UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
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
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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 January 31, 1999 there were outstanding 6,330,873 shares of the
registrant's common stock, par value $.05 per share.
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<CAPTION>
PART I FINANCIAL INFORMATION
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(in thousands, except per share data)
Dec. 31, 1998 March 31, 1998
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,480 $ 3,160
Accounts receivable, less allowance for
doubtful accounts ($1,282 and $1,033,
respectively) 22,085 23,505
Inventories 41,701 38,154
Other current assets 5,801 3,701
-------- --------
72,067 68,520
Fixed assets, net 11,732 12,142
Goodwill and other intangibles 9,982 8,907
Other assets 4,833 4,475
-------- --------
$ 98,614 $ 94,044
======== ========
Liabilities
Current liabilities:
Short term borrowings $ 2,927 $ 4,002
Current portion of long term debt 386 405
Accounts payable 10,298 12,368
Accrued payroll and benefits 1,685 1,636
Other current liabilities 8,731 5,165
-------- --------
24,027 23,576
Other liabilities 2,396 2,655
Long term debt 17,542 16,549
Shareholders' equity:
Common stock, par value $.05 per share;
Authorized - 24,000 shares; Issued -
6,557 shares and 6,518 shares,
respectively 328 326
Capital in excess of par value 45,105 44,805
Retained earnings 13,269 9,976
-------- --------
58,702 55,107
Less - Treasury stock, at cost (3,780) (3,785)
Notes receivable for stock purchases (18) (14)
Cumulative translation adjustment (255) (44)
-------- --------
54,649 51,264
-------- --------
$ 98,614 $ 94,044
======== ========
</TABLE>
(See accompanying notes to consolidated financial statements)
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<CAPTION>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations and Retained Earnings (Unaudited)
(in thousands, except per share data)
For the Three Months Ended: Dec. 31, 1998 Dec. 31, 1997
------------- -------------
<S> <C> <C>
Net sales $ 34,201 $ 31,347
Costs and expenses:
Production 21,054 $ 21,437
Research and development 2,106 2,266
Marketing, administrative and general 8,807 7,153
-------- --------
Total costs and expenses 31,967 30,856
Operating income 2,234 491
Other income (expense)
Interest income 27 92
Interest expense (430) (419)
Other income (expense) 182 (274)
-------- --------
Income (loss) before income taxes 2,013 (110)
Provision (benefit) for income taxes 782 (34)
-------- --------
Net income (loss) $ 1,231 $ (76)
======== ========
Retained earnings at beginning of period 12,038 10,412
-------- --------
Retained earnings at end of period $ 13,269 $ 10,336
======== ========
Earnings per share
Basic $ 0.19 $ (0.01)
======== ========
Diluted $ 0.18 $ (0.01)
======== ========
</TABLE>
(See accompanying notes to consolidated financial statements)
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<CAPTION>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations and Retained Earnings (Unaudited)
(in thousands, except per share data)
For the Nine Months Ended: Dec. 31, 1998 Dec. 31, 1997
------------- -------------
<S> <C> <C>
Net sales $103,464 $ 94,018
Costs and expenses:
Production 63,988 62,026
Research and development 6,196 6,554
Marketing, administrative and general 26,892 21,029
-------- --------
Total costs and expenses 97,076 89,609
Operating income 6,388 4,409
Other income (expense)
Interest income 145 98
Interest expense (1,266) (1,873)
Other income (expense) 120 (35)
-------- --------
Income before income taxes 5,387 2,599
Provision for income taxes 2,094 869
-------- --------
Net income $ 3,293 $ 1,730
======== ========
Retained earnings at beginning of period 9,976 8,594
Amortization of redeemable common stock 12
-------- --------
Retained earnings at end of period $ 13,269 $ 10,336
======== ========
Earnings per share
Basic $ 0.52 $ 0.34
======== ========
Diluted $ 0.48 $ 0.31
======== ========
</TABLE>
(See accompanying notes to consolidated financial statements)
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<TABLE>
<CAPTION>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
(in thousands of dollars)
For the Nine Months Ended December 31, 1998 1997
<S> <C> <C>
Cash flows from operating activities: -- --
Net income $ 3,293 $ 1,730
-------- --------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,807 2,951
Deferred compensation 457
Stock based compensation 86
Gain on sale of land (205)
Changes in assets and liabilities:
Accounts receivable 1,535 (1,820)
Inventories (2,917) 2,313
Accounts payable (2,420) (2,448)
Accrued payroll and benefits 49 (1,643)
Other assets & liabilities 116 (4,324)
-------- --------
Total adjustments (830) (4,633)
-------- --------
Net cash provided by (used in)operating activities 2,463 (2,903)
Cash flows from investing activities:
Capital expenditures (2,250) (1,977)
Proceeds from sale of land 312
Acquisition of businesses (505) (6,816)
-------- --------
Net cash used in investing activities (2,755) (8,481)
Cash flows from financing activities:
Proceeds from borrowings 1,443 6,718
Proceeds from issuance of common stock 28,519
Principal payments on debt and
capital lease obligations (1,666) (19,135)
Common stock transactions, net 46 468
-------- --------
Net cash (used in) provided by financing activities (177) 16,570
Effect of exchange rates (211) (302)
-------- --------
Net(decrease)increase in cash and cash equivalents (680) 4,884
Cash and cash equivalents, beginning of period 3,160 2,244
-------- --------
Cash and cash equivalents, end of period $ 2,480 $ 7,128
======== ========
Cash paid during the period for:
Interest $ 1,311 $ 1,532
======== ========
Income taxes $ 614 $ 1,612
======== ========
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 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 prior period balances have been
reclassified to conform with the current period presentation. Certain footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles (GAAP) have been condensed or
omitted pursuant to such SEC rules and regulations. These financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended March 31, 1998.
Cash flow statement - Non-cash transactions during fiscal 1999 and 1998
consisted of the acquisition of certain businesses with shares of the Company's
common stock. See Note 3.
NOTE 2. - INVENTORIES
Major classifications of inventory follow (in thousands):
Dec. 31, 1998 March 31, 1998
-------------- --------------
Component Parts $17,067 $22,061
Work In Process 3,534 1,488
Finished Products 21,100 14,605
------ ------
$41,701 $38,154
====== ======
NOTE 3. - ACQUISITIONS
Fiscal 1999 Acquisitions - In June 1998, the Company acquired all of the
outstanding stock of EFSEC AB ("EFSEC")for approximately $1,250,000 comprised of
cash and 28,161 shares of its common stock. EFSEC is a Swedish distributor of
electronic security equipment and had annual net sales of approximately
$3,000,000 prior to its acquisition.
In June 1998, the Company acquired all of the outstanding stock of Alarm Center
Kft ("Alarm Center") for $125,000 in cash. Alarm Center is a Hungarian
distributor of electronic security equipment and had annual net sales of
approximately $500,000 prior to its acquisition.
Fiscal 1998 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 $4,000,000. DA Systems is a British
manufacturer of security control equipment and had annual net sales of
approximately $10,800,000 prior to its acquisition.
In June 1997, the Company acquired 99.5% of the outstanding stock of Seriee of
France, in exchange for 34,141 shares of its common stock, valued at
approximately $600,000. Seriee is a manufacturer of electronic control and
communication equipment and had annual net sales of approximately $6,300,000
prior to its acquisition.
In June 1997, the Company acquired 98.7% of the outstanding stock of
Radio-Active Systems N.V.("RAS") of Belgium for approximately $3,600,000 in
cash. RAS had annual net sales of approximately $9,900,000 prior to its
acquisition.
In November 1997, the Company acquired all of the outstanding stock of
Security Supplies NZ Ltd. ("Security Supplies") of New Zealand for
approximately $50,000 in cash. Security Supplies had annual sales of
approximately $800,000 prior to its acquisition.
In January 1998, the Company acquired all of the outstanding stock of
Electronics Design & Manufacturing Pty Limited ("EDM") of Australia in exchange
for 186,667 shares of its common stock and $2,800,000 in cash. EDM had annual
net sales of approximately $4,600,000 prior to its acquisition.
These transactions have been accounted for as purchases and, accordingly, the
results of DA Systems, Seriee, RAS, Security Supplies, EDM, EFSEC and Alarm
Center are included in the consolidated financial statements as of the date of
acquisition. The financial statements reflect the final allocation of the
purchase price for each business, except for EDM, EFSEC and Alarm Center, for
which the purchase price allocation has not been finalized. Unallocated excess
of purchase price over net assets acquired as of December 31, 1998 is $3,272,000
and is included with goodwill and other intangibles.
NOTE 4 - EARNINGS PER SHARE
There are no significant reconciling items between net income as presented in
the consolidated statement of operations and net income available to common
shareholders 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 to deferred compensation plans, options and warrants,
as follows (in thousands):
Three months Nine months
Ended Dec. 31, Ended Dec. 31,
1998 1997 1998 1997
---- ---- ---- ----
Weighted average number of shares
outstanding 6,328 6,048 6,313 5,165
Shares associated with deferred
compensation, option and warrant plans 504 -- 513 398
NOTE 5 - RESTRUCTURING
The Company recorded a restructuring charge of approximately $400,000 during the
first quarter of fiscal 1999 for severance costs related to the termination of
employees at the Fairport, New York and Southall, England facilities. The charge
has been included in the results from continuing operations and had a material
impact on operating results in the first quarter of 1999. These manufacturing
employees will be terminated during fiscal 1999, thus the accrual has been
included in other current liabilities at December 31, 1998.
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 nine acquisitions
and established a manufacturing
facility in China. Recent acquisitions are described in Note 3. These
acquisitions had a significant impact on the comparative information for the
nine month and three month periods ending December 31, 1998 and 1997 with
respect to results of operations.
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.
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>
(Unaudited) (Unaudited)
Fiscal Year Three Months Nine Months
Ended March 31, Ended Dec. 31, Ended Dec. 31
1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Production 66.4 64.2 61.6 68.4 61.8 66.0
Research and development 6.8 8.0 6.2 7.2 6.0 7.0
Marketing, administrative
and general 23.2 21.2 25.7 22.8 26.0 22.3
----- ----- ----- ----- ----- -----
Operating income 3.6 6.6 6.5 1.6 6.2 4.7
Other income (expense)
Interest income 0.2 0.1 0.1 0.3 0.1 0.1
Interest expense (1.8) (1.7) (1.2) (1.3) (1.2) (2.0)
Other (expense) income (0.2) 0.2 0.5 (0.9) 0.1 (0.1)
----- ----- ----- ----- ----- -----
Income (loss) before income
taxes 1.8 5.2 5.9 (0.3) 5.2 2.7
Provision (benefit) for 0.7 1.5 2.3 (0.1) 2.0 0.9
income taxes
----- ----- ----- ----- ----- -----
Net income (loss) 1.1% 3.7% 3.6% (0.2)% 3.2% 1.8%
===== ===== ===== ===== ===== =====
</TABLE>
Three Months Ended December 31, 1998 Compared to Three Months Ended December
31, 1997
The Company's net sales increased 9.1% to $34,201,000 in the fiscal 1999
period from $31,347,000 in the comparable period in fiscal 1998. The net sales
of acquired businesses accounted for $1,875,000 of this increase. Net sales from
on-going operations were $32,326,000 in the fiscal 1999 period. Net sales during
the current period by the Company's on-going operations have been favorably
impacted compared to the prior year period by increased sales of security
sensors and controls as well as CCTV products. This has been offset, in part, by
the continued impact of lower sales to one of the Company's major domestic
customers and by the acquisition of two of the Company's domestic customers by
other businesses who are not standardized on the Company's products.
Production expenses decreased 1.8% to $21,054,000 in the fiscal 1999 period
from $21,437,000 in the comparable period in fiscal 1998. As a percentage of net
sales, production expenses decreased to 61.6% in the fiscal 1999 period compared
to 68.4% in the comparable period in fiscal 1998. The decrease in production
expenses in the aggregate and as a percentage of net sales was primarily due to
improvements in the Company's manufacturing cost structure and changes in
product mix.
Research and development expenses decreased 7.1% to $2,106,000 in the fiscal
1999 period from $2,266,000 in the comparable period in fiscal 1998. As a
percentage of net sales, research and development expenses decreased to 6.2% in
the fiscal 1999 period from 7.2% in the comparable period in 1998. The decrease
in research and development expenses as a percentage of net sales was primarily
due to the reduced use of outside consultants and the acquisition of
redistributor businesses during fiscal 1999 and 1998 which have sales but do not
incur research and development expenditures.
Marketing, administrative and general expenses increased 23.1% to $8,807,000
in the fiscal 1999 period from $7,153,000 in the comparable period in fiscal
1998. As a percentage of net sales, marketing, administrative and general
expenses increased to 25.7% in the fiscal 1999 period from 22.8% in the
comparable period in fiscal 1998. The increase in marketing, administrative and
general expenses in the aggregate and as a percentage of net sales was primarily
due to the acquisition of redistributor businesses in fiscal 1999 and additional
marketing and technical support expenditures incurred by the Company's domestic
and international businesses.
Interest expense increased to $430,000 in the fiscal 1999 period from
$419,000 in the comparable period in 1998, as borrowings outstanding remained
relatively consistent during the two periods.
The Company's effective income tax rate for the fiscal 1999 period was 38.8%
compared to 30.9% for the comparable period in fiscal 1998. The higher effective
rate was attributable to changes in the mix of the Company's income generated
from domestic and international entities as well as the impact of non-deductible
goodwill arising from the Company's acquisitions.
Nine Months Ended December 31, 1998 Compared to Nine Months Ended December
31, 1997
The Company's net sales increased 10.0% to $103,464,000 in the nine-month
fiscal 1999 period from $94,018,000 in the comparable period in fiscal 1998. The
net sales of acquired businesses accounted for $8,353,000 of this increase. Net
sales from on-going operations were $95,111,000 in the fiscal 1999 period. Sales
during the current period by the Company's on-going operations have been
favorably impacted compared to the prior year period by increased sales of
security sensors and controls as well as CCTV products. This has been offset, in
part, by lower sales to one of the Company's major domestic customers and by the
acquisition of two of the Company's domestic customers by other businesses who
are not standardized on the Company's products.
Production expenses increased 3.2% to $63,988,000 in the fiscal 1999 period
from $62,026,000 in the comparable period in 1998. As a percentage of net sales,
production expenses decreased to 61.8% in the fiscal 1999 period compared to
66.0% in the comparable period in fiscal 1998. 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 improvements in the Company's manufacturing cost structure
changes in product mix.
Research and development expenses decreased 5.5% to $6,196,000 in the fiscal
1999 period from $6,554,000 in the comparable period in fiscal 1998. The
decrease in research and development expenses is primarily attributable to the
reduced use of outside consultants. As a percentage of net sales, research and
development expenses decreased to 6.0% in the fiscal 1999 period from 7.0% in
the comparable period in 1998. The decrease in research and development expenses
as a percentage of net sales was primarily due to the reduced use of outside
consultants and the acquisition of redistributor businesses during fiscal 1999
and 1998 which have sales but do not incur research and development
expenditures.
Marketing, administrative and general expenses increased 27.9% to
$26,892,000 in the fiscal 1999 period from $21,029,000 in the comparable period
in fiscal 1998. As a percentage of net sales, marketing, administrative and
general expenses increased to 26.0% in the fiscal 1999 period from 22.3% in the
comparable period in fiscal 1998. The increase in marketing, administrative and
general expenses was primarily due to the acquisition of businesses in fiscal
1998. In addition, a charge of approximately $400,000 was recorded in the first
quarter of fiscal 1999 relating to the restructuring of the Company's Fairport,
New York and Southall, England manufacturing facilities. This restructuring
relates to severance associated with the transfer of manufacturing from those
facilities to the Company's China facility. It is expected that these actions
will be substantially completed by the end of fiscal 1999. The Company expects
to save approximately $2.0 million annually in production related salaries and
benefits as a result of this action.
Interest expense decreased to $1,266,000 in the fiscal 1999 period from
$1,873,000 in the comparable period in 1998. This decrease was primarily due to
lower borrowings outstanding. Approximately $18,800,000 in debt was repaid
during the second quarter of fiscal 1998 with proceeds from the Company's
September 1997 public offering of common stock.
The Company's effective income tax rate for the fiscal 1999 period was 38.9%
compared to 33.4% for the comparable period in fiscal 1998. The higher effective
rate was attributable to changes in the mix of the Company's income generated
from domestic and international entities as well as the impact of non-deductible
goodwill arising from the Company's acquisitions.
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 its acquisitions and the development of the China facility, the
Company has required external sources of financing to satisfy its liquidity
needs.
Nine Months Ended December 31, 1998. During the nine months ended December
31, 1998, the Company's operating activities provided $2,463,000 of operating
cash flow. Net income, depreciation and amortization provided $6,100,000. An
increase in inventories used $2,917,000. A decrease in accounts payable used
$2,420,000 and an increase in accounts receivables provided $1,535,000. Other
account changes provided $165,000 of operating cash flow.
During the nine months ended December 31, 1998, cash used in investing
activities was $2,755,000 and was utilized for the acquisition of EFSEC and
Alarm Center and for capital expenditures.
During the nine months ended December 31, 1998, cash used in financing
activities was $177,000, primarily representing principal repayments of debt.
Capital Resources. On December 31, 1998, the Company had cash balances of
$2,480,000. On that date, the Company had a $17,000,000 revolving credit
facility under which it had borrowed $2,093,000. 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, 2000.
The Company expects to continue to pursue acquisitions and the development
of new products and markets. On-going capital expenditures will include
continued investment in facilities and equipment necessary to produce and market
its security, fire detection, access control and CCTV 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 1999.
Year 2000 Issues. The Company has appointed a team to assess the impact of
the year 2000 on its information systems, products, and business. This team
includes two members of senior management and is led by the Vice President of
Operations. To ensure year 2000 compliance, the Company has established specific
categories to be reviewed:
Products. The Company places a high priority on ensuring its products are year
2000 ready. The Company has completed its review of all products that are
manufactured domestically and at its China manufacturing facility as well as
products purchased for resale by its domestic businesses. The Company believes
these products to be year 2000 compatible. The Company is completing its
assessment of year 2000 compatibility of products manufactured and purchased for
resale at its other foreign subsidiaries. The Company does not expect
significant issues with year 2000 readiness of products sold by its foreign
subsidiaries as products sold by the Company generally do not use date
information for calculations or comparisons.
Manufacturing. Some of the tools and equipment (hardware and software) used to
develop and manufacture the Company's products are date-sensitive. The Company
believes that the date-sensitive tools and equipment used by it to manufacture
products are now year 2000 compatible. As a result the Company does not expect
significant interruption to its manufacturing capabilities because of the
failure of tools and/or equipment.
Non-Manufacturing Business Applications. The Company is in the process of fixing
and testing all non-manufacturing business applications such as core financial
information and reporting systems, procurement, human resources/payroll, factory
applications, customer service systems, and revenue systems, and does not expect
any significant year 2000 problems in this area.
The Company's domestic business information systems required upgrades and
enhancements to be made year 2000 compatible. These upgrades have been made and
are currently being tested. All necessary upgrades to other information
technology infrastructure have been identified and remediation is in process.
Testing of year 2000 upgrades is expected to be completed prior to the year
2000.
Most of the Company's non-US subsidiaries' information systems will require
various degrees of upgrade or replacement to be capable of handling year 2000
issues (excluding the Hong Kong subsidiary, which utilizes the Company's
domestic information system). The Company has purchased a new enterprise
resource planning system capable of handling the year 2000 that is currently
being inplemented at its foreign subsidiaries. The Company expects to be capable
of handling the year 2000 at all locations without significant interruption to
business activity.
Facilities and Infrastructure. The Company has evaluated its facilities and
infrastructure (health, safety and environment systems, buildings,
security/alarms/doors, desktop computers, networks) to ensure they are year 2000
compatible. Upgrades are being implemented where needed and the Company does not
expect significant interruption to its operations because of year 2000 problems
with its facilities and infrastructure.
Logistics. Of importance to the Company for year 2000 is the readiness of
suppliers and the products the Company procures from suppliers as well as
customers and service providers. The Company has a comprehensive program to
identify and obtain year 2000 information from its critical suppliers, customers
and service providers. The program includes awareness letters, questionnaires,
and a review of year 2000 web-sites. The Company has mailed a questionnaire to
substantially all suppliers, customers and service providers regarding year 2000
readiness. Responses are currently being received and evaluated. If a supplier,
customer or service provider is of concern regarding year 2000 readiness, the
Company will develop contingency plans to minimize the year 2000 risk.
The Company estimates that its aggregate costs for year 2000 activities from
1997 through 2000 will be approximately $750,000. External costs incurred
through December 31, 1998 were approximately $145,000 and primarily related to
computer software. It is anticipated that the remaining year 2000 costs will
relate to computer software, computer hardware and consulting fees. The Company
does not separately track internal costs relating to the year 2000 and they are
not included in the Company's estimate of year 2000 costs. These costs do not
include estimates for potential litigation, which at the present time is not
viewed as a significant risk. The Company reviews and updates data for costs
incurred and forecasted costs each quarter. These costs are based on
management's estimates, which were determined based on assumptions of future
events, some within the Company's control, but some outside the Company's
control.
Management's estimate of the costs and completion dates are dependent on various
factors including the availability of skilled resources and the ability to
locate and modify all relevant software code. No amount of preparation and
testing can guarantee year 2000 compliance. Nevertheless, the Company recognizes
that failing to resolve its year 2000 issues on a timely basis would, in a worst
case scenario, significantly limit its ability to manufacture and distribute its
products and process its daily business transactions for a period of time,
especially if such failure is coupled with third party or infrastructure
failures. Similarly, the Company could be significantly affected by the failure
of one or more significant suppliers, customer or components of the
infrastructure to conduct their respective operations without interruption after
1999. Because of the difficulty of assessing the year 2000 compliance of such
third parties, the Company considers the potential disruptions caused by such
parties to present the most reasonably likely worst-case scenarios. Adverse
effects on the Company could include business disruption, increased costs, loss
of sales and other similar ramifications. However, the Company believes it is
taking appropriate preventive measures and will be successful in avoiding any
material adverse effect on the Company's operations or financial condition.
For additional information regarding the risks associated with the Company's
compliance with year 2000, see "Risk Factors-Year 2000" in Item 1 of the
Company's Form 10-K for the year ended March 31, 1998.
Euro Conversion. The Company is assessing the potential impact that may
result from the euro conversion in a number of areas, including the following:
(1) accounting and tax; (2) management information systems required to
accommodate euro-denominated transactions; (3) the impact on currency exchange
costs and currency exchange rate risk; and (4) the impact on existing contracts.
Since the Company is still in its assessment phase, the Company cannot yet
predict the anticipated impact of the euro conversion on the Company.
New Accounting Standards. In June 1997, the Financial Accounting Standards
Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income includes net income and several other items that current
accounting standards require to be recognized outside of net income. This
standard requires enterprises to display comprehensive income and its components
in financial statements, to classify items of comprehensive income by their
nature in financial items statements, and to display the accumulated balances of
other comprehensive income in stockholders' equity separately from retained
earnings and additional paid-in capital. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This standard requires enterprises to
report certain information about their operating segments in a complete set of
financial statements to shareholders; to report certain enterprise-wide
information about products and services, activities in different geographic
areas, and reliance on major customers; and to disclose certain segment
information in their interim financial statements. The basis for determining an
enterprise's operating segments is the manner in which financial information is
used internally by the enterprise's chief operating decision maker. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997.
The adoption of the disclosure requirements of SFAS 130 and SFAS 131 as required
for the Company's 1999 Annual Report are not expected to have a significant
impact on the Company's financial statement disclosures.
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.
Forward-Looking Statements
This quarterly report contains certain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, 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 quarterly report 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," "plan,"
"anticipate," "intend," "could," "estimate," "continue," "goal" or "strategy" 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 previously in the "Risk Factors"
section of the Company's 1998 Form 10-K for the year ended March 31, 1998.
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports for Form 8-K.
A. Exhibits
See Exhibit Index
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
<PAGE>
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: February 12, 1999 By: /s/ Karl H. Kostusiak
Karl H. Kostusiak, President
By: /s/ Frank J. Ryan
Frank J. Ryan, Vice President,
Secretary and Treasurer
(Principal Financial Officer)
By: /s/ Christopher P. Gerace
Christopher P. Gerace
Chief Accounting Officer
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Item
No. Exhibits Location
3(a) Detection Systems, Inc. Incorporated by reference to
Certificate of Exhibit 3 of the Company's
Incorporation as amended Quarterly Report on Form 10-Q for
the quarter ended 9/30/98
3(b) Detection Systems, Inc. Incorporated by reference to
By-Laws as amended Exhibit 3(b) of the Company's 1997
Annual Report on Form 10-K
10(a) Medical reimbursement plan Incorporated by reference to
Exhibit 10(b) of the Company's
1997 Annual Report on Form 10-K
10(b) Employee stock purchase Incorporated by reference to
plan Exhibit 10 of the Company's 1994
Annual Report on Form 10-K
10(c) Fleet Amended & Restated Incorporated by reference to
Credit Facility Agreement Exhibit 10(c) of the Company's
dated September 30, 1998 Quarterly Report on Form 10-Q for
the quarter ended 9/30/98
10(d) Deferred Compensation Plan Incorporation by reference to
and Deferred Bonus Plan Exhibit 10(c) of the Company's
Quarterly Report on Form 10-Q, for
the quarter ended 12/31/97
10(e) 1992 Restated Stock Option Incorporated by reference to
Plan Exhibit 22 of the Company's 1995
Annual Report on Form 10-K
10(f) 1997 Stock Option Plan Incorporated by reference to
Exhibit 10(o)of the Company's
Registration Statement on Form S-2
(No. 333-31951) filed on 7/24/97
10(g) Executive Officer Cash Incorporated by reference to
Bonus Plan Exhibit 10(g) of the Company's
1998 Annual Report on Form 10-K
10(h) Executive employment Incorporated by reference to
contract with Karl H. Exhibit 10(h) of the Company's
Kostusiak 1998 Annual Report on Form 10-K
10(i) Amendment #1 to executive Incorporated by reference to
employment contract with Exhibit 10(i) of the Company's
Karl H. Kostusiak Quarterly Report on Form 10-Q for
the quarter ended 9/30/98
10(j) Executive employment Incorporated by reference to
contract with David B. Exhibit 10(j) of the Company's
Lederer Quarterly Report on Form 10-Q for
the quarter ended 9/30/98
10(k) Executive employment Incorporated by reference to
contract with Lawrence R. Exhibit 10 of the Company's 1995
Tracy Annual Report on Form 10-K
10(l) Stock Purchase Agreements Incorporated by reference to
with Karl H. Kostusiak and Exhibit 10(l) of the Company's
David B. Lederer 1997 Annual Report on Form 10-K
10(m) Non-Employee Director Stock Incorporated by reference to
Option Plan Exhibit 10(m) of the Company's
Quarterly Report on Form 10-Q for
the quarter ended 9/30/98
11 Statement re: Computation Included as Exhibit 11 of this
of Per Share Earnings Quarterly Report on Form 10-Q
24 Powers of Attorney Incorporated by reference to
Exhibit 24 of the Company's 1998
Annual Report on Form 10-K
27 Financial Data Schedule Included as Exhibit 27 of this
Quarterly Report on Form 10-Q
Exhibit 11
DETECTION SYSTEMS, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
Three Months Ended December 31, 1998 1997
---- ----
Net income $1,231 $ (76)
===== =====
Weighted average number of shares 6,328 6,048
===== =====
Basic earnings per share $0.19 $(0.01)
===== =====
Shares attributable to deferred
compensation plans and stock
options and warrants 504
==== ====
Diluted earnings per share: $0.18 $(0.01)
==== ====
Nine Months Ended December 31, 1998 1997
---- ----
Net income $3,293 $1,730
Plus: amortization of redeemable stock 12
----- -----
Income available to common stockholders $3,293 $1,742
===== =====
Weighted average number of shares 6,313 5,165
===== =====
Basic earnings per share $0.52 $0.34
===== =====
Shares attributable to deferred
compensation plans and stock
options and warrants* 513 398
==== ====
Diluted earnings per share: $0.48 $0.31
==== ====
* Due to losses incurred in the third quarter for the period ended December
31, 1997, the effect of shares attributed to options, warrants and deferred
compensation was reduced by 195,236 in arriving at the year-to-date weighted
average number of shares included in diluted earnings per share, to avoid
anti-dilution.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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