UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to __________
Commission File Number: 0-8125
----------------------------
DETECTION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
State of New York 16-0958589
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
130 Perinton Parkway, Fairport, New York 14450
(Address of principal executive offices) (Zip Code)
(716) 223-4060
(Registrant's telephone number, including area code)
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
the filing requirements for the past 90 days. Yes X No
As of November 12, 1997 there were outstanding 6,098,514 shares of the
registrant's common stock, par value $.05 per share.
PART I FINANCIAL INFORMATION
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
Sept. 30, 1997 March 31, 1997
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 5,436,013 $ 2,244,265
Accounts receivable, less allowance
for doubtful accounts of $325,400 and 23,036,151 15,246,309
$313,800, respectively
Inventories 32,384,557 29,995,215
Deferred income tax charges 2,199,638 2,132,156
Prepaid expenses and other assets 1,784,363 883,137
---------- ----------
64,840,722 50,501,082
---------- ----------
Fixed assets 11,656,505 11,248,171
Deferred income taxes 3,046,200 3,046,200
Goodwill and other intangibles 4,949,281 2,942,626
Other assets 832,058 537,772
---------- ----------
Total Assets $85,324,766 $68,275,851
========== ==========
Liabilities & Shareholders' Equity
Current liabilities:
Current portion of long term debt $ 2,486,868 $ 953,648
Current portion of capital lease
obligation 52,188 147,574
Short term borrowings 715,277 0
Accounts payable 13,381,365 12,259,380
Accrued payroll and benefits 2,948,001 2,818,487
Other accrued liabilities 2,316,308 3,254,593
---------- ----------
21,900,007 19,433,682
Obligations under capital leases 25,750 54,125
Other long term liabilities 3,206,947 2,924,975
Long term debt 15,365,890 28,031,802
Shareholders' equity:
Common stock, par value $.05 per
share; Authorized - 12,000,000
shares; Issued - 6,098,927 shares
at September 30, 1997, and 4,478,993
shares at March 31, 1997 293,296 223,950
Capital in excess of par value 34,641,098 9,448,917
Retained earnings 10,411,636 8,594,306
---------- ----------
45,346,030 18,267,173
Less - Treasury stock, at cost (49,672) (52,553)
Notes receivable for stock purchases (320,780) (378,373)
Cumulative translation adjustment (149,406) (4,980)
---------- ----------
44,826,172 17,831,267
---------- ----------
Total liabilities and shareholders' equity $85,324,766 $68,275,851
========== ==========
(See accompanying notes to financial statements)
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations and Retained Earnings
(Unaudited)
Sept. 30, 1997 Sept. 30, 1996
For the Three Months Ended: (Current Year) (Preceding Year)
---------- -----------
Net sales $34,463,093 $24,865,642
Costs and expenses:
Production 23,033,399 16,577,368
Research and development 2,202,994 1,997,484
Marketing, administrative and general 7,488,684 4,778,247
---------- ----------
Total costs and expenses 32,725,077 23,353,099
Operating income 1,738,016 1,512,543
Interest income 2,376 8,784
Interest expense (816,831) (512,838)
Other income 23,050 23,643
---------- ----------
Income before taxes 946,611 1,032,132
Provision for taxes 274,499 238,000
---------- ----------
Net income $ 672,122 $ 794,132
========== ==========
Retained earnings at beginning of period 9,739,524 5,493,305
Retained earnings at end of period $10,411,636 6,287,437
========== ==========
Earnings per share
Basic $0.14 $0.19
==== ====
Diluted $0.12 $0.17
==== ====
(See accompanying notes to financial information)
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations and Retained Earnings
(Unaudited)
For the Six Months Ended: Sept. 30, 1997 Sept. 30, 1996
(Current Year) (Preceding Year)
------------ -------------
Net Sales $62,670,881 $48,043,965
Costs and expenses:
Production 40,589,331 31,943,190
Research and development 4,287,952 3,757,415
Marketing, administrative and general 13,875,241 9,469,901
---------- ----------
Total costs and expenses 58,752,524 45,170,506
Operating income 3,918,357 2,873,459
Interest income 6,030 28,126
Interest expense (1,454,300) (867,813)
Other income 238,758 23,643
---------- ----------
Income before taxes 2,708,845 2,057,415
Provision for taxes 903,499 639,000
---------- ----------
Net income $1,805,346 $ 1,418,415
---------- ----------
Retained earnings at beginning of period 8,594,306 4,869,022
Amortization of redeemable common stock 11,984
Retained earnings at end of period $10,411,636 $ 6,287,437
========== =========
Earnings per share
Basic $0.21 $0.33
==== ====
Diluted $0.20 $0.30
==== ====
(See accompanying notes to financial information)
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
For the Six Months Ended September 30, 1997 1996
Cash Flows from Operating Activities: ---- ----
Net income $1,805,346 $1,418,415
--------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,270,984 1,361,051
Gain on sale of land (205,000)
Stock based compensation 85,975 (107,000)
Deferred compensation 457,415 143,925
Changes in operating assets and liabilities:
Accounts receivable (1,428,534) (2,721,258)
Inventories 3,772,698 (3,363,358)
Income tax receivable (1,015,690) (251,009)
Prepaid expenses and other assets (1,042,635) (1,086,466)
Accounts payable (3,227,786) 2,827,413
Accrued payroll and benefits (10,569) 753,866
Other accrued liabilities (2,921,989) (56,835)
--------- ---------
Total adjustments (3,265,131) (2,499,671)
--------- ---------
Net cash used in operating
activities (1,459,785) (1,081,256)
Cash Flows from Investing Activities:
Proceeds from sale of land 312,000
Capital expenditures (1,319,246) (1,025,943)
Purchase of companies, net of cash acquired (6,816,052)
--------- ----------
Net cash used in investing activities (7,823,298) (1,025,943)
Cash Flows from Financing Activities:
Proceeds from borrowings 6,718,198 2,573,700
Proceeds from issuance of common stock 24,258,745
Principal payments on long-term debt and
capital lease obligations (18,844,028) (497,544)
Common stock transactions 474,358 410,380
Amortization of redeemable common stock 11,984
--------- ----------
Net cash provided by financing activities 12,619,257 2,486,536
Effect of exchange rate changes (144,426)
--------- ----------
Net increase in cash and cash
equivalents 3,191,748 379,337
Cash and cash equivalents at beginning of period 2,244,265 913,716
Cash and cash equivalents at end of period $5,436,013 $1,293,053
========= =========
Cash paid during the year for:
Interest $1,113,000 $484,400
Income taxes $1,576,600 $567,300
(See accompanying notes to financial information)
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL INFORMATION
THREE AND SIX MONTH PERIODS ENDED
September 30, 1997
(Unaudited)
NOTE 1. GENERAL
The accompanying unaudited interim consolidated financial information has
been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission (SEC). The unaudited interim consolidated financial
information include the consolidated accounts of Detection Systems, Inc. and
its majority-owned subsidiaries (collectively, "the Company") with all
intercompany transactions eliminated. In the opinion of management, all
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
information prepared in accordance with generally accepted accounting
principles (GAAP) have been condensed or omitted pursuant to such SEC rules
and regulations. The financial information should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended March 31,
1997.
Cash flow statement - During the first quarter of fiscal 1998, the Company
issued 221,738 and 34,121 shares of common stock in connection with the
acquisitions of DA Systems and Seriee S.A., respectively. The Company
repurchased the 221,738 shares issued in connection with the acquisition of
DA Systems during the second quarter of fiscal 1998 (see note 3).
Earnings per share - The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share," during the quarter ended
December 31, 1997. As required by this Statement, earnings per share of
prior periods are presented in accordance with the provisions of SFAS No.
128. There are no significant reconciling items between net income as
presented in the consolidated statement of operations and net income
available to common stockholders used in the calculation of earnings per
share. Reconciling items between the number of shares used in the
calculation of basic and diluted earnings per share relate only to deferred
compensation plans, options and warrants, as follows:
Three months ending Six months ending
Sep. 30, Sep. 30,
1997 1996 1997 1996
Weighted average number of
shares outstanding 4,831,166 4,271,790 4,723,909 4,255,155
Shares associated with deferred
compensation, option and
warrant plans 604,520 366,372 581,804 412,624
NOTE 2. INVENTORIES
Major classifications of inventory follow:
Sept. 30, 1997 March 31, 1997
------------- --------------
Component Parts $15,364,767 $19,457,368
Work In Process 948,519 2,697,459
Finished Products 16,071,271 7,840,388
---------- ----------
$32,384,557 $29,995,215
========== ==========
NOTE 3. ACQUISITIONS
In May 1997, the Company acquired all of the outstanding stock of DA Systems,
in exchange for 221,738 shares of its common stock. The shares were callable
at the Company's option at $17 per share plus interest at 8.25% until June
30, 1998, and could be put to the Company at that price after that date. The
Company exercised its call option to repurchase these shares in connection
with the issuance of common stock in September 1997. 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
S.A. of France, in exchange for 34,121 shares of its common stock, valued at
approximately $0.6 million. Seriee is a leading manufacturer of electronic
control and communication equipment with annual net sales of approximately
$6.3 million.
In June 1997, the Company acquired 98.7% of the outstanding stock of
Radio-Active Systems N.V.("RAS") of Belgium for approximately $3.6 million in
cash. RAS has a security equipment distribution network throughout Belgium
with annual net sales of approximately $10 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 information as of the date of acquisition. The financial
information reflects the preliminary allocation of purchase price as the
purchase price allocation has not been finalized. Unallocated excess of
purchase price over net assets acquired as of September 30, 1997 is $2.2
million and is included with goodwill and other intangibles.
Note 4. ISSUANCE OF COMMON STOCK
In September 1997, the Company sold 1,325,000 shares of common stock at $20
per share in a public offering. The Company had granted the underwriters a
30-day option to purchase up to 231,750 additional shares of common stock
under the same terms and conditions as the public offering to cover
over-allotments, and this option was exercised in October 1997. Expenses
associated with this offering as of September 30, 1997, of approximately $2.3
million were net against proceeds.
NOTE 5. RESTATEMENT
The Company discovered an incorrect posting in the second quarter of fiscal
1998 accounts payable of approximately $950,000. This error occurred in the
conversion of its China manufacturing facility's existing information system
to the corporate system. The Company restated the financial statements
included in its second quarter fiscal 1998 Form 10-Q, which were filed on
November 14, 1997, in a Form 10-Q/A. In connection with the fiscal 1998 year
end close, the Company discovered offsetting errors of approximately
$432,000, also relating primarily to accounts payable and resulting from the
conversion of its information systems. The Company is restating the
financial statements included in the second quarter Form 10-Q/A in this Form
10-Q/A. As a result, restated net income for the second quarter was $0.7
million ($0.14 per basic share and $0.12 per diluted share) compared to
previously reported net income of $0.4 million ($0.08 per basic share and
$0.07 per diluted share).
The second quarter of fiscal 1998 and year to date results of operations and
Management's Discussion and Analysis included in this report reflect the
restated results of operations for the quarter ended September 30, 1997.
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
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.
The Company's significant acquisitions during the current fiscal year
were: (i) purchase in May 1997 of DA Systems in the U.K., with annual net
sales of approximately $10.8 million, (ii) purchase in June 1997 of Seriee in
France, with annual net sales of approximately $6.3 million, and (iii)
purchase in June 1997 of RAS in Belgium, with annual net sales of
approximately $10.0 million. Previous significant acquisitions were Radionics
(February 1996) and Senses International, Inc. (July 1996). These
acquisitions have a significant impact on the comparative financial
information for the three and six month periods ending September 30, 1997 and
1996. The acquisitions were funded by borrowings under a commercial credit
facility and/or issuance of the Company's common stock.
Since the opening of the China manufacturing facility in late fiscal
1996 and throughout fiscal 1997, a portion of the Company's manufacturing was
moved from domestic plants to the China facility. While production of the
Company's highest volume products were moved to China during this period,
such products were limited in number relative to the Company's entire product
line. During the first and second quarters of fiscal 1998, a far greater
number of products that continued to be manufactured at the Company's
Radionics subsidiary were moved to the China facility. Manufacturing
efficiencies consistent with previous product transfers are anticipated, but
the short term impact of this rapid shift in production location resulted in
unexpected inefficiencies, exacerbated by the Company's multiple
manufacturing information systems, which created difficulties in effectively
coordinating overall materials procurement, production and scheduling.
Consequently, production quantities, yields and efficiency of the China
facility declined during this period while production related overhead
expenses, such as freight, remained constant or increased. To help assure
timely customer deliveries, the Company restarted manufacturing some of its
products at its Radionics facility. These factors resulted in higher average
unit costs for much of the product sold by the Company during the second
quarter of fiscal 1998.
Recently, the Company assigned a senior executive, George E. Behlke,
Vice President of Engineering, to manage and improve manufacturing operations
worldwide. In addition, the Company has added key personnel to both the
financial and management information systems departments. This team is
leading the modification of the Company's inventory and manufacturing
information systems, allowing the Company to improve all aspects of the
supply chain process.
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:
Three Months Six Months Fiscal Year Ended
Ended Sept. 30 Ended Sept. 30 March 31
1997 1996 1997 1996 1997 1996
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Production 66.8 66.7 64.8 66.5 64.2 66.9
Research and development 6.4 8.0 6.8 7.8 8.0 11.2
Marketing, administrative
and general 21.8 19.2 22.1 19.7 21.1 25.1
Purchased in-process
research and development 22.3
---- ---- ---- ---- ---- ----
Operating income (loss) 5.0 6.1 6.3 6.0 6.7 (25.5)
Interest income 0.0 0.0 0.0 0.0 0.2 0.8
Interest expense 2.3 1.9 2.3 1.7 1.7 0.8
Other income 0.0 0.0 0.3 0.0 0.0 0.0
---- ---- ---- ---- ---- ----
Income (loss) before
income taxes 2.7 4.2 4.3 4.3 5.2 (25.5)
Provision (benefit) for
income taxes 0.8 1.0 1.4 1.3 1.5 (6.7)
---- ---- ---- ---- ---- ----
Net income (loss) 2.0% 3.2% 2.9% 3.0% 3.7% (18.8)%
==== ==== ==== ==== ==== ====
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996.
The Company's net sales increased 38.6% to $34.5 million in the fiscal
1998 period from $24.9 million in the comparable period in fiscal 1997. The
net sales of DA Systems, RAS and Seriee, which were acquired in the first
quarter of fiscal 1997, accounted for $6.8 million of this increase. The
remaining $2.8 million increase represents sales growth from existing
operations.
Gross margins decreased to 33.2% in the fiscal 1998 period from 33.3%
reported in the comparable year ago period. Gross margins were negatively
impacted by the results of the three companies acquired in the first fiscal
quarter of 1998.
Production expenses increased 38.9% to $23.0 million in the fiscal 1998
period from $16.6 million in the comparable period in 1997. As a percentage
of net sales, production expenses increased to 66.8% in the fiscal 1998
period from 66.7% in the comparable period in fiscal 1997. 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 impacted by inefficiencies in the Company's management
information ("MIS") system and associated production planning, purchasing and
traffic management systems, which made it difficult for the Company to
control worldwide part, inventory and freight given increasing demand for its
products. To correct this problem, the Company has implemented an integrated
MIS system for all manufacturing locations. The benefits associated with
this change may not be fully appreciated immediately as there may be a
transition period before the benefits of this change are fully realized. The
increase in production expenses was also impacted by the addition of lower
margin sales from the three recent acquisitions.
Research and development expenses increased 10.3% to $2.2 million in the
fiscal 1998 period from $2.0 million in the comparable period in fiscal
1997. As a percentage of net sales, research and development expenses
decreased to 6.4% in the fiscal 1998 period from 8.0% in the comparable
period in fiscal 1997. The increase in research and development expenses was
primarily due to the addition of DA Systems and Seriee 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 56.7% to
$7.5 million in the fiscal 1998 period from $4.8 million in the comparable
period in fiscal 1997. As a percentage of net sales, marketing,
administrative and general expenses increased to 21.8% in the fiscal 1998
period from 19.2% in the comparable period in fiscal 1997. This increase was
primarily due to additional marketing related to acquisitions and
international marketing efforts which, in turn, increased marketing,
administrative and general expenses as a percentage of net sales.
Interest expense increased to $0.8 million in the fiscal 1998 period from
$0.5 million in the comparable period in fiscal 1997. 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 manufacturing operations to the China facility.
The Company's effective income tax rate for the fiscal 1998 period was
29.0% compared to 23.1% for the comparable period in fiscal 1997. The higher
effective rate is due to the source of pretax income among domestic and
international entities.
Six Months Ended September 30, 1997 Compared to Six Months Ended September
30, 1996
The Company's net sales increased 30.4% to $62.7 million in the fiscal
1998 period from $48.0 million in the comparable period in fiscal 1997. The
net sales of DA Systems, RAS and Seriee which were acquired in the first
fiscal quarter of fiscal 1998, accounted for $9.1 million of this increase.
The remaining $5.5 million increase represents sales growth from existing
operations.
Gross margins improved to 35.2% in the fiscal 1998 period from 33.5%
reported in the comparable year ago period. Gross margins were negatively
impacted by the results of the three companies acquired in the first fiscal
quarter of 1998.
Production expenses increased 27.1% to $40.6 million in the fiscal 1998
period from $31.9 million in the comparable period in fiscal 1997. As a
percentage of net sales, production expenses decreased to 64.8% in the fiscal
1998 period from 66.5% in the comparable period in fiscal 1997. 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 the Company's China facility offset, in part,
by manufacturing inefficiencies previously discussed. The benefits associated
with this change may not be fully appreciated immediately as there may be a
transition period before the benefits of this change are fully realized.
Research and development expenses increased 14.1% to $4.3 million in the
fiscal 1998 period from $3.8 million in the comparable period in fiscal
1997. As a percentage of net sales, research and development expenses
decreased to 6.8% in the fiscal 1998 period from 7.8% in the comparable
period in fiscal 1997. The increase in research and development expenses was
primarily due to the addition of DA Systems' and Seriee's 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 46.5% to
$13.9 million in the fiscal 1998 period from $9.5 million in the comparable
period in fiscal 1997. As a percentage of net sales, marketing,
administrative and general expenses increased to 22.0% in the fiscal 1998
period from 19.7% in the comparable period in 1996. This increase was
primarily due to additional marketing related to acquisitions and
international marketing efforts which, in turn, increased marketing,
administrative and general expenses as a percentage of net sales.
Interest expense increased to $1.5 million in the fiscal 1998 period from
$0.9 million in the comparable period in fiscal 1997. 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 a portion of the Company's manufacturing operations to the
China facility.
The Company's effective income tax rate for the fiscal 1998 period was
33.3% compared to 31.1% for the comparable period in fiscal 1997. The higher
effective rate reflects a shift in the source of pretax income between
domestic and international entities.
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 from 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 its acquisitions and the development
of the China facility, the Company has required external sources of financing
to satisfy its liquidity needs.
Six Months Ended September 30, 1997. During the six months ended
September 30, 1997, the Company's operating activities used $1.5 million of
operating cash flow. Net income, depreciation and amortization provided
$4.1 million, a decrease in inventories, excluding the impact of
acquisitions, provided $3.8 million and a decrease in accounts payable,
excluding the impact of acquisitions, used $3.2 million. Increases in
prepaid expenses and other assets, accounts receivable and income taxes
receivable used $1.0 million, $1.4 million and $1.0 million of operating cash
flow, respectively, and other account changes used $2.8 million of operating
cash flow.
During the six months ended September 30, 1997, cash used for investing
activities was $7.8 million and was utilized for the acquisition of RAS, DA
Systems and capital expenditures, primarily for tooling of fixtures for both
new products as well as moving existing products to lower cost, offshore
suppliers.
During the six months ended September 30, 1997, cash flows provided by
financing activities were $12.6 million, primarily representing proceeds from
issuance of common stock.
Capital Resources. On September 30, 1997, the Company had cash balances
of $5.4 million. On that date, the Company had $17.0 million available under
a revolving credit facility. 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.
During September 1997, the Company sold 1,325,000 shares of common
stock at $20 per share. Expenses of approximately $2,333,500 were net
against proceeds. The Company granted the underwriters a 30-day option to
purchase up to 231,750 additional shares of common stock under the same terms
and conditions as the public offering to cover over-allotments. This option
was exercised in October 1997.
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.
Year 2000 Issues. The Company does not believe that Year 2000 issues
will significantly affect future financial results.
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 presented under "Risk Factors"
included in the Company's Prospectus dated September 19, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DETECTION SYSTEMS, INC.
Registrant
DATE: August 11, 1998 /s/ Karl H. Kostusiak
Karl H. Kostusiak, President
/s/ Frank J. Ryan
Frank J. Ryan, Vice President,
Secretary and Treasurer
(Principal Financial Officer)
/s/ Christopher P. Gerace
Christopher P. Gerace
Chief Accounting Officer
(Principal Accounting Officer)
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders held on August 20, 1997, the
following individuals were elected to the Board of Directors:
Nominated Director FOR WITHHELD ABSTAINED
------------------ ---------- ---------- ----------
Donald R Adair 4,158,034 28,181 0
Mortimer B Fuller III 4,162,865 23,350 0
Karl H Kostusiak 4,162,902 23,313 0
David B Lederer 4,162,902 23,313 0
Edward C McIrvine 4,162,452 23,763 0
The following proposals were also approved:
FOR WITHHELD ABSTAINED
--------- ---------- ----------
Ratify the appointment
of Price Waterhouse as
independent auditors for
the fiscal year ending
March 31, 1998. 4,163,337 9,218 13,660
FOR WITHHELD ABSTAINED
--------- ---------- ----------
Approval of the 1997
Stock Option Plan effective
August 20, 1997. 2,792,663 214,752 1,178,800
Item 5. Other matters
In September 1997, the Company sold 1,325,000 shares of common stock
at $20 per share in a public offering. Expenses associated with this
offering of approximately $2,333,500 were net against proceeds and
reflected as a reduction of capital in excess of par value. The
Company granted the underwriters a 30-day option to purchase up to
231,750 additional shares of common stock under the same terms and
conditions as the public offering to cover over-allotments. This
option was exercised in October 1997.
Item 6. Exhibits and Reports for Form 8-K.
A. Exhibits
See Exhibit Index
B. Reports on Form 8-K
On May 21, 1997, a Form 8-K was filed under Item 5, related to
the Registrant's acquisition of all of the outstanding stock of
DA Systems from Numerex Corp. on May 7, 1997. No financial
reports were included with this report.
EXHIBIT INDEX
3 (a) Detection Systems, Inc. Certification of Incorporation, as
amended, are incorporated by reference to Exhibit 3(a) to the
Company's 1997 Annual Report on Form 10-K.
3 (b) Detection Systems, Inc. By-laws, as amended, are incorporated by
reference to Exhibit 3(b) to the Company's 1997 Annual Report on
Form 10-K.
10 (a) Executive Employment Agreement with Karl H. Kostusiak is
incorporated by reference to Exhibit 10(a) of the Company's
Quarterly Report on Form 10-Q for the quarter ended 6/30/97.
10 (b) Executive Employment Agreements with David B. Lederer are
incorporated by reference to Exhibit 10(b) of the Company's
Quarterly Report on Form 10-Q for the quarter ended 6/30/97.
(11) Statement regarding computation of per share earnings is included
as Exhibit 11 of this Quarterly Report on Form 10-Q.
(27) Financial data schedule is included as Exhibit 27 to the
electronic Edgar filing of this Interim Report on Form 10-Q.
Exhibit 11
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Computation of Earnings Per Common
And Common Equivalent Share
For the Three Months Ended: September 30, 1997
--------------
Net Income $672,122
Weighted average number of shares 4,831,166
Common Stock equivalent due to assumed exercise
of stock options and warrants and deferred
compensation plan shares 604,520
Earnings per share
Basic $0.14
Diluted $0.12
For the Six Months Ended: September 30, 1997
------------------
Net Income $1,805,346
Plus: amortization of redeemable stock 11,984
---------
Adjusted net income applicable to common stock 1,817,330
=========
Weighted average number of shares 4,723,909
Common Stock equivalent due to assumed exercise
of stock options and warrants and deferred
compensation plan shares 581,804
---------
Earnings per share
Basic $0.38
====
Diluted $0.34
====
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