-----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, UR2qPnvxGmXtdKr3EfSj/Dg7TNmnPI8Skh8X/VNhc/aPqAXzQEVskI+8bpUjWn8d h1H6G9iFzGS6gFTvRLPj6g== 0000028365-99-000002.txt : 19990215 0000028365-99-000002.hdr.sgml : 19990215 ACCESSION NUMBER: 0000028365-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 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: 99535399 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 QUARTERLY REPORT 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, 1998 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 January 31, 1999 there were outstanding 6,330,873 shares of the registrant's common stock, par value $.05 per share.
PART I FINANCIAL INFORMATION DETECTION SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheet (in thousands, except per share data) Dec. 31, 1998 March 31, 1998 (Unaudited) Assets Current assets: Cash and cash equivalents $ 2,480 $ 3,160 Accounts receivable, less allowance for doubtful accounts ($1,282 and $1,033, respectively) 22,085 23,505 Inventories 41,701 38,154 Other current assets 5,801 3,701 -------- -------- 72,067 68,520 Fixed assets, net 11,732 12,142 Goodwill and other intangibles 9,982 8,907 Other assets 4,833 4,475 -------- -------- $ 98,614 $ 94,044 ======== ======== Liabilities Current liabilities: Short term borrowings $ 2,927 $ 4,002 Current portion of long term debt 386 405 Accounts payable 10,298 12,368 Accrued payroll and benefits 1,685 1,636 Other current liabilities 8,731 5,165 -------- -------- 24,027 23,576 Other liabilities 2,396 2,655 Long term debt 17,542 16,549 Shareholders' equity: Common stock, par value $.05 per share; Authorized - 24,000 shares; Issued - 6,557 shares and 6,518 shares, respectively 328 326 Capital in excess of par value 45,105 44,805 Retained earnings 13,269 9,976 -------- -------- 58,702 55,107 Less - Treasury stock, at cost (3,780) (3,785) Notes receivable for stock purchases (18) (14) Cumulative translation adjustment (255) (44) -------- -------- 54,649 51,264 -------- -------- $ 98,614 $ 94,044 ======== ========
(See accompanying notes to consolidated financial statements)
DETECTION SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statement of Operations and Retained Earnings (Unaudited) (in thousands, except per share data) For the Three Months Ended: Dec. 31, 1998 Dec. 31, 1997 ------------- ------------- Net sales $ 34,201 $ 31,347 Costs and expenses: Production 21,054 $ 21,437 Research and development 2,106 2,266 Marketing, administrative and general 8,807 7,153 -------- -------- Total costs and expenses 31,967 30,856 Operating income 2,234 491 Other income (expense) Interest income 27 92 Interest expense (430) (419) Other income (expense) 182 (274) -------- -------- Income (loss) before income taxes 2,013 (110) Provision (benefit) for income taxes 782 (34) -------- -------- Net income (loss) $ 1,231 $ (76) ======== ======== Retained earnings at beginning of period 12,038 10,412 -------- -------- Retained earnings at end of period $ 13,269 $ 10,336 ======== ======== Earnings per share Basic $ 0.19 $ (0.01) ======== ======== Diluted $ 0.18 $ (0.01) ======== ========
(See accompanying notes to consolidated financial statements)
DETECTION SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statement of Operations and Retained Earnings (Unaudited) (in thousands, except per share data) For the Nine Months Ended: Dec. 31, 1998 Dec. 31, 1997 ------------- ------------- Net sales $103,464 $ 94,018 Costs and expenses: Production 63,988 62,026 Research and development 6,196 6,554 Marketing, administrative and general 26,892 21,029 -------- -------- Total costs and expenses 97,076 89,609 Operating income 6,388 4,409 Other income (expense) Interest income 145 98 Interest expense (1,266) (1,873) Other income (expense) 120 (35) -------- -------- Income before income taxes 5,387 2,599 Provision for income taxes 2,094 869 -------- -------- Net income $ 3,293 $ 1,730 ======== ======== Retained earnings at beginning of period 9,976 8,594 Amortization of redeemable common stock 12 -------- -------- Retained earnings at end of period $ 13,269 $ 10,336 ======== ======== Earnings per share Basic $ 0.52 $ 0.34 ======== ======== Diluted $ 0.48 $ 0.31 ======== ========
(See accompanying notes to consolidated financial statements)
DETECTION SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows (Unaudited) (in thousands of dollars) For the Nine Months Ended December 31, 1998 1997 Cash flows from operating activities: -- -- Net income $ 3,293 $ 1,730 -------- -------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,807 2,951 Deferred compensation 457 Stock based compensation 86 Gain on sale of land (205) Changes in assets and liabilities: Accounts receivable 1,535 (1,820) Inventories (2,917) 2,313 Accounts payable (2,420) (2,448) Accrued payroll and benefits 49 (1,643) Other assets & liabilities 116 (4,324) -------- -------- Total adjustments (830) (4,633) -------- -------- Net cash provided by (used in)operating activities 2,463 (2,903) Cash flows from investing activities: Capital expenditures (2,250) (1,977) Proceeds from sale of land 312 Acquisition of businesses (505) (6,816) -------- -------- Net cash used in investing activities (2,755) (8,481) Cash flows from financing activities: Proceeds from borrowings 1,443 6,718 Proceeds from issuance of common stock 28,519 Principal payments on debt and capital lease obligations (1,666) (19,135) Common stock transactions, net 46 468 -------- -------- Net cash (used in) provided by financing activities (177) 16,570 Effect of exchange rates (211) (302) -------- -------- Net(decrease)increase in cash and cash equivalents (680) 4,884 Cash and cash equivalents, beginning of period 3,160 2,244 -------- -------- Cash and cash equivalents, end of period $ 2,480 $ 7,128 ======== ======== Cash paid during the period for: Interest $ 1,311 $ 1,532 ======== ======== Income taxes $ 614 $ 1,612 ======== ========
(See accompanying notes to consolidated financial statements) DETECTION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997 (Unaudited) NOTE 1. - GENERAL The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The interim consolidated financial statements include the consolidated accounts of Detection Systems, Inc. and its majority-owned subsidiaries (collectively, "the Company") with all significant intercompany transactions eliminated. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented have been made. Certain prior period balances have been reclassified to conform with the current period presentation. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such SEC rules and regulations. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended March 31, 1998. Cash flow statement - Non-cash transactions during fiscal 1999 and 1998 consisted of the acquisition of certain businesses with shares of the Company's common stock. See Note 3. NOTE 2. - INVENTORIES Major classifications of inventory follow (in thousands): Dec. 31, 1998 March 31, 1998 -------------- -------------- Component Parts $17,067 $22,061 Work In Process 3,534 1,488 Finished Products 21,100 14,605 ------ ------ $41,701 $38,154 ====== ====== NOTE 3. - ACQUISITIONS 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 $125,000 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 DA Systems in exchange for 221,738 shares of its common stock. The shares were callable at the Company's option at $17 per share plus interest at 8.25% until June 30, 1998, and could be put to the Company at that price after that date. The Company exercised its call option to repurchase these shares in connection with the issuance of common stock in September 1997. The cost of this acquisition was approximately $4,000,000. DA Systems is a British manufacturer of security control equipment and had annual net sales of approximately $10,800,000 prior to its acquisition. In June 1997, the Company acquired 99.5% of the outstanding stock of Seriee 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 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 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 had annual net sales of approximately $4,600,000 prior to its acquisition. These transactions have been accounted for as purchases and, accordingly, the results of DA Systems, Seriee, RAS, Security Supplies, EDM, EFSEC and Alarm Center are included in the consolidated financial statements as of the date of acquisition. The financial statements reflect the final allocation of the purchase price for each business, except for EDM, EFSEC and Alarm Center, for which the purchase price allocation has not been finalized. Unallocated excess of purchase price over net assets acquired as of December 31, 1998 is $3,272,000 and is included with goodwill and other intangibles. NOTE 4 - EARNINGS PER SHARE There are no significant reconciling items between net income as presented in the consolidated statement of operations and net income available to common shareholders used in the calculation of earnings per share. Reconciling items between the number of shares used in the calculation of basic and diluted earnings per share relate to deferred compensation plans, options and warrants, as follows (in thousands): Three months Nine months Ended Dec. 31, Ended Dec. 31, 1998 1997 1998 1997 ---- ---- ---- ---- Weighted average number of shares outstanding 6,328 6,048 6,313 5,165 Shares associated with deferred compensation, option and warrant plans 504 -- 513 398 NOTE 5 - RESTRUCTURING The Company recorded a restructuring charge of approximately $400,000 during the first quarter of fiscal 1999 for severance costs related to the termination of employees at the Fairport, New York and Southall, England facilities. The charge has been included in the results from continuing operations and had a material impact on operating results in the first quarter of 1999. These manufacturing employees will be terminated during fiscal 1999, thus the accrual has been included in other current liabilities at December 31, 1998. DETECTION SYSTEMS, INC. AND SUBSIDIARIES 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 nine acquisitions and established a manufacturing facility in China. Recent acquisitions are described in Note 3. These acquisitions had a significant impact on the comparative information for the nine month and three month periods ending December 31, 1998 and 1997 with respect to results of operations. The Company recognizes net sales upon shipment of products to customers. Production expenses include materials, direct labor and manufacturing overhead as well as an allocated portion of indirect overhead. Outgoing freight, customs and other costs associated with delivery of products to customers are classified under marketing, administrative and general expenses. Research and development expenses include costs associated with salaries and benefits for certain engineering employees, supplies, agency approvals, depreciation and occupancy, as well as charges for independent testing and independent contractors engaged for specific projects. Marketing, administrative and general expenses include costs related to the Company's sales efforts and corporate and general administrative functions, including costs of executive, administrative and sales personnel, marketing/selling supplies, advertising, depreciation and professional fees. Results of Operations The following table sets forth, for the periods indicated, the percentages which certain items of income and expense bear to net sales:
(Unaudited) (Unaudited) Fiscal Year Three Months Nine Months Ended March 31, Ended Dec. 31, Ended Dec. 31 1998 1997 1998 1997 1998 1997 Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Costs and expenses: Production 66.4 64.2 61.6 68.4 61.8 66.0 Research and development 6.8 8.0 6.2 7.2 6.0 7.0 Marketing, administrative and general 23.2 21.2 25.7 22.8 26.0 22.3 ----- ----- ----- ----- ----- ----- Operating income 3.6 6.6 6.5 1.6 6.2 4.7 Other income (expense) Interest income 0.2 0.1 0.1 0.3 0.1 0.1 Interest expense (1.8) (1.7) (1.2) (1.3) (1.2) (2.0) Other (expense) income (0.2) 0.2 0.5 (0.9) 0.1 (0.1) ----- ----- ----- ----- ----- ----- Income (loss) before income taxes 1.8 5.2 5.9 (0.3) 5.2 2.7 Provision (benefit) for 0.7 1.5 2.3 (0.1) 2.0 0.9 income taxes ----- ----- ----- ----- ----- ----- Net income (loss) 1.1% 3.7% 3.6% (0.2)% 3.2% 1.8% ===== ===== ===== ===== ===== =====
Three Months Ended December 31, 1998 Compared to Three Months Ended December 31, 1997 The Company's net sales increased 9.1% to $34,201,000 in the fiscal 1999 period from $31,347,000 in the comparable period in fiscal 1998. The net sales of acquired businesses accounted for $1,875,000 of this increase. Net sales from on-going operations were $32,326,000 in the fiscal 1999 period. Net sales during the current period by the Company's on-going operations have been favorably impacted compared to the prior year period by increased sales of security sensors and controls as well as CCTV products. This has been offset, in part, by the continued impact of lower sales to one of the Company's major domestic customers and by the acquisition of two of the Company's domestic customers by other businesses who are not standardized on the Company's products. Production expenses decreased 1.8% to $21,054,000 in the fiscal 1999 period from $21,437,000 in the comparable period in fiscal 1998. As a percentage of net sales, production expenses decreased to 61.6% in the fiscal 1999 period compared to 68.4% in the comparable period in fiscal 1998. The decrease in production expenses in the aggregate and 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 decreased 7.1% to $2,106,000 in the fiscal 1999 period from $2,266,000 in the comparable period in fiscal 1998. As a percentage of net sales, research and development expenses decreased to 6.2% in the fiscal 1999 period from 7.2% in the comparable period in 1998. The decrease in research and development expenses as a percentage of net sales was primarily due to the reduced use of outside consultants and the acquisition of redistributor businesses during fiscal 1999 and 1998 which have sales but do not incur research and development expenditures. Marketing, administrative and general expenses increased 23.1% to $8,807,000 in the fiscal 1999 period from $7,153,000 in the comparable period in fiscal 1998. As a percentage of net sales, marketing, administrative and general expenses increased to 25.7% in the fiscal 1999 period from 22.8% in the comparable period 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 additional marketing and technical support expenditures incurred by the Company's domestic and international businesses. Interest expense increased to $430,000 in the fiscal 1999 period from $419,000 in the comparable period in 1998, as borrowings outstanding remained relatively consistent during the two periods. The Company's effective income tax rate for the fiscal 1999 period was 38.8% compared to 30.9% for the comparable period in fiscal 1998. The higher effective rate was attributable to changes in the mix of the Company's income generated from domestic and international entities as well as the impact of non-deductible goodwill arising from the Company's acquisitions. Nine Months Ended December 31, 1998 Compared to Nine Months Ended December 31, 1997 The Company's net sales increased 10.0% to $103,464,000 in the nine-month fiscal 1999 period from $94,018,000 in the comparable period in fiscal 1998. The net sales of acquired businesses accounted for $8,353,000 of this increase. Net sales from on-going operations were $95,111,000 in the fiscal 1999 period. Sales during the current period by the Company's on-going operations have been favorably impacted compared to the prior year period by increased sales of security sensors and controls as well as CCTV products. This has been offset, in part, by lower sales to one of the Company's major domestic customers and by the acquisition of two of the Company's domestic customers by other businesses who are not standardized on the Company's products. Production expenses increased 3.2% to $63,988,000 in the fiscal 1999 period from $62,026,000 in the comparable period in 1998. As a percentage of net sales, production expenses decreased to 61.8% in the fiscal 1999 period compared to 66.0% in the comparable period in fiscal 1998. 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 changes in product mix. Research and development expenses decreased 5.5% to $6,196,000 in the fiscal 1999 period from $6,554,000 in the comparable period in fiscal 1998. The decrease in research and development expenses is primarily attributable to the reduced use of outside consultants. As a percentage of net sales, research and development expenses decreased to 6.0% in the fiscal 1999 period from 7.0% in the comparable period in 1998. The decrease in research and development expenses as a percentage of net sales was primarily due to the reduced use of outside consultants and the acquisition of redistributor businesses during fiscal 1999 and 1998 which have sales but do not incur research and development expenditures. Marketing, administrative and general expenses increased 27.9% to $26,892,000 in the fiscal 1999 period from $21,029,000 in the comparable period in fiscal 1998. As a percentage of net sales, marketing, administrative and general expenses increased to 26.0% in the fiscal 1999 period from 22.3% in the comparable period in fiscal 1998. The increase in marketing, administrative and general expenses was primarily due to the acquisition of businesses in fiscal 1998. In addition, a charge of approximately $400,000 was recorded in the first quarter of fiscal 1999 relating to the restructuring of the Company's Fairport, New York and Southall, England manufacturing facilities. This restructuring relates to severance associated with the transfer of manufacturing from those facilities to the Company's China facility. It is expected that these actions will be substantially completed by the end of fiscal 1999. The Company expects to save approximately $2.0 million annually in production related salaries and benefits as a result of this action. Interest expense decreased to $1,266,000 in the fiscal 1999 period from $1,873,000 in the comparable period in 1998. This decrease was primarily due to lower borrowings outstanding. Approximately $18,800,000 in debt was repaid during the second quarter of fiscal 1998 with proceeds from the Company's September 1997 public offering of common stock. The Company's effective income tax rate for the fiscal 1999 period was 38.9% compared to 33.4% for the comparable period in fiscal 1998. The higher effective rate was attributable to changes in the mix of the Company's income generated from domestic and international entities as well as the impact of non-deductible goodwill arising from the Company's acquisitions. Liquidity and Capital Resources The Company considers liquidity to be its ability to meet its long- and short-term cash requirements. Prior to 1996, those requirements were primarily met by cash generated by the Company's operating activities and cash reserves. Since the 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, 1998. During the nine months ended December 31, 1998, the Company's operating activities provided $2,463,000 of operating cash flow. Net income, depreciation and amortization provided $6,100,000. An increase in inventories used $2,917,000. A decrease in accounts payable used $2,420,000 and an increase in accounts receivables provided $1,535,000. Other account changes provided $165,000 of operating cash flow. During the nine months ended December 31, 1998, cash used in investing activities was $2,755,000 and was utilized for the acquisition of EFSEC and Alarm Center and for capital expenditures. During the nine months ended December 31, 1998, cash used in financing activities was $177,000, primarily representing principal repayments of debt. Capital Resources. On December 31, 1998, the Company had cash balances of $2,480,000. On that date, the Company had a $17,000,000 revolving credit facility under which it had borrowed $2,093,000. 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, 2000. The Company expects to continue to pursue acquisitions and the development of new products and markets. On-going capital expenditures will include continued investment in facilities and equipment necessary to produce and market its security, fire detection, access control and CCTV 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 1999. Year 2000 Issues. The Company has appointed a team to assess the impact of the year 2000 on its information systems, products, and business. This team includes two members of senior management and is led by the Vice President of Operations. To ensure year 2000 compliance, the Company has established specific categories to be reviewed: Products. The Company places a high priority on ensuring its products are year 2000 ready. The Company has completed its review of all products that are manufactured domestically and at its China manufacturing facility as well as products purchased for resale by its domestic businesses. The Company believes these products to be year 2000 compatible. The Company is completing its assessment of year 2000 compatibility of products manufactured and purchased for resale at its other foreign subsidiaries. The Company does not expect significant issues with year 2000 readiness of products sold by its foreign subsidiaries as products sold by the Company generally do not use date information for calculations or comparisons. Manufacturing. Some of the tools and equipment (hardware and software) used to develop and manufacture the Company's products are date-sensitive. The Company believes that the date-sensitive tools and equipment used by it to manufacture products are now year 2000 compatible. As a result the Company does not expect significant interruption to its manufacturing capabilities because of the failure of tools and/or equipment. Non-Manufacturing Business Applications. The Company is in the process of fixing and testing all non-manufacturing business applications such as core financial information and reporting systems, procurement, human resources/payroll, factory applications, customer service systems, and revenue systems, and does not expect any significant year 2000 problems in this area. The Company's domestic business information systems required upgrades and enhancements to be made year 2000 compatible. These upgrades have been made and are currently being tested. All necessary upgrades to other information technology infrastructure have been identified and remediation is in process. Testing of year 2000 upgrades is expected to be completed prior to the year 2000. Most of the Company's non-US subsidiaries' information systems will require various degrees of upgrade or replacement to be capable of handling year 2000 issues (excluding the Hong Kong subsidiary, which utilizes the Company's domestic information system). The Company has purchased a new enterprise resource planning system capable of handling the year 2000 that is currently being inplemented at its foreign subsidiaries. The Company expects to be capable of handling the year 2000 at all locations without significant interruption to business activity. Facilities and Infrastructure. The Company has evaluated its facilities and infrastructure (health, safety and environment systems, buildings, security/alarms/doors, desktop computers, networks) to ensure they are year 2000 compatible. Upgrades are being implemented where needed and the Company does not expect significant interruption to its operations because of year 2000 problems with its facilities and infrastructure. Logistics. Of importance to the Company for year 2000 is the readiness of suppliers and the products the Company procures from suppliers as well as customers and service providers. The Company has a comprehensive program to identify and obtain year 2000 information from its critical suppliers, customers and service providers. The program includes awareness letters, questionnaires, and a review of year 2000 web-sites. The Company has mailed a questionnaire to substantially all suppliers, customers and service providers regarding year 2000 readiness. Responses are currently being received and evaluated. If a supplier, customer or service provider is of concern regarding year 2000 readiness, the Company will develop contingency plans to minimize the year 2000 risk. The Company estimates that its aggregate costs for year 2000 activities from 1997 through 2000 will be approximately $750,000. External costs incurred through December 31, 1998 were approximately $145,000 and primarily related to computer software. It is anticipated that the remaining year 2000 costs will relate to computer software, computer hardware and consulting fees. The Company does not separately track internal costs relating to the year 2000 and they are not included in the Company's estimate of year 2000 costs. These costs do not include estimates for potential litigation, which at the present time is not viewed as a significant risk. The Company reviews and updates data for costs incurred and forecasted costs each quarter. These costs are based on management's estimates, which were determined based on assumptions of future events, some within the Company's control, but some outside the Company's control. Management's estimate of the costs and completion dates are dependent on various factors including the availability of skilled resources and the ability to locate and modify all relevant software code. No amount of preparation and testing can guarantee year 2000 compliance. Nevertheless, the Company recognizes that failing to resolve its year 2000 issues on a timely basis would, in a worst case scenario, significantly limit its ability to manufacture and distribute its products and process its daily business transactions for a period of time, especially if such failure is coupled with third party or infrastructure failures. Similarly, the Company could be significantly affected by the failure of one or more significant suppliers, customer or components of the infrastructure to conduct their respective operations without interruption after 1999. Because of the difficulty of assessing the year 2000 compliance of such third parties, the Company considers the potential disruptions caused by such parties to present the most reasonably likely worst-case scenarios. Adverse effects on the Company could include business disruption, increased costs, loss of sales and other similar ramifications. However, the Company believes it is taking appropriate preventive measures and will be successful in avoiding any material adverse effect on the Company's operations or financial condition. For additional information regarding the risks associated with the Company's compliance with year 2000, see "Risk Factors-Year 2000" in Item 1 of the Company's Form 10-K for the year ended March 31, 1998. Euro Conversion. The Company is assessing the potential impact that may result from the euro conversion in a number of areas, including the following: (1) accounting and tax; (2) management information systems required to accommodate euro-denominated transactions; (3) the impact on currency exchange costs and currency exchange rate risk; and (4) the impact on existing contracts. Since the Company is still in its assessment phase, the Company cannot yet predict the anticipated impact of the euro conversion on the Company. New Accounting Standards. In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income includes net income and several other items that current accounting standards require to be recognized outside of net income. This standard requires enterprises to display comprehensive income and its components in financial statements, to classify items of comprehensive income by their nature in financial items statements, and to display the accumulated balances of other comprehensive income in stockholders' equity separately from retained earnings and additional paid-in capital. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This standard requires enterprises to report certain information about their operating segments in a complete set of financial statements to shareholders; to report certain enterprise-wide information about products and services, activities in different geographic areas, and reliance on major customers; and to disclose certain segment information in their interim financial statements. The basis for determining an enterprise's operating segments is the manner in which financial information is used internally by the enterprise's chief operating decision maker. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The adoption of the disclosure requirements of SFAS 130 and SFAS 131 as required for the Company's 1999 Annual Report are not expected to have a significant impact on the Company's financial statement disclosures. Dividend Policy. The Company is dedicated to promoting shareholder value through long-term profitability and growth and believes that continued investments in future product development are essential to this goal. For this reason, it has been the Company's policy to not pay cash dividends. Forward-Looking Statements This quarterly report contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs, including, but not limited to, statements concerning industry performance, the Company's operations, performance, financial condition, growth and acquisition strategies, margins and growth in sales of the Company's products. For this purpose, any statements contained in this quarterly report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "plan," "anticipate," "intend," "could," "estimate," "continue," "goal" or "strategy" or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company's control, and actual results may differ materially depending on a variety of important factors, including those described previously in the "Risk Factors" section of the Company's 1998 Form 10-K for the year ended March 31, 1998. PART II OTHER INFORMATION Item 6. Exhibits and Reports for Form 8-K. A. Exhibits See Exhibit Index B. Reports on Form 8-K No reports on Form 8-K were filed during the quarter. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DETECTION SYSTEMS, INC. Registrant DATE: February 12, 1999 By: /s/ Karl H. Kostusiak Karl H. Kostusiak, President By: /s/ Frank J. Ryan Frank J. Ryan, Vice President, Secretary and Treasurer (Principal Financial Officer) By: /s/ Christopher P. Gerace Christopher P. Gerace Chief Accounting Officer (Principal Accounting Officer) EXHIBIT INDEX Item No. Exhibits Location 3(a) Detection Systems, Inc. Incorporated by reference to Certificate of Exhibit 3 of the Company's Incorporation as amended Quarterly Report on Form 10-Q for the quarter ended 9/30/98 3(b) Detection Systems, Inc. Incorporated by reference to By-Laws as amended Exhibit 3(b) of the Company's 1997 Annual Report on Form 10-K 10(a) Medical reimbursement plan Incorporated by reference to Exhibit 10(b) of the Company's 1997 Annual Report on Form 10-K 10(b) Employee stock purchase Incorporated by reference to plan Exhibit 10 of the Company's 1994 Annual Report on Form 10-K 10(c) Fleet Amended & Restated Incorporated by reference to Credit Facility Agreement Exhibit 10(c) of the Company's dated September 30, 1998 Quarterly Report on Form 10-Q for the quarter ended 9/30/98 10(d) Deferred Compensation Plan Incorporation by reference to and Deferred Bonus Plan Exhibit 10(c) of the Company's Quarterly Report on Form 10-Q, for the quarter ended 12/31/97 10(e) 1992 Restated Stock Option Incorporated by reference to Plan Exhibit 22 of the Company's 1995 Annual Report on Form 10-K 10(f) 1997 Stock Option Plan Incorporated by reference to Exhibit 10(o)of the Company's Registration Statement on Form S-2 (No. 333-31951) filed on 7/24/97 10(g) Executive Officer Cash Incorporated by reference to Bonus Plan Exhibit 10(g) of the Company's 1998 Annual Report on Form 10-K 10(h) Executive employment Incorporated by reference to contract with Karl H. Exhibit 10(h) of the Company's Kostusiak 1998 Annual Report on Form 10-K 10(i) Amendment #1 to executive Incorporated by reference to employment contract with Exhibit 10(i) of the Company's Karl H. Kostusiak Quarterly Report on Form 10-Q for the quarter ended 9/30/98 10(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 9/30/98 10(k) Executive employment Incorporated by reference to contract with Lawrence R. Exhibit 10 of the Company's 1995 Tracy Annual Report on Form 10-K 10(l) Stock Purchase Agreements Incorporated by reference to with Karl H. Kostusiak and Exhibit 10(l) of the Company's David B. Lederer 1997 Annual Report on Form 10-K 10(m) Non-Employee Director Stock Incorporated by reference to Option Plan Exhibit 10(m) of the Company's Quarterly Report on Form 10-Q for the quarter ended 9/30/98 11 Statement re: Computation Included as Exhibit 11 of this of Per Share Earnings Quarterly Report on Form 10-Q 24 Powers of Attorney Incorporated by reference to Exhibit 24 of the Company's 1998 Annual Report on Form 10-K 27 Financial Data Schedule Included as Exhibit 27 of this Quarterly Report on Form 10-Q EX-11 2 PER SHARE EARNINGS Exhibit 11 DETECTION SYSTEMS, INC. COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share data) Three Months Ended December 31, 1998 1997 ---- ---- Net income $1,231 $ (76) ===== ===== Weighted average number of shares 6,328 6,048 ===== ===== Basic earnings per share $0.19 $(0.01) ===== ===== Shares attributable to deferred compensation plans and stock options and warrants 504 ==== ==== Diluted earnings per share: $0.18 $(0.01) ==== ==== Nine Months Ended December 31, 1998 1997 ---- ---- Net income $3,293 $1,730 Plus: amortization of redeemable stock 12 ----- ----- Income available to common stockholders $3,293 $1,742 ===== ===== Weighted average number of shares 6,313 5,165 ===== ===== Basic earnings per share $0.52 $0.34 ===== ===== Shares attributable to deferred compensation plans and stock options and warrants* 513 398 ==== ==== Diluted earnings per share: $0.48 $0.31 ==== ==== * Due to losses incurred in the third quarter for the period ended December 31, 1997, the effect of shares attributed to options, warrants and deferred compensation was reduced by 195,236 in arriving at the year-to-date weighted average number of shares included in diluted earnings per share, to avoid anti-dilution. EX-27 3 FDS -- WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000 9-MOS MAR-31-1999 APR-01-1998 DEC-31-1998 2,480 0 23,367 91,282) 41,701 72,067 30,790 (19,058) 98,614 24,027 0 0 0 328 54,321 98,614 34,201 34,201 21,054 31,967 (209) 0 430 2,013 782 1,231 0 0 0 1,231 0.19 0.18
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