UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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 8, 1999 there were outstanding 6,349,460 shares of the
registrant's common stock, par value $.05 per share.
<PAGE>
PART I FINANCIAL INFORMATION
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(in thousands, except per share data)
<TABLE>
<CAPTION>
Sept. 30, 1999 March 31, 1999
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $10,980 $ 4,414
Accounts receivable, less allowance for
doubtful accounts ($1,052 and $1,006,
respectively) 24,069 20,916
Inventories, net 30,034 37,762
Other current assets 3,673 3,249
------ ------
68,756 66,341
Fixed assets, net 12,749 12,420
Goodwill and other intangibles 9,540 9,381
Other assets 5,387 4,670
------ ------
$96,432 $92,812
====== ======
Liabilities
Current liabilities:
Short term borrowings $ 1,546 $ 1,416
Current portion of long term debt 1,919 647
Accounts payable 8,667 7,076
Accrued payroll and benefits 1,990 1,863
Income taxes payable 1,950 2,108
Other current liabilities 3,294 4,134
------ ------
19,366 17,244
Other liabilities 2,689 2,645
Long term debt 15,733 17,179
Shareholders' equity:
Common stock, par value $.05 per share;
Authorized - 12,000 shares
Issued - 6,578 shares and 6,555 shares,
respectively 329 328
Capital in excess of par value 45,081 45,073
Other accumulated comprehensive loss (305) (310)
Retained earnings 17,369 14,447
------ ------
62,474 59,538
Less - Treasury stock, at cost (3,786) (3,780)
Notes receivable for stock purchases (44) (14)
------ ------
58,644 55,744
------ ------
$96,432 $92,812
====== ======
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations and Retained Earnings (Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended: Sept. 30, 1999 Sept. 30, 1998
(Current Year) (Preceding Year)
-------------- ---------------
<S> <C> <C>
Net sales $36,699 $35,455
Costs and expenses:
Production 22,091 21,896
Research and development 2,617 1,956
Marketing, administrative and general 9,297 9,209
------ ------
Total costs and expenses 34,005 33,061
Operating income 2,694 2,394
Other income (expense):
Net interest expense (267) (363)
Other expense (31) (20)
------ ------
Income before income taxes 2,396 2,011
Provision for income taxes 895 781
------ ------
Net income $1,501 $ 1,230
Other comprehensive income:
Foreign currency translation adjustment 18 138
------ ------
Total comprehensive income 1,519 1,368
Retained earnings at beginning of period 15,868 10,808
Less: other comprehensive income (18) (138)
------ ------
Retained earnings at end of period $17,369 $12,038
====== ======
Earnings per share
Basic $0.24 $0.19
==== ====
Diluted $0.22 $0.18
==== ====
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations and Retained Earnings (Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Six Months Ended: Sept. 30, 1999 Sept. 30, 1998
(Current Year) Preceding Year)
-------------- ---------------
<S> <C> <C>
Net sales $71,465 $69,263
Costs and expenses:
Production 43,055 42,934
Research and development 4,910 4,090
Marketing, administrative and general 18,356 18,085
------ ------
Total costs and expenses 66,321 65,109
Operating income 5,144 4,154
Other income (expense)
Net interest expense (487) (718)
Other income (expense) 9 (62)
------ ------
Income before income taxes 4,666 3,374
Provision for income taxes 1,744 1,312
------ ------
Net income $ 2,922 $ 2,062
Other comprehensive income:
Foreign currency translation adjustment 5 23
------ ------
Total comprehensive income 2,927 2,085
Retained earnings at beginning of period 14,447 9,976
Less: other comprehensive income (5) (23)
------ ------
Retained earnings at end of period $17,369 $12,038
====== ======
Earnings per share
Basic $0.46 $0.33
==== ====
Diluted $0.43 $0.30
==== ====
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
For the Six Months Ended September 30, 1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,922 $2,062
----- -----
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,450 1,829
Changes in assets and liabilities:
Accounts receivable (3,139) (950)
Inventories 7,833 (2,777)
Accounts payable 1,391 (1,723)
Accrued payroll and benefits 117 223
Other assets & liabilities (1,924) 110
------ ------
Total adjustments 5,728 (3,288)
------ ------
Net cash provided by (used in) operating activities 8,650 (1,226)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,416) (1,584)
Acquisition of businesses (601) (473)
------ ------
Net cash used in investing activities (2,017) (2,057)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 130 3,322
Principal payments on debt and
capital lease obligations (174) (1,372)
Common stock transactions, net (28) (91)
----- -----
Net cash (used in) provided by financing activities (72) 1,859
Effect of exchange rates 5 23
----- -----
Net increase (decrease) in cash and cash equivalents 6,566 (1,401)
Cash and cash equivalents, beginning of period 4,414 3,160
----- -----
Cash and cash equivalents, end of period $10,980 $1,759
===== =====
Cash paid during the period for:
Interest $ 791 $ 863
=== ===
Income taxes $ 2,062 $ 458
===== ===
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(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, 1999.
CASH FLOW STATEMENT - Non-cash transactions during the first quarter of fiscal
1999 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):
<TABLE>
<CAPTION>
Sept. 30, 1999 March 31, 1999
-------------- --------------
<S> <C> <C>
Component Parts $10,419 $14,838
Work In Process 1,851 2,464
Finished Products 17,764 20,460
------ ------
$30,034 $37,762
====== ======
</TABLE>
NOTE 3. ACQUISITIONS
FISCAL 2000 ACQUISITIONS - During the second quarter ended September 30, 1999,
the Company acquired all of the outstanding shares of Caetec S.r.l. ("Caetec")
for approximately $700,000 in cash. Caetec is an Italian technology company with
a new line of fire control products.
FISCAL 1999 ACQUISITIONS - In June 1998, the Company acquired all of the
outstanding shares 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 with 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 $135,000 in cash. Alarm Center is a Hungarian
distributor of electronic security equipment with annual net sales of
approximately $500,000 prior to its acquisition.
These transactions have been accounted for as purchases and, accordingly, the
results of these businesses are included in the consolidated financial
statements as of the date of acquisition.
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 Six months
ended Sept. 30, ended Sept. 30,
1999 1998 1999 1998
---- ---- ---- ----
Weighted average number of shares
outstanding 6,348 6,324 6,363 6,307
Shares associated with deferred
compensation, option and warrant plans 490 515 476 523
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.
NOTE 6 - GEOGRAPHIC INFORMATION
The Company's operating structure includes operating segments in the United
States, Asia Pacific and Europe. Management evaluates the performance of its
operating segments separately to monitor the different factors affecting
financial performance in the different regions. Segment profit or loss includes
substabtially all of the segment's costs of production, distribution and
administration. The Company magages incoms taxes on a global basis, thus, the
Company evaluates segmment performance based on profit or loss before income
taxes.
The following table presents net sales and income (loss) before income taxes of
the company's domestic and foreign operations. Net sales and income (loss)
before income taxes of the Ccompany'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.
<TABLE>
<CAPTION>
For the three months ended September 30, 1999 1998
---- ----
(in thousands)
<S> <C> <C>
Sales to unaffiliated customers
United States operations $22,435 $22,730
Asia Pacific operations 6,686 5,022
European operations 7,578 7,703
------- -------
$36,699 $35,455
======= =======
Sales between affiliates
United States operations $ 2,209 $ 2,377
Asia Pacific operations 8,642 11,585
European operations 131 36
------ ------
$10,982 $13,998
====== ======
Income (loss) before income taxes
United States operations $ 1,109 $ 1,795
Asia Pacific operations 1,827 799
European operations (393) (57)
Eliminations (147) (526)
----- -----
$ 2,396 $ 2,011
===== =====
For the six months ended September 30, 1999 1998
---- ----
(in thousands)
Sales to unaffiliated customers
United States operations $43,657 $44,429
Asia Pacific operations 12,339 9,796
European operations 15,469 15,038
------- -------
$71,465 $69,263
======= =======
Sales between affiliates
United States operations $ 4,471 $ 4,174
Asia Pacific operations 15,892 19,274
European operations 248 126
------ ------
$20,611 $23,574
====== ======
Income (loss) before income taxes
United States operations $ 2,179 $ 3,071
Asia Pacific operations 2,701 1,524
European operations (598) (376)
Eliminations 384 (845)
----- -----
$ 4,666 $ 3,374
===== =====
</TABLE>
NOTE 7 - OTHER MATTERS
The Company's Board of Directors has authorized the repurchase of up to
$10,000,000 of the Company's common stock.
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a 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
provider of security sensor devices for the domestic market. In 1995, the
Company adopted a strategy designed to expand its product offerings, establish
an international sales presence, increase its manufacturing capacity and improve
its overall cost structure. The Company has since made ten acquisitions, opened
six sales offices and established a manufacturing facility in Asia.
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>
FISCAL YEAR ENDED THREE MONTHS SIX MONTHS ENDED
MARCH 31, SEPT. 30, SEPT. 30
1999 1998 1999 1998 1999 1998
------ ------ ------ ------ ------ ------
<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 61.7 65.6 60.2 61.7 60.2 62.0
Research and development 6.1 6.8 7.1 5.5 6.9 5.9
Marketing, administrative
and general 25.9 23.8 25.4 26.0 25.7 26.1
------ ------ ------ ------ ------ ------
Operating income 6.3 3.8 7.3 6.8 7.2 6.0
Net interest expense (1.1) (1.6) (0.7) (1.0) (0.7) (1.0)
Other income (expense) 0.1 (0.4) (0.1) (0.1) -- (0.1)
------ ------ ------ ------ ------ ------
Income before income taxes 5.3 1.8 6.5 5.7 6.5 4.9
Provision for income taxes 2.1 0.7 2.4 2.2 2.4 1.9
------ ------ ------ ------ ------ ------
Net income 3.2% 1.1% 4.1% 3.5% 4.1% 3.0%
====== ====== ====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
The Company's net sales increased 3.5% to $36,699,000 in the second
quarter of fiscal 2000 from $35,455,000 in the comparable period in fiscal 1999.
The net sales of acquired businesses accounted for $372,000 of this increase
(See Note 3 to the Financial Statements) while sales from on-going operations
accounted for $872,000. Net sales during this period by the Company's on-going
operations have been favorably impacted compared to the year ago period by
strong sales in the Asia-Pacific region, which increased 33.1%. Sales by
on-going operations in the United States and European regions were consistent
with the year ago period. Domestic sales continue to be affected by lower sales
to one of the Company's major customers and by the acquisition of some of the
Company's domestic customers by other businesses which are not standardized on
the Company's products.
Production expenses increased 0.1% to $22,091,000 in the fiscal 2000
period from $21,896,000 in the comparable period in fiscal 1999. As a percentage
of net sales, production expenses decreased to 60.2% in the fiscal 2000 period
compared to 61.7% in the comparable period in fiscal 1999. The decrease in
production expenses as a percentage of net sales was primarily due to
improvements in the Company's manufacturing cost structure.
Research and development expenses increased 33.8% to $2,617,000 in the
fiscal 2000 period from $1,956,000 in the comparable period in fiscal 1999. As a
percentage of net sales, research and development expenses increased to 7.1% in
the fiscal 2000 period from 5.5% in the comparable period in 1999. The increase
in research and development expenses in aggregate and as a percentage of net
sales is primarily attributable to headcount increases to support the Company's
research and development efforts.
Marketing, administrative and general expenses increased 0.1% to
$9,297,000 in the fiscal 2000 period from $9,209,000 in the comparable period in
fiscal 1999. As a percentage of net sales, marketing, administrative and general
expenses decreased to 25.4% in the fiscal 2000 period from 26.0% in the
comparable period in fiscal 1999. The increase in marketing, administrative and
general expenses is attributable to headcount increases as well as expenditures
associated with the opening of offices in Spain and Argentina during the
quarter.
Net interest expense decreased to $267,000 in the fiscal 2000 period from
$363,000 in the comparable period in 1999, as borrowings outstanding were lower
during the current period.
The Company's effective income tax rate for the fiscal 2000 period was
37.4% compared to 38.8% for the comparable period in fiscal 1999.
SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1998
The Company's net sales increased 3.2% to $71,465,000 in the fiscal 2000
period from $69,263,000 in the comparable period in fiscal 1999. The net sales
of acquired businesses accounted for $922,000 of this increase (See Note 3 to
the Financial Statements) while sales from on-going operations accounted for
$1,280,000 in the fiscal 2000 period. Net sales during this period by the
Company's on-going operations have been favorably impacted compared to the year
ago period by strong sales in the Asia-Pacific region, which increased 26.0%.
Sales by on-going operations in the United State and European regions were
consistent with the year ago period. Domestic sales continue to be affected by
lower sales to one of the Company's major customers and by the acquisition of
some of the Company's domestic customers by other businesses which are not
standardized on the Company's products.
Production expenses increased 0.3% to $43,055,000 in the fiscal 2000
period from $42,934,000 in the comparable period in fiscal 1999. As a percentage
of net sales, production expenses decreased to 60.2% in the fiscal 2000 period
compared to 62.0% in the comparable period in 1999. 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 changes in product mix and improvements in the Company's
manufacturing cost structure.
Research and development expenses increased 20.0% to $4,910,000 in the
fiscal 2000 period from $4,090,000 in the comparable period in fiscal 1999. As a
percentage of net sales, research and development expenses increased to 6.9% in
the fiscal 2000 period from 5.9% in the comparable period in 1999. The increase
in research and development expenses in aggregate and as a percentage of net
sales is primarily attributable to headcount increases to support the Company's
research and development efforts.
Marketing, administrative and general expenses increased 1.5% to
$18,356,000 in the fiscal 2000 period from $18,085,000 in the comparable period
in fiscal 1999. The year ago period included a $400,000 restructuring charge.
Excluding the impact of this charge, marketing, administrative and general
expenses increased 3.8%. Approximately $400,000 of this increase relates to the
acquisition of Efsec and Alarm Center (See Note 3 to the Financial Statements).
The remaining increase is attributable to the addition of personnel to the sales
and marketing departments. As a percentage of net sales, marketing,
administrative and general expenses decreased to 25.7% in the fiscal 2000 period
from 26.1% in the comparable period in fiscal 1999.
Net interest expense decreased to $487,000 in the fiscal 2000 period from
$718,000 in the comparable period in 1999, as borrowings outstanding were lower
during the current period.
The Company's effective income tax rate for the fiscal 2000 period was
37.4% compared to 38.9% for the comparable period in fiscal 1999.
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 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 Asia facility, the
Company has required external sources of financing to satisfy its liquidity
needs.
SIX MONTHS ENDED SEPTEMBER 30, 1999. During the six months ended September
30, 1999, the Company's operating activities provided $8,650,000 of operating
cash flow. Net income, depreciation and amortization provided $4,372,000. A
decrease in inventories provided $7,833,000. An increase in accounts receivable
used $3,139,000, while an increase in accounts payable provided $1,391,000.
Other account changes used $1,807,000 of operating cash flow.
During the six months ended September 30, 1999, cash used for investing
activities was $2,017,000 and was utilized for the acquisition of Caetec and for
capital expenditures.
During the six months ended September 30, 1999, cash used by financing
activities was $72,000, primarily representing principal repayments of debt.
CAPITAL RESOURCES. On September 30, 1999, the Company had cash balances of
$10,980,000. On that date, the Company had a $17,000,000 revolving credit
facility that was not drawn. This credit facility bears interest 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, and matures on July 31, 2000.
The Company expects to continue to pursue expansion and/or acquisition
opportunities and the development of new products and markets. Significant
expenditures will also include continued research and development investment in
detection, control and communication projects. The Company also plans to
continue its efforts to market its products internationally.
The Company's Board of Directors has authorized the repurchase of up to
$10,000,000 of the Company's common stock.
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 2000.
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 lead 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 Asia manufacturing facility as well as
products purchased for resale by its domestic businesses. The Company believes
these products to be year 2000 compliant. 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 product 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 compliant. 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 compliant. These upgrades have been made and
are currently being tested. 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 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 implemented at its foreign subsidiaries. This implementation is expected
to be complete at all locations prior to December 31, 1999. 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. This 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 and no
significant issues have been noted as of the date of this report. 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 $1,000,000. External costs incurred
through September 30, 1999 were approximately $920,000 and related primarily to
computer hardware and 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, 1999 which is incorporated
herein by reference thereto.
EURO CONVERSION. The Company is assessing the potential impact that may
result from the completion of 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. There has been no significant impact to the Company
resulting from the initial transition to the euro.
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 1999 Form 10-K for the year ended March 31, 1999.
PART II OTHER INFORMATION
Item 5. Other Information
None
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DETECTION SYSTEMS, INC.
Registrant
DATE: November 15, 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
Vice President & Chief Accounting Officer
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Item
NO. EXHIBITS LOCATION
3(a) Detection Systems, Inc. Included as Exhibit 3 of this
Certificate of Quarterly Report on Form 10-Q
Incorporation as amended
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 Included as Exhibit 10(c) of this
Credit Facility Agreement Quarterly Report on Form 10-Q
dated September 30, 1998
10(d) Deferred Compensation Plan Incorporated by reference to
and Deferred Bonus Plan Exhibit 10(c) to 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, as Incorporated by reference to the
amended Company's Proxy Statement on Form
DEF 14A filed on 7/8/99
10(g) Non-Employee Director Stock Incorporated by reference to
Option Plan Exhibit B of the Company's Proxy
Form DEF 14A filed 7/8/99
10(h) Executive Officer Cash Incorporated by reference to
Bonus Plan Exhibit 10(h) of the Company's
1999 Annual Report on Form 10-K
10(i) Executive employment Incorporated by reference to
contract with Karl H. Exhibit 10(i)of the Company's
Kostusiak Quarterly Report on Form 10-Q for
the quarter ended 6/30/99
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 6/30/99
10(k) 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
11 Computation of Per Share Included as Exhibit 11 of this
Earnings Statement Quarterly Report on Form 10-Q
27 Financial Data Schedule Included as Exhibit 27 of this
CERTIFICATE OF INCORPORATION
OF
DETECTION SYSTEMS, INC.
[as amended through 8/12/99]
Under Section 402 of the Business
Corporation Law of the
State of New York
FIRST: The name of the corporation is:
DETECTION SYSTEMS, INC.
SECOND: The purposes for which it is formed are as follows:
To design, develop, manufacture, assemble, fabricate,
import, lease, market, purchase or otherwise acquire
and generally to trade and deal in and with, as
principal or agent, at wholesale, retail, on
commission or otherwise, materials, components and
devices of a mechanical, electrical, optical or
chemical nature for use in detection systems, signal
systems and other systems.
To acquire by purchase, assignment, grant, license or
otherwise, to apply for, secure, lease or in any
manner obtain, to develop, hold, own, use, exploit,
operate, enjoy and introduce, to sell, assign, lease,
mortgage, pledge, grant licenses and rights of all
kinds in respect of, or otherwise dispose of, and
generally to deal in and with and turn to account for
any or all purposes, either for itself or as nominee
or agent for others:
(1) Any and all inventions, devices, processes,
discoveries and formulae, and improvements and
modifications thereof and rights and interests
therein;
(2) Any and all letters patent or applications for
letters patent of the United States of America
or of any other country, state, locality or
authority, and
(3) any and all rights, interests and privileges
connected therewith or incidental or
appertaining thereto;
(4) Any and all copyrights granted by the United
States of America or any other country, state,
locality or authority, and any and all rights,
interests and privileges connected therewith
or incidental or appertaining thereto.
To purchase or otherwise acquire, hold, own, sell,
lease or otherwise dispose of real property, improved
or unimproved, and personal property, tangible or
intangible, including, without limitation, goods,
wares and merchandise of every description and the
securities and obligations of any issuer, whether or
not incorporated.
To do all and everything necessary, suitable, or proper for
the accomplishment of any of the purposes, the attainment of any of the objects
or the furtherance of any of the powers hereinbefore set forth, either alone or
connection with other corporations, firms or individuals and either as
principals, or agents and to do every other act or acts, thing or things
incidental or appurtenant to or growing out of or connection with the aforesaid
objects, purposes or powers or any of them.
The foregoing enumeration of specific powers shall not be
deemed to limit or restrict in any manner the general powers of the corporation,
and the enjoyment and exercise thereof, as conferred by the laws of the State of
New York upon corporations organized under the provisions of the Business
Corporation Law.
THIRD: The office of the corporation within the State of New
York is to be located in the City of Rochester, County of Monroe.
FOURTH: The aggregate number of shares which the Corporation
shall have authority to issue is twenty-four million (24,000,000) common shares,
with par value of Five Cents ($.05) per share.
FIFTH: No holder of shares of the Corporation of any class now
or hereafter authorized, shall have any preferential or preemptive right to
subscribe for, purchase or receive any shares of the corporation of any class,
now or hereafter authorized, or any options or warrants for such shares, or any
rights to subscribe to or purchase such shares, or any securities convertible
into or exchangeable for such shares, which may at any time be issued, sold or
offered for sale by the Corporation.
SIXTH: The Secretary of State is designated the agent of the
Corporation upon whom process against the Corporation may be served. The post
office address to which the Secretary of State shall mail a copy of any process
against the Corporation so served upon him is 130 Perinton Parkway, Fairport,
New York 14450.
SEVENTH: The Corporation may not lend money to or guarantee
the obligation of a director of the Corporation unless (1) the particular loan
or guarantee is approved by the shareholders in accordance with the provisions
of Section 714 of the Business Corporation Law or (2) the Board of Directors
determines that the loan or guarantee benefits the Corporation and either
approves the specific loan or guarantee or a general plan authorizing loans and
guarantees.
Exhibit 11
DETECTION SYSTEMS, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended September 30, 1999 1998
---- ----
Net income $1,501 $1,230
===== =====
Weighted average number of shares 6,348 6,324
===== =====
Basic earnings per share $0.24 $0.19
===== =====
Shares attributable to deferred
compensation plans and stock
options and warrants 490 515
==== ====
Diluted earnings per share: $0.22 $0.18
==== ====
Six Months Ended September 30, 1999 1998
---- ----
Net income $2,922 $2,062
===== =====
Weighted average number of shares 6,363 6,307
===== =====
Basic earnings per share $0.46 $0.33
===== =====
Shares attributable to deferred
compensation plans and stock
options and warrants 476 523
==== ====
Diluted earnings per share: $0.43 $0.30
==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,980
<SECURITIES> 0
<RECEIVABLES> 25,121
<ALLOWANCES> (1,052)
<INVENTORY> 30,034
<CURRENT-ASSETS> 68,756
<PP&E> 34,220
<DEPRECIATION> (21,471)
<TOTAL-ASSETS> 96,432
<CURRENT-LIABILITIES> 19,366
<BONDS> 0
0
0
<COMMON> 329
<OTHER-SE> 58,315
<TOTAL-LIABILITY-AND-EQUITY> 96,432
<SALES> 36,699
<TOTAL-REVENUES> 36,699
<CGS> 22,091
<TOTAL-COSTS> 34,005
<OTHER-EXPENSES> 298
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 370
<INCOME-PRETAX> 2,396
<INCOME-TAX> 895
<INCOME-CONTINUING> 1,501
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,501
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.22
</TABLE>
