Page 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended: March 31, 1999
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934.
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 Number)
130 Perinton Parkway, Fairport, New York 14450
(Address of principal executive offices) (Zip Code)
(716) 223-4060
(Registrant's telephone number, including area code)
---------------------
Securities registered pursuant to Section 12(b) of the Act: None
---------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.05 Per Share
(Title of Class)
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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
As of June 11 the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $45,136,618.
As of June 11 there were outstanding 6,336,645 shares of the registrant's common
stock, par value $.05 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 1999 Annual Meeting of Shareholders -- See Part III of this
Form 10-K Annual Report for portions incorporated by reference.
<PAGE>
PART I
ITEM l. BUSINESS
GENERAL
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 niche provider of
intrusion detection 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 nine acquisitions, opened
four sales offices and established a manufacturing facility in Asia. These
initiatives have enabled the Company to expand its product catalog and market
reach and to increase its net sales from $34,336,000 in fiscal 1995 to
$138,045,000 in fiscal 1999.
The Company manufactures system components for sale to installation companies,
distributors and other equipment manufacturers either as individual components
or, increasingly, bundled with other compatible components to form an integrated
system for a specific customer's application. The Company is not engaged in the
installation or monitoring aspects of the industry. The Company presently offers
products in all four of the principal categories of the electronic protection
equipment market: security, fire, access control and CCTV.
ACQUISITIONS
The scale and product scope of the Company has increased as a result of its
acquisitions, beginning with the February 1996 acquisition of Radionics, Inc.
("Radionics"). These acquisitions have also helped the Company broaden its
catalog and expand its domestic and international distribution network. A
summary of the Company's nine acquisitions is as follows:
RADIONICS. In February 1996 the Company acquired all of the outstanding stock of
Radionics. Radionics had annual net sales of approximately $45,000,000 prior to
its acquisition. This acquisition gave the Company access to Radionics' network
of over 1,000 dealers. Radionics had a number of advanced products and models
under development which have subsequently been completed by the Company, such as
a 246-zone fully-integrated security, fire and access control panel and a
control communicator which can function as a wired, wireless or hybrid system
and can communicate using BellSouth's Cellemetry(R) technology.
SENSES. In July 1996 the Company acquired certain assets of Senses
International, Inc. ("Senses"), a manufacturer of long-range wireless alarm
transmission equipment marketed under the name "Safecom." Senses had annual net
sales of approximately $2,000,000 prior to its acquisition.
DA SYSTEMS. In May 1997 the Company acquired all of the outstanding stock of
Digital Audio Ltd. ("DA Systems"), a British manufacturer of security control
equipment with annual net sales of approximately $10,800,000 prior to its
acquisition. DA Systems provides the Company with a line of controls and
communication devices approved for sale in the U.K.
SERIEE. In June 1997, the Company acquired 99.5% of the outstanding stock of
Seriee S.A. ("Seriee"). Seriee is a French manufacturer of electronic control
and communications equipment with annual net sales of approximately $6,300,000
prior to its acquisition. Like the U.K., France has unique design requirements
and this acquisition provides the Company with a line of French-approved control
panels and a distribution network of 8 offices located throughout France. Prior
to its acquisition, Seriee was a distributor for certain Company products.
RAS. In June 1997, the Company acquired 98.7% of the outstanding stock of
Radio-active Systems N.V. ("RAS"). RAS, with five regional sales offices
throughout Belgium, had annual net sales of approximately $9,900,000 prior to
its acquisition. RAS had been a distributor for the Company for over 15 years
and, immediately prior to its acquisition, was the Company's second largest
distributor.
SECURITY SUPPLIES. In November 1997, the Company purchased the assets of
Security Supplies NZ Ltd. ("Security Supplies"). Security Supplies is a New
Zealand distributor of security products with annual net sales of approximately
$800,000 prior to its acquisition.
EDM. In January 1998, the Company acquired all of the outstanding stock of
Electronics Design and Manufacturing Pty Limited ("EDM"). With annual net sales
of approximately $4,600,000 prior to its acquisition, EDM is one of the largest
Australian manufacturers of residential and commercial control panels. The
acquisition of EDM, combined with the Company's existing distribution
operations, gives the Company a comprehensive catalog and sales presence in the
Australian market.
EFSEC. In June 1998, the Company acquired all of the outstanding stock of Efsec
AB ("Efsec"). Efsec is a Swedish distributor of electronic security equipment
and had annual net sales of approximately $3,000,000 prior to its acquisition.
ALARM CENTER. In June 1998, the Company acquired all of the outstanding stock of
Alarm Center Kft ("Alarm Center"). Alarm Center is a Hungarian distributor of
electronic security equipment and had annual net sales of approximately $500,000
prior to its acquisition.
PRODUCT LINE
The Company produces and distributes a wide variety of electronic protection
equipment, offering a single source of products to the professional installers
who provide custom systems for different types of buildings and protection
requirements.
Since early 1995, the Company has introduced several internally developed
products including, among others, its TriTech pet avoidance detectors, a control
panel that offers both wired and wireless on-premise communication capability,
an enhanced and broadened line of smoke detectors, a new line of passive
infrared intrusion detectors, and a fire system control and communication
product. In addition, the Company completed Radionics' second generation of
integrated panels which are capable of simultaneously controlling a
full-featured security system, fire system and access control system. The
Company has also expanded its product catalog by entering into a number of
alliances with partners that have technological capabilities that complement the
Company's internal capabilities.
Security Products
Security systems consist of intrusion detectors coupled with control and
communications equipment and, in many cases, notification devices. When a
triggering event occurs, a detector senses the event and notifies the control
equipment, which in turn causes the communications equipment to transmit an
alarm signal to an on-premise monitoring location or a remote central alarm
monitoring service. The control equipment also activates notification devices
such as strobes, horns and sirens if these options are features of the system.
Detectors. Security detectors are the components of a security system which
sense intrusion into protected areas. The Company markets security detectors
under a number of brand names, including: Detection Systems, Radionics, and
Seriee. Security detectors differ in three primary respects: the way they sense
intrusion or another alarm condition, the way they communicate with control
equipment and the type of information they transmit to the control equipment.
The Company offers detectors which use various basic technological approaches
for sensing the existence of an intrusion or other alarm condition, including:
passive infrared body heat detection, combination passive infrared and microwave
detection ("dual detectors"), combination passive infrared and camera,
photoelectric beam interruption, acoustic glass break detection, vibration
detection, and magnetic contacts.
These different types of detectors are needed for different types of
applications in commercial and mid- to high-end residential security systems and
complement each other in their system applications and the types of environments
in which they function best. Many alarm systems incorporate several different
types of detectors in a single alarm system to maximize the effectiveness of the
system.
Detectors can communicate with an alarm system's control equipment directly
(wired), indirectly (wireless) or on a combined or "hybrid" basis (where the
detector communicates via wireless transmission to a peripheral device which is
wired to the control equipment). The Company offers detectors which are used in
each of these types of systems. The information that detectors communicate to
the control equipment ranges from a simple communication that an alarm event has
occurred to, in a multiplex system, the identity of the detector sensing the
alarm condition, the nature of the alarm condition and diagnostic information
about the detector.
Control Equipment. The control components of a security system manage all the
functions of the system and provide the link between the system's detectors and
communications equipment. The Company markets control products under various
brand names, including: Radionics, Detection Systems, Abacus, EDM and Seriee.
The Company's control products include control panels which collect, interpret
and transmit the signals from the detectors and arming stations which are used
to program certain features of the system and to arm and disarm it. The
Company's control and communication product offerings were expanded in 1996 by
its acquisition of the Radionics control product line, which was well known in
the industry for alarm control and communication equipment.
The Company's security control product line includes products that are used in
all three types of systems installed by security professionals. Conventional
security systems include wired, wireless and hybrid (combination wired and
wireless) systems and communicate on which zone of detectors an alarm condition
exists. In the next level, multiplex systems, each sensor is addressable, which
means that the specific location of the alarm condition is reported. At the
highest level, the Company's advanced multiplex systems feature the capacity to
report back addressable test, diagnostic and alarm condition information,
assuring that the system is working properly, and to report whether a detector
has been tampered with.
The Company has a wide range of control panels, ranging from its Detection
Systems' low-cost six-zone panel which can operate six detection device
circuits, to Radionics' 246-zone fully integrated security, fire and access
control panel which can operate a combination of up to 246 intrusion detection,
smoke detection and access control circuits and devices.
Communications Equipment. The Company offers a broad line of communications
equipment, ranging from Radionics' central station receiving equipment, which
performs the function of receiving alarm signals from multiple sources, to
transmission equipment capable of accessing telephone lines, as well as some of
the alternative communication technologies which are commercially available. One
of these technologies is BellSouth's new Cellemetry(R) data service, which
permits wireless transmission of alarm signals to a central station using
existing cellular networks. Another is the ARDIS radio network, which offers a
more secure alternative to telephone lines as the means for contacting a central
monitoring station, and ultimately the police or fire department. A third is
LAN/WAN interface, which allows communications over private data networks. In
addition, the Company offers its Safecom long-range wireless alarm transmission
system which allows a monitoring company to establish and maintain a proprietary
two-way radio network to transmit and receive alarm signals. The Company also
offers its Fastlink system which provides one-way radio communication of alarm
signals to a remote monitoring station. The Company, through its Radionics and
DA Systems subsidiaries, is licensed to manufacture and sell in the U.K. and
U.S. derived channel communication devices that transmit alarm signals over the
unused bands of standard telephone lines. This allows alarm signals to be
transmitted at the same time a telephone line is being used for voice
communications.
Security Escort. The Company's Security Escort product is a multiple user help
call system which allows a user to alert appropriate security personnel as to
their location, name and any handicap or other special data by using a
transmitter the size of an auto keyless entry device. Security Escort systems
may be enabled to permit a user to trigger a strobe and sound a siren as well.
The primary components of a Security Escort system are a central command station
which is monitored by security personnel, a Microsoft Windows-based system
software package, transceivers, receivers and individual transmitters. This
system uses a digital micro-cellular architecture which accommodates up to 16
million individual user ID codes.
The Security Escort's advanced design features include: self-supervision of the
system's operational integrity by internally generating and monitoring test
transmissions; testing of transmitters by users; and system-generated notices
regarding system maintenance requirements. Security Escort allows a user to test
the system and his or her transmitter at any time, from any location and receive
visual confirmation that both are functioning properly. In addition, the system
software provides for full archiving of all system activity including victim
tracking and alarm map recall.
Fire Products
Fire detection systems work in the same manner as security systems. In fact,
many fire detection systems are operated in tandem with a security system by the
same control equipment. Fire alarm systems range from conventional systems,
which can sense and signal a fire condition or non-condition, to addressable
systems, which permit identification of the triggered detector within the
system, and analog systems, which permit communication of information regarding
the condition of the environment at the detector location. The Company offers
fire detection products under the brand names Detection Systems and Radionics.
The Company's fire detection product line, which includes products for both
residential and commercial applications, features detection components,
dedicated control panels, communication equipment and notification devices.
Detectors. The Company's fire detection components sense the presence of smoke
and heat by employing a variety of technologies, including beam smoke detectors,
photoelectric spot smoke detectors, ionization spot smoke detectors and heat
probes. The Company's smoke detectors are differentiated by a patented chamber
which provides increased immunity to dust, which is the leading cause of false
fire alarms. The Company also has a automatic test and calibration feature which
continuously senses and signals if dust or other conditions cause the detector's
sensitivity to deviate from its acceptable range.
Control Equipment. As described above, many of the Company's control panels
operate both security and fire alarm systems; however, some of the Company's
control panels are designed exclusively for operating fire alarm systems. The
Company originally entered the fire detection business as an extension of the
security products line by providing fire detection features and accessories
through the security control panel. The Company is in the process of introducing
new control product lines for the dedicated fire market.
Communication Equipment. The technologies the Company's products provide for
communicating fire alarm signals are the same as those provided by its security
alarm communications equipment.
Notification Devices. The Company distributes a full range of notification
devices such as strobes, horns and sirens varying in color and intensity which
fully comply with the Americans with Disabilities Act. These products are
distributed under the Company's name.
Access Control Products
Electronic access control systems consist of equipment that can identify an
authorized individual and permit that person to enter a restricted area. While
intrusion control products protect the property when no one is on-site, access
control products protect the property while it is occupied. The market for
access control systems is divided into three major end-user categories:
industrial, commercial, and governmental.
Access control systems can include card-based systems, CCTV-based systems, audio
systems and bar code systems. The Company distributes access control products on
an OEM basis under the brand names Readykey(R), Easikey(R), DS Entry and
Radionics. Access control products sold by the Company include control systems,
card readers, cards and detector accessories.
CCTV Products
CCTV is a system of relaying video and audio signals from a camera to a monitor
or a recording device. The term CCTV refers to a closed-circuit system sending
signals to select receivers as opposed to a system broadcasting signals to the
general public. The Company distributes CCTV products and offers its own CCTV
products on an OEM basis as well as under the brand name DS Vision. These
products consist of cameras, monitors, recorders, control units and other
accessories. The Company distributes color and black-and-white as well as both
high and low resolution cameras and monitors.
MARKETING
The Company's primary customers are: (i) national and regional installation and
service companies; (ii) national distributors; and (iii) original equipment
manufacturers. The Company has a sales force of approximately 97 representatives
of which 36 are domestic and 61 are international. The Company's products are
installed in industrial, commercial, institutional and residential buildings, in
both new and upgraded system installations.
Domestically, large regional and national accounts are supported directly by
regional sales and service managers. The Company's sales managers provide
technical support to customers regarding system design, installation and
service. The Company also conducts regular training programs for its customers
as well as technical seminars at national and regional trade shows. A call to
the Company's 800 sales number typically results in same-day shipment of most
standard products from one of two warehouses. To support the on-site installer
or service person, toll-free 800 lines connect directly to the Technical Service
Department.
The Company markets the Security Escort multiple user help call system in North
America and in Australia. While the system was initially designed for the
protection of individuals on college and university campuses, it is suitable for
many other applications and is now used in apartment complexes, condominiums,
retirement communities, hospitals, correctional facilities, governmental
facilities and manufacturing facilities.
The Company markets CCTV products primarily in Australia, Belgium and China.
COMPETITION
The markets in which the Company operates are highly competitive. The Company's
competitors include manufacturers of security and fire alarm equipment from all
over the world. The Company believes its two major competitors are Pittway and
the Berwind Group. In addition, the Company may face competition from new
entrants into these markets and increased competition from existing competitors.
A number of the Company's competitors have substantially greater financial and
other resources than the Company. In many cases the Company's competitors are
concentrated in one market niche in the electronic protection industry, allowing
them to concentrate their resources in that niche. The Company competes on the
basis of providing superior value to customers with respect to both products and
services. When selecting intrusion and fire detection equipment, professional
installation and service companies consider the breadth of products offered by
manufacturers and distributors, product performance and reliability, as well as
the incorporation of advanced technological features such as automatic testing,
efficiency of delivery, ease of installation and service, sales and technical
support services and price. There can be no assurance that the Company's
products and services will continue to be competitive and accepted by the market
in the future.
MANUFACTURING
The Company designs its products and prepares specifications for the component
parts used in its products. The Company purchases certain components from
outside sources and then assembles them into finished products.
The Company has manufacturing facilities in Fairport, New York; Zhuhai, China;
Southall, England; Lille, France and Sydney, Australia. The Company is ISO 9002
certified at its Fairport, Zhuhai and Southall locations.
The majority of the Company's manufacturing is conducted in its China facility.
These manufacturing operations, which commenced during fiscal 1996, are
conducted in a 70,000 square foot manufacturing facility in Zhuhai, People's
Republic of China. The Company is in the process of transferring manufacturing
of DA Systems products to the China facility. The Company is also in the process
of consolidating its purchasing for all of its manufacturing materials, which it
expects over time will result in additional cost savings. There can be no
assurance that such cost savings will be achieved. See Note 10 to the
Consolidated Financial Statements for further discussion of the Company's
restructuring actions. For further information concerning the Company's
manufacturing operations in China, see Sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Forward Looking Statements."
INTELLECTUAL PROPERTY
The Company has obtained over 40 patents related to its products. While the
Company obtains patents as appropriate and considers certain of its patents
valuable, it does not believe any one of them by itself is crucial to the
successful conduct of its business. The Company relies on a combination of
patents, trademark registrations, copyrights and confidentiality agreements to
protect its intellectual property.
RESEARCH AND DEVELOPMENT
The Company has continually placed significant emphasis on research and
development activities through internal efforts and partnering arrangements with
third parties. The acquisitions of Radionics, Safecom, DA Systems, Seriee and
EDM has provided additional technologies to those it already possessed. It is
the Company's intent to continue with its development efforts to keep pace with
technological advances in the security and fire protection industries by either
further internal efforts, additional acquisitions, or partnering arrangements.
The Company expended approximately $8,507,000, $8,579,000 and $8,115,000 on
research and development activities during 1999, 1998 and 1997, respectively.
BACKLOG
Backlog is not significant in the business of the Company. In general, orders
are processed from inventory on a relatively current basis. It is the Company's
goal to maintain four weeks of finished goods inventory for all products in
order to meet customer requirements.
YEAR 2000 ISSUES
The Company is in the process of implementing the necessary changes related
to Year 2000 issues. See discussion regarding Year 2000 in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
SUPPLIERS
The Company purchases raw materials, components and certain finished goods
worldwide from numerous suppliers. The majority of these materials are generally
available from more than one supplier. Certain products needed by the Company
can be obtained only from a limited number of suppliers, the shortage of which
could adversely impact production and/or sale of certain equipment by the
Company. The Company does not believe that the loss of any other suppliers would
have a material adverse effect on its overall business.
REGULATION
Many of the Company's products require approval by the Federal Communications
Commission (FCC) before they can be marketed in the United States. In addition,
commercial acceptance of the Company's products is typically dependent on the
listing of such products by Underwriters Laboratories ("UL"). The Company has
successfully obtained FCC approval and UL listing of its products in the past;
however, it cannot predict whether it will obtain approvals for future products
or whether FCC regulations or UL listing requirements relating to the Company's
current or future products might change. Internationally there are equivalent
approval requirements. See section entitled "Risk Factors."
A number of municipalities have enacted or are considering enacting legislation
which penalizes false alarms which trigger responses by police or fire
departments. The Company is unable to quantify the effects such legislation may
have on the security and fire protection markets as a whole, or on the Company.
However, because the Company competes in the mid- to high-end market, its
products generally have lower false alarm rates than low- and mid-range
products. Consequently, it would be expected that the impact of any such
regulation would be less to the Company than the impact of such regulation on
companies competing the low- and mid-range product markets.
Compliance with federal, state and local laws and regulations regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment have not had, and are not expected to have, a
material effect upon the capital expenditures, earnings or competitive position
of the Company.
EMPLOYEES
As of March 31, 1999, the Company directly or indirectly employed approximately
1,100 persons worldwide. Included in this total are 460 persons at the China
manufacturing facility. None of the Company's employees are represented by a
collective bargaining organization, and the Company's management believes
employee relations are good.
RISK FACTORS
Impact and Risks of Acquisitions
Between February 1996 and June 1998 the Company made nine acquisitions:
Radionics, DA Systems, Senses, Seriee, RAS, Security Supplies, EDM, Efsec and
Alarm Center. Part of the Company's growth strategy is to expand its product
catalog, technologies and markets through additional acquisitions. Integration
of the operations, management and business information systems of those
acquisitions is ongoing. There can be no assurance that the Company will be able
to successfully integrate the operations and management of its recent
acquisitions or that the Company will be able to consummate or, if consummated,
successfully integrate the operations, management and business information
systems of future acquisitions. Acquisitions involve several significant risks,
including but not limited to risks associated with: (i) the diversion of
management's attention to the assimilation of the acquired businesses; (ii) the
ability of the acquired businesses to maintain the quality of products and
services that the acquired businesses have historically provided; (iii) the need
to integrate financial and other systems with those of the Company and the
difficulty of achieving adequate internal and financial control and timely
reporting; (iv) the loss of key employees of the acquired businesses after the
acquisition; (v) unforeseen liabilities of the acquired business; (vi) the
dilutive effect of the issuance of additional equity securities; (vii) the
incurrence of additional debt as part of such acquisitions or to fund the
operations of the acquired business; and (viii) the amortization of goodwill and
other intangible assets involved in any acquisitions that are accounted for
using the purchase method of accounting. In addition, certain of the businesses
acquired by the Company have been unprofitable and there can be no assurance
that they can be made profitable. There can be no assurance that future
acquisition opportunities will become available, that future acquisitions can be
consummated on favorable terms or that such acquisitions will contribute to the
Company's profitability. The Company continues to investigate and consider
acquisition opportunities.
Management of Growth
Recent growth through acquisitions, expansion and related consolidation had
resulted in financial and manufacturing system weaknesses and resource
constraints on the Company's operations. The Company has made improvements to
its financial controls and enhanced its manufacturing information systems during
fiscal 1998 and 1999 in continuing efforts to keep pace with its expanded and
more complex operations. During fiscal 1998, several steps were taken to address
these matters, including (i) establishing and filling three new financial
positions, including a Chief Accounting Officer, and (ii) replacing three
different management information systems at its three primary sites with an
integrated system and developing that system further to improve financial
control. Despite the Company's continuing efforts to improve its financial
controls and management information systems, no assurance can be given that such
weaknesses will not reoccur. In the event of such reoccurrence the Company's
inability to manage growth and the related consolidation effectively could have
adverse effects on the Company's results of operations, financial condition and
financial reporting information.
Risks Associated with International Operations
The China factory is dependent on the local Chinese government for personnel and
utilities as well as all other municipal services. See "Business--
Manufacturing." The Company believes that its relationship with the local
Chinese government is good, however, any future deterioration of such
relationship could have a material adverse effect on the Company's results of
operations. One aspect of the Company's business strategy is to increase the
sale of its products in international markets. The Company's international
operations give rise to political and economic uncertainties relating to, among
other things, U.S. and foreign trade restrictions; foreign government stability;
risk of re-negotiation or modification of existing agreements or arrangements
with governmental authorities; foreign economic or political instability;
shipping costs and delays; tariffs; export controls; government regulation;
patent and trademark availability, protection and registration; foreign exchange
restrictions which limit the repatriation of investments and earnings therefrom;
changes in taxation or international tax treaties; military action and other
hostilities or confiscation of property. While the United States imposes quotas
and duties on selected imported products, there are currently no U.S. quotas on
the Company's products.
The Company is subject to currency exchange risks to the extent that its
purchases and sales occur outside the United States and it is unable to
denominate its purchases or sales in dollars or otherwise shift to its customers
or suppliers the risks of currency exchange rate fluctuations. Currently, the
Company does not engage in currency hedging transactions. However, it may do so
in the future. Fluctuations in exchange rates may affect the results of
operations and financial position of the Company's international operations
reported in dollars. Additionally, the results of operations, financial
condition and competitive position of the Company may be affected by the
relative strength of the currencies in countries where its products are sold.
Dependence on Significant Customers
The success of the Company depends on the business it conducts with a limited
number of significant customers. One customer is also a significant competitor
of the Company across many of its product lines and purchases the Company's
products to incorporate them into its products and systems. The Company has had
long-standing relationships with most of its significant customers; however, it
generally does not have supply contracts with them and they may unilaterally
reduce or discontinue their purchases without penalty. The Company's loss of (or
failure to retain a significant amount of business with) any of these customers
could have a material adverse effect on the Company. The Company believes that
its acquisitions, its international marketing initiatives and its increased use
of distributors may help reduce the potential impact of sales fluctuations
associated with the Company's largest customers. During fiscal 1999, sales to
the Company's two largest customers accounted for 11.3% and 4.6% of net sales,
respectively. In 1998, sales to the Company's two largest customers accounted
for 9.9% and 6.6% of net sales, respectively. During 1997, sales to the
Company's two largest customers accounted for 10.7% and 10.6% of net sales,
respectively. See Note 9 to the Consolidated Financial Statements found in
Exhibit 13 of this Form 10-K for more detailed information about sales to
significant customers.
Intellectual Property
The Company's ability to compete effectively depends, in part, on its ability to
protect its intellectual property, including its patents, trademarks, copyrights
and trade secrets, and on its ability to develop and protect future intellectual
property. In addition to patents, the Company relies on a combination of
trademark registrations, copyrights and confidentiality agreements to protect
its proprietary rights in intellectual property. The Company's ability to
compete effectively also depends on its ability to avoid infringing on the
proprietary rights of others. New patent applications are continually being
filed and prosecuted, and pending U.S. patent applications are confidential
until patents are issued. As a result, it is impossible to anticipate all
potential patent infringement issues. There can be no assurance that the steps
taken by the Company to protect its intellectual property will be adequate to
prevent misappropriation or that others will not independently develop
technology or products that compete with or are superior to the products of the
Company. Likewise, there can be no assurance that the Company will not
inadvertently infringe on the intellectual property rights of others.
Risks of Technological Change
The electronic protection industry is characterized by continuous technological
advances, frequent new product introductions and enhancements, declining market
prices for similar products over time and changes in customer requirements. The
Company's future success will depend on its ability to continue to develop new
products and technology to meet customer needs as well as to enhance its
existing products and to continually reduce product costs. There can be no
assurance that the Company's products and services will continue to be
competitive and accepted by the market in the future. Any failure by the Company
to anticipate or respond rapidly to technological advances, new products and
enhancements by competitors, or changes in customer requirements could have a
material adverse effect on the Company. See "Business--Intellectual Property."
Dependence on Key Personnel
The Company is dependent upon the efforts of certain key members of its senior
management team, including Karl H. Kostusiak, Chairman and Chief Executive
Officer. The loss of a key member of the Company's senior management team could
have an adverse effect on the operations of the Company. The Company carries no
key man life insurance on any of its management, but has non-competition
agreements with certain key officers and technical personnel.
Product Liability Claims
If an intrusion, fire or other event that the Company's products are designed to
detect occurs in a setting where the Company's products have been installed, the
Company may be subject to a claim that an error or omission on the part of the
Company contributed to the damages resulting from such event, which damages
could be substantial. Such a claim could be made whether or not the Company's
product performed properly under the circumstances. From time to time the
Company is subject to product liability claims in the ordinary course of its
business. The Company carries product liability insurance which management
believes is adequate; however, a product liability judgment or settlement in
excess of available insurance proceeds could have a material adverse effect on
the financial condition and results of operations of the Company and any adverse
claim or settlement could have an adverse effect on the availability and cost to
the Company of product liability insurance. The Company does not believe that
any pending or threatened litigation will have a material adverse effect on the
financial condition or results of operation of the Company. See "Item 3--Legal
Proceedings."
Dependence on Suppliers; Concentration of Manufacturing
While the Company manufactures most of the products it sells, certain of the
components used in its products are purchased from third parties and are
available from a limited number of sources. The loss of any one supplier or an
inability of suppliers to provide the Company with the required quantity or
quality of these components could have an interruptive effect on the Company's
business until such time as an alternative source of supply is found. See
"Business--Manufacturing."
Substantially all of the products manufactured by the Company are produced at
facilities in Fairport, New York, Zhuhai, China or Sydney, Australia.
Accordingly, any event resulting in the slowdown or stoppage of any of these
manufacturing operations could have a material adverse effect on the Company.
Government Regulation and Product Listing
Many of the Company's products require approval by FCC before they can be
marketed in the United States. In addition, commercial acceptance of the
Company's products is typically dependent on the listing of such products by UL.
The Company has successfully obtained FCC approval and UL listing of its
products in the past; however, it cannot predict whether it will obtain
approvals for future products or whether FCC regulations or UL listing
requirements relating to the Company's current or future products might change.
Failure to comply with FCC regulations or UL listing requirements, an inability
to receive approval for products under development or a change in existing
regulations or listing requirements that would make products non-compliant,
could have a material adverse effect on the financial condition and results of
operations of the Company. Most foreign countries also have similar regulatory
agencies and private certification or listing organizations, which could have
the same impact on sales of the Company's products within those countries. In
addition to the regulation of its products, the Company is subject to local,
state, federal and foreign laws regarding the discharge of materials into the
environment.
Volatility of Stock Price
The Common Stock has experienced significant volatility since the Company's
acquisition of Radionics in February 1996. The market for securities of
technology companies historically has been more volatile than the market for
stocks in general. The trading price of the Company's common stock may be
subject to wide fluctuations in response to quarter-to-quarter variations in
operating results, announcement of future developments including possible
acquisitions, new products by the Company or its competitors and other events or
factors. These fluctuations may be compounded by the historically low trading
volume in the Company's common stock. In addition, the stock market has from
time to time experienced extreme price and volume fluctuations that have
affected the market price for many technology companies and that often have been
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Company's common
stock. See Market for the Registrants Common Stock and Related Security Holder
Matters--Price Range of Common Stock."
Litigation
The Company and certain officers and directors have been named defendants in
several lawsuits alleging violations of federal securities laws relating to the
Company's September 1997 public offering. For additional information regarding
these lawsuits and associated risk factors, see Item 3 of this Form 10-K---Legal
Proceedings and Note 10 to the Consolidated Financial Statements, which are
incorporated herein by reference.
Year 2000
The Company is in the process of implementing the necessary changes related to
Year 2000 issues. For additional information regarding Year 2000, see Item 7 of
this Form 10-K--Management's Discussion and Analysis of Financial Condition and
Results of Operations, which is incorporated herein by reference.
Anti-takeover Provisions
The Company maintains employment and consulting agreements with certain officers
which provide that upon the occurrence of certain events following a change in
control of the Company, such officers may be entitled to receive the equivalent
of three years' compensation and other payments. See "Management---Employment
Agreements." The shares beneficially owned by the Company's executive officers
and directors and the compensation payable to certain officers following a
change in control may have the effect of discouraging persons from pursuing a
non-negotiated takeover of the Company and preventing certain changes of
control. Also, Section 912 of the New York Business Corporation Law, which is
applicable to the Company, contains provisions that restrict certain business
combinations with interested shareholders, which may have the effect of
inhibiting a non-negotiated merger or other business combination involving the
Company.
ITEM 2. Properties.
The Company conducts manufacturing, research and general office operations at
its 92,000 square foot facility at 130 Perinton Parkway, Fairport, New York.
Radionics' product configuration and general office operations are conducted at
its 156,000 square foot facility located in Salinas, California, the lease on
which expires in July 1999. Radionics has relocated to a 78,000 square foot
facility in June 1999.
The China manufacturing operations are conducted in a 70,000 square foot
manufacturing facility in Zhuhai, People's Republic of China. Detection Systems
(HK) Ltd. ("DS Hong Kong"), a subsidiary of the Company has a sub-contracting
agreement with the local Chinese government which runs through June 2000 and
requires the government to arrange for a factory, personnel and utilities and
for DS Hong Kong to furnish manufacturing equipment, raw materials and
management services. It is expected that the agreement will be extended beyond
June 2000. Pursuant to this agreement DS Hong Kong pays a fee and production
expenses to and makes payments to the workers at the facility.
DS-Australia, a subsidiary of the Company, has a three year lease for 15,500
square feet of manufacturing and office space from the former principal of EDM
which expires January 20, 2001.
ITEM 3. Legal Proceedings.
The Company and certain officers and directors have been named defendants in
several class-action lawsuits alleging violations of federal securities laws
relating to the Company's September 1997 public offering. The underwriters of
the public offering have also been named as defendants in three of these class
actions. The actions allege that the Company, certain of its officers and
directors and the underwriters made or are responsible for alleged misstatements
and omissions in various press releases and public filings concerning the
Company's business and financial condition. The Company believes these suits to
be without merit and intends to defend against them vigorously. However, it is
possible that an unfavorable resolution to such lawsuits would have a material
adverse impact on the financial condition and/or results of operations of the
Company. For additional information regarding these lawsuits, see Note 10 to the
Consolidated Financial Statements, which is incorporated herein by reference.
The Company experiences routine litigation in the normal course of business.
Also, the Company occasionally receives, and may continue to receive in the
future, communications from third parties claiming that the Company's products
or technologies infringe on such parties' intellectual property rights. The
Company does not believe that any pending or threatened litigation or
intellectual property claims will have a material adverse effect on the
financial condition or results of the operations of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
Company's fourth quarter ending March 31, 1999.
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Security
Holder Matters.
The Company's common stock trades on The Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol: DETC. On June 11, 1999, the closing price,
as reported by The Nasdaq Stock Market, was $8.06 per share, and the number of
shareholders was approximately 4,366,000. Certain information regarding the
price range of the Company's Common Stock (quarterly high and low) is presented
below:
PRICE RANGE OF COMMON STOCK
The quarterly high and low bid of the Company's common stock during the past two
years (in dollars):
<TABLE>
<CAPTION>
<S> <C> <C>
Fiscal Year Commencing April 1, 1999 High Low
---- ---
First quarter (through June 11, 1999) $9.125 $6.750
Fiscal Year Ended March 31, 1999
Fourth quarter $10.500 $8.000
Third quarter 11.875 8.625
Second quarter 10.500 8.125
First quarter 12.125 8.813
Fiscal Year Ended March 31, 1998
Fourth quarter $14.125 $8.500
Third quarter 21.250 13.125
Second quarter 22.500 17.250
First quarter 20.250 12.500
</TABLE>
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common Stock.
The Company currently anticipates that all of its earnings will be retained for
development and expansion of the Company's business and does not anticipate
paying any cash dividends in the foreseeable future. Any future determination as
to the payment of cash dividends will depend on a number of factors, including
future earnings, capital requirements, the financial condition and prospects of
the Company and any restrictions under credit agreements existing from time to
time, as well as such other factors as the Company's Board of Directors may deem
relevant. Certain financial covenants in the Company's current credit facility,
including a covenant to maintain a minimum tangible net worth, limit the
Company's ability to pay dividends.
ITEM 6. Selected Financial Data.
<TABLE>
The fiscal 1999 and 1998 results are not comparable due to the acquisitions made
during these years which were accounted for as purchases. Unaudited interim
quarterly results for the Company over the past two years were as follows (in
thousands, except per share data):
<CAPTION>
Fiscal Year Ending NET EARNINGS (LOSS)
NET GROSS INCOME PER SHARE
March 31, SALES MARGIN (LOSS) BASIC DILUTED
- --------- ------ ------- ------- ------ -------
1999 (Unaudited)
<S> <C> <C> <C> <C> <C>
Fourth quarter $34,581 $13,406 $1,178 $0.19 $0.17
Third quarter 34,201 13,147 1,231 0.19 0.18
Second quarter 35,455 13,559 1,230 0.19 0.18
First quarter * 33,808 12,770 832 0.13 0.12
1998
Fourth quarter* $32,325 $11,458 $(347) $(0.06) $(0.06)
Third quarter 31,347 9,910 (76) (0.01) (0.01)
Second quarter 34,463 11,430 672 0.14 0.12
First quarter 28,208 10,652 1,133 0.25 0.22
</TABLE>
*Includes charges relating to restructuring actions. See Note 10 to the
Consolidated Financial Statements of this Form 10-K, which is incorporated
herein by reference.
The Company's five year summary of operations is presented below. See the
discussion of acquisitions in "Business--Acquisitions" (in thousands, except
per share data):
<TABLE>
<CAPTION>
Year Ended March 31, 1999 1998 1997 1996 1995
==== ==== ==== ==== ====
<S> <C> <C> <C> <C> <C>
Net sales $138,045 $126,343 $101,251 $41,858 $34,336
Income (loss) before taxes 7,307 2,337 5,250 (10,665) 2,592
Provision (benefit) for taxes 2,836 955 1,525 (2,810) 1,078
Net income (loss) 4,471 1,382 3,725 (7,855) 1,514
AT YEAR END
Current assets $66,341 $68,520 $50,501 $28,426 $17,953
Current liabilities 17,244 23,576 19,434 12,714 2,990
Working capital 49,097 44,944 31,067 15,712 14,963
Total assets 92,812 94,044 68,276 45,897 24,745
Long term debt 17,179 16,549 28,086 17,936 746
Shareholders' equity 55,744 51,264 17,831 11,569 19,194
Number of employees 1,100 1,100 744 595 320
Number of shareholders 4,400 4,400 4,000 3,200 3,000
PER SHARE AMOUNTS*
Net income (loss)-basic $0.71 $0.25 $0.85 $(1.87) $0.38
Net income (loss)-diluted 0.65 0.24 0.76 (1.87) 0.35
Shareholders' equity 8.49 7.86 3.99 2.75 4.59
RATIOS/PERCENTAGES
Gross profit / sales 38.3% 33.6% 35.9% 33.2% 39.3%
Pre-tax profit (loss) / sales 5.3% 1.9% 5.2% (25.5)% 7.5%
Net income (loss) / sales 3.2% 1.1% 3.7% (8.8)% 4.4%
Current ratio 3.8 2.9 2.6 2.2 6.0
</TABLE>
*Restated to reflect the adoption of SFAS No. 128, and the three-for-two
stock split distributed December 17, 1996.
ITEM 7. 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 manufacturing cost
structure. The Company has since made nine acquisitions, opened four sales
offices and established a manufacturing facility in Asia. These initiatives have
enabled the Company to significantly expand its product catalog and market reach
and to increase its net sales from $34,336,000 in fiscal 1995 to $138,045,000 in
fiscal 1999.
During fiscal 1996 through 1999, the Company completed nine acquisitions: (i)
the purchase in February 1996 of Radionics of California, which had annual net
sales of approximately $45,000,000, (ii) the purchase in July 1996 of certain
assets of Senses of California, which had annual net sales of approximately
$2,000,000, (iii) the purchase in May 1997 of DA Systems of the United Kingdom,
which had annual net sales of approximately $10,800,000, (iv) the purchase in
June 1997 of Seriee of France, which had annual net sales of approximately
$6,300,000,(v) the purchase in June 1997 of RAS of Belgium, which had annual net
sales of approximately $9,900,000, (vi) the purchase in November 1997 of
Security Supplies of New Zealand, which had annual net sales of approximately
$800,000, (vii) the purchase in January 1998 of EDM of Australia, which had
annual net sales of approximately $4,600,000, (viii) the purchase in June 1998
of Efsec of Sweden, which had annual net sales of approximately $3,000,000, and
(ix) the purchase in June 1998 of Alarm Center of Hungary, which had annual net
sales of approximately $500,000. These acquisitions have served both to broaden
the Company's product lines and to increase its international presence. The
acquisitions have a significant impact on comparative financial information for
fiscal years 1999, 1998 and 1997.
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. 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, outgoing freight, customs
and other costs associated with product delivery, 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 March 31, 1999 1998 1997
<S> <C> <C> <C>
==== ==== ====
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Production 61.7 65.6 64.2
Research and development 6.1 6.8 8.0
Marketing, administrative & general 25.9 23.8 21.2
---- ---- ----
Operating income 6.3 3.8 6.6
Net interest expense (1.1) (1.6) (1.6)
Other income (expense) 0.1 (0.4) 0.2
--- --- ---
Income before income taxes 5.3 1.8 5.2
Provision for income taxes 2.1 0.7 1.5
--- --- ---
Net income 3.2% 1.1% 3.7%
=== === ===
</TABLE>
Year Ended March 31, 1999 Compared to Year Ended March 31, 1998
The Company's net sales increased 9.3% to $138,045,000 in fiscal 1999 from
$126,343,000 in fiscal 1998. The net sales of acquired businesses accounted for
$9,496,000 of this increase, while sales from the company's on-going businesses
accounted for approximately $2,206,000. Net sales during the current period by
the Company's on-going operations were favorably impacted compared to the prior
year period by increased sales of security sensors and controls as well as CCTV
products. This was offset, in part, by the continued impact of lower sales to
one of the Company's major domestic customers and by the acquisition of several
of the Company's domestic customers by other businesses who are not standardized
on the Company's products. See Note 9 to the Consolidated Financial Statements
for information regarding the Company's sales by geographic region and to
significant customers.
Production expenses increased 2.7% to $85,163,000 in fiscal 1999 from
$82,893,000 in fiscal 1998. As a percentage of net sales, production expenses
decreased to 61.7% from 65.6%. 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 cost structure and changes in product mix.
Research and development expenses decreased $72,000 to $8,507,000 in fiscal 1999
from $8,579,000 in fiscal 1998. As a percent of net sales, research and
development expenses decreased to 6.1% in fiscal 1999 from 6.8% in fiscal 1998.
The decrease in research and development expenses as a percentage of net sales
was primarily due to the acquisition of redistributor businesses during fiscal
1999 and 1998 which have sales but do not incur significant research and
development expenditures.
Marketing, administrative and general expenses increased $5,688,000 to
$35,727,000 in fiscal 1999 from $30,039,000 in fiscal 1998. As a percentage of
net sales, marketing, administrative and general expenses increased to 25.9% in
fiscal 1999 from 23.8% 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
a full year of ownership of redistributor businesses acquired during fiscal
1998. Redistributor businesses typically have higher marketing, administrative
and general expenses associated with product redistribution than do businesses
with manufacturing operations.
Included in other income (expense) are gains from fluctuations in currency
exchange rates of approximately $140,000, compared to a loss of approximately
$298,000 in the prior year. The Company does not currently hedge foreign
exchange risk, but may develop a formal hedging program in fiscal 2000.
Net interest expense decreased $531,000 to $1,504,000 in fiscal 1999 from
$2,035,000 in fiscal 1998. The decrease was primarily due to lower borrowings
outstanding. During fiscal 1999 approximately $1,642,000 of debt was repaid with
cash generated from operations.
The Company's effective income tax rate for fiscal 1999 was 38.8% compared to an
effective rate of 40.9% in fiscal 1998.
Year Ended March 31, 1998 Compared to Year Ended March 31, 1997
The Company's net sales increased 24.8% to $126,343,000 in fiscal 1998 from
$101,251,000 in fiscal 1997. The acquisition of businesses in fiscal 1998
accounted for approximately $24,229,000 of this increase, while sales from the
Company's on-going businesses accounted for approximately $863,000. Sales of the
Company's on-going operations were impacted by its purchase of RAS and Seriee
during fiscal 1998, both of whom had been distributors of the Company's products
in Europe. Sales to RAS and Seriee were approximately $1,300,000 in fiscal 1997.
Sales were also impacted by lower than anticipated sales to one of the Company's
major customers and the acquisition of two of the Company's customers by other
businesses. The Company has been able to offset, in part, the declines in sales
to those customers with increased sales to a broader base of customers. See Note
9 to the Consolidated Financial Statements for information regarding the
Company's sales by geographic region and to significant customers.
Production expenses increased 27.7% to $82,893,000 in fiscal 1998 from
$64,916,000 in fiscal 1997. As a percentage of net sales, production expenses
increased to 65.6% from 64.2%. The increase in production expenses was primarily
due to the increase in net sales. The increase in production expenses as a
percentage of net sales was primarily due to acquisitions of redistributor
businesses during fiscal 1998 and unexpected manufacturing inefficiencies. The
lower margin earned by the Company's acquisitions is reflective of the fact that
margins associated with the product redistribution business are typically lower
than margins associated with the sale of proprietary product. Excluding the
impact of acquisitions, production expenses as a percent of sales were
consistent with the prior year at 64.2%.
Research and development expenses increased $464,000 to $8,579,000 in fiscal
1998 from $8,115,000 in fiscal 1997. As a percentage of net sales, research and
development expenses decreased to 6.8% in fiscal 1998 from 8.0% in fiscal 1997.
The increase in research and development expenses is due to the acquisition of
certain businesses with research and development activities (DA Systems, EDM and
Seriee) and the continued emphasis of the Company on new product development.
The decrease in research and development expenses as a percentage of net sales
is due to a lower rate of spending on research and development by the businesses
acquired in fiscal 1998 compared to the Company's on-going operations, since
most of the businesses acquired in fiscal 1998 focus on product distribution. In
addition, the Company continued to benefit from synergies created by the
consolidation of certain domestic research and development activities.
Marketing, administrative and general expenses increased $8,537,000 to
$30,039,000 in fiscal 1998 from $21,502,000 in fiscal 1997. As a percentage of
net sales, marketing, administrative and general expenses increased to 23.8% in
fiscal 1998 from 21.2% in fiscal 1997. The increase in marketing, administrative
and general expenses was primarily due to the acquisition of businesses in
fiscal 1998. Acquired businesses accounted for approximately $6,284,000 of this
increase. In addition, a charge of approximately $400,000 was recorded in the
fourth quarter of fiscal 1998 relating to the restructuring of the Company's
Radionics manufacturing facility. This restructuring relates to severance
associated with the transfer of all remaining manufacturing from the Company's
Radionics facility to its Asia facility.
Included in other income (expense) are losses from fluctuations in currency
exchange rates of approximately $298,000, compared to a gain of approximately
$75,000 in the prior year.
Net interest expense increased $401,000 to $2,035,000 in fiscal 1998 from
$1,634,000 in fiscal 1997. The increase was primarily attributable to a higher
average outstanding balance of debt in fiscal 1998 compared to fiscal 1997,
which resulted from the Company's international expansion and higher inventory
levels.
The Company's effective income tax rate for fiscal 1998 was 40.9% compared to an
effective rate of 29.0% in fiscal 1997. The effective income tax rate was
primarily impacted by non-deductible goodwill, and the elimination of research
and development credits.
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.
During fiscal 1999, the Company's operating activities provided $7,197,000 of
operating cash flow. Net income, depreciation and amortization provided
$7,694,000. A decrease in inventories provided $1,022,000. A decrease in
accounts payable used $5,642,000 and a decrease in accounts receivable provided
$2,704,000. Other account changes provided $1,419,000 of operating cash flow.
During fiscal 1999, cash used in investing activities was $3,859,000. This
related to the acquisitions of Efsec and Alarm Center and capital expenditures.
During fiscal 1999, cash used in financing activities was $1,818,000, primarily
representing principal repayments of debt.
Pursuant to the terms of the Company's debt agreements, the Company has certain
ratios and covenants to maintain with respect to such items as working capital,
funded debt and fixed charges. Failure to comply with these guidelines
constitutes a default and permits the lenders to cause the obligations to become
currently due. The Company is in compliance with all covenants and requirements
under the terms of the borrowing agreements.
Capital Resources. On March 31, 1999, the Company had cash balances of
$4,414,000. 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 its pursuit of acquisitions 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 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. 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 Asia 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. 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. 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 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 $800,000. External costs incurred
through March 31, 1999 were approximately $560,000 and primarily related 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.
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.
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 not to pay cash dividends.
Inflation. During fiscal 1999, 1998 and 1997, inflation did not have a
significant impact on the Company's business, or results of operations.
Forward-Looking Statements
This 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 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 and elsewhere
in this Form 10-K, which is incorporated herein by reference thereto.
ITEM 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data required in this section are
included as Exhibit 13 of this Form 10-K, which is incorporated herein by
reference thereto.
ITEM 9. Disagreements on Accounting and Financial Disclosure.
Not applicable.
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The officers of the Company are as follows:
Name and Age Position, Offices Held and Year Appointed
- ------------ -----------------------------------------
Karl H. Kostusiak (60) President (1968)
David B. Lederer (59) Vice President, Business Development (1968)
George E. Behlke (42) Vice President, Operations (1995)
Frank J. Ryan (45) Vice President, Secretary and Treasurer (1982)
Lawrence R. Tracy (52) President, Detection Systems International, Inc.
subsidiary of Detection Systems, Inc. (1995)
Christopher P. Gerace (31) Vice President, Chief Accounting Officer (1999)
Jeffrey M. Swan (34) Vice President, Engineering (1999)
Each officer is elected to serve until the first meeting of the Board of
Directors held after the next annual meeting of shareholders and until his
successor is elected and has qualified. There is no family relationship between
any of the above officers.
Messrs. Kostusiak and Lederer have been President and Executive Vice
President of the Company since it was formed in 1968. Effective April 1, 1998,
Mr. Lederer has reduced his involvement to half time. In connection with this,
Mr. Lederer's title was changed from Executive Vice President to Vice President,
Business Development. Mr. Ryan has been employed by the Company in various
financial positions since 1980 and was promoted to Vice President in 1989. Mr.
Tracy was hired in February 1995 as President of the Company's Detection Systems
International, Inc. subsidiary. Mr. Behlke has been employed by the Company in
various engineering positions since 1977 and was promoted to Vice President in
May 1995. Mr. Gerace has been employed by the Company as Chief Accounting
Officer since 1997 and was promoted to Vice President in June 1999. Prior to
working for the Company Mr. Gerace was with the Audit and Business Advisory
Services Group of Pricewaterhouse, LLP. Mr. Swan has been employed by the
Company in various engineering positions since 1992 and was promoted to Vice
President in June, 1999.
The Company's Proxy Statement for the 1999 Annual Meeting of Shareholders
contains the other information required by Item 10 of Form 10-K. That
information is incorporated by reference in this Form 10-K.
ITEM 11. Executive Compensation.
The "Executive Compensation" section of the Company's Proxy Statement for its
1999 Annual Meeting of Shareholders contains the information required by Item
11, and is incorporated by reference in this Form 10-K.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The Company has stock purchase agreements with Messrs. Kostusiak and Lederer
which could in the future result in a change of control of the registrant. These
agreements are included in Exhibit 10 in this Form 10-K.
The Company's Proxy Statement for its 1999 Annual Meeting of Shareholders
contains the information required by Item 12, and is incorporated by reference
in this Form 10-K.
ITEM 13. Certain Relationships and Related Transactions.
The Company's Proxy Statement for its 1999 Annual Meeting of Shareholders
contains the information required by Item 13, and is incorporated by reference
in this Form 10-K.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this report:
Page
------
(1) Consolidated Financial Statements:
Report of Independent Accountants....................................31
Consolidated Balance Sheet...........................................32
Consolidated Statement of Operations and Retained Earnings...........33
Consolidated Statement of Cash Flows.................................34
Notes to Consolidated Financial Statements...........................35
(2) Consolidated Financial Statement Schedule V-Valuation
and Qualifying Accounts...........................................30
Financial statement schedules other than those listed above have been
omitted because the required information is contained in the
financial statements and notes thereto, or because such schedules are
not required or applicable.
(3) See Exhibit index beginning on page 27 of this Form 10-K.
(b) There were no Form 8-K filings during the last quarter of the period
covered by this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: June 29, 1999 By: /s/ Karl H. Kostusiak
Karl H. Kostusiak
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- -----
/s/ Karl H. Kostusiak President and Director June 29, 1999
Karl H. Kostusiak (Principal Executive
Officer)
/s/ Frank J. Ryan Vice President June 29, 1999
Frank J. Ryan Secretary/Treasurer
(Principal Financial
Officer)
/s/ Christopher P. Gerace Vice President June 29, 1999
Christopher P. Gerace Chief Accounting Officer
(Principal Accounting Officer)
Donald R. Adair Director
Mortimer B. Fuller, III Director
/s/ David B. Lederer Vice President and Director June 29, 1999
David B. Lederer
Edward C. McIrvine Director
By: /s/ Karl H. Kostusiak Attorney-in-Fact June 29, 1999
Karl H. Kostusiak
<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 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 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) 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
10(h) Executive Officer Cash Incorporated by reference to
Bonus Plan Exhibit 10(h)of this Annual
Report on Form 10-K
10(i) Executive employment Incorporated by reference to
contract with Karl H. Exhibit 10(j) of the Company's
Kostusiak 1998 Annual Report on Form 10-K
10(j) 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(k) 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(l) Stock Purchase Agreements Incorporated by reference to
with Karl H. Kostusiak and Exhibit 10(n) of the Company's
David B. Lederer 1997 Annual Report on Form 10-K
11 Statement re: Computation Included as Exhibit 11 of this
of Per Share Earnings Annual Report on Form 10-K
13 Excerpts from Annual Report Included as part of this Annual
to Security Holders Report on Form 10-K
22 Proxy Statement To be filed within 120 days of
the Company's fiscal year end
23 Consent of Independent Included as Exhibit 23 of this
Accountants Annual Report on Form 10-K
24 Powers of Attorney Included as Exhibit 24 of this
Annual Report on Form 10-K
27 Financial Data Schedule Included as Exhibit 27 of this
Annual Report on Form 10-K
<PAGE>
DETECTION SYSTEMS, INC.
SCHEDULE V - VALUATION AND
QUALIFYING ACCOUNTS
(In thousands of dollars)
Year ended March 31, 1999
-------------------------
<TABLE>
<CAPTION>
Additions
Balance at charged to Deduction: Balance
beginning costs and Write-off at end
Description of year expenses of assets of year
- ----------- --------- --------- --------- -------
<S> <C> <C> <C> <C>
Allowance for $1,033 $376 $403 $1,006
doubtful accounts
Allowance for 2,292 1,440 757 2,975
obsolete inventory
----- ----- ----- -----
$3,325 $1,816 $1,160 $3,981
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Year ended March 31, 1998
-------------------------
Additions
Balance at charged to Deduction: Balance
beginning costs and Write-off at end
Description of year expenses of assets of year
- ----------- --------- --------- --------- -------
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts $314 $901 $182 $1,033
Allowance for
obsolete inventory 1,615 2,108 1,431 2,292
----- ----- ----- -----
$1,929 $3,009 $1,613 $3,325
===== ===== ===== =====
</TABLE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of Detection Systems, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) (1) and (2) on page 25 present fairly, in all
material respects, the financial position of Detection Systems, Inc. and its
subsidiaries at March 31, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 1999,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Rochester, New York
May 24, 1999
<PAGE>
DETECTION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
<TABLE>
<CAPTION>
At Year Ended March 31, 1999 1998
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,414 $ 3,160
Accounts receivable, less allowance for doubtful
accounts ($1,006 and $1,033, respectively) 20,916 23,505
Inventories, net 37,762 38,154
Other current assets 3,249 3,701
-------- --------
66,341 68,520
-------- --------
Fixed assets, net 12,420 12,142
Goodwill, net 9,381 8,907
Other assets 4,670 4,475
-------- --------
$ 92,812 $ 94,044
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Short term borrowings $ 1,416 $ 4,002
Current portion of long term debt 647 405
Accounts payable 7,076 12,368
Accrued payroll and benefits 1,863 1,636
Income taxes payable 2,108 661
Other current liabilities 4,134 4,504
-------- --------
17,244 23,576
-------- --------
Other liabilities 2,645 2,655
Long term debt 17,179 16,549
Shareholders' equity:
Common stock, par value $.05 per share
Authorized - 24,000 shares
Issued - 6,562 shares and 6,518 shares, respectively 328 326
Capital in excess of par value 45,073 44,805
Other accumulated comprehensive loss (310) (44)
Retained earnings 14,447 9,976
-------- --------
59,538 55,063
Less-Treasury stock, at cost - 227 shares
and 229 shares, respectively (3,780) (3,785)
Notes receivable for stock purchases (14) (14)
-------- --------
55,744 51,264
-------- --------
$ 92,812 $ 94,044
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
DETECTION SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended March 31, 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $138,045 $126,343 $101,251
Costs and expenses
Production 85,163 82,893 64,916
Research and development 8,507 8,579 8,115
Marketing, administrative and general 35,727 30,039 21,502
------- ------- ------
129,397 121,511 94,533
------- ------- ------
Operating income 8,648 4,832 6,718
Other income (expense)
Net interest expense (1,504) (2,035) (1,634)
Other income (expense) 163 (460) 166
------- ------- ------
Income before income taxes 7,307 2,337 5,250
Provision for income taxes 2,836 955 1,525
------- ------- ------
Net income 4,471 1,382 3,725
Other comprehensive (loss) income
Foreign currency translation adjustment (266) (39) 3
------- ------- -------
Total comprehensive income 4,205 1,343 3,728
Retained earnings at beginning of year 9,976 8,594 4,869
Less: other comprehensive loss (income) 266 39 (3)
------- ------- ------
Retained earnings at end of year $14,447 $ 9,976 $ 8,594
======= ======= ======
Earnings per share:
Basic $0.71 $0.25 $0.85
==== ==== ====
Diluted $0.65 $0.24 $0.76
==== ==== ====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
DETECTION SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31, 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $4,471 $1,382 $3,725
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,223 3,226 2,737
Deferred compensation - 457 5
Deferred income taxes 627 501 178
Stock based compensation - 87 147
Changes in operating assets and liabilities:
Accounts receivable 2,704 (1,795) (4,764)
Inventories 1,022 (1,574) (15,929)
Accounts payable (5,642) (4,711) 6,028
Accrued payroll and benefits 227 (1,449) 1,252
Other assets and liabilities 565 (2,177) 22
------ ------ ------
Total adjustments 2,726 (7,435) (10,324)
Net cash provided by (used in) operating
activities 7,197 (6,053) (6,599)
------ ------ ------
Cash flows from investing activities
Purchase of businesses net of cash acquired (505) (9,618) -
Capital expenditures (3,354) (2,832) (3,983)
------ ------ ------
Net cash used in investing activities (3,859) (12,450) (3,983)
------ ------ ------
Cash flows from financing activities
Short term borrowings (194) 2,741 -
Proceeds from long term debt 2,392 - 10,047
Principal payments on long term debt and
capital lease obligations (4,034) (12,398) (540)
Issuance of common stock - 28,702 2,239
Repurchase of common stock - (3,767) -
Stock options exercised 18 4,180 148
------ ------ ------
Net cash (used in) provided by financing
activities (1,818) 19,458 11,894
------ ------ ------
Effect of exchange rate changes on cash
balances (266) (39) 2
Net increase in cash and cash equivalents 1,254 916 1,314
Cash and cash equivalents at beginning of year 3,160 2,244 930
------ ------ ------
Cash and cash equivalents at end of year $4,414 $3,160 $2,244
====== ====== ======
Cash paid during the year for:
Interest $1,745 $2,438 $1,575
====== ====== ======
Income taxes $2,426 $1,502 $1,096
====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(in thousands, except per share data)
NOTE 1-DESCRIPTION OF OPERATIONS AND ACCOUNTING POLICIES:
DESCRIPTION OF OPERATIONS -
Detection Systems, Inc. ("the Company") designs, manufactures and markets
electronic detection, control and communication equipment for the security, fire
protection, access control and CCTV industries.
PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements of the Company include all
majority-owned U.S. and non-U.S. subsidiaries. Intercompany accounts,
transactions and profits are eliminated. Certain amounts in the prior years'
financial statements have been reclassified to conform with the current year's
presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at year-end as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS -
Cash equivalents include time deposits and highly liquid investments with
original maturities of three months or less as of the date of purchase.
INVENTORIES -
Inventories, which include materials, labor and overhead, are recorded at the
lower of cost, determined by the first-in, first-out method, or market value.
The Company provides inventory reserves for excess, obsolete or slow-moving
inventory based on changes in customer demand, technology developments, or other
economic factors.
FIXED ASSETS AND EQUIPMENT UNDER CAPITAL LEASE -
Buildings and related improvements are depreciated using the straight-line
method over an estimated useful life ranging from 26 to 40 years. Land
improvements, machinery and equipment, production tooling and furniture are
depreciated on the straight-line method over estimated useful lives ranging from
three to ten years. Expenditures for maintenance and repairs are charged to
expense as incurred. Major improvements are capitalized.
GOODWILL -
Goodwill represents the excess of the cost of net tangible assets acquired in
business combinations over their fair value. Goodwill is amortized using the
straight-line method over periods ranging from three to twenty years. The
Company evaluates goodwill and all long-lived assets for impairment when events
or changes in circumstances indicate their carrying amounts may not be
recoverable, in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121. This is accomplished by comparing the estimated undiscounted
future cash flows with the respective carrying amount as of the date of
assessment. Should aggregate future cash flows be less than the carrying value,
a write-down would be required, measured as the difference between the carrying
value and the discounted future cash flows. Accumulated amortization of goodwill
at March 31, 1999 and 1998 was approximately $2,045,000 and $1,141,000,
respectively.
RETIREMENT PLANS -
The Company has two defined contribution pension plans which, in aggregate,
cover substantially all domestic employees. The first plan requires the Company
to match 100% of an employee's contribution up to one percent of the employee's
base salary and 25% of an employee's contribution between two and four percent
of the employee's base salary. The second plan permits employees to contribute
up to 20% of their eligible earnings. Annual contributions by the Company out of
its net profits are in amounts approved by the Company's Board of Directors. The
Company's contributions to these plans were approximately $231,000, $239,000 and
$155,000 in 1999, 1998 and 1997, respectively.
During the first quarter of fiscal 1997, the Company established a defined
benefit pension plan for certain key executives. The plan provides for an annual
benefit of 20% of their ending base annual compensation and medical expense
coverage for life after retirement. The liability is being recognized over their
remaining service periods.
REVENUE RECOGNITION -
Revenues are recognized when product is shipped. Revenue is reduced for
estimated customer returns and allowances. A provision for estimated product
warranty cost is recorded for product shipments.
RESEARCH AND DEVELOPMENT COSTS -
All product development costs are charged to operations during the period
incurred.
FOREIGN CURRENCY TRANSLATION -
Assets and liabilities of non-U.S. subsidiaries are translated at current
exchange rates, and related revenues and expenses are translated at average
exchange rates in effect during the period. Resulting translation adjustments
are recorded as a separate component of shareholders' equity.
STOCK BASED COMPENSATION -
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," which requires compensation cost to
be recognized based on the difference, if any, between the quoted market price
of the stock on the grant date and the amount an employee must pay to acquire
the stock.
INCOME TAXES -
The Company accounts for certain income and expense items differently for
financial reporting and income tax purposes in accordance SFAS No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities applying enacted statutory rates in effect for the
year in which the differences are expected to reverse.
EARNINGS PER SHARE -
The Company calculates earnings per share in accordance with SFAS No. 128,
"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 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 to deferred compensation plans, options
and warrants, as follows:
Year ended March 31, 1999 1998 1997
---- ---- ----
Weighted average number of shares outstanding 6,319 5,433 4,359
Shares associated with deferred compensation,
option and warrant plans 508 290 575
CONCENTRATION OF CREDIT RISK -
Financial instruments which potentially expose the Company to concentration of
credit risk consist principally of bank deposits, temporary investments and
accounts receivable. The Company performs ongoing credit evaluations of its
customers' financial condition and the Company maintains an allowance for
uncollectible accounts receivable based upon the expected collectibility of all
accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS -
The carrying amount of the Company's financial instruments, including cash and
cash equivalents, short-term investments, accounts receivable and short-term
borrowings, approximates their fair value at March 31, 1999 and 1998 as the
maturity of these instruments is short term. The carrying amount of the
Company's long-term debt obligations approximates their fair value as the
interest rates on such obligations approximate the market rate at March 31, 1999
and 1998.
CASH FLOW STATEMENT -
Non-cash transactions during 1999, 1998 and 1997 consisted of the acquisition of
certain businesses with shares of the Company's common stock. See Note 2.
NOTE 2-ACQUISITIONS
In 1995, the Company adopted a strategy which focused on expanding its product
offerings, establishing an international sales presence, increasing its
manufacturing capacity and improving its overall cost structure. The Company has
since made nine acquisitions and established a manufacturing facility in
Asia. These initiatives have enabled the Company to significantly expand its
product catalog and market scope.
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 $135,000 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.
These transactions have been accounted for as purchases and, accordingly, the
results of 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 purchase price for each business.
Fiscal 1998 Acquisitions
In May 1997, the Company acquired all of the outstanding stock of Digital Audio
Ltd. ("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 S.A.
("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 has one of the largest security equipment distribution networks in
Belgium and 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 provided the Company with immediate access to an
established market base in New Zealand and good growth potential. 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 is a major
Australian manufacturer of security control equipment and 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 these businesses are included in the consolidated financial
statements as of the date of acquisition. The financial statements reflect the
final allocation of purchase price for each business.
The following table summarizes, on an unaudited, pro forma basis, the estimated
combined results of operations of the Company as though the fiscal 1998
acquisitions were made at the beginning of fiscal 1998 and fiscal 1997,
respectively. The pro forma amounts do not necessarily reflect the results that
actually would have been obtained had the transactions taken place at the
beginning of the period indicated, nor are they intended to be a projection of
future results:
<TABLE>
<CAPTION>
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Net sales $137,614 $136,155
Costs and expenses 134,965 131,305
Income before taxes 2,649 4,850
Net income 1,544 3,447
Net income per share
Basic $0.28 $0.79
Diluted $0.27 $0.70
</TABLE>
Fiscal 1997 Acquisition
In July 1996, the Company acquired certain assets and patent rights of Senses
International, Inc. ("Senses"), a manufacturer of long range wireless alarm
transmission equipment. The Company paid approximately $600,000 for these
assets.
NOTE 3-INVENTORIES:
<TABLE>
<CAPTION>
Major classifications of inventory are as follows.
Year Ended March 31, 1999 1998
---- ----
<S> <C> <C>
Component parts $ 16,007 $ 23,386
Work in process 2,658 1,577
Finished products 22,072 15,483
-------- --------
40,737 40,446
Less-Reserve for obsolescence (2,975) (2,292)
-------- --------
$ 37,762 $ 38,154
======== ========
</TABLE>
NOTE 4-FIXED ASSETS:
<TABLE>
Major classifications of fixed assets are as follows.
<CAPTION>
Year Ended March 31, 1999 1998
---- ----
<S> <C> <C>
Land and improvements $ 716 $ 716
Building and improvements 6,748 6,479
Machinery and equipment 16,719 15,902
Production tooling 5,402 4,650
Furniture 2,737 1,849
-------- --------
32,322 29,596
Less-Accumulated depreciation (19,902) (17,454)
-------- --------
$ 12,420 $ 12,142
======== ========
</TABLE>
Total depreciation expense on fixed assets was approximately $3,133,000,
$3,393,000 and $2,373,000 in 1999, 1998, and 1997, respectively.
NOTE 5-INDEBTEDNESS
<TABLE>
A summary of the Company's borrowings is as follows:
<CAPTION>
Year Ended March 31, 1999 1998
---- ----
<S> <C> <C>
Revolving lines of credit $ 1,416 $ 4,002
Term loan-due 2005 14,350 13,359
Mortgage loan-due 2006 3,064 3,316
Other long term debt 248 -
Capital lease obligations 164 279
-------- --------
19,242 20,956
Less-current portion (2,063) (4,407)
-------- --------
$ 17,179 $ 16,549
======== ========
</TABLE>
The Company has a line of credit, payable upon demand, secured by the general
business assets of the Company. This line allows borrowings of up to $17,000,000
bearing interest at a rate of approximately 8.1% at March 31, 1999. The maximum
amount of borrowings on this line of credit during 1999 was approximately
$5,784,000. There were no borrowings against this line at March 31, 1999. This
facility matures July 31, 2000. In addition, two of the Company's European
subsidiaries have short term borrowing facilities, the largest of which is
payable on demand, for borrowings up to $2,000,000. The interest rate on this
facility is equal to the day to day money rate plus 2.2%. The maximum amount of
borrowings during 1999 was approximately $1,530,000. Borrowings against this
line were $1,093,000 at March 31, 1999.
In connection with the acquisition of Radionics, the Company borrowed
$17,750,000, of which $14,350,000 is a term loan secured by general business
assets and matures in 2005. The remaining $3,400,000 is a mortgage loan secured
by certain real estate and matures in 2006. Interest on the outstanding debt
accrues based upon either the federal funds rate, the prime rate or LIBOR, each
adjusted by a factor which varies based upon the rates of funded debt to
earnings before interest, tax, depreciation and amortization. At March 31, 1999
and 1998, the interest rate on these borrowings was approximately 6.6% and 7.4%,
respectively.
Pursuant to the terms of the debt agreements for the obligations listed above,
the Company has certain ratios and covenants to maintain with respect to such
items as working capital, funded debt and fixed charges. Failure to comply with
these guidelines constitutes a default and permits the lenders to cause the
obligations to become currently due. The Company is in compliance with all
covenants and requirements under the terms of the borrowing agreements.
Annual maturities of the Company's long term debt for the next five years are
approximately: 2000-$536,000; 2001-$2,927,000; 2002-$2,927,000; 2003-$2,910,000;
2004-$2,861,000.
The Company has various equipment under capital lease agreements which require
payments of principal and interest of approximately: 2000-$111,000;
2001-$47,000; 2002-$4,000; 2003-$2,000.
NOTE 6-DEFERRED COMPENSATION PLANS:
The Company's deferred compensation plan allows certain employees to defer the
receipt of salary or bonuses which they may be entitled to receive. The
compensation is normally payable at retirement and is fully vested when
deferred. For salaries or bonuses deferred, the employee elects, at the time of
deferral, to be paid in either stock or cash plus interest which has accrued
from the date of deferral. Unissued common share equivalents are limited to
146,000 shares under provisions of the plan. As of March 31, 1999 and 1998,
unissued common share equivalents of 98,000 existed under the plan.
The Company's stock bonus plan provided for bonuses payable in stock to certain
officers and key personnel if specified criteria was attained. The plan also
provided that recipients may defer receipt of stock bonuses until retirement.
The bonus fully vests when deferred. Unissued common share equivalents existing
under the plan were 279,000 in 1999 and 1998. The stock bonus plan was
terminated during fiscal 1998. Stock bonuses deferred prior to termination will
be distributed in accordance with the terms of the plan.
NOTE 7-SHAREHOLDERS' EQUITY:
The following table presents the changes in shareholders' equity balances during
the three years ended March 31, 1999.
<TABLE>
<CAPTION>
Common Stock Treasury Stock Capital
---------------- ---------------- in excess
Shares Amount Shares Amount of par
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996 2,811 $141 2 $ 12 $ 6,972
Distribution of stock bonuses 11 1 - - 84
Options and warrants exercised 41 2 (8) (12) 172
Treasury stock purchases - - 10 53 -
Common stock issued 134 6 - - 2,232
Three-for-two stock split 1,482 74 2 - (74)
Other - - - - 63
----- --- --- ---- ------
Balance at March 31, 1997 4,479 224 6 53 9,449
Distribution of stock bonuses 5 - - - 86
Options and warrants exercised 30 2 (3) (33) 101
Treasury stock purchases - - 226 3,765 3,755
Common stock issued 2,004 100 - - 31,387
Other - - - - 27
----- --- --- ---- ------
Balance at March 31, 1998 6,518 326 229 3,785 44,805
Options and warrants exercised 16 1 (2) (5) 72
Common stock issued 28 1 - - 256
Other - - - - (60)
----- --- --- ---- ------
Balance at March 31, 1999 6,562 $328 227 $3,780 $45,073
===== === === ===== ======
</TABLE>
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 232,000 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 of approximately $2,700,000 were netted against proceeds.
On December 17, 1996, the Company distributed a three-for-two stock split
effected in the form of a stock dividend to shareholders of record on November
27, 1996. This distribution increased the number of shares outstanding by
1,482,000. The amount of $74,000 was transferred from capital in excess of par
to common stock. All per share amounts in this report have been restated to
reflect this stock split.
In October 1996, the Company sold 114,000 shares from its authorized but
unissued shares of common stock in a private placement at a pre-split price of
$17.50 per share. The Company received approximately $2,000,000 in cash from
this transaction.
The Company has two fixed stock option plans whereby options for a total of
625,000 shares of the Company's common stock may be granted to key employees or
non-employees of the Company by the Board of Directors. The exercise price of
the options must equal or exceed the market value of the Company's common stock
on the date of grant. Options are generally exercisable at a rate of 40% in the
first year after grant, 60% in the second year after grant, 80% in the third
year after grant and in full thereafter. Options expire up to ten years after
the date of grant.
Pro forma net earnings and earnings per share information, as required by SFAS
No. 123, "Accounting for Stock-Based Compensation," has been determined as if
the Company had accounted for employee stock options under SFAS No. 123's fair
value method. The fair value of these options was estimated at the grant date
using a Black-Scholes option pricing model with the following weighted-average
assumptions: a risk-free interest rate based on the anticipated length of time
until exercise ranging from 5.06% to 5.43%; expected life of 4 to 5 years; and
an expected volatility of 75%. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period (generally 4 years). The Company's pro forma information follows:
<TABLE>
<CAPTION>
Year ended March 31, 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net earnings
As reported $ 4,471 $ 1,382 $ 3,725
Pro forma 3,683 594 $ 3,255
Net earnings per diluted share
As reported $0.65 $0.24 $0.76
Pro forma $0.54 $0.11 $0.66
</TABLE>
This disclosure is not likely to be representative of the effects on reported
net earning for future years, because options vest over four years and
additional awards generally are made each year.
<TABLE>
A summary of the status of the Company's stock option plan as of March 31, 1999,
1998 and 1997, and changes during the years ending on those dates, is presented
below:
<CAPTION>
1999 1998 1997
-------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------- ----- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 387 $8.23 339 $ 5.95 362 $ 4.45
Granted 164 9.75 110 14.41 50 14.54
Exercised (18) 4.46 (34) 4.31 (48) 4.65
Forfeited (14) 8.41 (28) 9.68 (25) 3.97
--- ---- --- ---- --- -----
Outstanding at
end of year 519 $8.82 387 $8.23 339 $ 5.95
=== ==== === ==== === =====
Options exercisable
at year-end 265 $6.95 181 $5.49 141 $ 4.51
=== ==== === ==== === ====
Weighted-average
fair value of
options granted
during the year $5.98 $9.08 $ 8.18
==== ==== =====
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding Remaining Exercise Outstanding Exercise
Exercise Prices at March 31, Contractual Price Per at March Price Per
Per Share 1999 Life Years Share 31, 1999 Share
---------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
$0.01- $4.99 155 1.2 4.29 138 4.32
$5.00- $9.99 138 2.7 7.38 75 5.75
$10.00-$14.99 191 3.9 11.55 35 13.52
$15.00-$19.99 30 3.0 19.08 15 19.12
$20.00-$24.99 5 3.4 22.51 2 22.52
--- --- ----- --- -----
$0.01-$24.99 519 2.7 8.82 265 6.95
</TABLE>
<TABLE>
A summary of changes in outstanding warrants as of March 31, 1999, 1998 and
1997, and changes during the years ending on those dates is presented below:
<CAPTION>
1999 1998 1997
-------------------- -------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 17 $4.71 17 $4.71 23 $ 4.03
Granted - - - - 2 13.50
Exercised - - - - (8) 4.40
-- ---- -- ---- -- ----
Outstanding at
end of year 17 $4.71 17 $4.71 17 $ 4.71
== ==== == ==== == =====
</TABLE>
NOTE 8-INCOME TAXES:
<TABLE>
The provision (benefit) for income taxes consists of the following.
<CAPTION>
Year Ended March 31, 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal
Current $ 876 $(39) $1,184
Deferred 618 494 (314)
State
Current 448 (13) 416
Deferred (78) 118 (74)
Foreign
Current 885 506 103
Deferred 87 (111) 210
---- ---- -----
$2,836 $955 $1,525
==== ==== =====
</TABLE>
<TABLE>
A reconciliation of the statutory federal income tax rate to the effective rate
is as follows.
<CAPTION>
Year Ended March 31, 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 3.3 3.0 4.5
Foreign tax rate differences (3.6) (3.9) (8.1)
Change in valuation allowances - - 0.8
Research and development credits - - (3.1)
Goodwill amortization 2.7 3.0 (1.0)
Other permanent items 2.4 4.8 1.9
----- ----- ----
Effective income tax rate 38.8% 40.9% 29.0%
===== ===== ====
</TABLE>
<TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<CAPTION>
Year Ended March 31, 1999 1998
---- ----
<S> <C> <C>
Book accruals not currently
deductible for tax $ 434 $ 722
Deferred compensation 799 701
Inventory 534 573
Accrued payroll and related costs 436 578
Tax basis of intangibles in excess of book 2,781 2,817
Tax credit carryforwards 607 602
Other 215 553
------- -------
Total deferred tax assets 5,806 6,546
------- -------
Depreciation (1,301) (945)
Other (48) (111)
------- -------
Total deferred tax liabilities (1,349) (1,056)
------- -------
Deferred tax asset valuation reserve (407) (589)
------- -------
Net deferred tax asset $ 4,050 $ 4,901
======= =======
</TABLE>
Valuation allowances have been recorded for net operating loss and credit
carryforwards which expire at various times between 2002 and 2011.
Deferred income taxes have not been provided on the undistributed earnings of
foreign subsidiaries. The amount of such earnings included in consolidated
retained earnings at March 31, 1999 was approximately $5,002,000. These earnings
have been substantially reinvested and the Company does not plan to initiate any
action that would precipitate the payment of income taxes thereon.
NOTE 9-GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
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
substantially all of the segment's costs of production, distribution and
administration. The Company manages income taxes on a global basis, thus, the
Company evaluates segment performance based on profit or loss before income
taxes.
Net sales by the Company to unaffiliated customers outside the United States
represents 38.4%, 32.4% and 15.7% of consolidated net sales for the years ended
March 31, 1999, 1998 and 1997. Net sales by the Company's domestic operations to
unaffiliated customers outside the United States represent 2.3%, 4.3% and 7.0%
of the Company's consolidated net sales for the years ended March 31, 1999, 1998
and 1997, respectively.
The following table presents net sales, income (loss) before income taxes,
identifiable assets, capital expenditures and depreciation expense of the
Company's domestic and foreign operations. Net sales and income (loss) before
income taxes of the Company's domestic operations include the impact of export
sales. Inter-area sales are presented on a basis intended to reflect the market
value of the products as nearly as possible. Identifiable assets are those
assets of the Company that are identified with the operations in the respective
geographic area.
<TABLE>
<CAPTION>
Year Ended March 31, 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales to unaffiliated customers
United States operations $ 88,232 $ 90,938 $ 92,442
Asia Pacific operations 20,023 12,501 8,326
European operations 29,790 22,904 483
--------- --------- ---------
$ 138,045 $ 126,343 $ 101,251
========= ========= =========
Sales between affiliates
United States operations $ 7,997 $ 7,362 $ 15,843
Asia Pacific operations 40,966 32,018 18,114
European operations 248 85 -
--------- --------- ---------
$ 49,211 $ 39,465 $ 33,957
========= ========= =========
Income (loss) before income taxes
United States operations $ 4,000 $ 1,799 $ 3,683
Asia Pacific operations 5,605 1,614 2,295
European Operations (1,485) (774) (156)
Eliminations (813) (302) (572)
--------- --------- ---------
$ 7,307 $ 2,337 $ 5,250
========= ========= =========
Identifiable assets
United States operations $ 45,514 $ 46,802 $ 48,238
Asia Pacific operations 27,369 30,193 19,402
European operations 19,929 17,049 636
--------- --------- ---------
$ 92,812 $ 94,044 $ 68,276
========= ========= =========
Capital expenditures
United States operations $ 1,081 $ 1,336 $ 1,890
Asia Pacific operations 1,636 1,061 2,081
European operations 637 435 12
--------- --------- ---------
$ 3,354 $ 2,832 $ 3,983
========= ========= =========
Depreciation expense
United States operations $ 1,721 $ 2,186 $ 2,008
Asia Pacific operations 1,035 700 363
European operations 377 507 2
--------- --------- ---------
$ 3,133 $ 3,393 $ 2,373
========= ========= =========
</TABLE>
During 1999, sales to the Company's two largest customers accounted for 11.3%
and 4.6% of net sales, respectively. During 1998, sales to the Company's two
largest customers accounted for 9.9% and 6.6% of net sales, respectively. During
1997, sales to the Company's two largest customers accounted for 10.7% and 10.6%
of net sales, respectively. Accounts receivable from the Company's largest
customers represented 13.2% of the accounts receivable balances at March 31,
1999.
NOTE 10-COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain facilities pursuant to operating lease agreements.
Operating lease expense for offices and other equipment was approximately
$2,705,000, $2,267,000 and $1,208,000 in 1999, 1998 and 1997, respectively.
Future minimum rental payments under noncancelable operating lease agreements
are as follows: 2000-$2,269,000; 2001-$1,837,000; 2002-$1,715,000;
2003-$1,570,000; 2004-$1,455,000; thereafter-$1,551,000.
Restructuring
Consistent with the manufacturing restructuring plan undertaken in 1999, 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.
The Company recorded a restructuring charge of approximately $400,000 during the
fourth quarter of fiscal 1998 for severance costs related to the termination of
47 employees at the Salinas, California facility. The charge has been included
in the results from continuing operations and had a material impact on operating
results in the fourth quarter of 1998. These manufacturing employees were
terminated during the first three quarters of 1999.
The restructurings of the Salinas, California and Fairport, New York facilities
are substantially complete. The restructuring of the Southall, England facility
is scheduled to be completed by December 31, 1999.
Legal Matters
The Company and certain of its officers and directors have been named as
defendants in six shareholder class actions filed in the United States District
Court for the Western District of New York. The underwriters of the Company's
September 19, 1997 public offering of common stock have been named as defendants
in three of these class actions. The first of these shareholder class actions
was filed on February 26, 1998. Four of the class actions purport to allege
claims on behalf of a class of purchasers of the company's common stock during
the period August 14, 1997 through February 23, 1998, one class action purports
to allege claims on behalf of a class of purchasers of the Company's common
stock during the period September 19, 1997 through February 23, 1998 and one
class action purports to allege claims on behalf of a class of purchasers of the
Company's common stock pursuant to the Company's September 19, 1997 public
offering. Collectively, the class actions assert claims under Sections 10(b) and
15 of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2) and 20(a) of
the Securities Act of 1933. The class actions allege that the Company, certain
of its officers and directors and the underwriters of the Company's September
1997 public offering made or are responsible for alleged misstatements and
omissions in various press releases and public filings concerning the Company's
business and financial condition.
Pursuant to the Private Securities Litigation Reform Act of 1995, certain
putative class members have moved for appointment as lead plaintiffs and sought
appointment of lead counsel. Certain of these class members have also moved for
consolidation and requested the opportunity to file a consolidated complaint.
The Company believes these suits to be without merit and intends to defend
against them vigorously. However, it is possible that an unfavorable resolution
to such lawsuits would have a material adverse impact on financial condition
and/or results of operations of the Company.
Exhibit 11
DETECTION SYSTEMS, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31, 1999 1998* 1997
---- ---- ----
<S> <C> <C> <C>
Net income applicable to common
stock $4,471 $1,382 $3,725
===== ===== =====
Weighted average number of shares 6,319 5,433 4,359
===== ===== =====
Basic earnings per share $0.71 $0.25 $0.85
===== ===== =====
Shares attributable to deferred
compensation plans and stock
options and warrants 508 290 575
==== ==== ====
Diluted earnings per share: $0.65 $0.24 $0.76
==== ==== ====
</TABLE>
* Due to losses incurred in the third and fourth quarters, the effect of shares
attributed to options, warrants and deferred compensation was reduced by 297,000
in arriving at the year-to-date weighted average number of shares included in
diluted earnings per share, to avoid anti-dilution.
EXHIBIT 10(h)
MINUTES of a Regular Meeting of the Board of
Directors of DETECTION SYSTEMS, INC., held
at the Offices of Detection Systems, Inc.,
Fairport, New York on the 27th day of May,
1999.
EXECUTIVE OFFICER COMPENSATION. Mr. Adair presented recommendations from the
Compensation Committee related to fiscal 2000 compensation and benefit
Changes. After discussion, and upon motion duly made, seconded, and
unanimously approved, it was:
RESOLVED: That effective June 1, 1999, officers' compensation and
benefits through May 30, 2000 will be as follows:
Officer Cash Bonus Plan. That a specific bonus for the fiscal year ending
March 31, 2000 be granted to officers as specified below, to be paid
approximately two weeks after the completion of the final year-end
audit, determined on a fiscal year performance basis:
Maximum Cash Bonus
as a Percentage of
Pre-Tax Profits
Above 4% of Sales
Executive
-------------------------------------------------------------------
Karl H. Kostusiak 5.0%
Lawrence R. Tracy 3.5%
George E. Behlke 1.2%
Frank J. Ryan 0.8%
Christopher Gerace 0.6%
Jeffrey Swan 0.6%
Such executive incentive compensation plans shall include an annual cash
bonus at the rate specified above of the amount by which the Company's
pre-tax profits exceed 4% of sales.
If Executive is employed by the Company for only part of a year or his or
her employment is terminated before year end, Executive's bonus for that
year will be pro rated based on the portion of the year Executive was
employed by the Company.
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-8 (No. 2-88316) of
Detection Systems, Inc. of our report dated May 24, 1999, appearing on page 31
of this Annual Report on Form 10-K.
/S/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Rochester, New York
June 28, 1999
Exhibit 24
POWER OF ATTORNEY
The undersigned, being a director of Detection Systems, Inc.
("Company"), hereby constitutes and appoints Karl H. Kostusiak, Frank J. Ryan
and David B. Lederer, or any of them, his true and lawful attorneys and agents,
each with full power and authority to act as such without the other, to sign the
name of the undersigned to the Company's fiscal 1999 Annual Report on Form 10-K,
and any amendments thereto, filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934 and the related rules and regulations
thereunder, the undersigned hereby ratifying and confirming all that said
attorneys and agents, or any of them, shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has signed and delivered these
presents as of the date(s) shown below:
/s/ Donald R. Adair 5/27/99
/s/ Mortimer B. Fuller III 5/27/99
/s/ David B. Lederer 5/28/99
/s/ Edward C. McIrvine 5/22/99
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 4,414
<SECURITIES> 0
<RECEIVABLES> 21,922
<ALLOWANCES> (1,066)
<INVENTORY> 37,762
<CURRENT-ASSETS> 66,341
<PP&E> 32,322
<DEPRECIATION> (19,902)
<TOTAL-ASSETS> 92,812
<CURRENT-LIABILITIES> 17,244
<BONDS> 0
0
0
<COMMON> 328
<OTHER-SE> 55,416
<TOTAL-LIABILITY-AND-EQUITY> 92,812
<SALES> 138,045
<TOTAL-REVENUES> 138,045
<CGS> 85,163
<TOTAL-COSTS> 129,397
<OTHER-EXPENSES> (163)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,504
<INCOME-PRETAX> 7,307
<INCOME-TAX> 2,836
<INCOME-CONTINUING> 4,471
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,471
<EPS-BASIC> 0.71
<EPS-DILUTED> 0.65
</TABLE>
