-----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, KwuiAav0Ym8Zz52UhyKPonq84a4eys/xoKC3/AJN8weSAHmsgpoL/CgXGHiI9DW8 epaFzd+R8jrJKci+bMGZFQ== 0000028365-98-000004.txt : 19980225 0000028365-98-000004.hdr.sgml : 19980225 ACCESSION NUMBER: 0000028365-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971230 FILED AS OF DATE: 19980223 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DETECTION SYSTEMS INC CENTRAL INDEX KEY: 0000028365 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 160958589 STATE OF INCORPORATION: NY FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08125 FILM NUMBER: 98547700 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1997 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to __________ Commission File Number: 0-8125 ---------------------------- DETECTION SYSTEMS, INC. (Exact name of registrant as specified in its charter) State of New York 16-0958589 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 130 Perinton Parkway, Fairport, New York 14450 (Address of principal executive offices) (Zip Code) (716) 223-4060 (Registrant's telephone number, including area code) ---------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes X No _____ As of February 20, 1998 there were outstanding 6,286,495 shares of the registrant's common stock, par value $.05 per share. PART I FINANCIAL INFORMATION DETECTION SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheet Dec. 31, 1997 Mar. 31, 1997 (Unaudited) Assets Current assets: Cash and cash equivalents $ 7,128,288 $ 2,244,265 Accounts receivable, less allowance for doubtful accounts of $563,400 and 23,428,292 15,246,309 $313,800, respectively Inventories 33,844,010 29,995,215 Deferred income tax charges 2,173,715 2,132,156 Prepaid expenses and other assets 1,774,764 883,137 ---------- ---------- 68,349,069 50,501,082 ---------- ---------- Fixed assets 11,746,215 11,248,171 Deferred income taxes 3,046,420 3,046,200 Goodwill and other intangibles 4,975,111 2,942,626 Other assets 598,455 537,772 ---------- ---------- Total Assets $88,715,270 $68,275,851 ========== ========== Liabilities and Shareholders' Equity Current liabilities: Current portion of long term debt $ 2,935,971 $ 953,648 Current portion of capital lease obligation 58,987 147,574 Short term borrowings 684,000 0 Accounts payable 14,467,732 12,259,380 Accrued payroll and benefits 1,315,461 2,818,487 Other accrued liabilities 2,537,267 3,254,593 ---------- ---------- 21,999,418 19,433,682 Obligations under capital leases 25,000 54,125 Other long term liabilities 3,330,784 2,924,975 Long term debt 14,650,644 28,031,802 Shareholders' equity: Common stock, par value $.05 per share; Authorized - 12,000,000 shares; Issued - 6,325,282 shares at December 31, 1997, and 4,478,993 shares at March 31, 1997 316,221 223,950 Capital in excess of par value 42,601,283 9,448,917 Retained earnings 10,210,540 8,594,306 ---------- ---------- 53,128,044 18,267,173 Less - Treasury stock, at cost (3,785,647) (52,553) Notes receivable for stock purchases (325,401) (378,373) Cumulative translation adjustment (307,572) (4,980) ---------- ---------- 48,709,424 17,831,267 ---------- ---------- Total liabilities and shareholders' equity $88,715,270 $68,275,851 ========== ========== (See accompanying notes to financial statements) DETECTION SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statement of Operations and Retained Earnings (Unaudited) Dec. 31, 1997 Dec. 31, 1996 For the Three Months Ended: (Current (Preceding Year) Year) ---------- ----------- Net sales $31,346,845 $26,441,837 Costs and expenses: Production 21,392,505 17,366,386 Research and development 2,266,100 2,046,418 Marketing, administrative and general 7,185,519 5,165,390 ---------- ---------- Total costs and expenses 30,844,124 24,578,194 Operating income 502,721 1,863,643 Interest income 91,813 54,270 Interest expense (418,948) (464,645) Other income (expense) (21,981) 0 ---------- ---------- Income before taxes 153,605 1,453,268 Provision for taxes 48,000 379,000 ---------- ---------- Net income $ 105,605 $ 1,074,268 ========== ========== Retained earnings at beginning of period 10,104,935 6,287,437 ---------- ---------- Retained earnings at end of period $10,210,540 $ 7,361,705 ========== ========== Earnings per share Basic $0.02 $0.24 Diluted $0.02 $0.21 (See accompanying notes to financial statements) DETECTION SYSTEMS, INC. AND SUBSIDIARIES Consolidated Income Statement(Unaudited) For the Nine Months Ended: Dec. 31, 1997 Dec. 31, 1996 (Current Year) (Preceding Year) ----------- ---------- Net Sales $94,017,726 $74,485,802 Costs and expenses: Production 62,483,836 49,309,576 Research and development 6,554,052 5,803,833 Marketing, administrative and general 20,990,760 14,635,291 ---------- ---------- Total costs and expenses 90,028,648 69,748,700 Operating income 3,989,078 4,737,102 Interest income 97,843 82,396 Interest expense (1,873,248) (1,332,458) Other income 216,777 23,643 ---------- ----------- Income before taxes 2,430,450 3,510,683 Provision for taxes 826,200 1,018,000 ---------- ----------- Net income $ 1,604,250 $ 2,492,683 ---------- ----------- Retained earnings at beginning of period 8,594,306 4,869,022 Amortization of redeemable common stock 11,984 ---------- ----------- Retained earnings at end of period $10,210,540 $ 7,361,705 ========== =========== Earnings per share Basic $0.31 $0.58 Diluted $0.28 $0.52 (See accompanying notes to financial information) DETECTION SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows (Unaudited) For the Nine Months Ended December 31 1997 1996 Cash Flows from Operating Activities: ---- ---- Net income $1,604,250 $2,492,683 --------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,951,340 1,901,244 Gain on sale of land (205,000) Stock based compensation 85,975 Deferred compensation 457,415 (16,669) Changes in operating assets and liabilities: Accounts receivable (1,820,675) (4,222,330) Inventories 2,313,245 (10,177,328) Income tax receivable (829,486) 97,424 Prepaid expenses and other assets (959,934) (1,155,565) Accounts payable (2,279,886) 5,100,922 Accrued payroll and benefits (1,643,109) 1,354,410 Other accrued liabilities (2,577,193) (248,677) --------- --------- Total adjustments (4,507,308) (7,366,569) --------- --------- Net cash used in operating activities (2,903,058) (4,873,886) Cash Flows from Investing Activities: Proceeds from sale of land 312,000 Capital expenditures (1,976,675) (2,317,285) Purchase of companies, net of cash (6,816,052) acquired --------- ---------- Net cash used in investing activities (8,480,727) (2,317,285) --------- --------- Cash Flows from Financing Activities: Proceeds from borrowings 6,718,198 5,257,700 Proceeds from issuance of common stock 28,519,669 2,000,005 Principal payments on long-term debt and (19,135,399) (527,789) capital lease obligations Common stock transactions 455,948 437,521 Amortization of redeemable common stock 11,984 --------- ---------- Net cash provided by financing 16,570,400 7,167,437 activities --------- ---------- Effect of exchange rate changes on cash (302,592) balances Net increase in cash and cash equivalents 4,884,023 (23,704) Cash and cash equivalents at 2,244,265 913,716 beginning of period Cash and cash equivalents at end of $7,128,288 $889,982 period ========= ========= Cash paid during the year for: Interest $1,531,948 $976,200 Income taxes $1,611,600 $585,200 (See accompanying notes to financial information) DETECTION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL INFORMATION THREE AND NINE MONTH PERIODS ENDED December 31, 1997 (Unaudited) NOTE 1. GENERAL The accompanying unaudited interim consolidated financial information has been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The unaudited interim consolidated financial information include the consolidated accounts of Detection Systems, Inc. and its majority- owned subsidiaries (collectively, "the Company") with all intercompany transactions eliminated. In the opinion of management, all adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented have been made. Certain footnote disclosures normally included in financial information prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such SEC rules and regulations. The financial information should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended March 31, 1997. Cash flow statement - During the first quarter of fiscal 1998, the Company issued 221,738 and 34,121 shares of common stock in connection with the acquisitions of DA Systems and Seriee S.A., respectively. The Company repurchased the 221,738 shares issued in connection with the acquisition of DA Systems during the second quarter of fiscal 1998 (see Note 3). Earnings per share - The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," during the quarter ended December 31, 1997. As required by this Statement, earnings per share of prior periods are presented in accordance with the provisions of SFAS No. 128. There are no significant reconciling items between net income as presented in the consolidated statement of operations and net income available to common stockholders used in the calculation of earnings per share. Earnings per share in future periods will be impacted by the acquisition of EDM in January 1998 (See Note 3). Reconciling items between the number of shares used in the calculation of basic and diluted earnings per share relate only to deferred compensation plans, options and warrants, as follows: Three months ending Nine months ending Dec. 31, Dec. 31, 1997 1996 1997 1996 Weighted average number of shares outstanding 6,047,782 4,451,985 5,164,808 4,320,765 Shares associated with deferred compensation, option and warrant plans 582,474 582,297 590,755 469,182 NOTE 2. INVENTORIES Major classifications of inventory follow: Dec. 31, 1997 Mar. 31, 1997 Component parts $17,488,101 $19,457,368 Work in process 1,778,394 2,697,459 Finished products 14,577,516 7,840,388 ---------- ---------- $33,844,010 $29,995,215 ========== ========== NOTE 3. ACQUISITIONS In May 1997, the Company acquired all of the outstanding stock of DA Systems, in exchange for 221,738 shares of its common stock. The shares were callable at the Company's option at $17 per share plus interest at 8.25% until June 30, 1998, and could be put to the Company at that price after that date. The Company exercised its call option to repurchase these shares in connection with the issuance of common stock in September 1997. The cost of this acquisition was approximately $4.0 million. DA Systems is a leading British manufacturer of security control equipment with annual net sales of approximately $10.8 million. In June 1997, the Company acquired 99.5% of the outstanding stock of Seriee S.A. of France, in exchange for 34,121 shares of its common stock, valued at approximately $0.6 million. Seriee is a leading manufacturer of electronic control and communication equipment with annual net sales of approximately $6.3 million. In June 1997, the Company acquired 98.7% of the outstanding stock of Radio-Active Systems N.V.("RAS") of Belgium for approximately $3.6 million in cash. RAS has the largest security equipment distribution network in Belgium with annual net sales of approximately $10 million. 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 $2.8 million in cash. EDM is a major Australian manufacturer of security control equipment with annual net sales of approximately $4.6 million. These transactions have been accounted for as purchases and, accordingly, the results of DA Systems, Seriee, RAS and EDM are included, or in the case of EDM, will be included in the consolidated financial information as of the date of acquisition. The financial information reflects the preliminary allocation of purchase price as the purchase price allocation has not been finalized. Unallocated excess of purchase price over net assets acquired as of December 31, 1997 is $2.3 million and is included with goodwill and other intangibles. Note 4. ISSUANCE OF COMMON STOCK In September 1997, the Company sold 1,325,000 shares of common stock at $20 per share in a public offering. The Company had granted the underwriters a 30-day option to purchase up to 231,750 additional shares of common stock under the same terms and conditions as the public offering to cover over-allotments, and this option was exercised in October 1997. Expenses associated with this offering of approximately $2.7 million were net against proceeds. NOTE 5. RESTATEMENT The company has discovered an incorrect posting in Second Quarter fiscal quarter 1998 accounts payable of approximately $950,000. This error occurred in the conversion of its China manufacturing facility's existing information system to the corporate system. The Company is restating its second quarter of fiscal 1998. As a result of this, net income for the second quarter was $0.4 million ($0.08 per basic share and $0.07 per diluted share) compared to previously reported net income of $1.1 million ($0.22 per basic share and $0.20 per diluted share). This week, the Company will file an amendment to its quarterly report on Form 10-Q for the quarter and six months ended September 30, 1997 as filed on November 14, 1997. The year to date results of operations and Management's Discussion and Analysis included in this report reflect the restated results of operations for the quarter ended September 30, 1997. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company is a leading supplier of equipment to the electronic protection industry. The Company designs, manufactures and markets electronic detection, control and communication equipment for security, fire protection, access control and CCTV applications, offering products primarily for the commercial and mid- to high-end residential portions of the market. From its founding in 1968 until 1995, the Company was primarily a niche provider of intrusion detection devices for the domestic market. In 1995, the Company adopted a strategy designed to substantially expand its product offerings, establish an international sales presence, increase its manufacturing capacity and improve its manufacturing cost structure. The Company has since made six acquisitions, opened sales offices in six countries and established a manufacturing facility in China. The Company's net sales increased 26.2% to $94.0 million in the nine months ended December 31, 1997 from $74.5 million in the comparable period in fiscal 1997. Approximately $15.6 million of the Company's sales for the nine months ended December 31, 1997 are from these acquired companies. The Company's significant acquisitions during the current fiscal year were: (i) purchase in May 1997 of DA Systems in the U.K., with annual net sales of approximately $10.8 million, (ii) purchase in June 1997 of Seriee in France, with annual net sales of approximately $6.3 million, (iii) purchase in June 1997 of RAS in Belgium, with annual net sales of approximately $10.0 million and (iv) purchase in January 1998 of EDM in Australia, with annual net sales of approximately $4.6 million. Previous significant acquisitions were Radionics (February 1996) and Senses International, Inc. (July 1996). These acquisitions have a significant impact on the comparative financial information for the three and nine month periods ending December 31, 1997 and 1996. The acquisitions were funded by borrowings under a commercial credit facility and/or issuance of the Company's common stock. Since the opening of the China manufacturing facility in late fiscal 1996 and throughout fiscal 1997, a portion of the Company's manufacturing was moved from domestic plants to the China facility. While production of the Company's highest volume products were moved to China during this period, such products were limited in number relative to the Company's entire product line. During the first and second quarters of fiscal 1998, a far greater number of products that continued to be manufactured at the Company's Radionics subsidiary were moved to the China facility. Manufacturing efficiencies consistent with previous product transfers are anticipated, but the short term impact of this rapid shift in production location resulted in unexpected inefficiencies, exacerbated by the Company's multiple manufacturing information systems, which created difficulties in effectively coordinating overall materials procurement, production and scheduling. Consequently, production quantities, yields and efficiency of the China facility declined during this period while production related overhead expenses, such as freight, remained constant or increased. To help assure timely customer deliveries, the Company restarted manufacturing some of its products at its Radionics facility. These factors resulted in higher average unit costs for much of the product sold by the Company during the second and third quarters of fiscal 1998. Recently, the Company assigned a senior executive, George E. Behlke, Vice President of Engineering, to manage and improve manufacturing operations worldwide. In addition, the Company has added key personnel to both the financial and management information systems departments. This team is leading the modification of the Company's inventory and manufacturing information systems, allowing the Company to improve all aspects of the supply chain process. 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: Three months Nine months Fiscal year ended Dec. 31, ended Dec. 31, March 31, 1997 1996 1997 1996 1997 1996 Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Costs and expenses: Production 68.3 65.7 66.5 66.2 64.2 66.9 Research and 7.2 7.7 7.0 7.8 8.0 11.2 development Marketing, administrative 22.9 19.6 22.3 19.6 21.1 25.1 and general Purchased in-process research and 22.3 development ---- ---- ---- ---- ---- ---- Operating 1.6 7.0 4.2 6.4 6.7 (25.5) income(loss) Interest income 0.3 0.0 0.1 0.0 0.2 0.8 Interest expense 1.3 1.8 2.0 1.8 1.7 0.8 Other income (0.1) 0.3 0.3 0.1 0.0 0.0 (expense) ---- ---- ---- ---- ---- ---- Income (loss) before income taxes 0.5 5.5 2.6 4.7 5.2 (25.5) Provision (benefit) for income taxes 0.2 1.4 0.9 1.4 1.5 (6.7) ---- ---- ---- ---- ---- ---- Net income (loss) 0.3% 4.1% 1.7% 3.3% 3.7% (18.8)% ==== ==== ==== ==== ==== ===== Three Months Ended December 31, 1997 Compared to Three Months Ended December 31, 1996 The Company's net sales increased 18.6% to $31.3 million in the fiscal 1998 period from $26.4 million in the comparable period in fiscal 1997. The net sales of DA Systems, RAS and Seriee, which were acquired in the first quarter of fiscal 1998, accounted for $6.5 million of this increase. Excluding the impact of acquisitions, sales declined $1.6 million primarily as a result of reduced sales volumes to the Company's largest domestic distributor. In addition, during the third quarter of fiscal 1998, two of the Company's larger customers were acquired by other companies. It is anticipated that these transactions may result in some decline in sales to these customers in the future. However, the Company is working to minimize any potentially adverse impact. Production expenses increased 23.2% to $21.4 million in the fiscal 1998 period from $17.4 million in the comparable period in 1997. The increase in production expenses was primarily due to a corresponding increase in the Company's net sales. Gross margin during the third quarter of fiscal 1998 of 31.7% declined from the 34.3% gross margin reported for the third quarter of fiscal 1997. Margins have been adversely impacted by lower margin sales from companies acquired during fiscal 1998 as well as manufacturing inefficiencies from the consolidation of manufacturing operations in China, previously discussed. Research and development expenses increased 10.7% to $2.3 million in the fiscal 1998 period from $2.0 million in the comparable period in fiscal 1997. As a percentage of net sales, research and development expenses decreased to 7.2% in the fiscal 1998 period from 7.7% in the comparable period in fiscal 1997. The increase in research and development expenses was primarily due to the addition of DA Systems and Seriee research and development expenses. The decrease in research and development expenses as a percentage of net sales was primarily due to savings achieved from the continued consolidation of certain research and development efforts of Radionics and the Company. Marketing, administrative and general expenses increased 39.1% to $7.2 million in the fiscal 1998 period from $5.2 million in the comparable period in fiscal 1997. As a percentage of net sales, marketing, administrative and general expenses increased to 22.9% in the fiscal 1998 period from 19.6% in the comparable period in fiscal 1997. This increase was primarily due to additional marketing, administrative and general expenses related to the newly acquired companies and increased international marketing expenditures. General expenses also included $250,000 of exchange losses during the quarter ended December 31, 1997. Exchange losses were insignificant during the same quarter last year. The Company is currently reviewing strategies to reduce exposure to currency fluctuations. Interest expense decreased to $0.4 million in the fiscal 1998 period from $0.5 million in the comparable period in fiscal 1997. This decrease was primarily due to the repayment of borrowings originally used to finance the Company's international expansion and increased inventory levels. Borrowings were repaid using proceeds from the second quarter offering of common stock. The Company's effective income tax rate for the fiscal 1998 period was 31.2% compared to 26.1% for the comparable period in fiscal 1997. The higher effective rate is due to a shift in the source of pretax income among domestic and international entities. Nine Months Ended December 31, 1997 Compared to Nine Months Ended December 31, 1996 The Company's net sales increased 26.2% to $94.0 million in the fiscal 1998 period from $74.5 million in the comparable period in fiscal 1997. The net sales of DA Systems, RAS and Seriee which were acquired in the first fiscal quarter of fiscal 1998, accounted for $15.6 million of this increase. Excluding the impact of these acquisitions, sales increased $3.9 million or 5.2% as a result of increased sales penetration across many accounts. Production expenses increased 26.7% to $62.5 million in the fiscal 1998 period from $31.9 million in the comparable period in fiscal 1997 primarily due to the corresponding increase in sales. Gross margins remained steady at 33.5% in the fiscal 1998 period compared to 33.8% reported in the comparable year ago period. Research and development expenses increased 12.9% to $6.6 million in the fiscal 1998 period from $5.8 million in the comparable period in fiscal 1997. As a percentage of net sales, research and development expenses decreased to 7.0% in the fiscal 1998 period from 7.8% in the comparable period in fiscal 1997. The increase in research and development expenses was primarily due to the addition of DA Systems' and Seriee's research and development expenses. The decrease in research and development expenses as a percentage of net sales was primarily due to savings achieved from the continued consolidation of certain research and development efforts of Radionics and the Company. Marketing, administrative and general expenses increased 43.4% to $21.0 million in the fiscal 1998 period from $14.6 million in the comparable period in fiscal 1997. As a percentage of net sales, marketing, administrative and general expenses increased to 22.3% in the fiscal 1998 period from 19.6% in the comparable period in 1997. This increase was primarily due to additional marketing, administrative and general expenses related to the newly acquired companies and increased international marketing expenditures. General expenses for the nine months ended December 31, 1998 also include $431,000 of losses associated with foreign exchange transactions, an increase of approximately $325,000 over the same period of fiscal 1997. Interest expense increased to $1.9 million in the fiscal 1998 period from $1.3 million in the comparable period in fiscal 1997. This increase was primarily due to additional borrowings required to finance the Company's international expansion and increased inventory levels necessary during the transition of a portion of the Company's manufacturing operations to the China facility. The Company's effective income tax rate for the fiscal 1998 period was 34.0% compared to 29.0% for the comparable period in fiscal 1997. The higher effective rate reflects a shift in the source of pretax income between domestic and international entities. 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 from the Company's operating activities and cash reserves. Since the 1995 implementation of the Company's strategy designed to enhance its product offerings, manufacturing capacity and international operations, particularly its acquisitions and the development of the China facility, the Company has required external sources of financing to satisfy its liquidity needs. Nine Months Ended December 31, 1997. During the nine months ended December 31, 1997, the Company used cash in its operations of $2.9 million. This use of cash was primarily driven by an increase in net working capital due to the increase in inventory related to the shift in manufacturing to the Company's China facility and significant reductions in accounts payable, payroll and other accruals. During the nine months ended December 31, 1997, cash used for investing activities was $8.5 million. Approximately $6.8 million was used for the acquisition of RAS, DA Systems and $2.0 million was used for capital expenditures, primarily for production tooling. During the nine months ended December 31, 1997, cash flows provided by financing activities were $16.6 million. Net proceed from the sale of common stock were approximately $28.4 million, with $19.1 million of these proceeds being used to repay outstanding borrowings. Capital Resources. On December 31, 1997, the Company had cash balances of $7.1 million. On that date, the Company also has $17.0 million available under a revolving credit facility. This credit facility bears interest based on the prime rate or the London Interbank Offered Rate, plus applicable points based on the Company's degree of financial leverage, and matures on July 31, 1998. During September 1997, the Company sold 1,325,000 shares of common stock at $20 per share. Expenses of approximately $2,333,500 were net against proceeds. The Company granted the underwriters a 30-day option to purchase up to 231,750 additional shares of common stock under the same terms and conditions as the public offering to cover over-allotments. This option was exercised in October 1997. The Company expects to continue its pursuit of acquisitions and the development of new products and markets. The Company has budgeted $3.0 million for capital expenditures during fiscal 1998, excluding any amounts required for acquisitions. These expenditures will include continued investment in facilities and equipment necessary to produce and market its security detection, fire detection, security, fire and access control products as well as certain new products. The Company also plans to continue its efforts to market its products internationally. The Company believes that the combination of its current cash balances, cash flows from operations and existing credit facilities will be sufficient to fund its planned operations during fiscal 1998. Dividend Policy. The Company is dedicated to promoting shareholder value through long term profitability and growth and believes that continued investments in future product development are essential to this goal. For this reason, it has been the Company's policy to not pay cash dividends. Year 2000 Issues. The Company does not believe that Year 2000 issues will significantly affect future financial results or required cash expenditures. Forward-Looking Statements The foregoing discussion and analysis contain certain "forward-looking statements" within the meaning of Section 27A of the Securities Act, which represent the Company's expectations or beliefs, including, but not limited to, statements concerning 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 therein that are not statements of historical fact may be deemed to be 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. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DETECTION SYSTEMS, INC. Registrant DATE: February 23, 1998 /s/ Karl H. Kostusiak Karl H. Kostusiak, President /s/ Frank J. Ryan Frank J. Ryan, Vice President, Secretary and Treasurer (Chief Financial Officer) PART II OTHER INFORMATION Item 1. Legal Proceedings Not applicable Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable Item 5. Other matters Not Applicable Item 6. Exhibits and Reports for Form 8-K. A. Exhibits See Exhibit Index B. Reports on Form 8-K On February 2, 1998, a Form 8-K was filed under Item 5, related to the Registrant's acquisition of all of the outstanding stock of Electronics Design & Manufacturing Pty Limited on January 21, 1998. No financial reports were included with this report. EXHIBIT INDEX 3 (a) Detection Systems, Inc. Certification of Incorporation, as amended, are incorporated by reference to Exhibit 3(a) to the Company's 1997 Annual Report on Form 10-K. 3 (b) Detection Systems, Inc. By-laws, as amended, are incorporated by reference to Exhibit 3(b) to the Company's 1997 Annual Report on Form 10-K. 10 (a) Executive Employment Agreement with Karl H. Kostusiak is incorporated by reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q for the quarter ended 6/30/97. 10 (b) Executive Employment Agreements with David B. Lederer are incorporated by reference to Exhibit 10(b) of the Company's Quarterly Report on Form 10-Q for the quarter ended 6/30/97. 10 (c) Deferred Compensation Plans are included as Exhibit 10(c) of this Quarterly Report on Form 10-Q. (11) Statement regarding computation of per share earnings is included as Exhibit 11 of this Quarterly Report on Form 10-Q. (27) Financial data schedule is included as Exhibit 27 to the electronic Edgar filing of this Quarterly Report on Form 10-Q. Exhibit 11 DETECTION SYSTEMS, INC. AND SUBSIDIARIES Consolidated Computation of Earnings Per Common And Common Equivalent Share For the Three Months Ended: December 31, 1997 -------------- Net Income $105,605 Weighted average number of shares 6,047,782 Common Stock equivalent due to assumed exercise of stock options and warrants and deferred compensation plan shares 582,474 Earnings per share Basic $0.02 Diluted $0.02 For the Nine Months Ended: December 31, 1997 ------------------ $1,604,250 Net Income Plus: amortization of redeemable stock 11,984 --------- Net income available to common stockholders $1,616,234 ========= Weighted average number of shares 5,164,808 Common Stock equivalent due to assumed exercise of stock options and warrants and deferred compensation plan shares 590,755 Earnings per share Basic $0.31 Diluted $0.28 EX-27 2
5 YEAR MAR-31-1998 DEC-31-1997 7,128,288 0 23,991,692 563,400 33,844,010 68,349,069 29,744,332 17,999,117 88,715,270 21,999,418 0 0 0 39,131,857 9,577,567 88,715,270 31,346,845 31,416,677 21,392,505 30,844,124 9,451,619 0 418,948 153,605 48,000 105,605 0 0 0 105,605 0.02 0.02
EX-10 3 [8/20/97 Restatement] DETECTION SYSTEMS, INC. DEFERRED COMPENSATION PLAN 1. Purpose Detection Systems, Inc. (the "Company") has adopted this Deferred Compensation Plan (the "Plan") to assist its officers with their individual tax and retirement income planning and to permit the Company to remain competitive in attracting, retaining, motivating and rewarding key executives who can directly influence the Company's operating results. The Plan permits officers to defer the receipt of salary or bonuses which they may be entitled to receive from the Company and the Company to make Company contributions for the benefit of its officers. The Plan was originally adopted as of August 1, 1986. This restatement is effective as of August 20, 1997. 2. Eligibility Any officer of the Company is eligible to participate in this Plan. 3. Contributions a. Company Contributions The Company may contribute to an officer's Participant Account any amount, at any time and for any reason as the Company in its sole discretion may determine. The Company has no obligation to make such contributions to any officer's account and contributions need not be the same for all officers. b. Officer Deferrals (1) Amount of Deferral. In addition to Company contributions, a participant may elect to defer receipt of up to 10 percent of his or her base salary and up to 100 percent of any bonus otherwise payable to the participant by the Company during a calendar year. (2) Time for Electing Deferral. An election to commence a deferral may be made at any time in accordance with the procedures set forth in subsection (3) below, provided that any election to defer compensation must be made prior to the time that such compensation is to be earned by the participant. Any election so made shall remain in effect until the participant elects in writing to change his or her election. (3) Manner of Electing Deferral. A participant shall elect a deferral by giving written notice to the Committee in a form prescribed by the Committee. The notice shall include (1) the amount to be deferred; (2) the period with respect to which the deferral relates; (3) an election of a lump sum payment or the number of monthly installments (not to exceed 120) for the payment of the deferred amounts; and (4) the date benefit payments are to be made or to commence. A participant may designate any date for the commencement of benefit payments but in the event the participant retires or otherwise terminates employment, benefit payments shall commence within 60 days of retirement or termination notwithstanding any later date specified in the participant's election form. In addition, if any scheduled payment from this Plan during a taxable year of the Company would, in combination with other compensatory payments to the participant during such year, result in the participant's compensation exceeding the $1 million cap under Code Section 162(m), the Company in its sole discretion may defer benefit payments to the first subsequent year when the participant's compensation will not exceed the $1 million cap. 4. Participant Accounts For each participant there shall be established both a Participant Interest Account and a Participant Stock Account (collectively referred to as the Participant Account). Each Participant Interest Account shall be credited with the amounts deferred by, or contributed by the Company on behalf of, a participant plus an assumed annual interest on such amounts at a rate designated by the Committee from time to time as the benchmark assumed interest rate. This assumed interest shall be compounded annually and treated as earned from the date of crediting to the date of withdrawal. The Participant Stock Account shall be credited at the end of each month with the number of shares of Company Common Stock that could be purchased at the Common Stock's then fair market value with the amounts deferred by, or contributed by the Company on behalf of, a participant each month plus any hypothetical dividends payable during such month on the Company Common Stock previously credited to the Participant Stock Account. The value of each Participant Interest and Stock Account shall be adjusted no less frequently than monthly to reflect contributions to the Account, payments from the Account as hereinafter provided, and assumed interest on the Interest Account or additional stock purchases from hypothetical dividends on the Stock Account. The Stock Account shall also be adjusted no less frequently than monthly to reflect any gains (or losses) in the fair market value of Company Common Stock. All amounts credited to Participant Accounts shall be fully vested at all times. Except for the possible claims of the Company's general creditors, they shall not be subject to forfeiture on account of any action by a participant or by the Company, including termination of employment. The maintenance of individual Participant Accounts is for bookkeeping purposes only. The Company is not obligated to make actual contributions to fund this plan or to acquire or set aside any particular assets for the discharge of its obligations, nor is any participant to have any property rights in any particular assets held by the Company, whether or not held for the purpose of funding the Company's obligations hereunder. 5. Payment of Deferred Amounts No withdrawal may be made from a Participant Account except as provided in this section 5. Payments from an Account shall normally commence within 60 days following a participant's retirement or other termination of employment provided that a participant may elect an earlier date for payment of his own deferrals in the election form to which his deferred amounts relate. In the case of financial hardship, the Committee, in its sole discretion, may distribute all or a portion of an Account before termination of employment but the amount of the distribution shall not exceed the amount needed to relieve the financial hardship. In the case of a potential violation of the $1 million cap on compensation under Code Section 162(m), the Company may defer payments to a later year as authorized in section 3. Any payments deferred for Section 162(m) purposes shall be paid as soon as payment would no longer constitute a violation of the Code Section 162(m) compensation cap. Such payments shall be made in a manner as consistent as possible with the participant's original deferral election. For example, if installment payments were elected, the originally scheduled installment payments shall be made on schedule for a year even if the participant is paid a lump sum in that same year for the deferred payments. At any time prior to his becoming eligible to commence receiving benefits, the participant shall make a single, irrevocable election with the Committee to receive his benefits from either his Participant Interest Account or his Participant Stock Account. If no such election is made, or in the event of the participant's death, payment shall be made from whichever account has the higher value, measured at the time of the benefit commencement date. Payments from an Interest Account shall be made only in cash and payments from a Stock Account shall be made only in stock, provided that any fractional shares from a Stock Account shall be paid in cash. An aggregate of 182,250 shares of Company Common Stock (subject to substitution or adjustment as provided below) shall be available for stock payments under this Plan. Such shares may be authorized and unissued shares or may be treasury shares. In the event of any change in the Common Stock of the Company by reason of any stock dividend, recapitalization, reorganization, merger, consolidation, split-up, combination, or exchange of shares, or rights offering to purchase Common Stock at a price substantially below fair market value, or of any similar change affecting the Common Stock, the number and kind of shares which thereafter are available for stock payments under the Plan shall be appropriately adjusted consistent with such change in such manner as the Committee may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, participants in the Plan. All payments from a Participant Account shall be made in the form of either a lump sum payment or monthly installments over a period of years not to exceed ten as elected by the participant. This election shall be made on the participant's deferral notice, provided that the participant may change this election, by written notice to the Committee at any time up to 36 months prior to the actual benefit commencement date. Any requested change of an earlier election that is made within the 36 month period preceding the actual benefit commencement date shall not be effective and shall be disregarded by the Committee. Where payments are made in monthly installments, the balance credited to a Participant Account shall be adjusted periodically for assumed interest or stock purchases as provided in section 4. If installment payments are elected, the first installment shall equal the value of the Participant Account at such time multiplied by a fraction, the numerator of which is one and the denominator of which is the total number of monthly installments to be made. All subsequent installments shall equal the value of the Participant Account as of the last valuation date preceding the installment which is to be paid multiplied by a fraction, the numerator of which is one and the denominator of which is the total number of installments elected minus the number of installments already paid. In the event of a participant's death before the participant has received all of the deferred payments to which the participant is entitled hereunder, the remaining number of installments which would have been paid to the participant shall be paid to the participant's estate in the same manner that the participant would have received them. Notwithstanding a participant's election of installment payments, the Committee, in its sole discretion, shall have a right to accelerate any such payments or to make payment of the balance in a Participant Account in a lump sum. 6. Participant's Rights Unsecured The right of any participant or, if applicable, the participant's estate, to receive benefits under the provisions of this Plan shall be an unsecured claim against the general assets of the Company. Any amounts held in a Participant Account are a part of the Company's general assets and shall be reachable by the general creditors of the Company. 7. Statement of Account Statements will be sent to participants no less frequently than annually setting forth the value of their Participant Accounts. 8. Transferability The rights of a participant under this Plan shall not be transferable other than by will or the laws of descent and distribution and are exercisable during the participant's lifetime only by him or by his guardian or legal representative. 9. Plan Administrator The administrator of this Plan shall be a committee of the Board of Directors of the Company as from time to time designated by the Board. The Committee's members shall be non-employees of the Company. The Committee shall have the authority to adopt rules and regulations for carrying out the Plan and to interpret, construe and implement the provisions of the Plan. 10. Amendment This Plan may at any time or from time to time be amended, modified or terminated by the Company's Board of Directors. No amendment, modification or termination shall, without the consent of a participant, adversely affect such participant's accruals in his or her Participant Account. 11. Governing Law This Plan and any participant elections hereunder shall be interpreted and enforced in accordance with the laws of the State of New York. 12. Effective Date The effective date of this restated Plan is August 20, 1997. IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Plan document on its behalf this 20th day of August 1997. DETECTION SYSTEMS, INC. By _________________________ Frank J. Ryan, Vice President Federal Tax Aspects The Plan is a non-qualified deferred compensation plan under the provisions of the Internal Revenue Code. At the time a Company contribution or a participant's deferral of compensation is made, it is intended that the participants will not recognize income, for Federal income tax purposes. In addition, assumed interest and hypothetical dividends will not be treated as income at the time they are credited to the participant accounts. Participants will recognize ordinary income at the time the Company contributions and participant deferrals, together with the earnings credited to these amounts, are actually paid out or made available to the participants. The amount of such ordinary income will equal the amount of cash received plus the fair market value, on the date of payment, of any shares paid or made available. The ultimate sale or exchange of any shares of common stock received under the Plan will result in either long-term or short term capital gain, or loss depending on the holding period. Under current law, long term capital gains or losses will result upon the disposition of shares that are held for more than six months. A participant's basis in the shares will be the amount of income he recognizes at the time the shares were actually paid or made available to the participant. The Company is not entitled to deduct the amount of contributions or deferrals into the Plan or the assumed interest or hypothetical dividends credited to an account. Instead, the Company is entitled to take a deduction at the time a participant recognizes income. The amount of the deduction is the amount of income that a participant must recognize. For Social Security tax (F.I.C.A.) purposes the Company contributions and participant deferrals under the Plan are taxable as "wages" at the time the services are performed. This will result in Social Security taxes to a participant and to the Company only where a participant is otherwise below the Social Security Wage Base at the time the contributions or deferrals are made. The Plan is not a tax-qualified plan under Section 401(a) of the Internal Revenue Code and is not subject to ERISA. The Company has not received any ruling from the Internal Revenue Service concerning the tax consequences of the Plan. EX-10 4 [8/20/97 Restatement] DETECTION SYSTEMS, INC. DEFERRED STOCK BONUS PLAN 1. Purpose Detection Systems, Inc. (the "Company") has adopted this Deferred Stock Bonus Plan (the "Plan") for the benefit of its key personnel who wish to defer the receipt of stock bonuses which they may be entitled to receive from the Company. The purposes of the Plan are to assist key personnel with their individual tax and retirement income planning and to permit the Company to remain competitive in attracting, retaining, motivating and rewarding personnel who can directly influence the Company's operating results. The Plan was originally adopted as of January 1, 1989. This restatement is effective as of August 20, 1997. 2. Eligibility All key personnel selected by the Committee established under Section 9 shall be eligible to participate in this Plan. 3. Contributions a. Company Contributions The Company may contribute to a participant's account any amount of Company Stock, at any time and for any reason as the Company in its sole discretion may determine. The Company has no obligation to make such contributions to any participant's account and contributions need not be the same for all participants. b. Participant Deferrals (1) Amount of Deferral. In addition to Company contributions, a participant may elect to defer receipt of up to 100 percent of any stock bonus otherwise payable to the participant by the Company during a calendar year. (2) Time for Electing Deferral. An election to commence a deferral may be made at any time in accordance with the procedures set forth in subsection (3) below, provided that any election to defer a stock bonus must be made prior to the time that such stock bonus will be earned by the participant. Any election so made shall remain in effect until the participant elects in writing to change his or her election. (3) Manner of Electing Deferral. A participant shall elect a deferral by giving written notice to the Committee in a form prescribed by the Committee. The notice shall include (1) the amount to be deferred; (2) the period with respect to which the deferral relates; (3) an election of a lump sum payment or the number of monthly installments (not to exceed 120) for the payment of the deferred amounts; and (4) the date benefit payments are to be made or to commence. A participant may designate any date for the commencement of benefit payments but in the event the participant retires or otherwise terminates employment, benefit payments shall commence within 60 days of retirement or termination notwithstanding any later date specified in the participant's election form. In addition, if any scheduled payment from this Plan during a taxable year of the Company would, in combination with other compensatory payments to the participant during such year, result in the participant's compensation exceeding the $1 million cap under Code Section 162(m), the Company in its sole discretion may defer benefit payments to the first subsequent year when the participant's compensation will not exceed the $1 million cap. 4. Participant Accounts For each participant there shall be established both a Participant Interest Account and a Participant Stock Account (collectively referred to as the Participant Account). Each Participant Interest Account shall be credited with the fair market value, determined as of the date of the deferral, of the stock bonus deferred on behalf of a participant plus an assumed annual interest on such amounts at a rate designated by the Committee from time to time as the benchmark assumed interest rate. This assumed interest shall be compounded annually and treated as earned from the date of crediting to the date of withdrawal. The Participant Stock Account shall be credited at the end of each month with the number of shares of Company Common Stock whose payment is deferred plus any hypothetical dividends payable on the Company Common Stock previously credited to the Participant Stock Account. The value of each Participant Interest and Participant Stock Account shall be adjusted no less frequently than monthly to reflect contributions to the Account, payments from the Account as hereinafter provided, and assumed interest on the Interest Account or additional stock purchases from hypothetical dividends on the Stock Account. The Stock Account shall also be adjusted as of the end of the Company's fiscal year to reflect gains (or losses) in the fair market value of Company Common Stock. For purposes of this Plan, the fair market value of the Company's Common Stock shall equal the Stock's average share value during the fiscal year preceding the date on which the valuation is performed. The Committee has the discretion to determine the precise method for calculating the average share value. All amounts credited to Participant Accounts shall be fully vested at all times. Except for the possible claims of the Company's general creditors, they shall not be subject to forfeiture on account of any action by a participant or by the Company, including termination of employment. The maintenance of individual Participant Accounts is for bookkeeping purposes only. The Company is not obligated to acquire or set aside any particular assets for the discharge of its obligations, nor is any participant to have any property rights in any particular assets held by the Company, whether or not held for the purpose of funding the Company's obligations hereunder. 5. Payment of Deferred Amounts No withdrawal may be made from a Participant Account except as provided in this section 5. Payments from an Account shall normally commence within 60 days following the earlier of (1) the benefit commencement date contained in the participant's initial deferral notice or (2) the participant's retirement or other termination of employment. At the election of a participant who could be subject to suit under section 16(b) of the Securities Exchange Act of 1934, payment can be delayed for up to six months and a day following termination of employment. In the case of financial hardship, the Committee, in its sole discretion, may distribute all or a portion of an Account before the normal benefit commencement date determined above but the amount of the distribution shall not exceed the amount needed to relieve the financial hardship. In the case of a potential violation of the $1 million cap on compensation under Code Section 162(m), the Company may defer payments to a later year as authorized in section 3. Any payments deferred for Section 162(m) purposes shall be paid as soon as payment would no longer constitute a violation of the Code Section 162(m) compensation cap. Such payments shall be made in a manner as consistent as possible with the participant's original deferral election. For example, if installment payments were elected, the originally scheduled installment payments shall be made on schedule for a year even if the participant is paid a lump sum in that same year for the deferred payments. At any time prior to his benefit commencement date, the participant shall make a single, irrevocable election with the Committee to receive his benefits from either his Participant Interest Account or his Participant Stock Account. If no such election is made or in the event of the participant's death, payment shall be made from whichever account has the higher value, measured at the time of the benefit commencement date. Payments from an Interest Account shall be made only in cash and payments from a Stock Account shall be made only in stock, provided that any fractional shares from a Stock Account shall be paid in cash. The number of shares of Company Common Stock that shall be available for stock payments under this Plan shall be limited to a maximum of 10% of the total shares outstanding. Such shares may be authorized and unissued shares or may be treasury shares. In the event of any change in the Common Stock of the Company by reason of any stock dividend, recapitalization, reorganization, merger, consolidation, split-up, combination, or exchange of shares, or rights offering to purchase Common Stock at a price substantially below fair market value, or of any similar change affecting the Common Stock, the number and kind of shares which thereafter are available for stock payments under the Plan shall be appropriately adjusted consistent with such change in such manner as the Committee may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, participants in the Plan. All payments from a Participant Account shall be made in the form of either a lump sum payment or monthly installments over a period of years not to exceed ten as elected by the participant. This election shall be made on the participant's deferral notice, provided that the participant may change this election, by written notice to the Committee at any time up to 36 months prior to the actual benefit commencement date. Any purported change of an earlier election that is made within the 36 month period preceding the actual benefit commencement date shall not be effective and shall be disregarded by the Committee. Where payments are made in monthly installments, the balance credited to a Participant Account shall be adjusted periodically for assumed interest or stock purchases as provided in section 4. In the event of a participant's death before the participant has received all of the deferred payments to which the participant is entitled hereunder, the remaining number of installments which would have been paid to the participant shall be paid to the participant's estate in the same manner that the participant would have received them. Notwithstanding a participant's election of installment payments, the Committee, in its sole discretion, shall have a right to accelerate any such payments or to make payment of the balance in a Participant Account in a lump sum. 6. Participant's Rights Unsecured The right of any participant or, if applicable, the participant's estate, to receive benefits under the provisions of this Plan shall be an unsecured claim against the general assets of the Company. Any amounts held in a Participant Account are a part of the Company's general assets and shall be reachable by the general creditors of the Company. 7. Statement of Account Statements will be sent to participants no less frequently than annually setting forth the value of their Participant Accounts. 8. Transferability The rights of a participant under this Plan shall not be transferable other than by will or the laws of descent and distribution and are excercisable during the participant's lifetime only by him or by his guardian or legal representative. 9. Plan Administrator The administrator of this Plan shall be a committee of the Board of Directors of the Company as from time to time designated by the Board. The Committee's members shall be non-employees of the Company. The Committee shall have the authority to adopt rules and regulations for carrying out the Plan and to interpret, construe and implement the provisions of the Plan. 10. Amendment This Plan may at any time or from time to time be amended, modified or terminated by the Company's Board of Directors. No amendment, modification or termination shall, without the consent of a participant, adversely affect such participant's accruals in his or her Participant Account. 11. Governing Law This Plan and any participant elections hereunder shall be interpreted and enforced in accordance with the laws of the State of New York. 12. Effective Date The effective date of this restated Plan is August 20, 1997. IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Plan document on its behalf this 20th day of August 1997. DETECTION SYSTEMS, INC. By ___________________________ Frank J. Ryan, Vice President -----END PRIVACY-ENHANCED MESSAGE-----