ITEM 2. PROPERTIES.
The Company's manufacturing, research and general office operations are conducted at its 92,000 square foot facility at 130 Perinton Parkway, Fairport, New York. This plant was re- financed as part of the Radionics acquisition and the mortgage loan is secured by a lien on the land and building.
Radionics' manufacturing, research and general office operations are conducted at its leased 156,000 square foot facility located in Salinas, California. The lease extends to July of 1999.
Internationally, the Company has leased a 70,000 square foot manufacturing facility in Southeast Asia and has offices / distribution centers located in Australia, France, Hong Kong and the United Kingdom, as well as a manufacturing facility in the United Kingdom.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the Company's fourth quarter ending March 31, 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
The Company's common stock trades on The Nasdaq National Market tier of The Nasdaq Stock Market under the symbol: DETC. On June 13, 1997, the closing price, as reported by The Nasdaq Stock Market, was $17.50 per share, and the number of shareholders was approximately 3,200. Certain information regarding the price range of the Company's Common Stock (quarterly high and low) is presented below:
PRICE RANGE OF COMMON STOCK
The quarterly high and low bid of the Company's common stock during the past three years (in dollars):
*Per share amounts have been restated to reflect the three-for- two stock split distributed December 17, 1996.
*Per share amounts have been restated to reflect the three-for- two stock split distributed December 17, 1996.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
The Company designs, manufactures and markets electronic detection, control and communication equipment for the security, fire protection, access control and CCTV industries. From its inception in 1968 until the early 1990s, the Company was primarily a niche provider of intrusion detection devices for the domestic market. In 1995, the Company adopted a strategy which focused on expanding its product offerings, establishing an international sales presence, increasing its manufacturing capacity and improving its manufacturing cost structure. The Company has since made five acquisitions, opened sales offices in seven countries and successfully established a manufacturing facility in China. These initiatives have enabled the Company to significantly expand its product catalog and market scope and to increase its net sales from $34.3 million in fiscal 1995 to $101.3 million in fiscal 1997.
The Company more than doubled its annualized net sales with its purchase of Radionics, Inc. ("Radionics") in February 1996. The Radionics acquisition had a significant impact on the comparative information for fiscal 1996 and 1997 with respect to both the results of operations as well as asset and liability balances. Radionics had annual net sales of $45.1 million for its year ended December 31, 1995. The Radionics acquisition was funded by borrowings under a commercial credit facility which has resulted in a significant increase in interest expense for the periods following the acquisition.
In April 1995, the Company commenced development of a manufacturing facility in China which became operational in October 1995. This facility has significantly increased the manufacturing capacity of the Company. The Company has realized manufacturing efficiencies by transitioning to its China facility a portion of its domestic manufacturing operations, including substantially all of the manufacturing operations previously conducted by Radionics. The Company believes that these efficiencies, coupled with the volume generated by its expanded product catalog and sales network, will enable it to reduce its unit manufacturing costs and increase its operating and gross profit margins.
The Company has recently completed four additional acquisitions: (i) the purchase of certain assets of Senses International, Inc. ("Senses") in October 1996 which had annual net sales of approximately $2.0 million, (ii) the purchase of Digital Audio Limited ("DA Systems") in May 1997 which had annual net sales of approximately $10.8 million, (iii) the purchase of Seriee, SA ("Seriee") in June 1997 which had annual net sales of approximately $6.3 million, and (iv) the purchase of Radio-Active Systems nv ("RAS") in June 1997 which had annual net sales of approximately $10.0 million.
The Company recognizes net sales upon shipment of products to customers. Production expenses include materials, direct labor and overhead as well as an allocated portion of indirect overhead. Outgoing freight, customs and other costs associated with delivery of the product to customers are classified under marketing, administrative and general expenses. Research and development expenses include costs associated with salaries, benefits and travel-related expenses for certain engineering employees, supplies, agency approvals, depreciation and telephone, 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.
The following table sets forth, for the periods indicated, the percentages which certain items of income and expense bear to net sales:
Year Ended March 31, 1997 Compared to Year Ended March 31, 1996
The Company's net sales increased 141.9% to $101.3 million in fiscal 1997 from $41.9 million in fiscal 1996. The acquisition of Radionics in February 1996 accounted for $45.6 million of this increase, while international and domestic sales growth accounted for $7.2 million and $6.5 million, respectively. See Note 10 of the Notes to the Consolidated Financial Statements for information regarding the Company's sales information by geographic area.
Production expenses increased 132.0% to $64.9 million in fiscal 1997 from $28.0 million in fiscal 1996. As a percentage of net sales, production expenses decreased to 64.1% in fiscal 1997 from 66.8% in fiscal 1996. 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 manufacturing efficiencies achieved by transitioning a portion of its domestic manufacturing to its China facility during fiscal 1997. This decrease was achieved despite the lower gross margins experienced by the Company from certain of its initial international sales. The Company anticipates further cost savings from the continued consolidation of its manufacturing operations during fiscal 1998 and 1999.
Research and development expenses increased 72.7% to $8.1 million in fiscal 1997 from $4.7 million in fiscal 1996. As a percentage of net sales, research and development expenses decreased to 8.0% in fiscal 1997 from 11.2% in fiscal 1996. The increase in research and development expenses was primarily due to the addition of Radionics' research and development expenses. The decrease in research and development expenses as a percentage of net sales was primarily due to synergies achieved by the consolidation of certain research and development efforts of Radionics and the Company.
Marketing, administrative and general expenses increased 103.6% to $21.4 million in fiscal 1997 from $10.5 million in fiscal 1996. As a percentage of net sales, marketing, administrative and general expenses decreased to 21.1% in fiscal 1997 from 25.1% in fiscal 1996. The increase in marketing, administrative and general expenses was primarily due to the addition of Radionics' operations. The decrease in marketing, administrative and general expenses as a percentage of net sales was primarily due to savings derived from the consolidation of Radionics into the Company's organization
Interest expense increased to $1.8 million in fiscal 1997 from $0.3 million in fiscal 1996. This increase was primarily due to the debt financing associated with the Radionics acquisition. Interest income decreased to $0.2 in fiscal 1997 from $0.3 in fiscal 1996.
Income before income taxes was $5.2 million in fiscal 1997 compared to a loss of $10.7 million for fiscal 1996. The fiscal 1996 results included a $9.4 million non-recurring charge related to in-process research and development associated with the Radionics acquisition. The remainder of the improvement was due to the other factors described above.
The Company's effective income tax rate for fiscal 1997 was 29.0% compared to a benefit rate of 26.4% in fiscal 1996. The fiscal 1997 effective rate reflects the benefits of certain lower foreign tax rates used to promote economic growth and the utilization of certain loss carryforwards from fiscal 1996.
Year Ended March 31, 1996 Compared to the Year Ended March 31,
The Company's net sales increased 21.9% to $41.9 million in fiscal 1996 from $34.3 million in fiscal 1995. The acquisition of Radionics in February 1996 accounted for $6.0 million of this increase. In addition, international sales grew by $4.9 million in fiscal 1996 as a result of the Company's international sales initiative. This increase was partially offset by a $3.4 million decline in domestic sales primarily attributable to reduced sales to a single domestic customer. See Note 10 of the Notes to the Consolidated Financial Statements for information regarding the Company's sales information by geographic area.
Production expenses increased 34.3% to $28.0 million in fiscal 1996 from $20.8 million in fiscal 1995. As a percentage of net sales, production expenses increased to 66.8% in fiscal 1996 from 60.7% in fiscal 1995. The increase in production expenses was primarily due to a corresponding increase in the Company's net sales. The increase in production expenses as a percentage of net sales was primarily due to the expensing of startup costs associated with the Company's China manufacturing facility.
Research and development expenses increased 15.5% to $4.7 million in fiscal 1996 from $4.1 million in fiscal 1995. As a percentage of net sales, research and development expenses decreased to 11.2% in fiscal 1996 from 11.9% in fiscal 1995. The increase in research and development expenses was primarily due to the addition of Radionics' research and development expenses.
Marketing, administrative and general expenses increased 54.9% to $10.5 million in fiscal 1996 from $6.8 million in fiscal 1995. As a percentage of net sales, marketing, administrative and general expenses increased to 25.1% in fiscal 1996 from 19.8% in fiscal 1995. The increase in marketing, administrative and general expenses, both in dollars and as a percentage of net sales, was primarily due to costs associated with the startup of foreign operations and the addition of Radionics' operations.
Interest expense increased to $0.3 million in fiscal 1996 from $0.2 million in fiscal 1995, and interest income increased to $0.3 in fiscal 1996 from $0.1 in fiscal 1995.
The Company incurred a loss before income taxes of $10.7 million in fiscal 1996 compared to income of $2.6 million for fiscal 1995. The fiscal 1996 results included a $9.4 million non-recurring charge related to in-process research and development associated with the Radionics acquisition. The remainder of the decline was due to the other factors described above.
The Company's effective income tax rate for fiscal 1996 was a benefit of 26.4% compared to a tax rate of 41.6% in fiscal 1995. The benefit rate for fiscal 1996 resulted from the Company's inability to fully recognize tax benefits associated with certain subsidiary losses and certain other items not deductible for tax purposes. The fiscal 1995 corporate tax rate was consistent with domestic, federal and state effective rates at that time.
Liquidity and Capital Resources
The Company considers liquidity to be its ability to meet its long- and short-term cash requirements. Prior to 1996, those requirements were primarily met by cash generated by the Company's operating activities and cash reserves. Since the implementation of the Company's strategy designed to enhance the Company's product offerings, manufacturing capacity and international operations, particularly the acquisition of Radionics and the development of the Company's China manufacturing facility, the Company has required external sources of financing to satisfy its liquidity needs.
Year Ended March 31, 1997. During fiscal 1997, the Company's operating activities used $6.6 million. The primary factor contributing to this use of cash was a $15.9 million increase in inventories which resulted from the transition of the manufacturing of the Company's products to the China facility. Sources of operating cash from net income, depreciation and amortization totalled $6.5 million. Other balance sheet changes contributed $2.9 million to operating cash flow. The Company believes that the consolidation of its manufacturing operations will enable the Company to reduce future inventory levels.
During fiscal 1997, cash used for investing activities was $4.0 million which was expended for capital equipment for the expansion of the Company's international operations and production tooling relating to the Radionics' product lines.
During fiscal 1997, cash flows provided by financing activities were $11.9 million. The two primary sources of this cash were: (i) $10.0 million of borrowings under the Company's revolving line of credit and (ii) receipt of $2.0 million from a private placement of Common Stock which the Company completed with five corporate pension funds in October 1996.
Year Ended March 31, 1996. During fiscal 1996, the Company's operating activities used $3.4 million. The primary factors contributing to this use of cash were a $7.9 million loss from operations and an increase in inventories of $4.3 million during the year. Sources of operating cash included depreciation and amortization of $2.0 million and a $9.4 million non-cash charge related to the write-off of in-process research and development associated with the Radionics acquisition. Other balance sheet changes used $2.7 million of cash.
During fiscal 1996, cash used for investing activities was $18.9 million, consisting of the purchase of Radionics for $18.0 million and capital expenditures of $3.4 million, offset by liquidation of short-term investments of $2.4 million.
During fiscal 1996, cash flows provided by financing activities were $18.7 million. The source of this cash was $18.9 million of borrowings under the Company's commercial credit facility, offset by principal payments on capital lease obligations.
Capital Resources. On March 31, 1997, the Company had cash balances of $2.2 million. On such date, the Company has a $11.5 million bank commitment for a revolving line of credit that was fully drawn upon. Subsequently, this commitment has been increased to $17.0 million, a portion of which was used for recent acquisitions. This commitment extends into fiscal 1999 and includes an interest rate based on the London Interbank Offered Rate plus applicable points based on the Company's performance. The balance becomes fully due and payable on the Revolving Line Termination Date of May 31, 1998.
The Company expects to continue expenditures on acquisitions and the development of new products and markets. These expenditures will include continued investment in security detection, fire detection, security, fire and access control products as well as several wireless projects. The Company also plans to continue its efforts to market its products internationally. The Company has budgeted $3.0 million for capital expenditures during fiscal 1998.
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.
Inflation. During fiscal 1997, 1996, and 1995, inflation did not have a significant impact on the Company's business.
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required in this section are included as Exhibit 13 of this Form 10-K.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The officers of the Company are as follows:
Name and Age Position, Offices Held and Year Appointed Karl H. Kostusiak (58) President (1968)
David B. Lederer (57) Executive Vice President (1968)
George E. Behlke (39) Vice President, Engineering (1995)
Gary Holroyd (38) Vice President, Manufacturing (1996)
Frank J. Ryan (43) Vice President, Secretary and Treasurer (1982)
Lawrence R. Tracy (50) President, Radionics and Detection Systems Inc.International, Inc., subsidiaries of Detection Systems, Inc. (1995)
Each officer is elected to serve until the first meeting of the Board of Directors held after the next annual meeting of shareholders and until his successor is elected and has qualified. There is no family relationship between any of the above officers.
Messrs. Kostusiak and Lederer have been President and Executive Vice President of the Company since it was formed in 1968. Mr. Ryan has been employed by the Company in various financial positions since 1980 and was promoted to Vice President in 1989. Mr. Holroyd has been employed by the Company since the acquisition of Radionics in February 1996 and was promoted to Vice President of Detection Systems in November 1996. Mr. Tracy was hired in February 1995 as President of the Company's Detection Systems International, Inc. subsidiary and was named President of Radionics, Inc. on February 13, 1996. Mr. Behlke has been employed by the Company in various engineering positions since 1977 and was promoted in May 1995 to Vice President.
The Company's Proxy Statement for the 1997 Annual Meeting of Shareholders contains the other information required by Item 10 of Form 10-K. That information is incorporated by reference to this Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The "Executive Compensation" section of the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders contains the information required by Item 11, and is incorporated by reference to this Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company has stock purchase agreements with Messrs. Kostusiak and Lederer which could in the future result in a change of control of the registrant. These agreements are included in Exhibit 10 of this Form 10-K.
The Company's Proxy Statement for its 1997 Annual Meeting of Shareholders contains the information required by Item 12, and is incorporated by reference to this Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company's Proxy Statement for its 1997 Annual Meeting of Shareholders contains the information required by Item 13, and is incorporated by reference to this Form 10-K.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(I) and (2) The required financial statements and schedules are contained herein or as exhibits.
(a)(3) See Exhibit Index attached to this Report on Form 10-K.
(b) There were no Form 8-K filings during the last quarter of the period covered by this report
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DETECTION SYSTEMS, INC. (Registrant)
Date: June 27, 1997 By: /s/ Karl H. Kostusiak Karl H. Kostusiak President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- -----
/s/ Karl H. Kostusiak President and Director June 27, 1997 Karl H. Kostusiak (Principal Executive Officer)
/s/ Frank J. Ryan Vice President June 27, 1997 Frank J. Ryan Secretary/Treasurer (Principal Financial Officer and Principal Accounting Officer)
Donald R. Adair Director
Mortimer B. Fuller, III Director
David B. Lederer Director
By: s/s Karl H. Kostusiak, Attorney-in-Fact June 27, 1997 Karl H. Kostusiak
EXHIBIT INDEX
Item Exhibits Location No. 2(a) Definitive Stock Incorporated by reference as Purchase Exhibit 2 to the Company's Agreement, dated Form 8K/A filed April 29, February 12, 1996, for 1996 purchase of stock of Radionics, Inc.
2(b) Asset Purchase Included as Exhibit 2(b) of Agreement, dated July this Annual Report on Form 22, 1996, for the 10-K purchase of the assets of Senses International
2(c) Stock Purchase Incorporated by reference as Agreement, dated May Exhibit 2-1 to the Company's 7, 1997, for the Form-8K filed May 21, 1997 purchase of the stock of Digital Audio Limited
3(a) Detection Systems, Included as Exhibit 3(a) of Inc. Certificate of this Annual Report on Form Incorporation 10-K
3(b) Detection Systems, Included as Exhibit 3(b) of Inc. this Annual Report on Form By-Laws as amended 10-K
4 Rights of Holders of Incorporated by reference to common Exhibit 4 of the Company's stock - 1981 plan 1993 Annual Report on Form 10-K
10 Non-employee director Incorporated by reference to (a) stock Exhibit 10(a) of the option plan (warrant Company's 1994 Annual Report plan) on Form 10-K
10 Medical reimbursement Included as Exhibit 10(b) of (b) plan this Annual Report on Form 10-K
10 Employee stock Incorporated by reference to (c) purchase plan Exhibit 10 of the Company's 1994 Annual Report on Form 10-K
10 Fleet Amended & Incorporated by reference to (d) Restated Credit Exhibit 10(d) of the Facility Agreement Company's 1996 Annual Report dated February 12, on Form 10-K 10 Included as Exhibit 10(d) of (d) Amended and Restated this Annual Report on Form Credit Facility 10-K Agreement (Amendment #1) dated May 31, 1996
10 Amended and Restated Included as Exhibit 10(d) of (d) Credit Facility this Annual Report on Form Agreement (Amendment 10-K #2) dated February 13,
10 Deferred Compensation Included as Exhibit 10(e) to (e) Plan and Deferred this Annual Report on Form Bonus Plan, both 10-K amended January 1997.
10 1992 Restated Stock Incorporated by reference to (f) Option Exhibit 22 of the Company's Plan 1995 Annual Report on Form 10-K
10 Detection Systems, Included as Exhibit 10(g) of (g) Inc. Executive Bonus this Annual Report on Form Plan 10-K
10 Executive employment Incorporated by reference to (h) contract with Karl H. Exhibit 10(h) of the Kostusiak. Company's 1996 Annual Report on Form 10-K
10 Executive employment Incorporated by reference to (i) contract with David B. Exhibit 10(i) of the Lederer. Company's 1996 Annual Report on Form 10-K
10 Executive employment Incorporated by reference to (j) contract with Lawrence Exhibit 10 of the Company's R. Tracy. 1995 Annual Report on Form 10-K.
10 ECI Amended License Incorporated by reference to (k) and Mfg. Agreement & Exhibit 10(k) of the Amendment No. 1 Company's 1996 Annual Report on Form 10-K
10 Shareholders Incorporated by reference to (l) Agreements w/ Exhibit 10 of the Company's ECI 1994 Annual Report on Form 10-K
10 Stock Purchase Included as Exhibit 10(n) of (n) Agreements with Karl this Annual Report on Form H. Kostusiak and David 10-K B. Lederer
10 Joint Venture Incorporated by reference to (o) Agreement for Exhibit 10(o) of the Establishment of D.S. Company's 1996 Annual Report First Systems on Form 10-K (Beijing) Limited
11 Statement re: Included as Exhibit 11 of Computation of Per this Annual Report on Form Share Earnings 10-K
13 Excerpts from Annual Included as Exhibit 13 of Report this Annual Report on Form to Security Holders 10-K
22 Proxy Statement To be filed within 120 days of the Company's fiscal year end.
23 Consent of Independent Included as Exhibit 23 of Accountants this Annual Report on Form 10-K
24 Powers of Attorney Included as Exhibit 24 of this Annual Report on Form 10-K
27 Financial Data Included as Exhibit 27 of Schedule this Annual Report on Form 10-K