
as may be reasonably necessary in order to effect such registration or
qualification; PROVIDED that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified or
to take any action which would subject it to service of process in suits,
other than
4
<PAGE>
RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
those arising out of the offering or sale of the Shares, in any
jurisdiction where it is not now so subject. In the event that the
qualification of the Shares in any jurisdiction is suspended, the Company shall
so advise you promptly in writing.
(g) The Company will make generally available to its security holders a
consolidated earnings statement, which need not be audited, covering a twelve-
month period commencing after the effective date of the Registration Statement
and ending not later than 15 months thereafter, as soon as practicable after
the end of such period, which consolidated earnings statement shall satisfy the
provisions of Section 11(a) of the Act.
(h) During the period of five years hereafter, the Company will furnish
to you as soon as practicable after the end of each fiscal year, a copy of its
annual report to shareholders for such year; and the Company will furnish to
you (i) as soon as available, a copy of each report or definitive proxy
statement of the Company filed with the Commission under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or mailed to
shareholders, and (ii) from time to time such other information concerning the
Company as you may reasonably request. In addition, for a period of two years
hereafter, the Company will furnish Raymond James & Associates, Inc. with
copies of any management letters received by the Company from the Company's
independent certified public accountants, including any such management letters
relating to the Company's fiscal year ending March 31, 1999.
(i) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (other than as a result of a
failure by the Representatives or any Underwriter to fulfill their or its
obligations hereunder) or if this Agreement shall be terminated by the
Underwriters because of any failure or refusal on the part of the Company to
comply with the terms or fulfill any of the conditions of this Agreement, the
Company agrees to reimburse the Representatives for all out-of-pocket expenses
(including fees and expenses of counsel for the Underwriters but excluding
wages and salaries paid by the Representatives) reasonably incurred by you in
connection herewith to a maximum aggregate reimbursement of Seventy-Five
Thousand Dollars (U.S. $75,000.00).
(j) The Company will apply the net proceeds from the sale of the Shares
to be sold by it hereunder substantially in accordance with the description set
forth in the Prospectus.
(k) If Rule 430A under the Act is employed, the Company will timely
file the Prospectus or term sheet (as described in Rule 434(b) under the Act)
pursuant to Rule 424(b) under the Act.
(l) The Company will not offer, sell, contract to sell or otherwise
dispose of any Common Stock or rights to purchase Common Stock, or any
securities convertible into or exchangeable for Common Stock, except to the
Underwriters pursuant to this Agreement, for a period of 120 days after
commencement of the public offering of the Shares by the Underwriters without
the prior written consent of Raymond James & Associates, Inc.; PROVIDED,
HOWEVER, that the Company may issue Common Stock upon the exercise of warrants
or stock options outstanding at the time of effectiveness of the Registration
Statement or pursuant to the Company's Deferred Compensation Plan or Deferred
Stock Compensation Plan and the Company may grant options under the Company's
1997 Stock Option Plan.
(m) The Company will not, directly or indirectly, take any action which
would constitute or any action designed, or which might reasonably be expected
to cause or result in or constitute, under the Act or otherwise, stabilization
or manipulation of the price of any security of the Company to facilitate the
sale or resale of the Shares.
5
<PAGE>
RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
(n) If at any time during the 25-day period after the first date that
any of the Shares are released by you for sale to the public, any rumor,
publication, or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Common Stock (including
the Shares) has been or is likely to be materially affected (regardless of
whether such rumor, publication, or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after written notice from you
advising the Company to the effect set forth above, forthwith consult with you
concerning the advisability and substance of, and, if appropriate, disseminate
a press release or other public statement responding to or commenting on such
rumor, publication, or event.
(o) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of its incorporation or the rules of the Nasdaq National
Market or any national securities exchange on which the Common Stock is listed,
a registrar (which, if permitted by applicable laws and rules, may be the same
entity as the transfer agent) for its Common Stock.
SECTION 6. AGREEMENTS OF THE SELLING SHAREHOLDERS. Each of the Selling
Shareholders, severally and not jointly, agrees with the several Underwriters
as follows:
(a) Such Selling Shareholder will not offer, sell, contract to sell or
otherwise dispose of any Common Stock or rights to purchase Common Stock, or
any securities convertible into or exchangeable for Common Stock, except to the
Underwriters pursuant to this Agreement, for a period of 120 days after
commencement of the public offering of the Shares by the Underwriters without
the prior written consent of Raymond James & Associates, Inc.
(b) Such Selling Shareholder will not, directly or indirectly, take any
action which would constitute or any action designed, or which might reasonably
be expected to cause or result in or constitute, under the Act or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares.
SECTION 7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter on the date hereof, and shall be
deemed to represent and warrant to each Underwriter on the Closing Date and the
Additional Closing Date, that:
(a) Each Prepricing Prospectus included as part of the Registration
Statement as originally filed or as part of any amendment or supplement
thereto, or filed pursuant to Rule 424(a) under the Act, complied when so filed
in all material respects with the provisions of the Act, except that this
representation and warranty does not apply to statements in or omissions from
such Prepricing Prospectus (or any amendment or supplement thereto) made in
reliance upon and in conformity with information relating to any Underwriter
furnished to the Company in writing by or on behalf of any Underwriter through
you expressly for use therein or in reliance upon and in conformity with
information relating to any Selling Shareholder furnished to the Company in
writing by or on behalf of any Selling Shareholder expressly for use therein.
(b) The Commission has not issued any order preventing or suspending
the use of any Prepricing Prospectus, and the Prepricing Prospectus included as
part of the Registration Statement declared effective by the Commission
complies as to form in all material respects with the requirements of the Act.
The Registration Statement, in the form in which it becomes effective and also
in such form as it may be when any post-effective amendment thereto shall
become effective, and the Prospectus, and any supplement or amendment thereto
when filed
6
<PAGE>
RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
with the Commission under Rule 424(b) under the Act, will comply in
all material respects with the provisions of the Act and will not at any such
times contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except that this representation and warranty does not
apply to statements in or omissions from the Registration Statement or the
Prospectus (or any amendment or supplement thereto) made in reliance upon and
in conformity with information relating to any Underwriter furnished to the
Company in writing by or on behalf of any Underwriter through you expressly for
use therein or in reliance upon and in conformity with information relating to
any Selling Shareholder furnished to the Company in writing by or on behalf of
any Selling Shareholder expressly for use therein. The Company has satisfied
all conditions to the use of Form S-2 with respect to the offering of the
Shares for sale to the public.
(c) The capitalization of the Company is as set forth in the Prospectus
as of the date set forth therein. All the outstanding shares of Common Stock
of the Company have been duly authorized and validly issued, are fully paid and
nonassessable and are free of any preemptive or similar rights; the Shares to
be issued and sold to the Underwriters by the Company hereunder have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor in accordance with the terms hereof, will be validly issued, fully
paid and nonassessable and free of any preemptive or similar rights; the
capital stock of the Company conforms to the description thereof in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto); and the delivery of certificates for the Shares pursuant to the terms
of this Agreement and payment for the Shares will pass valid marketable title
to the Shares, free and clear of any voting trust arrangements, liens,
encumbrances, equities, claims or defects in title to the several Underwriters
purchasing the Shares in good faith and without notice of any lien, claim or
encumbrance.
(d) The Company is a corporation duly organized and validly existing in
good standing under the laws of the State of New York with full corporate power
and authority to own, lease and operate its properties and to conduct its
business as presently conducted and as described in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), and is
duly registered and qualified to conduct its business and is in good standing
in each jurisdiction or place where the nature of its properties or the conduct
of its business requires such registration or qualification, except where the
failure to so register or qualify does not have a material adverse effect on
the condition (financial or other), business, properties, net worth or results
of operations of the Company and the Subsidiaries (as hereinafter defined),
taken as a whole.
(e) Each of Radionics, Inc., a California corporation; Emergency
Communication Inc., a New York corporation (in which the Company holds a 99.33%
equity interest); Detection Systems Foreign Sales Corp., a Barbados
corporation; TriSense Ltd., a New York corporation; Detection Systems
International, Inc., a New York corporation; Detection Systems Australia Pty.
Ltd., an Australian corporation; Detection Systems (HK) Ltd., a corporation
organized under the laws of Hong Kong; DS First Systems (Beijing) Limited, a
corporation (in which the Company owns a 30% equity interest) organized under
the laws of the People's Republic of China; Digital Audio Limited, a
corporation organized under the laws of England and Wales; SystemCredit Trading
Limited, a corporation organized (in which Digital Audio Limited owns a 100%
interest) under the laws of England and Wales; Seriee, S.A., a corporation
(in which the Company owns a 99.5% interest) organized under the laws of
France; and Radio-Active Systems N.V., a corporation (in which the Company owns
a 98.7% equity interest) organized under the laws of Belgium (collectively, the
"Subsidiaries"), is a corporation duly organized, validly existing and in good
standing in its jurisdiction of incorporation, with full corporate power and
authority to own, lease and operate its properties and to conduct its business
as presently conducted and as described in the Registration Statement and the
Prospectus (and any amendment or supplement thereto), and is duly registered
and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
to so register or qualify does not have a material adverse effect
7
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
on the condition (financial or other), business, properties, net worth or
results of operations of the Company and the Subsidiaries, taken as a whole.
Except as otherwise noted in the first sentence of this Section 7(e),
all of the outstanding shares of capital stock of each of the Subsidiaries
has been duly authorized and validly issued, are fully paid and nonassessable,
and are owned by the Company directly or indirectly through one of the other
Subsidiaries, free and clear of any lien, adverse claim, security interest,
equity or other encumbrance. Except for the Subsidiaries, the Company does
not own a material interest in or control, directly or indirectly,
any other corporation, partnership, joint venture, association, trust or
other business organization or entity.
(f) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or to which
any of their respective property, is subject, that are required to be described
in the Registration Statement or the Prospectus (or any amendment or supplement
thereto) but are not described as required. Except as described in the
Prospectus, there is no action, suit, inquiry, proceeding, or investigation by
or before any court or governmental or other regulatory or administrative
agency or commission pending or, to the best knowledge of the Company,
threatened against or involving the Company or any Subsidiary relating to any
product alleged to have been manufactured or sold by the Company or any
Subsidiary and alleged to have been unreasonably hazardous, defective, or
improperly designed or manufactured, nor, to the knowledge of the Company, is
there any basis for any such action, suit, inquiry, proceeding, or
investigation. There are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration Statement or
the Prospectus (or any amendment or supplement thereto) or to be filed as an
exhibit to the Registration Statement that are not described or filed as
required or incorporated by reference as permitted by the
Act. All such agreements, contracts, indentures, leases or other instruments
to which the Company or any Subsidiary is a party have been duly authorized,
executed and delivered by the Company or such Subsidiary, constitute valid and
binding agreements of the Company or such Subsidiary and are enforceable
against the Company or such Subsidiary in accordance with the terms thereof,
except as enforceability thereof may be limited by the application of
bankruptcy, reorganization, insolvency and other laws affecting the rights of
creditors generally.
(g) Neither the Company nor any of the Subsidiaries is in violation of
its certificate or articles of incorporation or bylaws, or other organizational
documents, nor is the Company or any of the Subsidiaries in violation of any
law, ordinance, administrative or governmental rule or regulation applicable to
the Company or any of the Subsidiaries or of any decree of any court or
governmental agency or body having jurisdiction over the Company or any of the
Subsidiaries, except where such violation has not had and will not have a
material adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company and the
Subsidiaries (as hereinafter defined), taken as a whole.
(h) The execution and delivery of this Agreement, and the performance
by the Company of its obligations under this Agreement have been duly and
validly authorized by the Company, and this Agreement has been duly executed
and delivered by the Company and constitutes the valid and legally binding
agreement of the Company, enforceable against the Company in accordance with
its terms, except as enforceability thereof may be limited by (i) the
application of bankruptcy, reorganization, insolvency and other laws affecting
creditors' rights generally, (ii) equitable principles being applied at the
discretion of a court before which any proceeding may be brought and (iii)
federal or state securities laws or principles of public policy relating to the
enforcement of rights to indemnification or contribution.
(i) None of the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement by the Company nor the consummation
by the Company of the transactions contemplated hereby (i) is or may be void or
voidable by any person or entity, (ii) requires any consent, approval,
authorization or other order of or registration or filing with, any court,
regulatory body, administrative agency or other governmental body,
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
agency or official (except such as may be required for the registration of
the Shares under the Act and compliance with the securities or Blue Sky
laws of various jurisdictions, all of which will be, or have been,
effected in accordance with this Agreement) or conflicts or will conflict
with or constitutes or will constitute a breach of, or a default under,
the certificate or articles of incorporation or bylaws, or other
organizational documents, of the Company or any of the Subsidiaries,
or (iii) conflicts or will conflict with or
constitutes a breach of, or a default under, any agreement, indenture, lease or
other instrument to which the Company or any of the Subsidiaries is a party or
by which any of them or any of their respective properties may be bound, or
violates any statute, law, regulation or filing or judgment, injunction, order
or decree applicable to the Company or any of the Subsidiaries or any of their
respective properties, or results in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any of the
Subsidiaries pursuant to the terms of any agreement or instrument to which any
of them is a party or by which any of them may be bound or to which any of the
property or assets of any of them is subject.
(j) Except as described in the Prospectus, each bond, debenture, note,
other evidence of indebtedness, indenture, lease, contract, agreement or
arrangement to which the Company or any of its Subsidiaries is a party or by
which any of them is bound, or to which any of the property or assets of the
Company or any of its Subsidiaries is subject, which is material to the
condition (financial or other), business, business prospects, properties, net
worth or results of operations of the Company and its
Subsidiaries, taken as a whole, has been duly and validly authorized, executed
and delivered by the Company or such Subsidiary, as applicable, and neither the
Company nor any of its Subsidiaries is in breach or default in any material
respect of any obligation, agreement, covenant or condition contained in any
such bond, debenture, note, other evidence of indebtedness, indenture, lease,
contract, agreement or arrangement; none of such bonds, debentures, notes,
other evidences of indebtedness, indentures, leases, contracts, agreements or
arrangements has been assigned by the Company or any of its Subsidiaries, and
the Company knows of no present condition or fact which would prevent
compliance by the Company or any of its Subsidiaries of any other party thereto
with the terms of any such bond, debenture, note, other evidence of
indebtedness, indenture, lease, contract, agreement or arrangement in all
material respects; neither the Company nor any of its Subsidiaries has any
present intention to exercise any rights that it may have to cancel any such
bond, debenture, note, other evidence of indebtedness, indenture, lease,
contract, agreement or arrangement or otherwise to terminate its rights and
obligations thereunder, and none of them has any knowledge that any other party
to any such bond, debenture, note, other evidence of indebtedness, indenture,
lease, contract, agreement or arrangement has any intention not to render full
performance in all materials respects as contemplated by the terms thereof.
(k) Except as described in the Prospectus, the Company does not have
outstanding and at the Closing Date (and the Additional Closing Date, if
applicable) will not have outstanding any options to purchase, or any warrants
to subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell, any shares of Common Stock or any
such warrants or convertible securities or obligations. No holder of
securities of the Company has rights to the registration of any securities of
the Company because of the filing of the Registration Statement which have not
been complied with or effectively waived. The Company has complied with all of
its duties and obligations pursuant to any agreement, instrument, or other
document pursuant to which any holder of securities of the Company has rights
to the registration of any securities of the Company because of the filing of
the Registration Statement.
(l) Price Waterhouse LLP, the certified public accountants that have
certified the financial statements filed as part of the Registration Statement
and the Prospectus (or any amendment or supplement thereto) are independent
public accountants as required by the Act.
(m) The financial statements, together with related schedules and
notes, forming part of, or incorporated by reference into, the Registration
Statement and the Prospectus (and any amendment or supplement thereto), present
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
fairly the historical consolidated financial position, results of operations
and changes in financial position of the Company and the Subsidiaries on the
basis stated in the Registration Statement at the respective dates or for the
respective periods to which they apply; such statements and related schedules
and notes have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein. The other financial and statistical information and data
relating to the Company set forth in the Registration Statement and Prospectus
(and any amendment or supplement thereto) is accurately presented and prepared
on a basis consistent with such financial statements and the books and records
of the Company.
(n) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), neither
the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or
entered into any transactions, not in the ordinary course of business, that is
material to the Company and the Subsidiaries, taken as a whole, and there has
not been any material change in the capital stock, or material increase in the
short-term debt or long-term debt, of the Company and the Subsidiaries, taken
as a whole, or any material adverse change, or any development involving or
which may reasonably be expected to involve a material adverse change, in the
condition (financial or other), business, net worth or results of operations of
the Company and the Subsidiaries, taken as a whole.
(o) The Company or each of the Subsidiaries, as the case may be, has
good and marketable title to all property (real and personal) described in the
Prospectus as being owned by them, free and clear of all liens, claims,
security interests or other encumbrances except such as are described in the
Registration Statement and the Prospectus or in a document filed as an exhibit
to the Registration Statement or such as are not materially burdensome and do
not interfere in any material respect with the use of the property or the
conduct of the business of the Company and the Subsidiaries, taken as a whole,
and the property (real and personal) held under lease by each of the Company or
the Subsidiaries, as the case may be, is held by them under valid, subsisting
and enforceable leases with only such exceptions as in the aggregate are not
materially burdensome and do not interfere in any material respect with the
conduct of the business of the Company and the Subsidiaries, taken as a whole.
(p) The Company has not distributed and will not distribute prior to
the Closing Date any offering material in connection with the offering and sale
of the Shares other than the Prepricing Prospectus and the Registration
Statement, the Prospectus or other materials permitted by the Act.
(q) The Company has not taken, directly or indirectly, any action which
constituted or any action designed, or which might reasonably be expected to
cause or result in or constitute, under the Act or otherwise, stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Shares.
(r) The Company is not an "investment company," an "affiliated person"
of, or "promoter" or "principal underwriter" for an investment company within
the meaning of the Investment Company Act of 1940, as amended.
(s) The Incorporated Reports, when they were filed (or if an amendment
with respect to any such Incorporated Reports was filed, such Incorporated
Reports as amended when such amendment was filed) with the Commission, were
timely filed (or filed within the time limits prescribed by Rule 12b-25 under
the Exchange Act) and conformed in all material respects to the requirements of
the Exchange Act; none of such Incorporated Reports, when filed (or if an
amendment with respect to any such Incorporated Reports was filed, such
Incorporated Reports as amended when such amendment was filed), contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
(t) The Company and each of the Subsidiaries have all permits,
licenses, franchises, approvals, consents and authorizations of governmental or
regulatory authorities or private persons or entities (hereinafter "permit" or
"permits") as are necessary to own their properties and to conduct their
business in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus, except where the failure
to have obtained any such permit has not had and will not have a material
adverse effect upon the condition (financial or other) or the business of the
Company and the Subsidiaries, taken as a whole; the Company and each of the
Subsidiaries have fulfilled and performed all of their material obligations
with respect to each such permit and no event has occurred
which allows, or after notice or lapse of time would allow, revocation or
termination of any such permit or result in any other material impairment of
the rights of the holder of any such permit, subject in each case to such
qualification as may be set forth in the Prospectus, except where such
revocation, termination or impairment has not had and will not have a material
adverse effect upon the condition (financial or other) or the business of the
Company and the Subsidiaries, taken as a whole; and, except as described in the
Prospectus, such permits contain no restrictions that are materially burdensome
to the Company or any of the Subsidiaries.
(u) The Company and each of the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; and neither the Company nor any of the Subsidiaries has any reason to
believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a comparable cost,
except as disclosed in the Registration Statement and the Prospectus.
(v) The Company and the Subsidiaries have complied and will comply in
all material respects with wage and hour determinations issued by the U.S.
Department of Labor under the Service Contract Act of 1965 and the Fair Labor
Standards Act in paying its employees' salaries, fringe benefits, and other
compensation for the performance of work or other duties in connection with
contracts with the U.S. government, and have complied and will comply in all
material respects with the requirements of the Americans with Disabilities Act
of 1990, the Family and Medical Leave Act of 1993, the Employee Retirement
Income Security Act, the Civil Rights Act of 1964 (Title VII), as amended, the
Age Discrimination in Employment Act and state labor laws, except where the
failure to comply with any such requirements has not, and will not, have a
material adverse effect (financial or other) upon the condition of the Company
and the Subsidiaries, taken as a whole. The Company and the Subsidiaries have
complied and will comply in all material respects with the terms of all
certifications and representations made to the U.S. government in connection
with the submission of any bid or proposal or any contract. The Company and
the Subsidiaries have complied and will comply in all material respects with
their obligations under their agreements and contracts with the U.S. government
and agencies thereof. To the Company's knowledge, the Company and the
Subsidiaries have complied in all material respects with all foreign
requirements that are substantially similar in nature to the foregoing
domestic requirements and are applicable to the Company's and the Subsidiaries'
non-U.S. operations, except where the failure to comply with any such
requirements has not, and will not, have a material adverse effect (financial
or other) upon the condition of the Company and the Subsidiaries, taken as a
whole.
(w) The Company and the Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access
to assets is permitted only in accordance with management's general or specific
authorizations; and (iv) the recorded accountability for assets is compared
with existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
(x) Neither the Company nor any Subsidiary has, directly or indirectly,
at any time during the past five years (i) made any unlawful contribution to
any candidate for political office, or failed to disclose fully any
contribution in violation of law, or (ii) made any payment to any federal,
state or foreign governmental official, or other person charged with similar
public or quasi-public duties, other
than payments required or permitted by the laws of the United States or any
jurisdiction thereof or applicable foreign jurisdictions, except where the
making of any such contribution or payment has not had and will not have a
material adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company and the
Subsidiaries (as hereinafter defined), taken as a whole.
(y) The Company and the Subsidiaries have obtained all required
permits, licenses, and other authorizations, if any, which are required under
federal, state, regional, county, local and foreign statutes, codes, ordinances
and other laws relating to pollution or protection of the environment,
including laws relating to emissions, discharges, releases, spilling,
injecting, leaching, or disposing into the environment or threatened releases
of pollutants, contaminants, chemicals, or industrial, hazardous, or toxic
materials or wastes into the environment (including, without limitation,
ambient air, surface water, ground water, land surface, or subsurface strata)
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, discharge into the environment, transport, or
handling of pollutants, contaminants, chemicals, or industrial, hazardous, or
toxic materials or wastes, or any regulation, rule, code, plan, order, decree,
judgment, injunction, notice, or demand letter issued, entered, promulgated, or
approved thereunder ("Environmental Laws"), except where the failure to obtain
any such permit, license or authorization has not had and will not have a
material adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company and the
Subsidiaries (as hereinafter defined), taken as a whole. The Company and the
Subsidiaries are in material compliance with all terms and conditions of all
required permits, licenses, and authorizations, and are also in material
compliance with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules, and timetables contained in
the Environmental Laws. There is no pending or, to the knowledge of the
Company, threatened civil or criminal litigation, notice of violation, warning
letter, or administrative proceeding relating in any way to the Environmental
Laws (including, without limitation, notices, demand letters, or claims under
the Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended ("CERCLA"), as amended by the Superfund Amendments Reauthorization
Act of 1987 ("SARA"), the Toxic Substances Control Act of 1976, the Emergency
Planning and Community Right-to-Know Act of 1986, the Clean Water Act of 1977,
and the Clear Air Act of 1966, all as amended, and similar foreign, state, or
local laws) involving the Company or any of the Subsidiaries. To the knowledge
of the Company, there have not been and there are not any past, present, or
foreseeable future events, conditions, circumstances, activities, practices,
incidents, actions, or plans which may interfere with or prevent continued
compliance, or which may give rise to any common law or legal liability, or
otherwise form the basis of any present or future claim, action, demand, suit,
proceeding, hearing, study, or investigation, based on or related to the
manufacture, processing, distribution, use, treatment, storage, disposal,
arrangement for disposal, transport, arrangement for transport, or handling, or
the emission, discharge, release, or threatened release into the environment,
of any pollutant, contaminant, chemical, or industrial, hazardous, or toxic
material or waste, including, without limitation, any liability arising, or any
claim, action, demand, suit, proceeding, hearing, study, or investigation which
may be brought under RCRA, CERCLA, SARA, or similar foreign, state, regional,
county, or local laws.
(z) From time to time the Company evaluates the effect of Environmental
Laws on the business, operations, and properties of the Company and the
Subsidiaries and the associated costs and liabilities (including without
limitation, any capital or operating expenditures required for clean-up,
closure of properties or compliance with any Environmental Laws or any permit,
license, or approval, any related constraints on operating activities and any
potential liabilities to third parties). On the basis of such evaluations,
the Company believes that such associated
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
costs and liabilities would not, singly or in the aggregate, reasonably
be expected to have a material adverse effect on the business or condition
(financial or otherwise) of the Company and the Subsidiaries, taken as a
whole.
(aa) Except as otherwise disclosed in the Prospectus, the Company and
the Subsidiaries own or possess adequate rights to use all patents, trademarks,
trademark registrations, service marks, service mark registrations, trade
names, mask works, copyrights, licenses, inventions, trade secrets and rights
necessary for the conduct of their respective businesses, as now conducted or
hereinafter proposed to be conducted as described in the Prospectus. To the
knowledge of the Company, neither the Company nor any Subsidiary is infringing
in any material respect on any patent, trademark, service mark, mask work,
trade name, copyright, license, invention, trade secret or other intellectual
property or franchise rights of any person or entity. Except as described in
the Prospectus, no claim has been made against the Company alleging the
infringement by the Company of any patent, trademark, service mark, trade name,
mask work, copyright, license, invention, trade secret or other intellectual
property or franchise right of any person or entity. The Company has duly and
properly filed or cause to be filed with the United States Patent and Trademark
Office (the "PTO") all its United States patent applications described or
referred to in the Prospectus. The Company has clear title to its patents and
patent applications referred to in the Prospectus.
(ab) All offers and sales of the Company's and its Subsidiaries' capital
stock and debt or other securities prior to the date hereof were made in
compliance with the Act and all other applicable state and federal laws or
regulations, or any actions under the Act or any state or federal laws or
regulations in respect of any such offers or sales are effectively barred by
effective waivers or statutes of limitation.
(ac) The Common Stock has been and continues to be designated for
inclusion in the Nasdaq National Market under the symbol DETC, and the Company
is in compliance with the maintenance and designation criteria applicable to
Nasdaq National Market issuers.
(ad) All federal, state and local tax returns required to be filed by or
on behalf of the Company and each Subsidiary with respect to all periods ended
prior to the date of this Agreement have been filed (or are the subject of
valid extension) with the appropriate federal, state and local authorities and
all such tax returns, as filed, are accurate in all material respects. All
federal, state and local taxes (including estimated tax payments) required to
be shown on all such tax returns or claimed to be due from or with respect to
the business of the Company and each Subsidiary have been paid or reflected as
a liability on the financial statements of the Company and the Subsidiaries for
appropriate periods, except for those taxes which are being contested by the
Company in good faith and for which appropriate reserves are reflected in the
Company's financial statements. All deficiencies asserted as a result of any
federal, state or local tax audits have been paid or finally settled and no
issue has been raised in any such audit which, by application of the same or
similar principals, reasonably could be expected to result in a proposed
deficiency for any other period not so audited. No state of facts exist or has
existed which would constitute grounds for the assessment of any tax liability
with respect to the periods which have not been audited by appropriate federal,
state or local authorities. There are no outstanding agreements or waivers
extending the statutory period of limitation applicable to any federal, state
or local tax return for any period.
(ae) Except as described in the Prospectus, there are no outstanding
loans, advances, or guarantees of indebtedness by the Company or any Subsidiary
to or for the benefit of any of its officers, directors, or controlling
persons, or any of the members of the families of any of them. Except as
disclosed in the Prospectus, there are no business relationships or related
party transactions required to be disclosed therein by Regulation S-K of the
Commission.
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
SECTION 8. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS.
Each Selling Shareholder, severally and not jointly, represents and warrants to
each Underwriter on the date hereof, and shall be deemed to represent and
warrant to each Underwriter on the Closing Date and the Additional Closing
Date, that:
(a) All consents, approvals, authorizations and orders necessary for
the execution and delivery by such Selling Shareholder of this Agreement, the
Power of Attorney (the "Power of Attorney") hereinafter referred to, the
Custody Agreement (the "Custody Agreement") hereinafter referred to, and for
the sale and delivery of the Shares to be sold by such Selling Shareholder
hereunder, have been obtained; and such Selling Shareholder has full right,
power and authority to enter into this Agreement, the Power of Attorney and the
Custody Agreement and to sell, assign, transfer and deliver the Shares to be
sold by such Selling Shareholder hereunder.
(b) The Power of Attorney and the Custody Agreement have been duly
authorized, executed and delivered by such Selling Shareholder, and this
Agreement has been duly authorized, executed and delivered by or on behalf of
such Selling Shareholder and the Power of Attorney, the Custody Agreement and
this Agreement constitute valid and binding agreements of such Selling
Shareholder enforceable in accordance with their respective terms, except as
enforceability thereof may be limited by (i) the application of bankruptcy,
reorganization, insolvency and other laws affecting creditors' rights
generally, (ii) equitable principles being applied at the discretion of a court
before which any proceeding may be brought and (iii) federal or state
securities laws or principles of public policy relating to the enforcement of
rights to indemnification or contribution; the performance of this Agreement,
the Power of Attorney and the Custody Agreement and the consummation of the
transactions herein and therein contemplated will not result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
any statute, indenture, mortgage, deed of trust, voting trust agreement, note
agreement, lease or other agreement or instrument to which such Selling
Shareholder is a party or by which such Selling Shareholder or its properties
are bound, or under any order, rule or regulation or any court or governmental
agency or body applicable to such Selling Shareholder or the business or
property of such Selling Shareholder.
(c) The execution, delivery, and performance of this Agreement by such
Selling Shareholder, compliance by such Selling Shareholder with all the
provisions hereof and the consummation of the transactions contemplated hereby
will not require any consent, approval, authorization or other order of any
court, regulatory body, administrative agency, or other government body (except
such as may be required under the Act or state securities or Blue Sky laws),
and will not conflict with or constitute a breach of any of the terms or
provisions of, or a default under, any organizational documents of such Selling
Shareholder, if not an individual, or any agreement, indenture, or other
instrument to which such Selling Shareholder is a party or by which such
Selling Shareholder or any property of such Shareholder is bound, or violate
any law, administrative regulation or ruling or court decree applicable to such
Selling Shareholder or property of such Selling Shareholder.
(d) Immediately prior to the Closing Date (and the Additional Closing
Date, if appropriate) such Selling Shareholder will have good and valid title
to the Shares to be sold by such Selling Shareholder hereunder, free and clear
of all liens, encumbrances, equities or claims, and, upon delivery
of such Shares and payment therefor pursuant hereto, good and valid title to
such Shares free and clear of all liens, encumbrances, equities or claims, will
pass to the several Underwriters.
(e) Such Selling Shareholder will not offer, sell, contract to sell or
otherwise dispose of any Common Stock or rights to purchase Common Stock or any
securities convertible into or exchangeable for Common Stock, except to the
Underwriters pursuant to this Agreement, for a period of 120 days after
commencement of the public offering of the Shares by the Underwriters without
the prior written consent of Raymond James & Associates, Inc.
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
(f) Such Selling Shareholder has not, directly or indirectly, (i) taken
any action which constituted, or any action designed, or which might reasonably
be expected to cause or result in or constitute, under the Act or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares or (ii) since the filing of the
Registration Statement, bid for, purchased (other than pursuant to the exercise
of options) or paid any compensation for soliciting purchases of, the Shares.
(g) The sale of such Selling Shareholder's Shares pursuant to this
Agreement is not prompted by any material information concerning the Company
that is not set forth in the Prospectus.
(h) To the extent that any statements in or omission from the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are made in reliance upon and in conformity with written information
furnished to the Company by such Selling Shareholder expressly for use therein,
the Registration Statement and the Prospectus (and any amendment or supplement
thereto) will, when they become effective or are filed with the Commission, as
the case may be, conform in all material respects to the requirements of the
Act and not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading.
(i) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, each Selling Shareholder agrees to deliver to you prior to or at
the Closing a properly completed and executed United States Treasury Department
Form W-9 (or other applicable form or statement specified by Treasury
Department regulations in lieu thereof).
(j) The Firm Shares represented by the certificates held in custody for
such Selling Shareholder under the Custody Agreement are subject to the
interests of the Underwriters hereunder, and the arrangements made by such
Selling Shareholder for such custody, and the appointment by such Selling
Shareholder of the Attorneys-in-Fact by the Power of Attorney, are to that
extent irrevocable. Each of the Selling Shareholders specifically agrees that
the obligations of the Selling Shareholders hereunder shall not be terminated
by operation of law, whether by the death or incapacity of any individual
Selling Shareholder or, in the case of an estate or trust, by the death or
incapacity of any executor or trustee or the termination of such estate or
trust, or in the case of a corporation, the liquidation or dissolution of the
corporation, or by the occurrence of any other event. If any individual
Selling Shareholder or any such executor or trustee should die or become
incapacitated, or if any such estate or trust should be terminated, or if any
such corporation should liquidate or dissolve, or if any other such event
should occur, before the delivery of the Shares hereunder, certificates
representing the Shares shall be delivered by or on behalf of the Selling
Shareholders in accordance with the terms and conditions of this Agreement and
the Custody Agreements, and actions taken by the Attorneys-in-Fact
pursuant to Powers of Attorney shall be as valid as if such death, incapacity,
liquidation, dissolution or other event had not occurred, regardless of whether
or not the Custodian, the Attorneys-in-Fact, or any of them, shall have
received notice of such death, incapacity, liquidation, dissolution or other
event.
(k) Certificates in negotiable form representing all of the Firm Shares
to be sold by such Selling Shareholder hereunder (execpt those of Karl H.
Kostusiak) have been placed in custody
under a Custody Agreement, in the form heretofore furnished to you, duly
executed and delivered by such Selling Shareholder to Karl H. Kostusiak,
as custodian (the "Custodian"), and that such Selling Shareholder
has duly executed and delivered a Power of Attorney, in the form heretofore
furnished to you, appointing Karl H. Kostusiak and Frank J. Ryan and each of
them, as such Selling Shareholder's attorneys-in-fact (the "Attorneys-in-Fact")
with authority to execute and deliver this Agreement on behalf of such Selling
Shareholder as provided in this Section 8, to authorize the delivery of the
Firm Shares to be sold by such Selling Shareholder hereunder and otherwise to
act on behalf of such Selling Shareholder in connection with the transactions
contemplated by this Agreement and the Custody Agreement.
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
SECTION 9. EXPENSES. The Company hereby agrees with the several
Underwriters that the Company will pay or cause to be paid the costs and
expenses associated with the following: (i) the preparation, printing or
reproduction, and filing with the Commission of the Registration Statement
(including financial statements and exhibits thereto), each Prepricing
Prospectus, the Prospectus, and each amendment or supplement to any of them;
(ii) the printing (or reproduction) and delivery (including postage, air
freight charges and charges for counting and packaging) of such copies of the
Registration Statement, each Prepricing Prospectus, the Prospectus, and all
amendments or supplements to any of them as may be reasonably requested for use
in connection with the offering and sale of the Shares; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the Shares,
including any stamp taxes in connection with the offering of the Shares; (iv)
the printing (or reproduction) and delivery of this Agreement and all other
agreements or documents printed (or reproduced) and delivered in connection
with the offering of the Shares; (v) the registration of the Common Stock under
the Exchange Act, if applicable, and the listing of the Shares on the Nasdaq
National Market; (vi) the registration or qualification of the Shares for offer
and sale under the securities or Blue Sky laws of the several states as
provided in Section 5(f) hereof (including the reasonable fees and expenses of
counsel for the Underwriters relating to such registration and qualification);
(vii) the filing fees and the reasonable fees and expenses of counsel for the
Underwriters in connection with any filings required to be made with the
National Association of Securities Dealers, Inc. or NASD Regulation, Inc. in
connection with the offering; (viii) the transportation and other expenses
incurred by or on behalf of representatives of the Company in connection with
the presentations to prospective purchasers of the Shares; (ix) the fees and
expenses of the Company's accountants and the fees and expenses of counsel
(including local and special counsel) for the Company; (x) the preparation,
printing and distribution of bound volumes for the Representatives and their
counsel; and (xi) the performance by the Company of its other obligations under
this Agreement. Notwithstanding the foregoing, in the event that the proposed
offering is terminated for the reasons set forth in Section 5(i) hereof, the
Company agrees to reimburse the Underwriters as PROVIDED in Section 5(i). The
provisions of this Section 9 shall not affect any agreement that the Company
and the Selling Shareholders may have for the sharing of such costs and
expenses.
SECTION 10. INDEMNIFICATION AND CONTRIBUTION.
The Company agrees to indemnify and hold harmless you and each other
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, liabilities and expenses,
including reasonable costs of investigation, arising out of or based upon any
breach of any representation, warranty, agreement or covenant of the Company
contained herein or arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any Prepricing
Prospectus or in the Registration Statement or the Prospectus or in any
amendment or supplement thereto, or arising out of or based upon any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or arising
out of or based upon any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials used in connection
with the marketing of the Shares, including, without limitation, slides,
videos, films and tape recordings, except insofar as such losses, claims,
damages, liabilities or expenses arise out of or are based upon an untrue
statement or omission or alleged untrue statement or omission which has been
made therein or omitted therefrom in reliance upon and in conformity with the
information relating to an Underwriter furnished in writing to the Company by
or on behalf of any Underwriter through you expressly for use in connection
therewith; PROVIDED, HOWEVER, that the indemnification contained in this
paragraph with respect to any Prepricing Prospectus shall not inure to the
benefit of any Underwriter (or to the benefit of any person controlling such
Underwriter) on account of any such loss, claim, damage, liability or expense
arising from the sale of the Shares by such Underwriter
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
to any person if a copy of the Prospectus shall not have been delivered or sent
to such person within the time required by the Act and the regulations
thereunder, and the untrue statement or alleged untrue statement or omission or
alleged omission of a material fact contained in such Prepricing Prospectus was
corrected in the Prospectus, PROVIDED that the Company has delivered the
Prospectus to the several Underwriters in requisite quantity on a timely basis
to permit such delivery or sending.
Each Selling Shareholder, severally and not jointly, agrees to indemnify
and hold harmless you and each other Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation) arising
out of or based upon any breach of any representation, warranty, agreement or
covenant of such Selling Shareholder contained herein or arising out of or
based upon any untrue statement or alleged untrue statement of a material fact
contained in any Prepricing Prospectus or in the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon an untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with the information relating to
an Underwriter furnished in writing to the Company by or on behalf of any
Underwriter through you expressly for use in connection therewith; PROVIDED,
HOWEVER, that each Selling Shareholder shall only be liable under this
paragraph with respect to (A) information pertaining to such Selling
Shareholder furnished by or on behalf of such Selling Shareholder expressly for
use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto or (B) facts that
would constitute a breach of any representation or warranty of such Selling
Shareholder set forth in Section 8 hereof.
If any action or claim shall be brought against any Underwriter or any
person controlling any Underwriter in respect of which indemnity may be sought
against the Company or any of the Selling Shareholders, such Underwriter or
such controlling person shall promptly notify in writing the party(s) against
whom indemnification is being sought (the "indemnifying party" or "indemnifying
parties"), and such indemnifying party(s) shall assume the defense thereof,
including the employment of counsel reasonably acceptable to such Underwriter
or such controlling person and payment of all fees and expenses. Such
Underwriter or any such controlling person shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Underwriter or such controlling person unless (i) the indemnifying party(s) has
(have) agreed in writing to pay such fees and expenses, (ii) the indemnifying
party(s) has (have) failed to assume the defense and employ counsel reasonably
acceptable to the Underwriter or such controlling person, or (iii) the named
parties to any such action (including any impleaded parties) include both such
Underwriter or such controlling person and the indemnifying party(s), and such
Underwriter or such controlling person shall have been advised by its counsel
that representation of such indemnified party and any indemnifying party(s) by
the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation by the same counsel
has been proposed) due to actual or potential differing interests between them
(in which case the indemnifying party(s) shall not have the right to assume the
defense of such action on behalf of such Underwriter or such controlling
person). The indemnifying party(s) shall not be liable for any settlement of
any such action effected without its (their) written consent, but if settled
with such written consent, or if there be a final judgment for the plaintiff in
any such action, the indemnifying party(s) agrees to indemnify and hold
harmless any Underwriter and any such controlling person from and against any
loss, claim, damage, liability or expense by reason of such settlement or
judgment, but in the case of a judgment only to the extent stated in the
immediately preceding paragraph.
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
Each Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Company, its directors, its officers who sign the Registration
Statement, the Selling Shareholders and any person who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
to the same extent as the foregoing indemnity from the Company and the Selling
Shareholders to each Underwriter, but only with respect to information relating
to such Underwriter furnished in writing by or on behalf of such Underwriter
through you expressly for use in the Registration Statement, the Prospectus or
any Prepricing Prospectus, or any amendment or supplement thereto. If any
action or claim shall be brought or asserted against the Company, any of its
directors, any such officers, or any such controlling person or the Selling
Shareholders or any controlling person of a Selling Shareholder based on the
Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be
sought against any Underwriter pursuant to this paragraph, such Underwriter
shall have the rights and duties given to the Company and the Selling
Shareholders by the preceding paragraphs (except that if the Company and the
Selling Shareholders shall have assumed the defense thereof such Underwriter
shall not be required to do so, but may employ separate counsel therein and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at such Underwriter's expense), and the Company, its directors, any
such officers, and any such controlling persons and the Selling Shareholders or
any controlling person of a Selling Shareholder shall have the rights and
duties given to the Underwriters by the immediately preceding paragraph.
In any event, the Company and the Selling Shareholders will not, without
the prior written consent of the Representatives, settle or compromise or
consent to the entry of any judgment in any proceeding or threatened claim,
action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not the Representatives or any person who controls
the Representatives within the meaning of Section 15 of the Act or Section 20
of the Exchange Act is a party to such claim, action, suit or proceeding)
unless such settlement, compromise or consent includes an unconditional release
of all Underwriters and such controlling persons from all liability arising out
of such claim, action, suit or proceeding.
If the indemnification provided for in this Section 10 is unavailable to
an indemnified party in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then an indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities or expenses (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Shareholders on the
one hand and the Underwriters on the other hand from the offering of the Shares
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of the Company and the Selling Shareholders on the one hand and the
Underwriters on the other in connection with the statements or omissions that
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received by
the Company and the Selling Shareholders on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
and the Selling Shareholders bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus (or any term sheet used in reliance
on Rule 434(b) under the Act); provided that, in the event that the
Underwriters shall have purchased any Additional Shares hereunder, any
determination of the relative benefits received by the Company and the Selling
Shareholders or the Underwriters from the offering of the Shares shall include
the net proceeds (before deducting expenses) received by the Company and the
Selling Shareholders, and the underwriting discounts and commissions received
by the Underwriters, from the sale of such Additional Shares, in each case
computed on the basis of the respective amounts set forth in the notes to the
table on the cover page of the Prospectus. The relative fault of the Company
and the Selling Shareholders on the one hand and the Underwriters on the other
hand shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
or alleged omission to state a material fact relates to information supplied by
the Company and the Selling Shareholders on the one hand or by the Underwriters
on the other hand and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders, and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 10 was
determined by a pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities and expenses referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 10, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price of the Shares underwritten by it and distributed to
the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to
this Section 10 are several in proportion to the respective numbers of Firm
Shares set forth opposite their names in SCHEDULE I hereto (or such numbers of
Firm Shares increased as set forth in Section 12 hereof) and not joint.
Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 10 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 10 and the
representations and warranties of the Company and the Selling Shareholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Company, its directors or officers
or any person controlling the Company or any Selling Shareholder or any person
controlling any Shareholder, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter or any person controlling any Underwriter, or to the Company, its
directors or officers, or any person controlling the Company or any Selling
Shareholder or any person controlling any Shareholder, shall be entitled to the
benefits of the indemnity, contribution and reimbursement agreements contained
in this Section 9.
SECTION 11. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Firm Shares hereunder are
subject to the following conditions:
(a) The Registration Statement shall have become effective not later
than 9:30 a.m., New York City time, on the date hereof, or at such later date
and time as shall be consented to in writing by you, and all filings required
by Rules 424(b) and 430A under the Act shall have been timely made.
(b) Subsequent to the effective date of the Registration Statement
there shall not have occurred any change, or any development involving, or
which might reasonably be expected to involve, a prospective material adverse
change, in the condition (financial or other), business, properties, net worth
or results of operations of the Company and the Subsidiaries, taken as a whole,
not contemplated by the Prospectus (or any supplement thereto), that in your
reasonable opinion, as Representatives of the several Underwriters, would
materially and adversely affect the market for the Shares.
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
(c) You shall have received on the Closing Date (and the Additional
Closing Date, if any) an opinion of Nixon, Hargrave, Devans & Doyle LLP,
counsel for the Company, dated the Closing Date (and the Additional Closing
Date, if any), in form and substance reasonably satisfactory to you and your
counsel, to the effect that:
(i) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of New York with
full corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus (and any amendment or supplement thereto),
and is duly registered and qualified to conduct its business and is in
good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration
or qualification, except where the failure to so register or qualify
does not have a material adverse effect on the condition (financial
or other), business, properties, net worth or results of operation of
the Company and the Subsidiaries, taken as a whole.
(ii) Each of the Subsidiaries is a corporation duly organized and
validly existing in good standing under the laws of the jurisdiction of
its organization, with full corporate power and authority to own, lease
and operate its properties and to conduct its business as described
in the Registration Statement and the Prospectus (and any amendment
or supplement thereto); and is duly registered and qualified to conduct
its business and is in good standing in each jurisdiction or place
where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the
failure to so register or qualify does not have a material adverse
effect on the condition (financial or other), business, properties,
net worth or results of operation of the Company and the Subsidiaries,
taken as a whole; and all of the outstanding shares of capital stock of
each of the Subsidiaries have been duly authorized and validly issued,
and are fully paid and nonassessable, and, except as otherwise noted in
Section 7(e) of this Agreement, are owned by the Company directly,
or indirectly through one of the other Subsidiaries, free and clear
of any perfected security interest, or to the knowledge of such counsel,
any other voting trust arrangements, liens, encumbrances, equities,
claims or defects in title.
(iii) The authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof
contained in the Prospectus under the caption "Description of Capital
Stock."
(iv) All shares of capital stock of the Company issued on or after
April 1, 1990, and outstanding prior to the issuance of the Shares to be
issued and sold by the Company hereunder, have been duly authorized
and validly issued, are fully paid and nonassessable (except as
permitted by Section 505 of the New York Business Corporation Law) and
are free of any preemptive or, to the best knowledge of such counsel
after reasonable inquiry, similar rights that entitle or will entitle
any person to acquire any Shares upon the issuance thereof by the
Company, or any actions based upon any of the foregoing are effectively
barred by effective waivers or statutes of limitation.
(v) All offers and sales of the Company's and its Subsidiaries'
capital stock prior to the date hereof were made in compliance with the
registration provisions of the Act and the registration provisions of
all other applicable State of New York and federal laws or regulations
or any actions under the Act or any State of New York or federal laws
or regulations in respect of any such offers or sales are effectively
barred by effective waivers or statutes of limitation.
(vi) The Shares to be issued and sold to the Underwriters by the
Company hereunder have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor in accordance
with the terms hereof, will be validly issued, fully paid and
nonassessable and free of any preemptive or,
20
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
to the best knowledge of such counsel after reasonable inquiry, similar
rights that entitle or will entitle any person to acquire any Shares
upon the issuance thereof by the Company.
(vii) The form of certificates for the Shares conforms to the
requirements of the applicable corporate laws of the State of New York.
(viii) The Registration Statement has become effective under the
Act and, to the best knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose are pending before or, to the knowledge of
such counsel, contemplated by the Commission.
(ix) The Company has all requisite corporate power and authority
to enter into this Agreement and to issue, sell and deliver the Shares
to be sold by it to the Underwriters as provided herein, and this
Agreement has been duly authorized, executed and delivered by the
Company and is a valid, legal and binding agreement of the Company
enforceable against the Company in accordance with its terms, except
as enforceability thereof may be limited by (i) the application of
bankruptcy, reorganization, insolvency and other laws affecting
creditors' rights generally, (ii) equitable principles being applied
at the discretion of a court before which any proceeding may be brought
and (iii) federal or state securities laws or principles of public
policy relating to the enforcement of rights to indemnification or
contribution.
(x) To the knowledge of such counsel, neither the Company nor any
of the Subsidiaries is in violation of its certificate or articles of
incorporation or bylaws, or other organizational documents, and such
counsel has no knowledge that the Company or any Subsidiary is in
default in the performance of any material obligation, agreement or
condition contained in any bond, indenture, note or other evidence of
indebtedness or in any other agreement material to the Company and the
Subsidiaries, taken as a whole, except as has been disclosed in the
Prospectus.
(xi) Neither the offer, sale or delivery of the Shares, the
execution, delivery or performance of this Agreement, compliance by the
Company with all provisions hereof nor consummation by the Company of
the transactions contemplated hereby conflicts or will conflict with
or constitutes or will constitute a breach of, or a default under,
the certificate or articles of incorporation or bylaws, or other
organizational documents, of the Company or any of the Subsidiaries or
any agreement, indenture, lease or other instrument to which the
Company or any of the Subsidiaries is a party or by which any of
them or any of their respective properties is bound that is made an
exhibit to the Registration Statement, or, to the knowledge of such
counsel, will result in (A) the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or
any of the Subsidiaries or (B) a violation of any existing law,
regulation, ruling (assuming compliance with all applicable state
securities and Blue Sky laws), judgment, injunction, order or decree
known to such counsel to be applicable to the Company, the Subsidiaries
or any of their respective properties.
(xii) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency or official is required on
the part of the Company (except such as have been obtained under the
Act or such as may be required under state securities or Blue Sky laws
governing the purchase and distribution of the Shares) for the valid
issuance and sale of the Shares to the Underwriters under this
Agreement.
(xiii) The Registration Statement and the Prospectus (including
the Incorporated Reports) and any supplements or amendments thereto
(except for the financial statements and the notes thereto and the
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
schedules and other financial and statistical data included or
incorporated by reference therein, as to which such counsel need not
express any opinion) comply as to form in all material respects with
the requirements of the Act.
(xiv) To the best knowledge of such counsel, (A) other than as
described or contemplated in the Registration Statement (including the
Incorporated Reports) or the Prospectus (or any amendment or supplement
thereto), there are no legal or governmental proceedings pending or
threatened against the Company or any of the Subsidiaries, or to which
the Company or any of the Subsidiaries, or any of their property, is
subject, that are required to be described in the Registration Statement
(including the Incorporated Reports) or Prospectus (or any amendment or
supplement thereto) that are not described as required therein, and
(B) there are no agreements, contracts, indentures, leases or other
instruments, that are required to be described in the Registration
Statement (including the Incorporated Reports) or the Prospectus
or to be filed as an exhibit to the Registration Statement (including
the Incorporated Reports) that are not described or filed as required,
as the case may be.
(xv) Such counsel has no knowledge that the Company or any of the
Subsidiaries is in material violation of any law, ordinance,
administrative or governmental rule or regulation applicable to the
Company or any of the Subsidiaries or of any decree of any court or
governmental agency or body having jurisdiction over the Company or
any of the Subsidiaries, except where such violation does not and will
not have a material adverse effect on the condition (financial or
other), business, properties, net worth or results of operation of the
Company and the Subsidiaries, taken as a whole.
(xvi) Such counsel has no knowledge that: (A) the Company or any
of the Subsidiaries does not have any permit, license, franchise,
approval, consent or authorization of governmental or regulatory
authorities ("permit") that is necessary to own their properties and to
conduct their business in the manner described in the Prospectus,
subject to such qualifications as may be set forth in the Prospectus;
(B) the Company or any of the Subsidiaries has failed to fulfill and
perform any of their material obligations with respect to such permits;
(C) any event has occurred which allows, or after notice or lapse of
time would allow, revocation or termination thereof or result in any
other material impairment of the rights of the holder of any such
permit, subject in each case to such qualification as may be set forth
in the Prospectus; and (D) except as described in the Prospectus, that
any permit contains restrictions that are materially burdensome to the
Company or any of the Subsidiaries.
(xvii) The property described in the Prospectus as held under
lease by either of the Company or its Subsidiaries is held under valid,
subsisting and enforceable leases, with only such exceptions as in the
aggregate are not material and do not interfere in any material respect
with the conduct of the business of the Company and the Subsidiaries,
taken as a whole.
(xviii) Such counsel has reviewed all agreements, contracts,
indentures, leases or other documents or instruments referred to in the
Registration Statement and the Prospectus (other than routine contracts
entered into by the Company or any Subsidiary for the purchase of
materials or the sale of products, entered into in the normal course
of business) and such agreements, contracts, indentures, leases or
other documents or instruments are fairly summarized or disclosed
therein, and filed as exhibits thereto as required, and such counsel
does not know, after reasonable inquiry, of any agreements, contracts,
indentures, leases or other documents or instruments required to be so
summarized or disclosed or filed which have not been so summarized or
disclosed or filed.
22
<PAGE>
RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
(xix) Such counsel has no reason to believe that the descriptions
in the Prospectus of statutes, regulations or legal or governmental
proceedings are other than accurate or fail to present fairly the
information required to be shown.
(xx) The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of
1940, as amended.
(xxi) Except as otherwise disclosed in the Prospectus, the Company
or the Subsidiaries are the registered owners of all trademarks described
in the Prospectus as being registered trademarks of the Company or the
Subsidiaries, and such counsel has no knowledge of any claim to the
contrary or any challenge by any other person to the rights of the
Company and the Subsidiaries with respect to such trademarks. Except
as otherwise described in the Prospectus, such counsel has no
knowledge that any claim has been made against the Company alleging
the infringement by the Company of any patent, trademark, service mark,
trade name, mask work, copyright, license, invention, trade secret or
other intellectual property or franchise right of any person or entity.
In rendering such opinion, counsel may rely upon an opinion or opinions,
each dated the Closing Date (and the Additional Closing Date, if applicable),
of other counsel as to the laws of a jurisdiction other than the State of New
York, provided that (1) each such local counsel is acceptable to you, (2) such
reliance is expressly authorized by each opinion so relied upon and a copy of
each such opinion is delivered to you and is in form and substance satisfactory
to you, and (3) counsel shall state in their opinion that they believe that
they and you are justified in relying thereon. In rendering such opinion,
counsel may rely, to the extent they deem such reliance proper, as to matters
of fact upon certificates of officers of the Company and of government
officials. Copies of all such certificates shall be furnished to you and your
counsel on the Closing Date (and the Additional Closing Date, if applicable).
In rendering such opinion, in each case where such opinion is qualified
by "the best knowledge of such counsel after reasonable inquiry" or words of
similar import, such counsel may rely as to matters of fact upon certificates
of executive and other officers and employees of the Company or its
Subsidiaries as you and such counsel shall deem are appropriate and such other
procedures as you and such counsel shall mutually agree; PROVIDED, HOWEVER, in
each such case, such counsel shall state that it has no knowledge contrary to
the information contained in such certificates or developed by such procedures
and knows of no reason why you should not reasonably rely upon the information
contained in such certificates or developed by such procedures. In addition,
in rendering such opinion such counsel may state that where an opinion is
qualified by "the best knowledge of such counsel after reasonable inquiry" or
words of similar import, such opinion is based solely upon the conscious
awareness of facts or other information by the attorneys at such counsel's firm
who have had active involvement in the transactions contemplated by this
Agreement.
In addition to the opinion set forth above, such counsel shall state that
during the course of the preparation of the Registration Statement (including
the Incorporated Reports) and the Prospectus and the amendments thereto,
nothing has come to the attention of such counsel which has caused it to
believe that the Registration Statement and the Prospectus or any amendment
thereto (except for the financial statements and other financial and
statistical information contained therein or omitted therefrom as to which no
opinion need be expressed), at the date thereof, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that
the Registration Statement and the Prospectus, as of the date of the opinion
(except as aforesaid), contains an untrue statement of a material fact or
omits to state
23
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RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
Notwithstanding the foregoing provisions of this Section 11(c), (A) with
respect to Subsidiaries organized under the laws of jurisdictions outside the
United States of America, the opinion of counsel required by paragraph (ii)
above need only be given with respect to Detection Systems Australia Pty. Ltd.,
an Australian corporation, and Detection Systems (HK) Ltd., a corporation
organized under the laws of Hong Kong ("DS Hong Kong"), (B) with respect to
property located outside the United States of America and described in the
Prospectus as held under lease by either the Company or its Subsidiaries, the
opinion of counsel required by paragraph (xvii) above need only be given with
respect to the lease entered into by DS Hong Kong for the manufacturing
facility in Zhuhai, China, (C) the opinions of counsel described in the
foregoing clauses (A) and (B) of this paragraph may be given by one or more
counsel other than Nixon, Hargrave, Devans & Doyle LLP, provided that (x) each
such other counsel is reasonably acceptable to you and (y) such opinions are in
form and substance reasonably acceptable to you and your counsel, and (D)
Nixon, Hargrave, Devans & Doyle LLP may expressly exclude from its opinion of
counsel the opinion required by paragraph (xvii) above to the extent that such
opinion relates to the property described in the Prospectus as held under lease
by Radionics, Inc.
(d) You shall have received on the Closing Date the opinion from the
respective counsel for the Selling Shareholders, dated the Closing Date in form
and substance satisfactory to you, to the effect that:
(i) A Power of Attorney and a Custody Agreement have been duly
authorized, executed and delivered by or on behalf of the Selling
Shareholder and constitute valid and binding agreements of the Selling
Shareholder enforceable in accordance with their respective terms, except
as enforceability thereof may be limited by (i) the application of
bankruptcy, reorganization, insolvency and other laws affecting creditors'
rights generally, (ii) equitable principles being applied at the
discretion of a court before which any proceeding may be brought and (iii)
federal or state securities laws or principles of public policy relating
to the enforcement of rights to indemnification or contribution.
(ii) This Agreement has been duly authorized, executed and
delivered by or on behalf of the Selling Shareholder and constitutes a
valid and binding agreement of the Selling Shareholder enforceable in
accordance with its terms, except as enforceability thereof may be
limited by (i) the application of bankruptcy, reorganization, insolvency
and other laws affecting creditors' rights generally, (ii) equitable
principles being applied at the discretion of a court before which any
proceeding may be brought and (iii) federal or state securities laws or
principles of public policy relating to the enforcement of rights to
indemnification or contribution; and the performance of this Agreement,
the Power of Attorney and the Custody Agreement and the consummation of
the transactions herein and therein contemplated will not result in a
breach or violation of any of the terms or provisions of, or constitute
a default under, any statute, indenture, mortgage, deed of trust, voting
trust agreement, note agreement, lease or other agreement or instrument
of which such counsel is aware and to which the Selling Shareholder is a
party or by which the Selling Shareholder or its properties are bound,
or any order, rule or regulation, known to such counsel of any court or
governmental agency or body applicable to the Selling Shareholder or the
business or property of the Selling Shareholder.
(iii) No consent, approval, authorization or order has been or is
required for the consummation of the transaction contemplated by this
Agreement, the Power of Attorney or the Custody Agreement in connection
with the Shares to be sold by the Selling Shareholder hereunder, except
(name any such consent, approval, authorization or order) which has (have)
been duly obtained and is (are) in full force and effect,
24
<PAGE>
RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
such as have been obtained under the Act and such as may be required
under state securities or Blue Sky laws in connection with the purchase
and distribution of such Shares by the Underwriters.
(iv) Immediately prior to the Closing Date the Selling
Shareholder has good and valid title to the Shares to be sold by such
Selling Shareholder under this Agreement, free and clear of all liens,
encumbrances, equities or claims, and full right, power and authority
to sell, assign, transfer and deliver the Shares to be sold by the
Selling Shareholder hereunder.
(v) Good and valid title to such Shares, free and clear of all
liens, encumbrances, equities or claims has been transferred to each of
the several Underwriters that have purchased such shares in good faith
and without notice of any adverse claim.
In rendering such opinion, such counsel may rely upon a certificate of
the Selling Shareholder as to matters of fact with respect to (i) any consent,
approval, authorization or order required for the consummation of the
transactions contemplated by this Agreement, the Power of Attorney or the
Custody Agreement, (ii) ownership of and liens, encumbrances, equities or
claims on the Shares sold by the Selling Shareholder, and (iii) any agreements,
mortgages, deeds of trust, voting trusts, notes, leases or other instruments
provided that such counsel shall state that they have no knowledge contrary to
the information contained in such certificate.
(e) You shall have received on the Closing Date (and the Additional
Closing Date, if any) an opinion of Fowler, White, Gillen, Boggs, Villareal and
Banker, P.A., counsel for the Underwriters, dated the Closing Date (and the
Additional Closing Date, if any), with respect to the issuance and sale of the
Firm Shares, the Registration Statement and other related matters as you may
reasonably request and the Company and its counsel shall have furnished to your
counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters.
(f) You shall have received letters addressed to you and dated the date
hereof and the Closing Date (and the Additional Closing Date, if any) from
Price Waterhouse LLP, independent certified public accountants, substantially
in the forms heretofore approved by you.
(g) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been taken or, to the knowledge of the Company, shall be contemplated by the
Commission at or prior to the Closing Date; (ii) there shall not have been any
material change in the capital stock of the Company nor any material increase
in the short-term or long-term debt of the Company (other than in the ordinary
course of business) from that set forth or contemplated in the Registration
Statement or the Prospectus (or any amendment or supplement thereto); (iii)
there shall not have been since the respective dates as of which information is
given in the Registration Statement and the Prospectus (or any amendment or
supplement thereto), except as may otherwise be stated in the Registration
Statement and Prospectus (or any amendment or supplement thereto), any material
adverse change (present or potential future) in the condition (financial or
other), business properties, net worth or results of operations of the Company
and the Subsidiaries, taken as a whole; (iv) the Company and the Subsidiaries
shall not have any liabilities or
obligations, direct or contingent (whether or not in the ordinary course of
business) that are material to the Company and the Subsidiaries, taken as a
whole, other than those reflected in the Registration Statement or the
Prospectus (or any amendment or supplement thereto); and (v) all of the
representations and warranties of the Company contained in this Agreement shall
be true and correct in all material respects on and as of the date hereof and
on and as of the Closing Date as if made on and as of the Closing Date, and you
shall have received a certificate, dated the Closing Date and signed by the
chief executive officer and the chief financial officer of the Company (or such
other officers as are acceptable to you) to the effect set forth in this
Section 10(g) and in Section 10(h) hereof.
25
<PAGE>
RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
(h) The Company shall not have failed in any material respect at or
prior to the Closing Date to have performed or complied with any of its
agreements herein contained and required to be performed or complied with by it
hereunder at or prior to the Closing Date.
(i) The Company shall have furnished or caused to have been furnished
to you such further certificates and documents as you shall have reasonably
requested.
(j) At or prior to the Closing Date, you shall have received the
written commitment of each of the Company's directors and executive officers
and each of the Selling Shareholders not to offer, sell or otherwise dispose of
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for, or any rights to purchase or acquire, Common Stock, other
than in accordance with this Agreement for a period of 120 days after
commencement of the public offering of the Shares by the Underwriters without
the prior written consent of Raymond James & Associates, Inc.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to you and your counsel.
The several obligations of the Underwriters to purchase Additional Shares
hereunder are subject to the satisfaction on and as of the Additional Closing
Date of the conditions set forth in this Section 10, except that, if the
Additional Closing Date is other than the Closing Date, the certificates,
opinions and letters referred to in paragraphs (c) through (i) shall be dated
in the Additional Closing Date and the opinions called for by paragraphs (c)
and (d) shall be revised to reflect the sale of Additional Shares.
SECTION 12. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective upon the later of (a) the execution and delivery hereof by the
parties hereto, or (b) release of notification of the effectiveness of the
Registration Statement by the Commission.
If any one or more of the Underwriters shall fail or refuse to purchase
Firm Shares which it or they have agreed to purchase hereunder, and the
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than
one-tenth of the aggregate number of the Firm Shares, each non-defaulting
Underwriter shall be obligated, severally, in the proportion which the number
of Firm Shares set forth opposite its name in Schedule I hereto bears to the
aggregate number of Firm Shares set forth opposite the names of all
non-defaulting Underwriters or in such other proportion as you may specify in
the Agreement Among Underwriters, to purchase the Firm Shares which such
defaulting Underwriter or Underwriters agreed, but failed or refused to
purchase. If any Underwriter or Underwriters shall fail or refuse to purchase
Firm Shares and the aggregate number of Firm Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Firm Shares
and arrangements satisfactory to you, the
Company, and the Selling Shareholders for the purchase of such Firm Shares are
not made within 36 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter or the Company
and the Selling Shareholders. In any such case which does not result in
termination of this Agreement, either you or the Company shall have the right
to postpone the Closing Date, but in no event for longer than seven (7) days,
in order that the required changes, if any, in the Registration Statement and
the Prospectus or any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting Underwriter
from liability in respect of any such default of any such Underwriter under
this Agreement.
26
<PAGE>
RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
SECTION 13. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company or any Selling Shareholder by notice to the Company,
if prior to the Closing Date or the Additional Closing Date (if different from
the Closing Date and then only as to the Additional Shares), as the case may
be, (i) trading in securities generally on the New York Stock Exchange,
American Stock Exchange or the Nasdaq Stock Market shall have been suspended or
materially limited, (ii) trading of any securities of the Company, including
the Shares, on the New York Stock Exchange, American Stock Exchange or the
Nasdaq Stock Market shall have been suspended or materially limited, whether as
the result of a stop order by the Commission or otherwise, (iii) a general
moratorium on commercial banking activities in New York or Florida shall have
been declared by either federal or state authorities, (iv) there shall have
occurred any outbreak or escalation of hostilities or other international or
domestic calamity, crisis or change in political, financial or economic
conditions or other material event the effect of which on the financial markets
of the United States is such as to make it, in your judgment, impracticable or
inadvisable to market the Shares or to enforce contracts for the sale of the
Shares, or (v) the Company or any of the Subsidiaries shall have, in the sole
judgment of the Representatives, sustained any material loss or interference
with their respective businesses or properties from fire, flood, hurricane,
accident, or other calamity, whether or not covered by insurance, or from any
labor disputes or any legal or governmental proceeding, or there shall have
been any material adverse change (including, without limitation, a material
change in management or control of the Company) in the condition (financial or
otherwise), business prospects, net worth, or results of operations of the
Company and the Subsidiaries, except in each case as described in, or
contemplated by, the Prospectus (excluding any amendment or supplement
thereto). Notice of such cancellation shall be promptly given to the Company
and its counsel by telegraph or telephone and shall be subsequently confirmed
by letter.
SECTION 14. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements
set forth under the caption "Underwriting" in any Prepricing Prospectus and in
the Prospectus, constitute all the information furnished by or on behalf of the
Underwriters through you or on your behalf as such information is referred to
in Section 6(a) and 6(b) hereof.
SECTION 15. MISCELLANEOUS. Except as otherwise provided in Sections 5,
12 and 13 hereof, notice given pursuant to any of the provisions of this
Agreement shall be in writing and shall be delivered (i) if to the Company, at
the office of the Company at 130 Perinton Parkway, Fairport, New York 14450,
Attention: Karl H. Kostusiak, Chairman and Chief Executive Officer (with copy
to Justin P. Doyle, Esq., Nixon, Hargrave, Devans & Doyle LLP, 1300 Clinton
Square, Rochester, New York 14604; or (ii) if to you, as the Underwriters, (A)
Raymond James & Associates, Inc., 880 Carillon Parkway, St. Petersburg, Florida
33716, Attention: Thomas W. Mullins, Senior Vice President; and (B) Needham &
Company, Inc., 445 Park Avenue, New York, New York 10022, Attention: Vincent E.
Gallagher, Managing Director (with copy to R. Alan Higbee, Esq., Fowler, White,
Gillen, Boggs, Villareal and Banker, P.A., 501 East Kennedy Boulevard, Suite
1700, Tampa, Florida 33602).
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Company, its directors and officers, the Selling Shareholders
and the other controlling persons referred to in Section 10 hereof, and their
respective successors and assigns, to the extent provided herein, and no other
person shall acquire or have any right under or by virtue of this Agreement.
Neither of the terms "successor" and "successors and assigns" as used in this
Agreement shall include a purchaser from any Underwriter of any of the Shares
in his status as such purchaser.
27
<PAGE>
RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
SECTION 16. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
without reference to choice of law principles thereunder. This Agreement may
be signed in various counterparts which together shall constitute one and the
same instrument. This Agreement shall be effective when, but only when, at
least one counterpart hereof shall have been executed on behalf of each party
hereto.
28
<PAGE>
RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter and your acceptance shall constitute a binding agreement between
us.
Very truly yours,
DETECTION SYSTEMS, INC.
By:____________________________
Name:__________________________
Title:_________________________
SELLING SHAREHOLDERS
By:_____________________________
As attorney-in-fact on behalf of each
of the Selling Shareholders named in
Schedule II to this Agreement.
CONFIRMED as of the date first above mentioned,
on behalf of itself and the other several
Underwriters named in Schedule I hereto.
RAYMOND JAMES & ASSOCIATES, INC.
NEEDHAM & COMPANY, INC.
By: RAYMOND JAMES & ASSOCIATES, INC.
By:__________________________________
Authorized Representative
29
<PAGE>
SCHEDULE I
NUMBER
OF FIRM
NAME SHARES
- ----- -------
Raymond James & Associates, Inc...............................
Needham & Company, Inc........................................
TOTAL ........................................................... 1,545,000
=========
<PAGE>
SCHEDULE II
Firm Additional Total
Shares Shares Shares
------ ---------- -------
Company.................. 1,325,000 231,750 1,556,750
- -------
Selling Shareholders
- --------------------
David B. Lederer ........ 130,000 0 130,000
Karl H. Kostusiak ....... 72,000 0 72,000
Lawrence R. Tracy ....... 10,000 0 10,000
Frank J. Ryan ........... 8,000 0 8,000
<PAGE>
EXHIBIT 5
Nixon, Hargrave, Devans & Doyle LLP
Attorneys and Counsellors at Law
Clinton Square
Post Office Box 1051
(716) 263-1000
September 18, 1997
Detection Systems, Inc.
130 Perinton Parkway
Fairport, New York 14450
RE: Registration Statement on Form S-2, Registration No. 333-31951
Ladies and Gentlemen:
We have acted as counsel to Detection Systems, Inc., a New York
corporation (the "Company"), in connection with a Registration Statement on
Form S-2, as amended (the "Registration Statement"), filed by the Company
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"), with respect to 1,776,750
shares (the "Shares") of Common Stock of the Company, $.05 par value per
share (the "Common Stock"), offered by the Company and certain shareholders
of the Company (the "Selling Shareholders"). This opinion is being
delivered to you in connection with the Registration Statement.
In connection with the foregoing, we have examined the
Registration Statement and the Preliminary Prospectus contained in the
Registration Statement (the "Preliminary Prospectus"). We also have
examined originals or copies, certified or otherwise identified to our
satisfaction, of such corporate records, certificates and other documents
and have made such investigations of law as we have deemed necessary or
appropriate as a basis for the opinions expressed below. We understand
that the number of Shares sold by the Selling Shareholders will be 220,000
Shares (8,000 less Shares than disclosed in the Preliminary Prospectus) and
the number of Shares to be sold by the Company will be up to 1,556,750
Shares (289,750 more Shares than disclosed in the Preliminary Prospectus).
As to questions of fact material to our opinions expressed
herein, we have, when relevant facts were not independently established,
relied upon certificates of, and information received from, the Company
and/or representatives of the Company. We have
<PAGE>
Detection Systems, Inc.
September 18, 1997
Page 2
made no independent investigation of the facts stated in such certificates
or as to any information received from the Company and/or representatives
of the Company and do not opine as to the accuracy of such factual matters.
We also have relied, without investigation, upon certificates and other
documents from, and conversations with, public officials.
In rendering the following opinions, we have assumed, without
investigation, the authenticity of all documents or other instruments
submitted to us as originals, the conformity to the originals of all
documents or other instruments submitted to us as copies, the genuineness
of all signatures on such originals or copies, and the legal capacity at
the time of execution thereof of natural persons who executed any such
document or instrument.
Members of our firm involved in the preparation of this opinion
are licensed to practice law in the State of New York and we do not purport
to be experts on, or to express any opinion herein concerning, the laws of
any other jurisdiction other than the laws of the State of New York and the
federal laws of the United States of America.
Based upon and subject to the forgoing, and the other
qualifications and limitations contained herein, we are of the opinion that
(a) the 1,556,750 Shares being issued by the Company are duly authorized
and after such Shares have been appropriately issued and delivered in
accordance with the provisions of the Underwriting Agreement, the proposed
form of which has been or will be included as Exhibit 1 to the Registration
Statement, as amended, and the consideration for such Shares has been
received by the Company, such Shares will be validly issued, fully paid and
non-assessable, and (b) the 220,000 Shares to be sold by the Selling
Shareholders are duly authorized, validly issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the use of our names as it appears under
the caption "Legal Matters" in the Prospectus contained in the Registration
Statement. In giving such consent, we do not thereby admit that we come
within the category of persons whose consent is required under Section 7 of
the Act or the rules and regulations of the Commission thereunder.
We further consent to the filing of this opinion as an exhibit to
applications to the securities commissioners of the various states of the
United States, to the extent so required, in connection with the
registration of the Shares.
<PAGE>
Detection Systems, Inc.
September 18, 1997
Page 3
This opinion is intended solely for your benefit in connection
with the transactions described above and, except as provided in the two
immediately preceding paragraphs, may not be otherwise communicated to,
reproduced, filed publicly or relied upon by, any other person or entity
for any other purpose without our express prior written consent. This
opinion is limited to the matters stated herein, and no opinion or belief
is implied or may be inferred beyond the matters expressly stated herein.
Very truly yours,
/s/ Nixon, Hargrave, Devans & Doyle LLP
<PAGE>
EXHIBIT 10.(P)
Contract for the Leasing of Plant
---------------------------------
PARTY A: Zhuhai City Xiangzhou District Foreign Processing Trade
Services Qiansan Branch Company (this is a translated name, no
official English name being given)
PARTY B: Detection Systems (HK) Limited
Based on the principle of equality and mutual benefits, Party A and Party
B have, through negotiations, agreed on a contract as follows in relation
to the leasing by Party B from Party A of Plant B at Qiansan Meixi
Industrial District, for observance by the parties:-
1. PLANT AREA, RENTAL AND DEPOSIT
(1) Party A shall lease to Party B a 6-storey Plant of an area of
7,030 square metres. For the first year, only the 1-4 storeys
of an area of 4,688 square metres shall be rented at 18
Renminbi per square metre, totalling 84,380 Renminbi, while the
5-6 storeys of an area of 2,344 square metres shall be left
vacant, monthly rental shall be at 4.65 Renminbi per square
metre, totalling 10,900 Renminbi, aggregating a monthly rental
of 95,280 Renminbi for the entire Plant. For the second year,
the entire Plant shall be rented, monthly rental shall be at 18
Renminbi per square metre, totalling 126,540 Renminbi.
Thereafter, the rental rate shall be increased by 1 Renminbi
for each subsequent year, meaning the third year rental shall
be at 19 Renminbi per square metre, and so on.
(2) Upon provisional signing of this Contract, Party B shall
immediately pay to Party A a deposit for the Plant in the
amount of 10,000 Renminbi, which sum shall be repaid to Party B
in one lump sum within 30 days after Party B has cleared and
vacated from the Plant site upon termination of this Contract.
2. WATER, ELECTRICITY AND TELEPHONE CHARGES
(1) Party A shall be responsible for the provision of electricity,
transformers, telephone lines and tap water supplies up to the
Plant wall.
(2) Upon signing of this Contract, Party A shall provide
electricity of a capacity of 500 KW for use by Party B. Party
B shall bear the costs of installing water, electricity and
telephone facilities within the Plant. However, Party B may
use the electrical facilities only after Party A and the
electricity supply bureau have examined and approved the same.
Telephone charges shall follow government rates; electricity
charges shall be at government rates plus 0.10 Renminbi for
each watt, being provision for the depreciation of the
<PAGE>
facilities to increase capacity; water charges shall be at
standard rates applicable to industrial districts; and
management fees for security, cleaning, etc. shall be 1,000
Renminbi per month.
3. LEASE PERIOD
(1) Duration of the lease shall be 10 years, from 1 June 1995 to 31
May 2005. Upon expiration of the lease, provided that Party B
has given Party A a written request to renew the lease 6 months
prior to the expiration of this Contract, then, all terms being
equal, Party B shall have priority in continuing with the lease
for another 10 years at a rental to be agreed upon. Otherwise,
the Plant shall be returned to Party A upon expiration of this
Contract.
(2) This Contract shall be formally signed on 1 June, whereupon,
Party A shall give to Party B a 1-month rent free period for
purposes of renovating the Plant. Rental shall begin to accrue
as from 1 July.
4. CHANGES RELATING TO LESSOR AND LESSEE
(1) If Party A (lessor) transfers the ownership of the Plant to a
third party, this Contract shall continue to be valid as
against the new owner of the Plant.
(2) Party A shall notify Party B 3 months prior to selling the
Plant, and all things being equal, Party B shall have the prior
right to purchase the Plant.
(3) Party A agrees that Party B may sublease the 2 unused storeys
to a third party during the first year. The terms and
agreement for the sublease shall be agreed upon between Party B
and the third party, but the terms and agreement for the
sublease must be consistent with this Contract and must not
give rise to conflicts. Rental in excess of 4.65 Renminbi per
square metre shall belong to Party A.
5. Party A shall assist Party B in the management of matters of the
enterprise relating to such matters as personnel, finance, import
and export customs declaration for a monthly management fee of 5,000
Renminbi from the enterprise.
6. Party B shall enjoy autonomy in the administration of the Plant and
the management of its production, financial and labour matters.
7. PAYMENT METHOD
Party B shall pay to Party A before the 5th day of each month the
rental for the Plant, management fee and the previous month's water
and electricity charges. Late payment is subject to a late penalty
payment of 1% for each day. Where payment is late for more than 2
months, Party A shall be entitled to cease to supply water and
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electricity, repossess the Plant and claim for all arrears in rental
and charges, as well as penalty payments. Collection of water,
electricity and telephone charges by Party A from Party B shall be
based on bills, invoices and other related documents and in
accordance with stipulated time.
8. RESPONSIBILITIES OF PARTY A AND PARTY B
(1) For the protection of both parties, Party A shall obtain
insurance coverage for the Plant and Party B shall obtain
insurance coverage for the facilities, production materials and
other items.
(2) Party B may construct a surrounding wall and within the
enclosure build toilet, kitchen, power generator room and other
facilities, and may also make doors at the side and back of the
Plant to facilitate loading and unloading of goods and the
workers' movement. Where alteration of other parts of the
Plant is necessary, Party A's consent should be sought.
(3) Upon expiration of the Contract without renewal (or early
termination of the Contract), all renovation works and other
immovable accessory facilities injected by Party B shall belong
to Party A.
(4) During the term of the Contract, other than damage to the Plant
due to force majeure, Party B shall be responsible for all
outcome arising from its action and due to human factor.
Neither party shall be responsible to the other party in
respect of any damage to the Plant or loss caused to Party A or
Party B due to force majeure.
(5) Repairs and Maintenance during the Term of the Lease: Party B
shall take good care and make proper use of the Plant. Party A
shall provide periodical checks diligently to ensure safety of
accommodation and normal usage. Party A shall be responsible
for repair works to the Plant where these arise from Plant
design or construction problems, but where such problems are
caused by Party B's improper use or are contributory to human
factor, Party B shall be responsible for the repairs. Where it
is Party A's responsibility to do the repairs to the Plant,
Party B shall render all assistance diligently and must not
obstruct the progress of the repair works. If Party A is
genuinely unable to pay for the repair costs, the parties may
mutually agree to attend to the repairs jointly, and repair
costs paid by Party B shall in due course be offset against the
rental or be repaid by instalments by Party A. If due to Party
A's failure to carry out timely repairs to the Plant, Party B's
staff or property suffers damage, Party A shall compensate
Party B for the damage. If damage to the Plant is attributable
to Party B's responsibility, Party B shall compensate Party A
for losses suffered.
(6) Party A declares that the Plant referred to in this Contract
was constructed and operated in accordance with relevant state
policies and regulations. Party A and Party B are entering
into this Contract in accordance with and on the basis of the
current state policies and laws. In the event of new state
policies, laws or regulations being contradictory to this
Contract, hence necessitating in the
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termination of this Contract, compensation to Party B shall be
made in accordance with state policies.
(7) Party A shall assist Party B in the handling and the
importation of requisite machinery and facilities, office
equipment, raw materials, etc.
(8) To facilitate Party B's consideration and decision of plans for
the expansion of the Plant in future, Party A shall inform
Party B six months prior to the implementation of any plan to
construct buildings in the area around or near the Plant.
9. ARBITRATION
(1) If Party B wishes to terminate this Contract unilaterally
during the term of this Contract, it should notify Party A in
writing six months in advance, whereupon the parties shall
negotiate on the arrangement.
(2) Party A and Party B shall strictly observe and perform the
terms of this Contract. Neither party may terminate this
Contract unilaterally, and any breach thereof shall give the
other party the right to pursue against such breach of
responsibility.
10. SETTLEMENT OF DISPUTE
The parties may continue to negotiate and agree on any matter that
has not been dealt with herein. In case of dispute, the parties
shall endeavour to resolve the matter amicably through negotiation,
failing which, the matter may be referred to the people's court for
judgment.
This Contract shall be effective immediately upon signing by the
respective legal representatives of Party A and Party B.
Attachments herewith are:
1. boundary map showing the plane location of the Plant and occupied
area
2. plane map on the internal area of the Plant
Party A: (signed by legal representative, endorsed with company chop)
Party B: (signed by authorised representative, endorsed with company
chop)
June 1, 1995
<PAGE>
EXHIBIT 10.(Q)
Sub-contracting Agreement of Detection Systems,--China Plant, Qianshan,
Zhuhia City
No. 09(95)Sub-contracting Agreement,
Qianshan, Xiangzhou, Zhuhai
In accordance with the principle of equal and mutual benefits and
through the friendly negotiation, Detection Systems,--China Plant located
at Qianshan, Zhuhai City (Party A) and Detection Systems(HK) Limited (Party
B) have made this agreement.
1. Both Parties of the Agreement
Party A: Detection Systems,--China Plant, Qianshan Town, Zhuhai
City
Official Representative:
Tel: 8622618
Address: The Industrial Estate of Meixi Village, Quinshan Town,
Zhuhai City
Party B: Detection Systems (HK) Limited
Official Representative: Herrick Kan
Tel. 26352815
Address: Unit 13-18, 17/F New Commerce Centre,
19 On Sum Street, Shatin, N.T. Hongkong
2. Commercial Assistance
Commercial Assistance: Qianshan Branch Xiangzhou Foreign
Processing & Assembly Service Company of Zhuhai City
Office Representative: Lu Chao-yuan
Address: 19, Dongfeng Road, Qianshan Towo, Xiangzhou District,
Zhuhai City
Tel: 8612061 8611172
3. Purpose of the Agreement
Party B provides the manufacturing equipments, tools and
decorating materials, etc. with the
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approximate value of 3,887.47 thousand HKS. Party B also
provides all the raw and auxiliary materials, packing materials
free of charge. Party A manufactures the Electronic Burglary
Systems and Closed-circuit TV Systems with the materials provided
by Party B. All the manufactured products will be exported.
Party A will get the expenses for the processing. The annual
quantity of processing is one million pieces and the annual sub-
contracting fee is two million HKS.
4. Responsibilities for Both Parties
Party A:
(1) Provide factory of seven thousand square meters and the
accessories for water and electricity, and organize the labour for the
production.
(2) Process all the Customs documents for import and export in
China's Customs.
(3) Except unavoidable factors, accept the technical instruction
of Party B and fulfill the processing tasks on time, quality and quantity
according to the product type requirements of Party B.
(4) Provide job and living conditions for technical and managing
personnels from Party B (All the expenditures will be borne by Party B)
Party B:
(1) Provide the manufacturing equipments, tools and decorating
materials with the approximate value of 3,887.47 thousand HKS (See the
lists for the detail). The legal title of properties belongs to Party B.
After the expired date of the agreement, Party B can export all the
materials after the approval by the Customs, other than those scrap
materials and nip.
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(2) Process all the Customs documents for import and export out
of China distinct.
(3) Send technical personnel to Party A for installation and
testing of the mechanical equipments; for the instruction of production and
for checking of the products before being sent out from the factory; and
responsible for all the expenditures of technical personnels.
(4) According to production capabilities of the equipments,
provide enough raw and auxiliary materials and arrange subcontracting
agreements in advance to assure that Party A have even and smooth
production.
5. Principle of determining the Price and Payment Terms
(1) The trial period is one month. During the trial period,
Party B should pay Party A400HKS$ for each worker each month (25.5 Working
days per month, eight working hours per day).
(2) The processing expenses will be paid by D/P (Documents
against Payment at Sight). Party A will get the expenses through Zhuhai
Branch, Bank of China from Party B, Hongkong Branch, Bank of China. The
paying period is seven days. After the due date, Party B must pay bank
interest to Party A according to the current interest rate of the Bank.
Party A have absolute right to stop delivering goods if the required fee
hasn't been received.
6. Responsibility for Product Quality, Rate of Loss, Transportation
and Insurance Terms
(1) Party B will be responsible for the quality of the raw and
auxiliary materials, packing materials. Party A will be responsible for
the quality of manufactured products. The quality of the products are
based on the technical requirements which both parties agreed and checked
by random sample. Once
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approved and received, Party B will be wholly responsible for the quality
problem.
(2) The rate of loss of the raw ans auxiliary materials and the
rate of nonconformed products should be listed in each subcontracting
contract.
(3) The import and export of the raw and auxiliary materials
will be processed by the port of Gongbei, Xianghou and Jiuzhou Harbour.
And all the transportation expenses will be borne by Party B.
(4) All the insurance of equipments, tools, raw and auxiliary
materials, packing materials and finished products under transportation and
storage will be held by Zhuhai Branch, the People's Insurance Company of
China with the help of Party A. Insurance premium will be borne by Party
B. The insurance of the factory will be borne by Party A.
7. Promises of Both Parties
(1) Party B will be responsible for the expenditures of
repairing the equipments and replacing the spare parts.
(2) Party B will be responsible for paying Party A life expenses
of eight HK$ for each person each day according to the actual number of
worker if Party B has not provided enough materials causing working days
less than 25 or cumulated days of without work over 4. Party A can accept
the orders from other customers.
(3) During the period of this agreement, Party B must pay to
Party A in average no less than 700HK$ for each person of the factory.
(4) During the period of this agreement, all the parties should
abide by the rules and regularities of Fire Protection, Safety Production
and Labour Management in China. Both parties should cooperate actively.
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8. Arbitration
In the process of carrying-out this agreement, both parties agree
to ask Guangdong Branch, Foreign Economic & Trade Arbitration Committee of
the China's International Trade Promotion Committee for arbitration if they
have arguments which cannot be solved through negotiation. Both parties
acknowledge that the arbitration is final. And the loser will bear all the
economic loss. The arbitration is based on Chinese law.
9. The Effect Condition of the Agreement and Others
(1) The agreement will come into effect after the three parties
signed the signature and the date from the approval by the authorized
department of the Government of Party A. The effective period is five
years.
(2) Any party who doe snot carry out this agreement and incoming
economic losses for other parties must bear responsibility of compensation.
(3) Commercial assistance will help the enterprise to develop
the incoming materials processing business.
(4) Both parties may negotiate and add other terms if there are
some unmentioned terms. The added terms will be carried out with this
agreement after they are ap proved by the original approval organization.
If there are some special reasons for cancelling this agreement in advance,
the reasons should be pointed out two months in advance. After the
approval by the original approval organization, the agreement can be
cancelled.
(5) There are four original documents for this agreement, three
for each signatured party, one for the approval department. Various copies
have the same effect for this agreement.
(6) This Agreement is signed at Qianshan, Zhuhai City on June
19, 1995.
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EXHIBIT 23
Consent of Independent Accountants
We hereby consent to the use and incorporation by reference in the
Prospectus constituting part of this Registration Statement on Form S-
2 of our report dated June 2, 1997 relating to the financial
statements of Detection Systems, Inc., which appears in such
Prospectus and on page 27 of the Annual Report on Form 10-K for the
year ended March 31, 1997. We also consent to the application of such
report to the Financial Statement Schedule for the three years ended
March 31, 1997 listed under Item 14(a) of Detection Systems, Inc.'s
Annual Report on Form 10-K for the year ended March 31, 1997 when such
schedule is read in conjunction with the financial statements referred
to in our report. The audits referred to in such report also included
this Financial Statement Schedule. We also consent to the references
to us under the headings "Experts" and "Selected Consolidated
Financial Data" in such Prospectus. However, it should be noted that
Price Waterhouse LLP has not prepared or certified such "Selected
Consolidated Financial Data."
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Rochester, New York
September 18, 1997
