UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to __________
Commission File Number: 0-8125
----------------------------
DETECTION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
State of New York 16-0958589
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
130 Perinton Parkway, Fairport, New York 14450
(Address of principal executive offices) (Zip Code)
(716) 223-4060
(Registrant's telephone number, including area code)
----------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes __X__ No _____
As of August 9, 2000 there were outstanding 6,334,797 shares of
the registrant's common stock, par value $.05 per share.
<PAGE>
PART I FINANCIAL INFORMATION
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(in thousands, except per share data)
June 30, March 31,
2000 2000
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $3,254 $ 7,799
Accounts receivable, less allowance for
doubtful accounts ($981 and $1,020,
respectively) 23,032 22,505
Inventories, net 37,014 32,594
Other current assets 5,233 5,822
------ ------
68,533 68,720
------ ------
Fixed assets, net 12,504 12,565
Goodwill, net 8,996 9,169
Other assets 5,409 5,164
------ ------
$95,442 $95,618
====== ======
Liabilities
Current liabilities:
Short term borrowings $27 $ 336
Current portion of long term debt 381 657
Accounts payable 11,205 9,515
Accrued payroll and benefits 1,538 1,933
Income taxes payable 1,225 1,703
Other current liabilities 3,573 3,447
------ ------
17,949 17,591
Other liabilities 2,889 2,968
Long term debt 16,079 16,595
Shareholders' equity:
Common stock, par value $.05 per
share;
Authorized -- 24,000,000 shares;
Issued - 329 329
6,579,341 shares and 6,579,341
shares,
respectively
Capital in excess of par value 43,588 43,601
Other accumulated comprehensive loss (783) (695)
Retained earnings 18,593 17,915
------ ------
61,727 61,150
Less - Treasury stock, at cost -
244,964 shares and 177,400 shares, (3,084) (2,561)
respectively
Notes receivable for stock purchases (118) (125)
------ ------
58,525 58,464
------ ------
$95,442 $95,618
====== ======
(See accompanying notes to financial statements)
<PAGE>
Consolidated Statement of Operations and Retained Earnings
(Unaudited)
(in thousands, except per share data)
June 30, 2000 June 30, 1999
For the Three Months Ended: (Current Year) (Preceding
Year)
-------------- ---------------
Net sales $33,842 $34,766
Costs and expenses:
Production 19,507 20,964
Research and development 2,800 2,293
Marketing, administrative and 9,851 9,059
general
------ ------
Total costs and expenses 32,158 32,316
Operating income 1,684 2,450
Other income (expense)
Net interest (expense) (271) (220)
Foreign exchange gain (loss) (318) 8
Other income (expense) (5) 32
------ ------
Income before income taxes 1,090 2,270
Provision for income taxes 412 849
------ ------
Net income 678 1,421
Other comprehensive (loss)
Foreign currency translation (88) (13)
adjustment
------ ------
Total comprehensive income 590 1,408
Retained earnings at beginning of 17,915 14,447
period
Less: other comprehensive loss 88 13
------ ------
Retained earnings at end of period $18,593 $15,868
====== ======
Earnings per share
Basic $0.11 $0.22
==== ====
Diluted $0.10 $0.21
==== ====
(See accompanying notes to financial statements)
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
(in thousands)
For the Three Months Ended June 30, 2000 1999
Cash flows from operating activities: ---- ----
Net income $678 $ 1,421
----- ------
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Depreciation and amortization 1,068 651
Changes in assets and liabilities:
Accounts receivable (527) (1,865)
Inventories (4,420) 4,093
Accounts payable 1,690 802
Accrued payroll and benefits (395) 313
Other assets & liabilities (85) (1,452)
------ ------
Total adjustments (2,669) 2,542
------ ------
Net cash (used in) provided by
operating (1,991) 3,963
activities
Cash flows from investing activities:
Capital expenditures (834) (810)
------ ------
Net cash used in investing activities (834) (810)
Cash flows from financing activities:
Net (payments) borrowings from short
term debt (310) 102
Principal payments on debt and
capital lease obligations (792) (94)
Common stock transactions, net - (52)
Repurchases of common stock (530) -
------ ------
Net cash used in financing activities (1,632) (44)
Effect of exchange rates (88) (13)
----- -----
Net (decrease) increase in cash and (4,545) 3,096
cash equivalents
Cash and cash equivalents at
beginning of period 7,799 4,414
----- -----
Cash and cash equivalents at end of $3,254 $7,510
period
===== =====
Cash paid during the quarter for:
Interest $344 $375
=== ===
Income taxes $207 $1,400
=== =====
(See accompanying notes to financial statements)
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
NOTE 1. GENERAL
The accompanying unaudited interim consolidated financial
statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (SEC). The
interim consolidated financial statements include the
consolidated accounts of Detection Systems, Inc. and its
majority-owned subsidiaries (collectively, "the Company") with
all significant intercompany transactions eliminated. In the
opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair statement of the
financial position, results of operations and cash flows for the
interim periods presented have been made. Certain footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles (GAAP)
have been condensed or omitted pursuant to such SEC rules and
regulations. These financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the
year ended March 31, 2000.
NOTE 2. INVENTORIES
Major classifications of inventory follow (in thousands):
June 30, 2000 March 31, 2000
------------- --------------
Component Parts $12,302 $11,823
Work In Process 2,470 1,851
Finished Products 22,242 18,920
------ ------
$37,014 $32,594
====== ======
NOTE 3. ACQUISITIONS
Fiscal 2000 Acquisitions -- During the 2nd Quarter ended September
30, 1999, the Company acquired all of the outstanding shares of
Caetec S.r.l. ("Caetec") for approximately $700,000 in cash.
Caetec is an Italian technology company with a line of fire
control products.
This transaction has been accounted for as a purchase and,
accordingly, the results of the business are included in the
consolidated financial statements as of the date of acquisition.
The financial statements reflect the final allocation of the
purchase price for the business.
NOTE 4 - EARNINGS PER SHARE
There are no 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, are as follows
(in thousands):
Three months
Ended June 30,
2000 1999
---- ----
Weighted average number of shares 6,369 6,336
outstanding
Shares associated with deferred
compensation, option and warrant plans 409 482
NOTE 5 -- GEOGRAPHIC INFORMATION
The Company's operating structure includes operating segments in
the Americas, 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.
The following table presents net sales and income (loss) before
income taxes of the Company's domestic and foreign operations.
Net sales and income (loss) before income taxes of the 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.
For the Three Months Ended June 30, 2000 1999
---- ----
(in thousands)
Sales to unaffiliated customers
America operations $20,233 $21,223
Asia-Pacific operations 5,612 5,653
European operations 7,997 7,890
------- -------
$33,842 $34,766
======= =======
Sales between affiliates
America operations $2,834 $2,262
Asia-Pacific operations 9,440 7,250
European operations 212 117
------ ------
$12,486 $9,629
====== ======
Income (loss) before income taxes
America operations $1,078 $1,070
Asia-Pacific operations 994 874
European Operations (830) (205)
Eliminations (152) 531
----- -----
$1,090 $2,270
===== =====
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a supplier of equipment to the electronic
protection industry. The Company designs, manufactures and
markets electronic detection, control and communication equipment
for security, fire protection, access control and closed circuit
television ("CCTV") applications. The Company's products are
used primarily in the commercial and mid- to high-end residential
market. From its founding in 1968 until 1995, the Company was
primarily a provider of security sensor devices for the U.S.
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. Since then, the Company has made ten
acquisitions, opened six 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.
The Company recognizes net sales upon shipment of products to
customers. Production expenses include materials, direct labor
and manufacturing overhead as well as an allocated portion of
indirect overhead. Outgoing freight, customs and other costs
associated with delivery of products to customers are classified
under marketing, administrative and general expenses. Research
and development expenses include costs associated with salaries
and benefits for certain engineering employees, supplies, agency
approvals, depreciation and occupancy, as well as charges for
independent testing and independent contractors engaged for
specific projects. Marketing, administrative and general
expenses include costs related to the Company's sales efforts and
corporate and general administrative functions, including costs
of executive, administrative and sales personnel,
marketing/selling supplies, advertising, depreciation and
professional fees.
Results of Operations
The following table sets forth, for the periods indicated, the
percentages which certain items of income and expense bear to net
sales:
(Unaudited)
Three Months Ended
June 30,
2000 1999
Net sales 100.0% 100.0%
Costs and expenses:
Production 57.6 60.3
Research and development 8.3 6.6
Marketing, administrative
and general 29.1 26.1
---- ----
Operating income 5.0 7.0
Net interest expense (0.8) (0.6)
Other income (expense) (1.0) (0.1)
---- ----
Income before income taxes 3.2 6.5
Provision for income taxes 1.2 2.4
---- ----
Net income 2.0% 4.1%
=== ===
Three Months Ended June 30, 2000 Compared to Three Months Ended
June 30, 1999
The Company's net sales decreased 2.7% to $33,843,000 in the
first quarter of fiscal 2001 from $34,766,000 in the comparable
period in fiscal 2000. Sales in the Asia-Pacific market were
$5,600,000 compared to $5,700,000 last year. European operations
reported quarterly sales of $8,000,000 compared to $7,900,000
last year. International sales were impacted by the decline in
foreign currencies against the U.S. dollar. Sales in the North
American market were $20,200,000 for the first quarter 2001
compared to $21,200,000 a year ago. Sales in North America were
impacted by lower sales to certain major customers and by
acquisitions within the U.S. market.
Production expenses decreased 6.9% to $19,507,000 in the
fiscal 2001 period from $20,964,000 in the comparable period in
fiscal 2000. As a percentage of net sales, production expenses
decreased to 57.6% in the fiscal 2001 period compared to 60.3% a
year ago. The decrease in production expenses in the aggregate
and as a percentage of net sales was primarily due to continued
effect of improvements in the Company's manufacturing structure
and changes in product mix.
Research and development expenses increased 22.1% to
$2,800,000 in the fiscal 2001 period from $2,293,000 in the
comparable period in fiscal 2000. As a percentage of net sales,
research and development expenses increased to 8.3% in the fiscal
2001 period from 6.6% in the same period a year ago. The
increase in research and development expenses is primarily
attributable to personnel increases to support the Company's
technology initiatives.
Marketing, administrative and general expenses increased 9.2%
to $9,896,000 in the fiscal 2001 period from $9,059,000 in the
comparable period in fiscal 2000. As a percentage of net sales,
marketing, administrative and general expenses increased to 29.3%
in the fiscal 2001 period from 26.1% in the comparable period in
2000. The increase is attributable to additional headcount to
support the expansion of the Company's market reach and an
incremental expense associated with the proxy challenge.
Net interest expense increased to $271,000 in the fiscal 2001
period from $220,000 in the comparable period in 2000, due to a
rise in interest rates.
Other expense increased to $323,000 in the fiscal 2001 period
from $40,000 of income in the comparable period in 2000 due to
foreign currency losses.
The Company's effective income tax rate for the fiscal 2001
period was 37.8% compared to 37.4% for the comparable period in
fiscal 2000.
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 then,
the Company's growth strategy has required external sources of
financing to satisfy its liquidity needs.
Three Months Ended June 30, 2000. During the three months
ended June 30, 2000, the Company's operating activities used
$2,010,000 of cash. Net income, depreciation and amortization
provided $1,699,000. An increase in inventories used
$4,420,000. An increase in accounts payable provided $1,690,000,
while an increase in accounts receivable used $527,000. Other
account changes used $452,000 of operating cash flow.
During the three months ended June 30, 2000, cash used for
investing activities was $815,000, relating to capital
expenditures.
During the three months ended June 30, 2000, cash used in
financing activities was $1,632,000, primarily representing
principal repayments of debt and repurchases of common stock.
Capital Resources. On June 30, 2000, the Company had cash
balances of $3,254,000. The Company has a three year, $35,000,000
revolving line of credit facility. 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. This facility requires interest
only payments through June 2003 and principal and interest
payments from June 2003 through May 2007.
The Company expects to continue its pursuit of acquisitions
and the development of new products and markets. Significant
expenditures will include continued research and development in
detection, control and communication projects. The Company also
plans to continue its efforts to expand its international market
presence.
During the three months ended June 30, 2000, the Company
repurchased $530,000 of its common stock. The Company has
repurchased $1,300,000 or 142,500 shares, of its common stock
since the stock repurchase program's inception in August 1999.
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 2001.
Year 2000. The Company has implemented the necessary changes
related to year 2000 issues. Since January 1, 2000, the
Company's mission critical internal computer systems have
continued to operate without exception and the Company is not
aware of product difficulties at any of our customer sites.
Euro Conversion. The Company is continuing to assess 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. At this time, the Company does not
anticipate any significant impact resulting from conversion.
Dividend Policy. The Company is dedicated to promoting
shareholder value through long term profitability and growth and
believes that continued investments in future product development
are essential to this goal. For this reason, it has been the
Company's policy to not pay cash dividends.
Forward-Looking Statements
This quarterly report contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended, which represent the Company's
expectations or beliefs, including, but not limited to,
statements concerning industry performance, the Company's
operations, performance, financial condition, growth and
acquisition strategies, margins and growth in sales of the
Company's products. For this purpose, any statements contained
in this quarterly report that are not statements of historical
fact may be deemed to be forward-looking statements. Without
limiting the generality of the foregoing, words such as "may,"
"will," "expect," "believe," "plan," "anticipate," "intend,"
"could," "estimate," "continue," "goal" or "strategy" or the
negative or other variations thereof or comparable terminology
are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and
uncertainties, certain of which are beyond the Company's control,
and actual results may differ materially depending on a variety
of important factors, including those described previously in the
"Risk Factors" section of the Company's 2000 Form 10-K for the
year ended March 31, 2000.
Item 3. Other Information
A. Shareholder Proposals -- Deadline for Inclusion in Proxy Materials
The Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders stated that any proposal by a stockholder of the
Company intended to be presented at the 2000 Annual Meeting of
Stockholders must be received by the Company on or before March 11,
2000 to be included in the proxy materials of the Company relating
to such meeting.
In accordance with the Company's By-laws, since the Annual Meeting
for 2000 will be set for a date which is not within 30 days before
or after the anniversary of last year's annual meeting, any proposal
by a stockholder of the Company intended to be presented at the 2000
Annual Meeting must be received by the Company not later than the
close of business on the tenth day following the day of which the
notice of the date of the Annual Meeting is mailed or public
disbursement of the date of the 2000 Annual Meeting is made,
whichever first occurs.
B. Shareholder Proposals -- Discretionary Voting of Proxies
In accordance with recent amendments to Rule 14a-4 under the
Securities Exchange Act of 1934, if notice of a proposal by a
shareholder of the Company intended to be presented at the 2000
Annual Meeting of Shareholders is not received by the Company within
a reasonable time before the Company mails its proxy statement for
the 2000 Annual Meeting of Shareholders, the persons authorized
under the Company's management proxies may exercise discretionary
authority to vote or act on such proposal if the proposal is raised
at the 2000 Annual Meeting of Shareholders.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
See Exhibit Index
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of 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: August 14, 2000 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 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 August 14, 2000
Karl H. Kostusiak (Principal Executive
Officer)
/s/ Frank J. Ryan Vice President August 14, 2000
Frank J. Ryan Secretary/Treasurer
(Principal Financial Officer)
/s/ Christopher P. Gerace Vice President and August 14, 2000
Christopher P. Gerace Chief Accounting Officer
(Principal Accounting
Officer)
<PAGE>
EXHIBIT INDEX
Item
No. Exhibits Location
3(a) Detection Systems, Inc. Incorporated by reference to
Certificate of Exhibit 3 of the Company's
Incorporation as amended Quarterly Report on Form
10-Q for the quarter ended
9/30/99
3(b) Detection Systems, Inc. Included as Exhibit 3(b) of
By-Laws as amended this Quarterly Report on
Form 10-Q
10(a) Medical reimbursement Incorporated by reference to
plan 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 2000 Amended & Included as Exhibit 10(c) of
Restated Credit this Quarterly Report on
Facility Agreement Form 10-Q
dated July 28, 2000
10(d) First Amendment to the Included as Exhibit 10(d) of
2000 Amended and this Quarterly Report on
Restated Credit Facility Form 10-Q
Agreement
10(e) Deferred Compensation Incorporated by reference to
Plan and Deferred Bonus Exhibit 10(c) to the
Plan Company's Quarterly Report
on Form 10-Q, for the
quarter ended 12/31/97
10(f) 1992 Restated Stock Incorporated by reference to
Option Exhibit 22 of the Company's
Plan 1995 Annual Report on Form
10-K
10(g) 1997 Stock Option Plan Incorporated by reference to
Exhibit A of the Company's
Definitive Proxy Form DEF
14A filed on 7/8/99
10(h) Non-Employee Director Incorporated by reference to
Stock Option Plan Exhibit B of the Company's
Definitive Proxy Form DEF
14A filed on 7/8/99
10(i) Executive employment Incorporated by reference to
contract with Karl H. Exhibit 10(i) of the
Kostusiak Company's Quarterly Report
on Form 10-Q for the Quarter
ended 6/30/99
10(j) Executive employment Incorporated by reference to
contract with David B. Exhibit 10(j) of the
Lederer Company's Quarterly Report
on Form 10-Q for the Quarter
ended 6/30/99
10(k) Stock Purchase Incorporated by reference to
Agreements with Karl H. Exhibit 10(n) of the
Kostusiak and David B. Company's 1997 Annual Report
Lederer on Form 10-K
11 Statement re: Included as Exhibit 11 of
Computation of Per Share this Quarterly Report on
Earnings Form 10-Q
27 Financial Data Schedule Included as Exhibit 27 of
this Quarterly Report on
Form 10-Q
