-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kao3PzBD7qTVb1yaleuw9sDWNVLQzDT7YOzYhN0MgMaZv3sK1VtJxIaZblmR0M4U p6uSaQo6f+n4vx/bsxUTCQ== /in/edgar/work/20000629/0000028365-00-000005/0000028365-00-000005.txt : 20000920 0000028365-00-000005.hdr.sgml : 20000920 ACCESSION NUMBER: 0000028365-00-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DETECTION SYSTEMS INC CENTRAL INDEX KEY: 0000028365 STANDARD INDUSTRIAL CLASSIFICATION: [3669 ] IRS NUMBER: 160958589 STATE OF INCORPORATION: NY FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-08125 FILM NUMBER: 664761 BUSINESS ADDRESS: STREET 1: 130 PERINTON PKWY CITY: FAIRPORT STATE: NY ZIP: 14450 BUSINESS PHONE: 7162234060 MAIL ADDRESS: STREET 1: 130 PERINTON PARKWAY CITY: FAIRPORT STATE: NY ZIP: 14450 10-K405 1 0001.txt ANNUAL REPORT ON FORM 10-K 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, 2000 [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. 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 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 2 the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $53,800,000. On this date the aggregate market value of all voting stock was approximately $60,392,000. As of June 2 there were outstanding 6,364,000 shares of the registrant's common stock, par value $.05 per share. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for 2000 Annual Meeting of Shareholders -- See Part III of this Form 10-K Annual Report for portions incorporated by reference. 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 ten acquisitions, opened six 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 $141,917,880 in fiscal 2000. The Company manufactures system components for sale to electronic protection installation and service 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 now 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 ten 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 and used as the base for further product line expansion. 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. The Senses product has been integrated into the Radionics product line. This enables Radionics to offer secure wireless alarm signaling capabilities. 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 eight 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. CAETEC. During the second quarter ended September 30, 1999, the Company acquired all of the outstanding shares of Caetec S.r.l. ("Caetec") for approximately $700,000 in cash. Caetec is an Italian technology company with a line of fire control products. 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. The Company continues to expand its product line through internal research and development activities, acquisition of companies with desired technologies and partnerships with businesses 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 a number of different 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 to maximize the effectiveness of the system. Detectors can communicate with an alarm system's control equipment on a wired or wireless basis 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 communication 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 as well as 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 Radionics, which is well known in the industry for its 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 identity of the device and the 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 four-zone panels which can operate four detection device circuits, to 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 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 or the Internet. 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, 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. Integrated Systems. The Company has introduced several products that combine control and communication functionality in order to improve the operating efficiency of electronic protection systems that encompass multiple remote locations. These products allow end-users to send and accept security system data over local-area or wide-area networks or the Internet using TCP/IP protocol. They also enable end-users to control many aspects of individual security systems installed at remote locations from one central location and can integrate with CCTV and five alarm systems. These products use an open-architecture format, so they can be used to control the Company's equipment as well as competitors' equipment. Security Escort. The Company's Security Escort product is a multiple user help-call, man down or asset tracking system which allows a user to alert appropriate security personnel as to the location, name or other special data of a protected individual or asset by using transmitters of various sizes and shapes. 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, Radionics and Caetec. 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 has since expanded its product offerings in the United States through the release of a new line of fire control equipment and in Europe through the acquisition of a company that specializes in developing fire control equipment. 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 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. Access control systems can be used on stand-alone basis or they can be fully integrated with Radionics panels. Stand-alone systems offered by the Company can control a virtually unlimited number of users and doors. The Company's integrated access control systems can control up to eight doors and 1,000 users. 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 names Radionics Vision and DS Vision primarily in Belgium and China and very recently in the U.S. 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. Certain product distributed under the Radionics Vision brand name includes digital video capabilities. This enables users to view and control cameras live from any remote location. It also allows users to view stored images or video files, or transport these files into e-mail messages, all from remote locations. 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 143 representatives of which 41 are domestic and 102 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 toll-free 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 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 Belgium and China and is rolling out an integrated line of CCTV products for the U.S. Market. 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 Honeywell and Interlogix. 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 smaller 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 electronic security 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 superior signal processing, 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; Slough, England; Lille, France and Sydney, Australia. The Company is ISO 9002 certified at its Fairport and Zhuhai locations. The majority of the Company's manufacturing is now 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. This facility is being expanded to 120,000 square feet. The expansion is expected to be completed in August, 2000. The Company has completed the transfer of most of the manufacturing of DA Systems products to the China facility. 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 55 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, licenses, 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, EDM and Caetec have 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 electronic protection industries by either further internal efforts, additional acquisitions, or partnering arrangements. The Company expended approximately $10,503,000, $8,507,000 and $8,579,000 on research and development activities during 2000, 1999 and 1998, 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 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; however, the Company continues to monitor potential 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. However, certain components 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. 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 desired approvals and listings of its products in the past; however, it cannot predict whether it will obtain approvals for future products or whether requirements relating to the Company's current or future products might change. Internationally there are equivalent approval requirements and risks. See section entitled "Risk Factors." A number of municipalities in the United States 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. 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, 2000, the Company directly or indirectly employed approximately 1,200 persons worldwide. Included in this total are 475 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 July 1999 the Company made ten acquisitions: Radionics, DA Systems, Senses, Seriee, RAS, Security Supplies, EDM, Efsec, Alarm Center and Caetec. 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 The Company's growth through acquisitions, expansion and related consolidation resulted in financial and manufacturing system weaknesses and resource constraints during prior years. The Company has made substantial improvements to its financial controls and enhanced its manufacturing information systems in continuing efforts to keep pace with its expanded and more complex operations. 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 future. 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, factory space 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 and Industry Consolidation 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 for any reason, including merger with or acquisition by another business, 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 2000, sales to the Company's two largest customers accounted for 15.7% (Honeywell) and 1.2% of net sales, respectively. In 1999, sales to the Company's two largest customers accounted for 11.3% (Pittway) 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. 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 and certain of the Company's public filings in 1997 and early 1998. For additional information regarding these lawsuits and associated risk factors, see Item 3 of this Form 10-K--Legal Proceedings, Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 10 to the Consolidated Financial Statements, which are incorporated herein by reference. Year 2000 The Company has implemented 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 & Change in Control Provisions The Company maintains employment and consulting agreements with two executive officers which provide that upon the occurrence of certain events following a change in control, the Company may be required to: (a) pay the equivalent of three years compensation, (b) fund a trust, escrow account, or similar vehicle with assets sufficient to pay a retirement benefit (commencing at age 69) equal to 60% of the executive's base salary, and benefits, and (c) make non-compete payments for the period between a change in control and age 69 equal to approximately 60% of the executive's base salary, and benefits. All non-compete and retirement benefit payments cease if the officers compete with the Company. See Exhibit 10(i)-Executive Employment Contract with Karl H. Kostusiak and Exhibit 10(j)-Executive Employment Contract with David B. Lederer. 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. In February 2000, the Company adopted certain amendments to its By-laws that may deter, discourage or make more difficult the assumption of control of the Company by another person through a tender offer, merger, proxy contest or similar transaction. The Company's By-laws, as amended, limit the manner in which shareholders may bring matters before shareholder meetings and nominate directors for election to the Company's Board of Directors. Shareholders must generally provide a specified form of notice regarding any such matter or nomination to the Company's Secretary within 90 to 120 days of an annual meeting. Additionally, the amended By-laws no longer permit a special shareholder meeting to be called by majority shareholder vote. 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 78,000 square foot facility located in Salinas, California, the lease on which expires in June 1, 2004. Detection Systems (HK) Ltd. ("DS Hong Kong"), a subsidiary of the Company, has a sub-contracting agreement with the local government of Zhuhai, China which runs through June 2005. The agreement 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. Pursuant to this agreement DS Hong Kong pays a fee, production expenses and makes payments to the workers at the facility. The subcontractor is currently expanding the facility from 70,000 to 120,000 square feet. The expansion is expected to be completed in August, 2000. 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 and certain of the Company's public filings in 1997 and early 1998. 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. In March, 2000, the Company reached an agreement in principle to settle the consolidated shareholder class action suits. 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, 2000. 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 2,2000 the closing price, as reported by The Nasdaq Stock Market, was $9.500 per share, and the number of shareholders was approximately 3,700. 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): Fiscal Year Commencing April 1, 2000 High Low --- --- First quarter (through June 2, 2000) $10.750 8.750 Fiscal Year Ended March 31, 2000 Fourth quarter 13.000 9.438 Third quarter 10.438 8.750 Second quarter 10.500 7.813 First quarter 9.125 7.125 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 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. Unaudited interim quarterly results for the Company over the past two years were as follows (in thousands, except per share data): Fiscal Year Ending NET EARNINGS (LOSS) NET GROSS INCOME PER SHARE March 31, SALES MARGIN (LOSS) BASIC DILUTED - --------- ------ ------- ------- ------ ------- 2000 (Unaudited) Fourth quarter** $34,120 $13,360 $(609) $(0.10) $(0.10) Third quarter 36,333 14,611 1,155 0.18 0.17 Second quarter 36,699 14,608 1,501 0.24 0.22 First quarter 34,766 13,802 1,421 0.22 0.21 1999 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 *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. **Includes charge relating to litigation settlement in March 2000. 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): Year Ended March 31, ...... 2000 1999 1998 1997 1996 ======== ======== ======== ======== ======= Net sales ................. $141,918 $138,045 $126,343 $101,251 $41,858 Income (loss) before taxes 5,585 7,307 2,337 5,250 (10,665) Provision (benefit) for tax 2,117 2,836 955 1,525 (2,810) Net income (loss) ......... 3,468 4,471 1,382 3,725 (7,855) AT YEAR END Current assets ............ $ 68,720 $ 66,341 $ 68,520 $ 50,501 $28,426 Current liabilities ....... 17,591 17,244 23,576 19,434 12,714 Working capital ........... 51,129 49,097 44,944 31,067 15,712 Total assets .............. 95,618 92,812 94,044 68,276 45,897 Long term debt ............ 16,595 17,179 16,549 28,086 17,936 Shareholders' equity ...... 58,464 55,744 51,264 17,831 11,569 Number of employees ....... 1,200 1,100 1,100 744 595 Number of shareholders .... 3,700 4,400 4,400 4,000 3,200 PER SHARE AMOUNTS Net income (loss)-basic ... $ 0.55 $ 0.71 $ 0.25 $ 0.85$ (1.87) Net income (loss)-diluted . 0.51 0.65 0.24 0.76 (1.87) Shareholders' equity ...... 9.13 8.80 8.15 3.99 2.75 RATIOS/PERCENTAGES Gross profit / sales .......... 39.7% 38.3% 33.6% 35.9% 33.2 % Pre-tax profit (loss) / sales . 3.9% 5.3% 1.9% 5.2% (25.5)% Net income (loss) / sales ..... 2.4% 3.2% 1.1% 3.7% (8.8)% Current ratio ................. 3.9% 3.8% 2.9% 2.6% 2.2 % 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 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 from $34,336,000 in fiscal 1995 to $141,918,000 in fiscal 2000. During fiscal 1996 through 2000, the Company completed ten 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, (ix) the purchase in June 1998 of Alarm Center of Hungary, which had annual net sales of approximately $500,000 and (x) the purchase in July 1999 of Caetec, an Italian technology company with a line of fire control products. These acquisitions have served both to broaden the Company's product lines and to increase its international presence. These acquisitions impact the comparability of financial information for fiscal years 1999 and 1998. 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: Fiscal Year Ended March 31, 2000 1999 1998 ==== ==== ==== Net sales 100.0% 100.0% 100.0% Costs and expenses: Production 60.3 61.7 65.6 Research and development 7.4 6.1 6.8 Marketing, administrative & general 26.3 25.9 23.8 Litigation 1.0 - - ---- ---- ---- Operating income 5.1 6.3 3.8 Net interest expense (0.8) (1.1) (1.6) Other income (expense) (0.4) 0.1 (0.4) --- --- --- Income before income taxes 3.9 5.3 1.8 Provision for income taxes 1.5 2.1 0.7 --- --- --- Net income 2.4% 3.2% 1.1% === === === Year Ended March 31, 2000 Compared to Year Ended March 31, 1999 The Company's net sales increased 2.8% to $141,918,000 in fiscal 2000 from $138,045,000 in fiscal 1999. Net sales during the current period were favorably impacted compared to the prior year period by increased sales of fire, access control and 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 0.4% to $85,537,000 in fiscal 2000 from $85,163,000 in fiscal 1999. As a percentage of net sales, production expenses decreased to 60.3% from 61.7%. The increase in production expenses was primarily due to a corresponding increase in the Company's net sales. The decrease in production expenses as a percentage of net sales was primarily due to improvements in the Company's manufacturing cost structure and changes in product mix. Research and development expenses increased 23.5% to $10,503,000 in fiscal 2000 from $8,507,000 in fiscal 1999. As a percent of net sales, research and development expenses increased to 7.4% in fiscal 2000 from 6.1% in fiscal 1999. The increase in research and development expenses in the aggregate and as a percentage of net sales is primarily attributable to personnel increases to support the Company's technology initiatives. Marketing, administrative and general expenses increased 4.4% to $37,315,000 in fiscal 2000 from $35,727,000 in fiscal 1999. As a percentage of net sales, marketing, administrative and general expenses increased to 26.3% in fiscal 2000 from 25.9% in fiscal 1999. The increase in marketing, administrative and general expenses in the aggregate and as a percentage of net sales was primarily due to additional headcount to support the expansion of our market reach and relocation of the Company's U.K. office In March, 2000, the Company reached an agreement in principle to settle the shareholder class action suit. The settlement is subject to certain conditions, including court approval. The Company recorded a one-time charge of $1.4 million during the fourth quarter ending March 31, 2000, for settlement costs not covered by insurance. Included in other income (expense) are losses from fluctuations in currency exchange rates of approximately $874,000, compared to a gain of approximately $140,000 in the prior year. The Company does not currently hedge foreign exchange risk. Net interest expense decreased $414,000 to $1,090,000 in fiscal 2000 from $1,504,000 in fiscal 1999. The decrease was primarily due to lower borrowings outstanding. During fiscal 2000 approximately $574,000 of debt was repaid with cash generated from operations. The Company's effective income tax rate for fiscal 2000 was 37.9% compared to an effective rate of 38.8% in fiscal 1999. 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 1999 by the Company's on-going operations were favorably impacted compared to the prior year by increased sales of security sensors and controls as well as CCTV products. This was offset, in part, by the 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 0.8% 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 18.9% 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. 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. 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. During fiscal 2000, the Company's operating activities provided $9,787,000 of operating cash flow. Net income, depreciation and amortization provided $7,314,000. A decrease in inventories provided $5,274,000. An increase in accounts payable provided $2,238,000. An increase in accounts receivable used $1,503,000 and other account changes used $3,536,000 of operating cash flow. During fiscal 2000, cash used in investing activities was $4,002,000. This related to the acquisition of Caetec and capital expenditures. During fiscal 2000, cash used in financing activities was $2,015,000, primarily representing repurchases of treasury shares and 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. On March 31, 2000, the Company was in compliance with all covenants and requirements under the terms of the borrowing agreements. The Company's Board of Directors has authorized the repurchase of up to $10,000,000 of the Company's common stock. As of March 31, 2000, the Company had purchased 86,500 shares of common stock for approximately $807,000. The Company maintains employment contracts that could require payments in the event of a change in control. See Item 1 of this Form 10-K--Anti-takeover and Change in Control Provisions, which is incorporated herein by reference. Capital Resources. On March 31, 2000, the Company had cash balances of $7,799,000. 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. During May 2000, the Company and its primary lender agreed to consolidate the term loan and line of credit into a three year, $35,000,000 revolving line of credit. This facility will require interest only payments through June 2003. Principal and interest payments will be required 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 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 2001. Year 2000 Issues. 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 the 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 not to pay cash dividends. Inflation. During fiscal 2000, 1999 and 1998, 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. 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 (61) CEO & President (1968) David B. Lederer (60) Executive Vice President (1968) George E. Behlke (43) Vice President, Operations & GM Asia (1995) Frank J. Ryan (46) Vice President, Secretary and Treasurer (1982) Christopher P. Gerace (32) Vice President, Chief Accounting Officer (1999) Jeffrey M. Swan (35) 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 reduced his involvement to half time and served as Vice President, Business Development. In April, 2000, Mr. Lederer returned to full time status as Executive Vice President. Mr. Ryan has been employed by the Company in various financial positions since 1980 and was promoted to Vice President in 1989. 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 Price Waterhouse, 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 2000 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 2000 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 2000 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 2000 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 25 of this Form 10-K. (b) There were no Form 8-K filings during the last quarter of the period covered by this report. 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, 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 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 CEO, President and Director June 29, 2000 Karl H. Kostusiak (Principal Executive Officer) /s/ Frank J. Ryan Vice President June 29, 2000 Frank J. Ryan Secretary/Treasurer (Principal Financial Officer) /s/ Christopher P. Gerace Vice President June 29, 2000 Christopher P. Gerace Chief Accounting Officer (Principal Accounting Officer) Donald R. Adair Director Mortimer B. Fuller, III Director David B. Lederer Executive Vice President & Director Edward C. McIrvine Director By: /s/ Karl H. Kostusiak Attorney-in-Fact June 29, 2000 Karl H. Kostusiak 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. 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 plan Incorporated by reference to 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 A of the Company's Definitive Proxy Form DEF 14A filed on 7/8/99 10(g) Non-Employee Director Stock Incorporated by reference to Option Plan Exhibit B of the Company's Definitive Proxy Form DEF 14A filed 7/8/99 10(h) Executive Officer Cash Incorporated by reference to the Bonus Plan Company's 1999 Annual Report on Form 10-K 10(i) Executive employment Incorporated by reference to contract with Karl H. Exhibit 10(i) of the Company's Kostusiak Quarterly Report on Form 10-Q for the quarter ended 6/30/99 10(j) Executive employment Incorporated by reference to contract with David B. Exhibit 10(j) of the Company's Lederer Quarterly Report on Form 10-Q for the quarter ended 6/30/99 10(k) Stock Purchase Agreements Incorporated by reference to with Karl H. Kostusiak and Exhibit 10(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 Exhibit 13 of this to Security Holders Annual 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 EX-11 2 0002.txt Exhibit 11 DETECTION SYSTEMS, INC. COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share data) Year Ended March 31, 2000 1999 1998 ---- ---- ---- Net income applicable to common stock $3,468 $4,471 $1,382 ===== ===== ===== Weighted average number of shares 6,344 6,319 5,433 ===== ===== ===== Basic earnings per share $0.55 $0.71 $0.25 ===== ===== ===== Shares attributable to deferred compensation plans and stock options and warrants 480 508 290 ==== ==== ==== Diluted earnings per share: $0.51 $0.65 $0.24 ==== ==== ==== EX-13 3 0003.txt
Exhibit 13 DETECTION SYSTEMS, INC. SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS (In thousands of dollars) Year ended March 31, 2000 ------------------------- Additions Balance at charged to Deduction Balance beginning costs and Write-off at end Description of year expenses of assets of year - ----------- --------- --------- --------- ------- Allowance for $1,006 $350 $336 $1,020 doubtful accounts Allowance for 2,975 865 940 2,900 obsolete inventory ----- ----- ----- ----- $3,981 $1,215 $1,276 $3,920 ===== ===== ===== =====
Year ended March 31, 1999 ------------------------- Additions Balance at charged to Deduction: Balance beginning costs and Write-off at end Description of year expenses of assets of year - ----------- --------- --------- --------- ------- 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 ===== ===== ===== =====
Exhibit 13 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 24 present fairly, in all material respects, the financial position of Detection Systems, Inc. and its subsidiaries at March 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States 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 June 1, 2000 Exhibit 13 DETECTION SYSTEMS, INC. CONSOLIDATED BALANCE SHEET (in thousands, except per share data) At March 31, ....................................... 2000 1999 -------- -------- Assets Current assets: Cash and cash equivalents .......................... $ 7,799 $ 4,414 Accounts receivable, less allowance for doubtful accounts ($1,020 and $1,006, respectively) ....... 22,505 20,916 Inventories, net ................................... 32,594 37,762 Other current assets ............................... 5,822 3,249 -------- -------- 68,720 66,341 -------- -------- Fixed assets, net .................................. 12,565 12,420 Goodwill, net ...................................... 9,169 9,381 Other assets ....................................... 5,164 4,670 -------- -------- $ 95,618 $ 92,812 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Short term borrowings .............................. $ 336 $ 1,416 Current portion of long term debt .................. 657 647 Accounts payable ................................... 9,515 7,076 Accrued payroll and benefits ....................... 1,933 1,863 Income taxes payable ............................... 1,703 2,108 Other current liabilities .......................... 3,447 4,134 -------- -------- 17,591 17,244 -------- -------- Other liabilities .................................. 2,968 2,645 Long term debt ..................................... 16,595 17,179 Shareholders' equity: Common stock, par value $.05 per share Authorized - 24,000,000 shares Issued - 6,579,341 shares and 6,562,499 shares, respectively ............................. 329 328 Capital in excess of par value ..................... 43,601 45,073 Other accumulated comprehensive loss ............... (695) (310) Retained earnings .................................. 17,915 14,447 -------- -------- 61,150 59,538 Less-Treasury stock, at cost - 177,400 shares and 227,404 shares, respectively ................. (2,561) (3,780) Notes receivable for stock purchases ............... (125) (14) -------- -------- 58,464 55,744 -------- -------- $ 95,618 $ 92,812 ======== ======== See accompanying Notes to Consolidated Financial Statements. Exhibit 13 DETECTION SYSTEMS, INC. CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS (in thousands, except per share data) Year ended March 31, .................... 2000 1999 1998 --------- --------- --------- Net sales ............................... $ 141,918 $ 138,045 $ 126,343 Costs and expenses Production ............................. 85,537 85,163 82,893 Research and development ............... 10,503 8,507 8,579 Marketing, administrative and general .. 37,315 35,727 30,039 Litigation ............................. 1,381 --------- --------- --------- 134,736 129,397 121,511 --------- --------- --------- Operating income ........................ 7,182 8,648 4,832 Other income (expense) Net interest expense .................. (1,090) (1,504) (2,035) Other income (expense) ................ (507) 163 (460) --------- --------- --------- Income before income taxes .............. 5,585 7,307 2,337 Provision for income taxes .............. 2,117 2,836 955 --------- --------- --------- Net income .............................. 3,468 4,471 1,382 Other comprehensive loss Foreign currency translation adjustment (385) (266) (39) --------- --------- --------- Total comprehensive income .............. 3,083 4,205 1,343 Retained earnings at beginning of year .. 14,447 9,976 8,594 Less: other comprehensive loss .......... 385 266 39 --------- --------- --------- Retained earnings at end of year ........ $ 17,915 $ 14,447 $ 9,976 ========= ========= ========= Earnings per share: Basic ................................. $ 0.55 $ 0.71 $ 0.25 ========= ========= ========= Diluted ............................... $ 0.51 $ 0.65 $ 0.24 ========= ========= ========= See accompanying Notes to Consolidated Financial Statements. Exhibit 13 DETECTION SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands, except per share data) Year Ended March 31, ......................... 2000 1999 1998 ------- ------- -------- Cash flows from operating activities Net income .................................. $ 3,468 $ 4,471 $ 1,382 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .............. 3,846 3,223 3,226 Deferred compensation ...................... -- -- 457 Deferred income taxes ...................... (354) 627 501 Stock based compensation ................... -- -- 87 Changes in operating assets and liabilities: Accounts receivable ........................ (1,503) 2,704 (1,795) Inventories ................................ 5,274 1,022 (1,574) Accounts payable ........................... 2,238 (5,642) (4,711) Accrued payroll and benefits ............... 58 227 (1,449) Other assets and liabilities ............... (3,240) 565 (2,177) ------- ------- -------- Total adjustments .......................... 6,319 2,726 (7,435) Net cash provided by (used in) operating activities ................................. 9,787 7,197 (6,053) ------- ------- -------- Cash flows from investing activities Purchase of businesses net of cash acquired . (621) (505) (9,618) Capital expenditures ........................ (3,381) (3,354) (2,832) ------- ------- -------- Net cash used in investing activities ........ (4,002) (3,859) (12,450) ------- ------- -------- Cash flows from financing activities Short term borrowings ....................... (1,079) (194) 2,741 Proceeds from long term debt ................ -- 2,392 -- Principal payments on long term debt and capital lease obligations .................. (574) (4,034) (12,398) Issuance of common stock .................... -- -- 28,702 Repurchase of common stock .................. (806) -- (3,767) Stock options exercised ..................... 444 18 4,180 ------- ------- -------- Net cash (used in) provided by financing activities ................................. (2,015) (1,818) 19,458 ------- ------- -------- Effect of exchange rate changes on cash balances ................................... (385) (266) (39) Net increase in cash and cash equivalents .... 3,385 1,254 916 Cash and cash equivalents at beginning of year 4,414 3,160 2,244 ------- ------- -------- Cash and cash equivalents at end of year ..... $ 7,799 $ 4,414 $ 3,160 ======= ======= ======== Cash paid during the year for: Interest ..................................... $ 1,613 $ 1,745 $ 2,438 ======= ======= ======== Income taxes ................................. $ 3,926 $ 2,426 $ 1,502 ======= ======= ======== See accompanying Notes to Consolidated Financial Statements. Exhibit 13 DETECTION SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000, 1999 AND 1998 (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, 2000 and 1999 was approximately $2,734,000 and $2,045,000, 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 $229,000, $231,000 and $239,000 in 2000, 1999 and 1998, respectively. The Company has a defined benefit pension plan for certain key executives. This plan provides for an annual benefit of 30% 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 also 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 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, 2000 1999 1998 ---- ---- ---- Weighted average number of shares outstanding 6,344 6,319 5,433 Shares associated with deferred compensation, option and warrant plans 480 508 290 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, 2000 and 1999 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, 2000 and 1999. 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 ten acquisitions and established a manufacturing facility in Asia. These initiatives have enabled the Company to significantly expand its product catalog and market scope. All of the acquisitions have been accounted for as purchases and, accordingly, the results 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 2000 Acquisitions During the second quarter ended September 30, 1999, the Company acquired all of the outstanding shares of Caetec S.r.l. ("Caetec") for approximately $700,000 in cash. Caetec is an Italian technology company with a line of fire control products. 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. Fiscal 1998 Acquisitions In May 1997, the Company acquired all of the outstanding stock of Digital Audio Ltd. ("DA Systems") for approximately $4,000,000 in cash. 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. 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. NOTE 3-INVENTORIES: Major classifications of inventory are as follows.
Year Ended March 31, ........ 2000 1999 -------- -------- Component parts ............. $ 12,875 $ 16,007 Work in process ............. 2,015 2,658 Finished products ........... 20,604 22,072 -------- -------- 35,494 40,737 Less-Reserve for obsolescence (2,900) (2,975) -------- -------- $ 32,594 $ 37,762 ======== ========
NOTE 4-FIXED ASSETS: Major classifications of fixed assets are as follows.
Year Ended March 31, ........ 2000 1999 -------- -------- Land and improvements ....... $ 767 $ 716 Building and improvements ... 6,775 6,748 Machinery and equipment ..... 19,364 16,719 Production tooling .......... 5,160 5,402 Furniture ................... 3,082 2,737 -------- -------- 35,148 32,322 Less-Accumulated depreciation (22,583) (19,902) -------- -------- $ 12,565 $ 12,420 ======== ========
Total depreciation expense on fixed assets was approximately $3,376,000, $3,133,000 and $3,393,000 in 2000, 1999, and 1998, respectively. NOTE 5-INDEBTEDNESS A summary of the Company's borrowings is as follows:
Year Ended March 31, ...... 2000 1999 -------- -------- Revolving lines of credit . $ 336 $ 1,416 Term loan-due 2005 ........ 14,133 14,350 Mortgage loan-due 2006 .... 2,812 3,064 Other long term debt ...... 168 248 Capital lease obligations . 139 164 -------- -------- 17,588 19,242 Less-current portion ...... (993) (2,063) -------- -------- $ 16,595 $ 17,179 ======== ========
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 9.0% at March 31, 2000. There were no borrowings against this line during 2000. This facility matures July 31,2000. One of the Company's European subsidiaries has a short term borrowing facility, which is payable on demand, for borrowings up to $350,000. The interest rate on this facility ranged from 5.46% to 6.26% during 2000. The maximum amount of borrowings during 2000 was approximately $260,000. At March 31, 2000, the Company has a term loan, secured by general business assets, of $14,133,000 and a mortgage loan, secured by certain real estate, of $2,812,000. The term loan requires principal and interest payments through 2005. The mortgage loan requires principal and interest payments through 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, 2000 and 1999, the interest rate on these borrowings was approximately 6.8% and 6.6%, respectively. During May 2000, the Company and its primary lender agreed to consolidate the term loan and line of credit into a three year, $35,000,000 revolving line of credit. This facility will require interest only payments through June 2003. Principal and interest payments will be required from June 2003 through May 2007. The Company has certain ratios and covenants to maintain with respect to items such 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. On March 31, 2000, the Company was in compliance with all covenants and requirements under the terms of its borrowing agreements. Annual maturities of the Company's long term debt and capital leases for the next five years are approximately: 2001-$748,000; 2002-$313,000; 2003-$296,000; 2004-$3,278,000; and, 2005-$3,529,000. 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, 2000 and 1999, 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 or resignation. The bonus fully vests when deferred. Unissued common share equivalents existing under the plan were 279,000 in 2000 and 1999. 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, 2000.
Common Stock Treasury Stock Capital ---------------- ---------------- in excess Shares Amount Shares Amount of par ------ ------ ------ ------ ------- 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 ===== === === ===== ====== Options and warrants exercised 17 1 (137) (2,025) (1,472) Treasury stock purchases - - 87 806 - ----- --- --- ---- ------ Balance at March 31, 2000 6,579 $329 177 $2,561 $43,601 ===== === === ===== ======
In September 1997, the Company sold 1,557,000 shares of common stock at $20 per share in a public offering. Expenses associated with this offering of approximately $2,700,000 were netted against proceeds. The Company has two fixed stock option plans whereby options for a total of 875,000 shares of the Company's common stock may be granted to key employees or non-employees of the Company by the Board of Directors and a fixed stock option plan whereby options for a total of 50,000 shares of the Company's common stock may be granted to non-employee Directors of the Company. 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 4.75% to 5.75%; expected life of 4 to 5 years; and an expected volatility of 62%. 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:
Year ended March 31, 2000 1999 1998 ---- ---- ---- Net earnings As reported $3,468 $4,471 $1,382 Pro forma $2,635 $3,683 $ 594 Net earnings per diluted share As reported $0.51 $0.65 $0.24 Pro forma $0.39 $0.54 $0.11
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. A summary of the status of the Company's stock option plan and outstanding warrants as of March 31, 2000, 1999 and 1998, and changes during the years ending on those dates, is presented below:
2000 1999 1998 ----------------- ------------------ ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ------- ----- ------- ------ ------- Outstanding at beginning of year 536 $8.69 404 $8.08 356 $ 5.89 Granted 99 9.47 164 9.75 110 14.41 Exercised (175) 4.62 (18) 4.46 (34) 4.31 Forfeited (6) 8.99 (14) 8.41 (28) 9.68 --- ---- --- ---- --- ----- Outstanding at end of year 454 $10.34 536 $8.69 404 $8.08 === ==== === ==== === ===== Options exercisable at year-end 216 $10.24 278 $6.84 191 $5.44 === ==== === ==== === ==== Weighted-average fair value of options granted during the year $5.21 $5.98 $9.08 ==== ==== =====
Options & Warrants 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 2000 Life Years Share 31, 2000 Share ---------- ----------- ----------- --------- ----------- --------- $0.01- $4.99 57 1.0 $ 3.97 57 $ 3.96 $5.00- $9.99 171 3.9 9.45 38 9.43 $10.00-$14.99 191 2.9 11.59 96 11.94 $15.00-$19.99 30 2.0 19.08 22 19.11 $20.00-$24.99 5 2.5 22.50 3 22.50 $0.01-$24.99 454 3.0 $10.34 216 $10.24
NOTE 8-INCOME TAXES:
The provision (benefit) for income taxes consists of the following. Year Ended March 31, ................... 2000 1999 1998 ------ ------- ----- Federal Current ............................... $ 532 $ 876 $ (39) Deferred .............................. 368 618 494 State Current ............................... 76 448 (13) Deferred .............................. 141 (78) 118 Foreign Current ............................... 936 885 506 Deferred .............................. 64 87 (111) ------ ------- ----- $2,117 $ 2,836 $ 955 ====== ======= =====
A reconciliation of the statutory federal income tax rate to the effective rate is as follows.
Year Ended March 31, ................... 2000 1999 1998 ------ ------ ------ Statutory federal rate ................. 34.0% 34.0% 34.0% State taxes, net of federal benefit .... 2.6 3.3 3.0 Foreign tax rate differences ........... (7.0) (3.6) (3.9) Change in valuation allowances ......... -- -- -- Research and development credits ....... -- -- -- Goodwill amortization .................. 3.7 2.7 3.0 Other permanent items .................. 4.6 2.4 4.8 ------ ------ ------ Effective income tax rate .............. 37.9% 38.8% 40.9% ==== ==== ====
Deferred tax assets (liabilities) are comprised of the following:
Year Ended March 31, ..................... 2000 1999 ------- ------- Book accruals not currently deductible for tax ...................... $ 635 $ 434 Deferred compensation .................... 676 799 Inventory ................................ 599 534 Accrued payroll and related costs ........ 379 436 Tax basis of intangibles in excess of book 2,367 2,781 Tax credit carryforwards ................. 549 607 Other .................................... 241 215 ------- ------- Total deferred tax assets ................ 5,446 5,806 ------- ------- Depreciation ............................. (1,369) (1,301) Other .................................... (169) (48) ------- ------- Total deferred tax liabilities ........... (1,538) (1,349) ------- ------- Deferred tax asset valuation reserve ..... (431) (407) ------- ------- Net deferred tax asset ................... $ 3,477 $ 4,050 ======= =======
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, 2000 was approximately $6,739,000. 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 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. Net sales by the Company to unaffiliated customers outside the United States represents 41.6%, 38.4% and 32.4% of consolidated net sales for the years ended March 31, 2000, 1999 and 1998. Net sales by the Company's domestic operations to unaffiliated customers outside the United States represent 0.8%, 2.3% and 4.3% of the Company's consolidated net sales for the years ended March 31, 2000, 1999 and 1998, 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.
Year Ended March 31, ................. 2000 1999 1998 --------- --------- --------- Sales to unaffiliated customers America operations ................... $ 84,058 $ 88,232 $ 90,938 Asia Pacific operations .............. 24,787 20,023 12,501 European operations .................. 33,073 29,790 22,904 --------- --------- --------- $ 141,918 $ 138,045 $ 126,343 ========= ========= ========= Sales between affiliates America operations ................... $ 9,235 $ 7,997 $ 7,362 Asia Pacific operations .............. 36,429 40,966 32,018 European operations .................. 476 248 85 --------- --------- --------- $ 46,140 $ 49,211 $ 39,465 ========= ========= ========= Income (loss) before income taxes America operations ................... $ 2,482 $ 4,988 $ 1,799 Asia Pacific operations .............. 5,311 4,617 1,614 European Operations .................. (2,612) (1,485) (774) Eliminations ......................... 404 (813) (302) --------- --------- --------- $ 5,585 $ 7,307 $ 2,337 ========= ========= ========= Identifiable assets America operations ................... $ 45,919 $ 45,514 $ 46,802 Asia Pacific operations .............. 28,005 27,369 30,193 European operations .................. 21,694 19,929 17,049 --------- --------- --------- $ 95,618 $ 92,812 $ 94,044 ========= ========= ========= Capital expenditures America operations ................... $ 1,779 $ 1,081 $ 1,336 Asia Pacific operations .............. 803 1,636 1,061 European operations .................. 799 637 435 --------- --------- --------- $ 3,381 $ 3,354 $ 2,832 ========= ========= ========= Depreciation expense America operations ................... $ 1,839 $ 1,721 $ 2,186 Asia Pacific operations .............. 1,035 1,035 700 European operations .................. 502 377 507 --------- --------- --------- $ 3,376 $ 3,133 $ 3,393 ========= ========= =========
During 2000, sales to the Company's two largest customers accounted for 15.7% and 1.2% of net sales, respectively. 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. Accounts receivable from the Company's largest customers represented 17.7% of the accounts receivable balances at March 31, 2000. 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 $2,140,000, $2,705,000 and $2,267,000 in 2000, 1999 and 1998, respectively. Future minimum rental payments under noncancelable operating lease agreements are as follows: 2001-$2,369,000 2002-$2,325,000; 2003-$2,198,000; 2004-$2,075,000; 2005-$1,318,000; thereafter-$2,943,000. Restructuring The Company recorded a restructuring charge of approximately $400,000 during the first quarter of fiscal 1999 for severance costs related to the termination of employees at the Fairport, New York and Southall, England facilities. The charge has been included in the results from continuing operations and had a material impact on operating results in the first quarter of 1999. 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. The restructurings of the Salinas, California, Fairport, New York and Southall, England facilities are substantially complete. Legal Matters 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 and certain of the Company's public filings in 1997 and early 1998. 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. In March, 2000, the Company reached an agreement in principle to settle the consolidated shareholder class action suits. The settlement is subject to certain conditions, including court approval. The Company recorded a one-time charge of $1.4 million during the fourth quarter ending March 31, 2000, for costs not covered by insurance. EX-23 4 0004.txt CONSENT OF INDEPENDENT AUDITORS Consent of Independent Accountants We hereby consent to the incorporation by reference in the registration statement on Form S-8 (No. 2-88316) of Detection Systems, Inc. of our report dated June 1, 2000, appearing on page 32 of this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Rochester, New York June 29, 2000 EX-24 5 0005.txt Exhibit 24 POWER OF ATTORNEY The undersigned, being a director of Detection Systems, Inc. (the "Company"), hereby constitutes and appoints Karl H. Kostusiak, Frank J. Ryan, David B. Lederer and Christopher P. Gerace, 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 2000 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 have signed and delivered these presents as of the date marked below. May 24, 2000 /s/ Donald R. Adair May 24, 2000 /s/ Mortimer B. Fuller May 24, 2000 /s/ Edward C. McIrvine May 30, 2000 /s/ David B. Lederer EX-27 6 0006.txt FDS
5 1000 USD 12-MOS MAR-31-2000 APR-01-1999 MAR-31-2000 1 7,799 0 23,525 (1,020) 32,594 68,720 35,148 (22,583) 95,618 17,591 0 0 0 329 58,135 95,618 141,918 141,918 85,537 134,736 507 0 1,090 5,585 2,117 3,468 0 0 0 3,468 0.55 0.51
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