Filed On 7/24/97 · SEC File 333-31951 · Accession Number 901309-97-38
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
7/24/97 Detection Systems Inc S-2 7:173 Nixon Peabody LLP/FA
Document/Exhibit Description Pages Size
1: S-2 Registration of Securities 81± 275K
2: EX-2 Exhibit 2(D) 17 59K
3: EX-2 Exhibit 2(E) 16 50K
4: EX-2 Exhibit 2(F) 11± 42K
5: EX-10 Exhibit 10(D) 43 154K
6: EX-10 Exhibit 10(O) 4 24K
7: EX-23 Exhibit 23(B) 1 6K
As Filed with the Securities and Exchange Commission on July 23, 1997
Registration No. 333-__________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DETECTION SYSTEMS, INC.
(Exact name of Registrant as Specified in its Charter)
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
716-223-4060
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Office)
Frank J. Ryan, Vice President
130 Perinton Parkway, Fairport, New York 14450
716-223-4060
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies of all communications to:
Justin P. Doyle, Esq. R. Alan Higbee, Esq.
Roger W. Byrd, Esq. David M. Doney, Esq.
Nixon, Hargrave, Devans & Doyle LLP Fowler, White, Gillen, Boggs,
Clinton Square, Suite 1300 Villareal and Banker, P.A.
Rochester, New York 14604 501 East Kennedy Blvd.,
Suite 1700
Tampa, Florida 33602
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box./ /
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering./ / _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. <square>
CALCULATION OF REGISTRATION FEE:
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Title of Shares to Amount to Offering Price Offering Registration
be Registered be Registered Per Share Price Fee
Common Stock,
par value $.05 1,495,000(1) $18.875(2) $28,218,125(2) $8,551
(1) Includes 195,000 shares of Common Stock which may be sold by the Company to
cover over-allotments.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457 of the Securities Act of 1933.
--------------------------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act or until the Registration Statement shall become effective
on such date as the Commission, acting pursuant to said section 8(a), may
determine.
SUBJECT TO COMPLETION DATED JULY 23, 1997
1,300,000 SHARES
[DSI LOGO] DETECTION SYSTEMS, INC. [RADIONICS LOGO]
COMMON STOCK
OF THE 1,300,000 SHARES OF COMMON STOCK OFFERED HEREBY, 1,072,000
SHARES ARE BEING ISSUED AND SOLD BY DETECTION SYSTEMS, INC. (THE "COMPANY") AND
228,000 SHARES ARE BEING SOLD BY CERTAIN SHAREHOLDERS OF THE COMPANY (THE
"SELLING SHAREHOLDERS"). THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM
THE SALE OF COMMON STOCK BY THE SELLING SHAREHOLDERS. SEE "PRINCIPAL AND
SELLING SHAREHOLDERS."
THE COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "DETC." ON JULY 21, 1997, THE LAST REPORTED SALE PRICE OF THE COMMON
STOCK WAS $18.875 PER SHARE.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price Underwriting Proceeds Proceeds to
to Discounts and to Selling
Public Commissions(1) Company(2) Shareholders
[S] [C] [C] [C] [C]
Per Share $_________ $_________ $_________ $_________
Total (3) $_____________ $_____________ $_____________ $_____________
(1)The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2)Before deducting expenses estimated to be $250,000, which are payable by the
Company.
(3)The Company has granted the Underwriters a 30-day option to purchase up to
195,000 additional shares of Common Stock on the same terms and conditions
as the securities offered hereby, solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $_____________,
$_____________ and $_____________, respectively. See "Underwriting."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS,
SUBJECT TO PRIOR SALE, WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THEM, AND
SUBJECT TO CERTAIN OTHER CONDITIONS INCLUDING THE RIGHT OF THE UNDERWRITERS TO
WITHDRAW, CANCEL, MODIFY OR REJECT ANY ORDER IN WHOLE OR IN PART. IT IS
EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT
, 1997, AT THE OFFICES OF RAYMOND JAMES & ASSOCIATES, INC., ST. PETERSBURG,
FLORIDA.
RAYMOND JAMES & ASSOCIATES, INC. NEEDHAM & COMPANY, INC.
The date of this Prospectus is , 1997
******************************************************************************
*Information contained herein is subject to completion or amendment. A *
*registration statement relating to these securities has been filed with the *
*Securities and Exchange Commission. These securities may not be sold nor *
*may offers to buy be accepted prior to the time the Registration Statement *
*becomes effective. This Prospectus shall not constitute an offer to sell *
*or the solicitation of an offer to buy nor shall there be any sale of these *
*securities in any state in which such offer, solicitation or sale would be *
*unlawful prior to registration or qualification under the securities laws of*
*any such state. *
******************************************************************************
INSIDE FRONT COVER
[Photograph of Security System Components]
Samples of the Company's Security System Products
[Photograph of Fire System Components]
Samples of the Company's Fire System Products
[Photograph of Access Control System Components]
Samples of the Company's Access Control System Products
[Photograph of CCTV Components]
Samples of the Company's CCTV Products
DETECTION SYSTEMS, DA SYSTEMS, DS VISION, EASIKEY, RADIONICS, READYKEY,
SAFECOM, TRISENSE, TRITECH AND SECURITY ESCORT ARE TRADEMARKS OF THE COMPANY.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR
AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER
THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO (THE "CONSOLIDATED FINANCIAL STATEMENTS"), APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION SET FORTH HEREIN
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, REFLECTS A
THREE-FOR-TWO STOCK SPLIT IN THE FORM OF A STOCK DIVIDEND DISTRIBUTED ON
DECEMBER 17, 1996, AND ASSUMES THAT 221,738 SHARES OF COMMON STOCK OWNED BY
NUMEREX CORP. ARE REPURCHASED SIMULTANEOUSLY WITH THE CLOSING OF THE OFFERING.
AS USED HEREIN, THE "COMPANY" MEANS DETECTION SYSTEMS, INC. AND ITS
SUBSIDIARIES, EXCEPT WHERE THE CONTEXT INDICATES OTHERWISE, AND A "FISCAL YEAR"
MEANS THE TWELVE-MONTH PERIOD ENDING ON MARCH 31ST OF THE SPECIFIED YEAR.
THE COMPANY
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 closed circuit television ("CCTV") applications, offering products
primarily for the commercial and mid- to high-end residential portions of the
market. From its founding in 1968 until 1995, the Company was primarily a
niche provider of intrusion detection devices for the domestic market. In
1995, the Company adopted a strategy designed to 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 five acquisitions, opened sales offices in six countries
and successfully established a manufacturing facility in China. These
initiatives have enabled the Company to significantly expand its product
catalog and market reach and to increase its net sales from $34.3 million in
fiscal 1995 to $101.3 million in fiscal 1997. Excluding amounts attributable
to acquisitions, the Company's net sales grew by approximately 22.5% in fiscal
1997.
The Company manufactures system components for sale to installation
companies, distributors and other equipment manufacturers either as individual
components or, increasingly, bundled with other compatible components to form
an integrated system for a specific customer's application. The Company is not
engaged in the installation or monitoring aspects of the industry. The
Company's primary customers are: (i) national and regional installation
companies such as ADT, Ameritech, Checkpoint, Holmes Protection, Honeywell,
Simplex, Wells Fargo and Westar; (ii) national distributors such as ADI in the
U.S., Efsec in Sweden, Glastrak in the Netherlands and Rimi in Russia; (iii)
original equipment manufacturers ("OEMs") such as Pittway and ITI Technologies
that integrate the Company's components into their finished products, and
(iv) certain large commercial customers such as Pepsico and agencies of the
federal government.
The Company presently offers products in all four of the principal
categories of the electronic protection equipment market: security, fire,
access control and CCTV. According to industry statistics, combined U.S.
wholesale equipment sales for these four categories were estimated at $5.3
billion in 1996. The Company believes international markets of significant
size also exist for each of these four categories. There are several factors
driving the growth of the private security industry. The perception by
Americans that crime is a significant problem has continued to grow as
evidenced by the focus on crime in political campaigns and in the media.
Insurance companies often provide incentives to businesses for installing
electronic security systems or require such systems as a condition of insurance
coverage. An electronic fire system is required in commercial facilities in
many localities in order to comply with municipal fire codes. There has been a
trend for large commercial customers to centralize their security function at
the corporate level instead of managing security on an ad hoc site-basis. This
has often resulted in greater attention and resources for security solutions.
The growth in telecommuting and in-home offices has created incremental demand
for residential security products by bringing expensive office equipment into
the home. Market penetration has also been driven by the increased
affordability of systems, as advances in technology and reduced manufacturing
costs have increasingly brought high quality systems into price ranges
attractive to residential and small commercial customers. In addition to new
systems, there is ongoing system replacement in the commercial and mid- to
high-end residential markets, creating significant retrofit opportunities. The
Company estimates that customers in these markets typically upgrade or replace
their systems every seven to ten years.
3
The scale and product scope of the Company has increased significantly due
to recent acquisitions, particularly the February 1996 acquisition of
Radionics, Inc. ("Radionics"). Based in Salinas, California, Radionics had net
sales of $45.1 million for the year ended December 31, 1995 and was a leading
provider of control panels and related equipment to the Company's industry.
Subsequent to the Radionics acquisition, the Company has completed four
additional acquisitions: (i) the purchase in July 1996 of certain assets of
Senses International, Inc. ("Senses") which had annual net sales of
approximately $2.0 million, (ii) the purchase in May 1997 of Digital Audio
Limited ("DA Systems") which had annual net sales of approximately $10.8
million, (iii) the purchase in June 1997 of Seri<e'>e, S.A. ("Seri<e'>e") which
had annual net sales of approximately $6.3 million, and (iv) the purchase in
June 1997 of Radio-Active Systems N.V. ("RAS") which had annual net sales of
approximately $9.9 million. These acquisitions have served both to broaden the
Company's product lines and increase its international presence.
The Company's goal is to be an international leader in the design,
manufacture and marketing of equipment for the electronic protection industry,
satisfying all of its customers' protection needs with a complete line of high-
quality, technologically advanced products which are distributed by a worldwide
marketing organization and supported by a service-oriented product support
team. Among the principal elements of the Company's strategy are the
following:
* Catalog expansion - continuing to expand its product catalog through
internal development, acquisitions and partnering with companies that
have technological capabilities that complement the Company's internal
capabilities. The Company believes that the ability to provide a full
catalog of products will result in competitive advantages over firms
which only provide a small portion of the products regularly required
by the industry's customers. Part of the Company's motivation for its
recent acquisitions was to expand the Company's product catalog. The
Company is promoting the sale of its fire, access control and other
product lines by leveraging the superior market acceptance it enjoys in
the security equipment arena.
* INTERNATIONAL EXPANSION - continuing to expand its international
sales efforts. The Company's acquisitions of DA Systems, RAS and
Seri<e'>e have given the Company inroads into important European
markets. The Company plans to use the distribution networks of these
companies to distribute its full range of products, as appropriate. In
addition, the Company's sales offices in Asia and Australia have been
successful in developing a base of operations from which the Company
can further expand in those markets.
* TECHNOLOGICAL ADVANCEMENT - continuing to develop technologically
advanced products. The Company utilizes the power of microprocessors
and application specific integrated circuits to fully exploit presently
available technology. By using this technology, the Company has
developed: detection products which feature demonstrably superior
signal processing capacity which optimize the trade-off between false
alarms and catch performance; control products which generally provide
a superior level of programming flexibility and more sophisticated
firmware than competitive product offerings; and communication
equipment which provides access to a variety of commercially available
communication technologies.
* Market focus - continuing to focus on the installation and service
professionals that service the commercial and mid- to high-end
residential security and fire alarm system markets, who view the
features and quality of the Company's products as providing superior
value. The Company is also increasing its sales efforts directed to
the U.S. government.
* Production efficiencies - increasing utilization of its China
facility and continuing to consolidate its purchasing. The Company's
China facility became operational in October 1995. The Company has
been able to reduce its unit manufacturing costs by transitioning
production from its Fairport, New York and Salinas, California
locations to its China facility. The Company anticipates additional
cost savings from the continued transition of production to its China
facility. The Company has also realized cost savings by consolidating
purchasing of components for its worldwide operations.
The address of the Company's principal executive offices is 130 Perinton
Parkway, Fairport, New York 14450, and its telephone number is (716) 223-4060.
4
THE OFFERING
Common Stock offered by the Company 1,072,000 shares
Common Stock offered by the Selling
Shareholders 228,000 shares
Common Stock to be outstanding after
the offering 5,599,032 shares(1)
Use of proceeds To repay indebtedness under the
Company's revolving credit
facility, which repayment will
provide availability under such
facility for working capital
and general corporate purposes,
including possible
acquisitions, and to repurchase
Common Stock issued in
connection with a recent
acquisition. See "Use of
Proceeds."
Nasdaq National Market symbol DETC
(1)Does not include shares issuable upon the exercise of outstanding options
and warrants or under deferred compensation plans which, as of March 31,
1997, were: (i) an aggregate of 355,020 shares issuable upon the exercise of
currently outstanding options and warrants, (ii) 98,019 shares issuable
under the Company's Deferred Compensation Plan, and (iii) 252,390 shares
issuable under the Company's Deferred Stock Compensation Plan.
5
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands except per share amounts)
[Download Table]
FISCAL YEAR ENDED MARCH 31,
------------------------------------------------
1993 1994 1995 1996(1) 1997
------- ------ ------ -------- -----
OPERATING DATA:
Net sales $29,432 $31,355 $34,336 $41,858 $101,251
Costs and expenses:
Production 18,036 19,541 20,830 27,978 64,916
Research and development 3,534 4,161 4,070 4,700 8,115
Purchased in-process research
and development 9,350
Marketing, administrative
and general 5,511 6,112 6,789 10,515 21,411
Operating income (loss) 2,351 1,541 2,647 (10,685) 6,809
Interest income 239 196 113 340 206
Interest expense 234 166 168 320 1,765
--- --- --- --- -----
Income (loss) before taxes and
cumulative effect of a change
in accounting principle 2,356 1,571 2,592 (10,665) 5,250
Provision (benefit) for taxes 919 426 1,078 (2,810) 1,525
--- --- ----- ------- -----
Income (loss) before cumulative
effect of a change in
accounting principle 1,437 1,145 1,514 (7,855) 3,725
Cumulative effect of a change in
accounting principle 130
----- ------ ------ ------ -----
Net income (loss) $1,437 $1,275 $1,514 $(7,855) $3,725
====== ====== ====== ======= ======
Earnings (loss) per common
and common equivalent share $.34 $.30 $.35 ($1.83) $.76
======= ======= ======= ======== =====
Weighted average number of
shares 4,376 4,407 4,484 4,285 4,934
At Year End
March 31, 1997
-------------------------
As
Actual Adjusted(2)
-------- ----------
Balance Sheet Data:
Cash and cash equivalents $ 2,244 $ 2,244
Working capital 31,067 32,020
Total assets 68,276 68,276
Total debt, including current portion(3) 29,187 14,379
Shareholders' equity 17,831 36,500
_____________________
(1) In February 1996, the Company acquired Radionics. Purchased in-process
research and development of Radionics, which consisted of products still
in the development stage but not considered to have reached technological
feasibility, was valued at $9.4 million. In accordance with generally
accepted accounting principles, this amount was expensed upon acquisition
in the fourth quarter of fiscal 1996. The Company's fiscal 1996 results
were also adversely affected by $3.9 million in costs associated with the
start-up of the Company's China facility and other international
operations.
(2) Adjusted to reflect the sale of 1,072,000 shares of Common Stock offered
by the Company hereby at an assumed public offering price of $18.875 per
share and the application of the net proceeds therefrom in the manner
described under "Use of Proceeds."
(3) Reflects repayment of $3.9 million associated with the repurchase of
221,738 shares of Common Stock issued to Numerex Corp. in connection with
the Company's May 1997 purchase of its DA Systems subsidiary.
6
RISK FACTORS
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK, INCLUDING THE
RISKS DESCRIBED BELOW. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
SPECIFIC FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION CONTAINED IN
THIS PROSPECTUS, BEFORE DECIDING WHETHER TO INVEST IN THE COMMON STOCK OFFERED
HEREBY.
THIS PROSPECTUS CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), 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 PROSPECTUS 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," "ANTICIPATE," "INTEND," "COULD," "ESTIMATE" OR "CONTINUE"
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 BELOW UNDER THIS "RISK
FACTORS" SECTION AND ELSEWHERE IN THIS PROSPECTUS.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
The success of the Company depends heavily on the business it conducts with
a limited number of significant customers. In fiscal 1997, 10.7%, 10.6% and
6.0% of the Company's net sales were attributable to Pittway Corporation
("Pittway"), Ameritech Corp. ("Ameritech") and Honeywell Inc., respectively.
Pittway is a competitor of the Company across many of its product lines and
purchases the Company's products to incorporate them into its products and
systems. During October 1996, Ameritech (an established customer of the
Company) began purchasing the Company's products through Pittway to utilize
Pittway's distribution facilities. The Company has had long-standing
relationships with most of its significant customers; however, it generally
does not have supply contracts with them and they may unilaterally reduce or
discontinue their purchases without penalty. The Company's loss of (or failure
to retain a significant amount of business with) any of these customers could
have a material adverse effect on the Company. See "Business-Marketing."
COMPETITION
The markets in which the Company operates are highly competitive. The
Company's competitors include manufacturers of security and fire alarm
equipment from all over the world. In addition, the Company may face
competition from new entrants into these markets and increased competition from
existing competitors. A number of the Company's competitors have substantially
greater financial and other resources than the Company. In many cases the
Company's competitors are concentrated in one market niche in the electronic
protection industry, allowing them to concentrate their resources in that
niche. The Company competes on the basis of providing superior value to
customers with respect to both products and services. There can be no
assurance that the Company's products and services will continue to be
competitive and accepted by the market in the future. See
"Business-Competition."
IMPACT AND RISKS OF ACQUISITIONS
Between February 1996 and July 1997 the Company made five acquisitions:
Radionics, DA Systems, Senses, Seri<e'>e and RAS. Part of the Company's growth
strategy is to expand its product catalog, technologies and markets through
additional acquisitions. There can be no assurance that the Company will be
able to successfully integrate the operations and management of its recent
acquisitions or that the Company will be able to consummate or, if consummated,
successfully integrate the operations and management of future acquisitions.
Acquisitions involve significant risks, including risks associated with: (i)
the diversion of management's attention to the assimilation of the acquired
businesses; (ii) the ability of the acquired businesses to maintain the quality
of products and services that the acquired business has historically provided;
(iii) the need to integrate financial and other systems with those of the
Company; (iv) the loss of key employees of the acquired business after the
acquisition; (v) unforseen liabilities of the acquired business; (vi) the
dilutive effect of the issuance of additional equity securities; (vii) the
incurrence of additional debt as part of such acquisition or to fund the
operations of the acquired business; and (viii) the amortization of goodwill
and other intangible assets involved in any acquisitions that are accounted for
using the purchase method of accounting. In addition, certain of the
businesses acquired by the Company have been unprofitable and there can be no
assurance that they can be made profitable. There can be no assurance that
future
7
acquisition opportunities will become available, that future acquisitions can
be consummated on favorable terms or that such acquisitions will contribute to
the Company's profitability. Currently, the Company has no arrangements or
understandings with any party with respect to any future acquisition. The
Company, however, continues to investigate and consider acquisition
opportunities. See "Business-Strategy."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company is exposed to risks associated with international operations
because a significant portion of its products are manufactured at its China
facility and it has increasingly significant sales in a number of foreign
countries. Approximately 25% of the Company's manufacturing output during
fiscal 1997 was produced at its China facility. The Company leases its China
facility from the local Chinese government and is dependent on the local
Chinese government for personnel and utilities as well as all other municipal
services. See "Business-Manufacturing." The Company believes that its
relationship with the local Chinese government is good, however, any future
deterioration of such relationship could have a material adverse effect on the
Company's results of operations. Sales of the Company's products outside the
United States accounted for approximately 16% of its net sales during fiscal
1997. One aspect of the Company's business strategy is to increase the sale of
its products in international markets. The Company's international operations
give rise to political and economic uncertainties relating to, among other
things, U.S. and foreign trade restrictions; foreign government stability; risk
of renegotiation or modification of existing agreements or arrangements with
governmental authorities; foreign economic stability; shipping costs and
delays; tariffs; export controls; government regulation; patent and trademark
availability, protection and registration; foreign exchange restrictions which
limit the repatriation of investments and earnings therefrom; changes in
taxation or international tax treaties; military action and other hostilities
or confiscation of property. While the United States imposes quotas and duties
on selected imported products, there are currently no U.S. quotas or duties on
the Company's products.
The Company is subject to currency exchange risks to the extent that its
purchases and sales occur outside the United States and it is unable to
denominate its purchases or sales in dollars or otherwise shift to its
customers or suppliers the risks of currency exchange rate fluctuations.
Currently, the Company does not engage in currency hedging transactions for
normal operations, although it did engage in a hedging transaction in
connection with the purchase of RAS, and it may do so in the future.
Fluctuations in exchange rates may affect the results of the Company's
international operations reported in dollars and the value of such operations'
net assets reported in dollars. Additionally, the results of operations,
financial condition and competitive position of the Company may be affected by
the relative strength of the currencies in countries where its products are
sold.
INTELLECTUAL PROPERTY
The Company's ability to compete effectively will depend, in part, on its
ability to protect its intellectual property, including its patents,
trademarks, copyrights and trade secrets, and on its ability to develop and
protect future intellectual property. In addition to patents, the Company
relies on a combination of trademark registrations, copyrights and
confidentiality agreements to protect its proprietary rights in intellectual
property. The Company's ability to compete effectively also depends on its
ability to avoid infringing on the proprietary rights of others. New patent
applications are continually being filed and prosecuted, and pending U.S.
patent applications are confidential until patents are issued. As a result, it
is impossible to anticipate all potential patent infringement issues. There
can be no assurance that the steps taken by the Company to protect its
intellectual property will be adequate to prevent misappropriation or that
others will not independently develop technology or products that compete with
or are superior to the products of the Company. Likewise, there can be no
assurance that the Company will not inadvertently infringe on the intellectual
property rights of others.
RISKS OF TECHNOLOGICAL CHANGE
The electronic protection industry is characterized by continuous
technological advances, frequent new product introductions and enhancements,
declining market prices for similar products over time and changes in customer
requirements. The Company's future success will depend in large part on its
ability to develop new products and technology to meet customer needs as well
as to enhance its existing products and to continually reduce product costs.
Any failure by the Company to anticipate or respond rapidly to technological
advances, new products and enhancements by competitors, or changes in customer
requirements could have a material adverse effect on the Company. See
"Business-Industry Overview" and "Business-Intellectual Property."
8
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the efforts of certain key members of its
senior management team, including Karl H. Kostusiak, President and Chief
Executive Officer. The loss of a key member of the Company's senior management
team could have an adverse effect on the operations of the Company. The
Company carries no key man life insurance on any of its management, but has
non-competition agreements with certain key officers and technical personnel.
See "Management."
PRODUCT LIABILITY CLAIMS
If an intrusion, fire or other event that the Company's products are
designed to detect occurs in a setting where the Company's products have been
installed, the Company may be subject to a claim that an error or omission on
the part of the Company contributed to the damages resulting from such event,
which damages could be substantial. Such a claim could be made whether or not
the Company's product performed properly under the circumstances. From time to
time the Company is subject to product liability claims in the ordinary course
of its business. The Company carries product liability insurance which
management believes is adequate; however, a product liability judgment or
settlement in excess of available insurance proceeds could have a material
adverse effect on the financial condition and results of operations of the
Company and any adverse claim or settlement could have an adverse effect on the
availability and cost to the Company of product liability insurance. The
Company does not believe that any pending or threatened litigation will have a
material adverse effect on the financial condition or results of operation of
the Company. See "Business-Legal."
DEPENDENCE ON SUPPLIERS; CONCENTRATION OF MANUFACTURING
While the Company manufactures most of the products it sells, certain of
the components used in its products are purchased from third parties and are
available from a limited number of sources. The loss of any one supplier or an
inability of suppliers to provide the Company with the required quantity or
quality of these components could have an interruptive effect on the Company's
business until such time as an alternative source of supply is found. See
"Business-Manufacturing."
The Company manufactures approximately 85% of the products it markets,
and obtains the other 15% from external suppliers of finished goods.
Substantially all of the products manufactured by the Company are produced at
its facilities in Fairport, New York or Zhuhai, China. Accordingly, any event
resulting in the slowdown or stoppage of either of these manufacturing
operations could have a material adverse effect on the Company.
GOVERNMENT REGULATION AND PRODUCT LISTING
Many of the Company's products require approval by the Federal
Communications Commission ("FCC") before they can be marketed in the United
States. In addition, commercial acceptance of the Company's products is
typically dependent on the listing of such products by Underwriters
Laboratories ("UL"). The Company has successfully obtained FCC approval and UL
listing of its products in the past; however, it cannot predict whether it will
obtain approvals for future products or whether FCC regulations or UL listing
requirements relating to the Company's current or future products might change.
Failure to comply with FCC regulations or UL listing requirements, an inability
to receive approval for products under development or a change in existing
regulations or listing requirements that would make products non-compliant,
could have a material adverse effect on the financial condition and results of
operations of the Company. Most foreign countries also have similar regulatory
agencies and private certification or listing organizations, which could have
the same impact on sales of the Company's products within those countries. In
addition to the regulation of its products, the Company is subject to local,
state, federal and foreign laws regarding the discharge of materials into the
environment.
VOLATILITY OF STOCK PRICE
The Common Stock has experienced significant volatility, as well as a
significant increase in market price, since the Company's acquisition of
Radionics in February 1996. The market for securities of technology companies
historically has been more volatile than the market for stocks in general. The
trading price of the Common Stock may be subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, announcement of
future developments including possible acquisitions, new products by the
Company or its competitors and other events or factors. These fluctuations may
be compounded by the historically low trading volume in the Common Stock. In
addition, the stock market has from time
9
to time experienced extreme price and volume fluctuations that have
particularly affected the market price for many technology companies and that
often have been unrelated to the operating performance of these companies.
These broad market fluctuations may adversely affect the market price of the
Common Stock. See "Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, the Company will have 5,599,032
shares of Common Stock outstanding (5,794,032 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, 4,665,660 shares
(4,860,660 shares if the Underwriters' over-allotment option is exercised in
full), including the shares sold in this offering, will be freely tradeable by
persons other than affiliates of the Company without restriction under the
Securities Act. Of the remaining 933,372 shares, 727,802 shares will be
beneficially owned by persons who are affiliates of the Company which are
eligible for public sale subject to the volume and other limitations of Rule
144, 171,429 shares will be "restricted" securities within the meaning of Rule
144 under the Securities Act which may be sold pursuant to a currently
effective registration statement under the Securities Act, and 34,141 shares
will be subject to the resale restrictions under Regulation S of the Securities
Act. The Company, certain shareholders of the Company selling shares of Common
Stock hereunder (the "Selling Shareholders"), and the Company's executive
officers and directors have agreed not to sell, contract to sell or otherwise
dispose of any of their shares for a period of 120 days after the closing of
this offering without the prior written consent of Raymond James & Associates,
Inc. Notwithstanding the foregoing, at any time on or after the date of this
Prospectus, the Company may issue shares pursuant to the exercise of warrants
or employee stock options outstanding on the date of this Prospectus, which
issuances or sales may be effected any time after the date of this Prospectus.
Sales of substantial amounts of shares of Common Stock in the public market
after this offering, including sales pursuant to Rule 144 or Regulation S, or
the perception that such sales could occur, may adversely affect the market
price of the Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company has entered into employment and consulting agreements with
certain officers which provide that upon the occurrence of certain events
following a change in control of the Company, such officers may be entitled to
receive the equivalent of three years' compensation. See
"Management-Employment Agreements." The shares beneficially owned by the
Company's executive officers and directors and the compensation payable to
certain officers following a change in control may have the effect of
discouraging persons from pursuing a non-negotiated takeover of the Company and
preventing certain changes of control. Also, Section 912 of the New York
Business Corporation Law, which is applicable to the Company, contains
provisions that restrict certain business combinations with interested
shareholders, which may have the effect of inhibiting a non-negotiated merger
or other business combination involving the Company.
10
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,072,000 shares of
Common Stock offered by the Company, after deducting underwriting discounts and
commissions and estimated offering expenses and assuming a public offering
price of $18.875 per share, are estimated to be approximately $18.7 million
(approximately $22.1 million if the Underwriters' over-allotment option is
exercised in full). Approximately $3.9 million of the net proceeds from this
offering will be used to repurchase 221,738 shares of Common Stock issued to
Numerex Corp. in connection with the Company's May 1997 purchase of its DA
Systems subsidiary. The balance of the proceeds will be used to repay
indebtedness under the Company's revolving credit facility which, after such
payment, will have approximately $17.0 million of availability for working
capital and general corporate purposes, including possible acquisitions. The
revolving credit facility matures on July 31, 1998 and bears interest at a
floating rate which was 9.25% per year as of July 21, 1997. The Company will
not receive any of the proceeds from the sale of Common Stock by the Selling
Shareholders; however, certain of the Selling Shareholders have advised the
Company that they intend to use their proceeds from the sale of the Common
Stock to repay stock option loans from the Company.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 and as adjusted to reflect the sale of 1,072,000 shares of
Common Stock offered by the Company hereby at an assumed public offering price
of $18.875 per share and the application of the net proceeds therefrom in the
manner described under "Use of Proceeds." This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements.
MARCH 31, 1997
-------------------------
ACTUAL AS ADJUSTED
------ -----------
Current maturities of obligations under capital
leases and long-term debt $1,101 $148
Obligations under capital leases 54 54
Long-term debt(2) 28,032 14,177
Shareholders' equity:
Common stock, par value $.05 per share,
4,478,993 shares issued and outstanding,
5,500,993 shares issued and outstanding
as adjusted(1) 224 278
Capital in excess of par value 9,449 28,064
Retained earnings 8,594 8,594
Treasury stock, at cost (53) (53)
Notes receivable for stock purchases (378) (378)
Cumulative translation adjustment (5) (5)
------- -------
Total shareholders' equity 17,831 36,500
-------- --------
Total capitalization $45,917 $50,731
======== ========
_________________
(1) Does not include shares issuable upon the exercise of outstanding options
and warrants or under deferred compensation plans which, as of March 31,
1997, were: (i) an aggregate of 355,020 shares issuable upon the exercise
of currently outstanding options and warrants, (ii) 98,019 shares issuable
under the Company's Deferred Compensation Plan, and (iii) 252,390 shares
issuable under the Company's Deferred Stock Compensation Plan.
(2) Reflects repayment of $3.9 million associated with the repurchase of
221,738 shares of Common Stock issued to Numerex Corp. in connection with
the Company's May 1997 purchase of its DA Systems subsidiary.
11
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"DETC." The following table sets forth the high and low closing prices of the
Common Stock for the periods indicated.
FISCAL YEAR ENDED MARCH 31, 1995 HIGH LOW
First Quarter $7.000 $4.000
Second Quarter 6.312 4.062
Third Quarter 6.250 3.687
Fourth Quarter 5.312 3.187
FISCAL YEAR ENDED MARCH 31, 1996
First Quarter 5.187 4.312
Second Quarter 5.187 5.375
Third Quarter 5.250 3.937
Fourth Quarter 6.500 3.687
FISCAL YEAR ENDED MARCH 31, 1997
First Quarter 12.312 6.312
Second Quarter 13.812 9.687
Third Quarter 20.875 10.750
Fourth Quarter 24.500 14.500
FISCAL YEAR COMMENCING APRIL 1, 1997
First Quarter 20.250 13.500
Second Quarter (through July 21, 1997) 18.875 17.500
On July 21, 1997, the last reported sale price for the Common Stock as reported
on the Nasdaq National Market was $18.875 per share and the number of
shareholders of record was approximately 1,150.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that all of its earnings will be
retained for development and expansion of the Company's business and does not
anticipate paying any cash dividends in the foreseeable future. Any future
determination as to the payment of cash dividends will depend on a number of
factors, including future earnings, capital requirements, the financial
condition and prospects of the Company and any restrictions under credit
agreements existing from time to time, as well as such other factors as the
Company's Board of Directors may deem relevant. Certain financial covenants in
the Company's current credit facility, including a covenant to maintain a
minimum tangible net worth, limit the Company's ability to pay dividends.
12
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
The selected consolidated financial data presented below has been derived
from the Consolidated Financial Statements. The Consolidated Financial
Statements as of and for the years ended March 31, 1993, 1994, 1995, 1996 and
1997 have been audited by Price Waterhouse LLP, independent accountants. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements and other consolidated financial information
included elsewhere in this Prospectus.
FISCAL YEAR ENDED MARCH 31,
[Download Table]
1993 1994 1995 1996(1) 1997
----- ----- ----- ------- -----
OPERATING DATA:
Net sales $29,432 $31,355 $34,336 $41,858 $101,251
Costs and expenses:
Production 18,036 19,541 20,830 27,978 64,916
Research and development 3,534 4,161 4,070 4,700 8,115
Purchased in-process research
and development 9,350
Marketing, administrative and
general 5,511 6,112 6,789 10,515 21,411
------ ------ ----- ------ ------
Operating income (loss) 2,351 1,541 2,647 (10,685) 6,809
Interest income 239 196 113 340 206
Interest expense 234 166 168 320 1,765
---- ---- --- --- -----
Income (loss) before income taxes
and cumulative effect of a
change in accounting principle 2,356 1,571 2,592 (10,665) 5,250
Provision (benefit) for income
taxes 919 426 1,078 (2,810) 1,525
Income (loss) before cumulative
effect of a change in accounting
principle 1,437 1,145 1,514 (7,855) 3,725
Cumulative effect of a change in
accounting principle 130
------ ------ ----- ------ -----
Net income (loss) $1,437 $1,275 $1,514 $(7,855) $3,725
======= ======= ====== ======= ======
Earnings (loss) per common
and common equivalent share $.34 $.30 $.35 ($1.83) $.76
Weighted average number of
shares 4,376 4,407 4,484 4,285 4,934
[Download Table]
AT YEAR END MARCH 31,
------------------------------------------------
1993 1994 1995 1996 1997
-------- ------- ------- ------- -------
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,762 $ 3,907 $ 4,597 $ 930 $ 2,244
Working capital 12,205 13,447 14,963 15,712 31,067
Total assets 22,543 22,780 24,745 45,898 68,276
Total debt, including
current portion 1,662 1,582 1,181 19,680 29,187
Shareholders' equity 16,059 17,492 19,194 11,569 17,831
_____________________
(1) In February 1996, the Company acquired Radionics. Purchased in-process
research and development of Radionics, which consisted of products still
in the development stage but not considered to have reached technological
feasibility, was valued at $9.4 million. In accordance with generally
accepted accounting principles, this amount was expensed upon acquisition
in the fourth quarter of fiscal 1996. The Company's fiscal 1996 results
were also adversely affected by $3.9 million in costs associated with the
start-up of the Company's China facility and other international
operations.
13
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 five
acquisitions, opened sales offices in six countries and successfully
established a manufacturing facility in China. These initiatives have enabled
the Company to significantly expand its product catalog and market reach 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 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 net sales of $45.1 million for the year ended December 31, 1995. The
Radionics acquisition was funded by borrowings under a commercial credit
facility which caused 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, may further enable it to reduce its
unit manufacturing costs.
The Company has recently completed four additional acquisitions: (i) the
purchase in July 1996 of certain assets of Senses which had annual net sales of
approximately $2.0 million, (ii) the purchase in May 1997 of DA Systems which
had annual net sales of approximately $10.8 million, (iii) the purchase in June
1997 of Seri<e'>e which had annual net sales of approximately $6.3 million, and
(iv) the purchase in June 1997 of RAS which had annual net sales of
approximately $9.9 million. These acquisitions have served both to broaden the
Company's product lines and increase its international presence.
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.
14
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
which certain items of income and expense bear to net sales:
FISCAL YEAR ENDED MARCH 31,
-----------------------------------
1995 1996 1997
-------- --------- --------
[S] [C] [C] [C]
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Production 60.7 66.9 64.2
Research and development 11.9 11.2 8.0
Purchased in-process research and
development 22.3
Marketing, administrative and general 19.7 25.1 21.1
------ ------ ----
Operating income (loss) 7.7 (25.5) 6.7
Interest income 0.3 0.8 0.2
Interest expense 0.5 0.8 1.7
------ ------ ----
Income (loss) before income taxes 7.5 (25.5) 5.2
Provision (benefit) for income taxes 3.1 (6.7) 1.5
------ ------ ----
Net income (loss) 4.4% (18.8)% 3.7%
======= ====== ====
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 64.2% in fiscal 1997 from 66.9% 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 savings achieved from 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 $320,000 in
fiscal 1996. This increase was primarily due to the debt financing associated
with the Radionics acquisition. Interest income decreased to $206,000 in
fiscal 1997 from $340,000 in fiscal 1996.
Income before income taxes was $5.3 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 and the expensing of $3.9 million in
costs associated with the start-up of the Company's China facility and other
international operations. The remainder of the improvement was due to the
other factors described above.
15
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 income tax rates used to promote
economic growth and the utilization of loss carryforwards from fiscal 1996.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
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 by
geographic area and significant customers.
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 66.9% 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 costs associated
with the start-up of the Company's China 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 19.7% 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 start-up of foreign
operations and the addition of Radionics' operations.
Interest expense increased to $320,000 in fiscal 1996 from $169,000 in
fiscal 1995, and interest income increased to $340,000 in fiscal 1996 from
$113,000 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 and the
expensing of $3.9 million of costs associated with the start-up of foreign
operations. 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 federal and state income tax rates in effect 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 1995 implementation of the Company's strategy designed to enhance its
product offerings, manufacturing capacity and international operations,
particularly the acquisition of Radionics and the development of the China
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
as well as a strategic decision by the Company to increase inventories to
enable it to improve its delivery and order turnaround performance. Net
income, depreciation and amortization provided $6.5 million of net operating
cash and other account changes contributed $2.9 million to operating cash flow.
The
16
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 and
was utilized for capital expenditures, primarily 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 credit facility and (ii) receipt of
$2.0 million from a private placement of Common Stock which the Company
completed with five institutional investors 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 losses 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 account 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 (including expenses
and net of cash acquired) 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 facilities, offset by principal payments on capital
lease obligations.
CAPITAL RESOURCES. On March 31, 1997, the Company had cash balances of
$2.2 million. On that date, the Company had an $11.5 million revolving credit
facility that was fully drawn. Subsequently, this was increased to $17.0
million, a portion of which was used for recent acquisitions. 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.
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 research
and development 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 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 1995, 1996 and 1997, 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
including those described under the caption "Risk Factors" and elsewhere in
this Prospectus.
17
BUSINESS
THE COMPANY
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 catalog, establish an
international sales presence, increase its manufacturing capacity and improve
its manufacturing cost structure. The Company has since made five
acquisitions, opened sales offices in six countries and successfully
established a manufacturing facility in China. These initiatives have enabled
the Company to significantly expand its product catalog and market reach and to
increase its net sales from $34.3 million in fiscal 1995 to $101.3 million in
fiscal 1997. Excluding amounts attributable to acquisitions, the Company's net
sales grew by approximately 22.5% in fiscal 1997.
INDUSTRY OVERVIEW
The electronic protection industry consists of companies that design,
manufacture, distribute, sell, install, monitor and maintain intrusion, fire
alarm and other electronic protection systems. The Company manufactures system
components for sale to installation companies, distributors, other equipment
manufacturers and, in limited cases, significant commercial or governmental
end-users. The Company is not engaged in the installation or monitoring
aspects of the industry. For many years, the electronic protection industry
was oriented towards the protection of physical assets with simple burglary
detection and alarm equipment. In line with its customers' requirements, the
industry has since broadened in scope to one which not only provides
sophisticated equipment for intrusion detection but additionally provides
important "premises control" functions, such as fire detection, personnel
access control and CCTV monitoring of interior and exterior areas. Equipment
required for these functions is sold as individual components or, increasingly,
bundled with other compatible components to form an integrated system for a
specific customer's application.
The Company presently offers products in all four of the principal
categories of the electronic protection equipment market: security, fire,
access control and CCTV. According to statistics compiled by the Security
Industry Association (the "SIA") in its 1997 SECURITY INDUSTRY MARKET OVERVIEW,
combined U.S. wholesale equipment sales for these four categories were
estimated at $5.3 billion in 1996. The Company believes international markets
of significant size also exist for each of the four categories. The SIA report
contains various U.S. statistics for each of the four categories, including the
following:
* SECURITY PRODUCTS. This category had an estimated U.S. market size
of $1.8 billion in 1996, with a 7.1% annual growth rate forecasted for
the five year period ending 2001. This market data includes sales for
commercial and residential alarm systems of all price points. The
Company presently addresses the commercial market and mid- to high-end
residential applications.
* FIRE PRODUCTS. This category had an estimated U.S. market size of
$1.1 billion in 1996, when considering only equipment sales for
commercial applications. The Company competes primarily in the
commercial fire equipment market and, to a lesser extent, offers
products for residential applications.
* ACCESS CONTROL PRODUCTS. This category had an estimated U.S.
market size of $1.6 billion in 1996. The U.S. market for access
control equipment is forecasted to grow at 9.0% each year through the
four year period ending 2000. The most rapidly growing part of the
access control market has been high-technology, PC-based systems for
large commercial applications with multiple entrance and exit points.
* CCTV PRODUCTS. This category had an estimated U.S. market size of
$758.0 million in 1996. The U.S. CCTV market is forecasted to grow at
a rate of 10.2% each year through the four year period ending 2000.
According to the SIA study, the overall U.S. market for all private
security products and services is forecasted to grow at approximately 8% per
year through 2000. There are several factors driving the growth of the private
security industry. The perception by Americans that crime is a significant
problem has continued to grow as evidenced by the focus on crime in political
campaigns and in the media. Insurance companies often provide incentives to
businesses for installing electronic security systems or require such systems
as a condition of insurance coverage. An electronic fire system is required in
18
commercial facilities in many localities in order to comply with municipal fire
codes. There has been a trend for large commercial customers to centralize
their security function at the corporate level instead of managing security on
an ad hoc site-basis. This has often resulted in greater attention and
resources for security solutions. The growth in telecommuting and in-home
offices has created incremental demand for residential security products by
bringing expensive office equipment into the home. Market penetration has also
been driven by the increased affordability of systems, as advances in
technology and reduced manufacturing costs have increasingly brought high
quality systems into price ranges attractive to residential and small
commercial customers. In addition to new systems, there is ongoing system
replacement in the commercial and mid- to high-end residential markets,
creating significant retrofit opportunities. The Company estimates that
customers in these markets typically upgrade or replace their systems every
seven to ten years.
The Company believes that product manufacturing in the electronic
protection industry is characterized by the following attributes:
* HIGH DEGREE OF FRAGMENTATION. Manufacturing for the electronic
protection industry is highly fragmented and consists of a broad array
of equipment manufacturers, each of which typically provides only a
portion of the products required to deliver a comprehensive security
solution. The Company believes that there are more than 200 companies
engaged in manufacturing system components in the United States.
* TRENDS TOWARD CONSOLIDATION. There have recently been a number of
mergers and acquisitions among manufacturers of products for the
electronic protection industry, including the five acquisitions made by
the Company since 1996. The Company believes that this acceleration in
manufacturer consolidation is based in part on a competitive model that
has emerged in the industry which rewards companies that can offer a
full product catalog across all four of the principal categories of its
industry: security products, fire products, access control products
and CCTV products. The Company's customers are seeking vendors which
not only provide a full catalog of products, but can also supply
products for the many electric and electronic standards which exist
throughout the world. The installation and monitoring segment of the
industry has also been consolidating rapidly, with national and
regional firms such as ADT, Ameritech and Entergy regularly acquiring
local competitors. The national and regional consolidators often seek
to reduce the number of vendors required to meet their product needs.
The Company believes international full-catalog equipment suppliers
will have advantages over small niche product suppliers in capturing
business from these large installation and monitoring companies.
* CONTINUING TECHNOLOGICAL CHANGE. Detection, control and
communication equipment are being continuously improved, taking
advantage of increasing capabilities of microprocessors and application
specific integrated circuits. The improvements are primarily software-
based and are generally directed at increasing system sophistication,
reducing false alarms, reducing installation and service costs and
enhancing end-user convenience. A recent trend has been increased
integration of different types of security and alarm systems. Whereas
basic security and fire alarm systems were once adequate for many
customers, many customers now prefer access control and CCTV systems
integrated into a single system with traditional security and fire
capabilities. Despite the technological advances that occur in the
industry, there remains a certain inertia or loyalty to products that
have already been widely accepted by installation and monitoring
companies. It can be expensive for installation and monitoring
companies to adopt new products because product changes may create new
inventory requirements, necessitate re-training of installation and
service personnel and make inventories of displaced products obsolete.
It is often difficult for new products to gain rapid commercial
penetration. For this reason, acquisitions are often attractive, and
sometimes preferred to new product development, as a means of growth in
the Company's industry. This is particularly true when a niche
manufacturer can be purchased that has a significant existing customer
base.
* DIGITAL COMMUNICATIONS TECHNOLOGY. Digital technology has
permitted the consolidation of local stations into large, remote
monitoring stations, often hundreds of miles from the end-user's
business or residence. This has driven demand for a whole new
generation of products which take advantage of digital technology and
which utilize non-traditional communication channels such as two-way
radio, derived channel, cellular and satellite communications. Many
times, these communications channels are more reliable, secure and
often lower in cost than traditional communication methods such as
telephone lines.
* FALSE ALARMS. The electronic protection industry is increasingly
focusing on false alarms because of the significant burden they impose
on the support infrastructure of police and fire departments and
because, over the long-term, they undermine the protection afforded by
electronic protection systems. Industry associations and manufacturing
19
and installation companies have been working together in recent years
to develop products and procedures to reduce false alarms.
STRATEGY
The Company's goal is to be an international leader in the design,
manufacture and marketing of equipment for the electronic protection industry,
satisfying all of its customers' protection needs with a complete line of high-
quality, technologically advanced products which are distributed by a worldwide
marketing organization and supported by a service-oriented product support
team. Principal elements of the Company's strategy include:
* Catalog expansion - continuing to expand its product catalog
through internal development, acquisitions and partnering with
companies that have technological capabilities that complement the
Company's internal capabilities. The Company believes that the ability
to provide a full catalog of products will result in competitive
advantages over firms which only provide a small portion of the
products regularly required by the industry's customers. Part of the
Company's motivation for its recent acquisitions was to expand the
Company's product catalog. The Company is promoting the sale of its
fire, access control and other product lines by leveraging the superior
market acceptance it enjoys in the security equipment arena.
* INTERNATIONAL EXPANSION - continuing to expand its international
sales efforts. The Company's acquisitions of DA Systems, RAS and
Seri<e'>e have given the Company inroads into important European
markets. The Company plans to use the distribution networks of these
companies to distribute its full range of products, as appropriate. In
addition, the Company's sales offices in Asia and Australia have been
successful in developing a base of operations from which the Company
can further expand in those markets.
* TECHNOLOGICAL ADVANCEMENT - continuing to develop technologically
advanced products. The Company utilizes the power of microprocessors
and application specific integrated circuits to fully exploit presently
available technology. By using this technology, the Company has
developed: detection products which feature demonstrably superior
signal processing capacity which optimize the trade-off between false
alarms and catch performance; control products which generally provide
a superior level of programming flexibility and more sophisticated
firmware than competitive product offerings; and communication
equipment which provides access to a variety of commercially available
communication technologies.
* Market focus - continuing to focus on the installation and service
professionals that service the commercial and mid- to high-end
residential security and fire alarm system markets, who view the
features and quality of the Company's products as providing superior
value. The Company is also increasing its sales efforts directed to
the U.S. government.
* Production efficiency - increasing utilization of its China
facility and continuing to consolidate its purchasing. The Company's
state-of-the-art China facility became operational in October 1995.
The Company has been able to reduce its unit manufacturing costs by
transitioning production from its Fairport, New York and Salinas,
California locations to its China facility. The Company anticipates
additional cost savings from the continued transition of production to
its China facility. The Company has also realized cost savings by
consolidating purchasing of components for its worldwide operations.
* Customer development - continuing to partner with significant
customers to develop new or enhanced products to meet specific end-user
needs. Products that the Company has jointly developed in the past
include a line of intrusion detectors with self-diagnostics for ADT to
work with its proprietary communication protocol, an integrated control
panel for Honeywell and a long-range photoelectric smoke detector for
Simplex.
* Related applications - exploiting opportunities to apply its
technologies in related applications for markets from which it does not
currently generate significant revenues. For example, the Company's
Security Escort product leverages its technological capabilities and
has provided it with an application that is useful in markets such as
colleges and prisons, which are different than those which it has
served historically.
20
ACQUISITIONS
The Company's recent acquisitions demonstrate the implementation of its
primary strategies of catalog and international expansion. These acquisitions
significantly expanded the Company's product catalog while simultaneously
expanding its domestic and international distribution network.
RADIONICS. In February 1996 the Company acquired all of the outstanding
stock of Radionics, which has generally been regarded as a premier U.S.
manufacturer of security, fire and access control equipment and central station
receivers. Radionics had annual net sales of $45.1 million for calendar year
1995, and this acquisition more than doubled the Company's net sales rate.
This acquisition gave the Company access to Radionics' network of over 1,000
dealers. Radionics had a number of advanced products and models under
development which have subsequently been completed by the Company, such as a
246-zone fully-integrated control panel and a control communicator which can
function as a wired, wireless or hybrid system and can communicate using
BellSouth's Cellemetry<reg-trade-mark> technology.
SENSES. In July 1996 the Company acquired certain assets of Senses, a
manufacturer of long-range wireless alarm transmission equipment marketed under
the name "Safecom," with annual net sales of approximately $2.0 million. This
acquisition provided the Company with an important new technology, a patent on
the transmission of alarm signals from a digital communicator through a radio
network, and access to dealers who have installed approximately 150 Safecom
radio networks. Safecom networks are operating in 19 countries around the
world, with the greatest penetration in South America. The Safecom products
are particularly attractive in markets where the infrastructure for more
traditional forms of signal communication do not exist or are unreliable.
DA SYSTEMS. In May 1997 the Company acquired all of the outstanding stock
of DA Systems, a leading British manufacturer of security control equipment
with annual net sales of approximately $10.8 million. This acquisition
provided the Company with a line of controls and communication devices approved
for sale in the U.K., which has unique requirements for the design of security
control and communication equipment. Approval of future products should be
expedited by having U.K.-based engineers working on such products. DA Systems
also provided the Company with an important new in-building wireless radio
technology believed by the Company to be superior in performance to competitive
offerings.
SERIEE. On June 24, 1997 the Company acquired 99.5% of the outstanding
stock of Seriee. Seri<e'>e is a leading French manufacturer of electronic
control and communications equipment with net sales of approximately
$6.3 million per year and has the largest security equipment distribution
network in France. Like the U.K., France has unique design requirements and
this acquisition provides the Company with a line of French-approved control
panels which, coupled with Seriee's 10 agency offices located throughout
France, give the Company a significant entrance into the French market. Prior
to its acquisition, Seriee was a distributor for certain Company products.
RAS. On June 25, 1997 the Company acquired 98.7% of the outstanding stock
of RAS. RAS, with net sales of approximately $9.9 million per year, has the
largest security equipment distribution network in Belgium, with five regional
sales offices located throughout that country. The Company believes that RAS
has significant technical expertise in CCTV and access control systems and is
strategically located to service northern European customers by providing
convenient technical support and inventory. RAS had been a distributor for the
Company for over 15 years and, immediately prior to its acquisition, was the
Company's second largest distributor.
PRODUCTS
The Company produces and distributes a wide variety of electronic
protection equipment, offering a single source of products to the professional
installers who provide custom systems for different types of buildings and
protection requirements. The Company's products include security, fire and
access control systems and components, CCTV system components and the Security
Escort multiple user help call system. The Company seeks to be a value leader
by offering high quality and technologically advanced products at competitive
prices. The Company believes that the commercial and mid- to high-end
residential portions of the electronic protection industry recognize the
quality of the Company's products and consider them to offer attractive value.
The following table sets forth the Company's net sales for fiscal 1997 in
each of the primary categories of products offered by the Company:
21
Fiscal 1997
Net Sales Percent
Product Type (in thousands) of Total
------------- -------------- --------
Security products $77,298 76.3%
Fire products 13,029 12.9%
Access control products 9,067 9.0%
CCTV products 1,857 1.8%
---------- -------
Total $101,251 100.0%
=========== =======
From its inception until 1995, the Company was primarily a niche provider
of intrusion detection devices. Following the shift in the Company's strategy
in 1995 to expand the products it offers by acquisition and internal
development, the Company has significantly expanded its product catalog by
adding: (i) control and communication equipment with its purchase of Radionics
in February 1996, (ii) wireless radio network products with its purchase of
certain assets of Senses in July 1996, (iii) in-building wireless radio
technology with its purchase of DA Systems in May 1997, and (iv) an additional
line of security control panels with its acquisition of Seri<e'>e in June 1997.
Since early 1995, the Company has introduced several internally developed
products including, among others, its TriTech pet avoidance detectors, a
control panel that offers both wired and wireless on-premise communication
capability, an enhanced and broadened line of smoke detectors, a new line of
passive infrared intrusion detectors, and a fire system control and
communication product. In addition, the Company completed Radionics' second
generation of integrated panels which are capable of simultaneously controlling
a full-featured alarm system, fire system and access control system. The
Company has also expanded its product catalog by entering into a number of
alliances with partners that have technological capabilities that complement
the Company's internal capabilities. One recent example of such an alliance
brought about the Company's first entry into the CCTV market in fiscal 1997.
SECURITY PRODUCTS
Security systems consist of intrusion detectors coupled with control and
communications equipment and, in many cases, notification devices. When a
triggering event occurs, a detector senses the event and notifies the control
equipment, which in turn causes the communications equipment to transmit an
alarm signal to a remote central alarm monitoring service or directly to the
police. The control equipment also activates notification devices such as
strobes, horns and sirens if these options are features of the system.
DETECTORS. Security detectors are the components of a security system
which sense intrusion into protected areas. The Company markets security
detectors under the brand names Detection Systems, Radionics, TriSense, DA
Systems and Seriee. Security detectors differ in three primary respects:
the way they sense intrusion or another alarm condition, the way they
communicate with control equipment and the type of information they transmit to
the control equipment.
The Company offers detectors which use six basic technological approaches
for sensing the existence of an intrusion or other alarm condition:
Type of Detector Operation
----------------------------------- -----------------------------------
Passive infrared body heat detection Passive infrared detectors operate
by detecting the change in energy
that occurs when a body of one
temperature passes by a background
of another temperature within the
detector's field of view.
Special processing techniques
enable the detector to determine
whether a change in energy is
caused by a person or by some other
false alarm source.
Combination passive infrared and Dual detectors combine passive
microwave detection infared detectors with microwave
("dual detectors") detectors. Microwave detectors
generate microwave signals and detect
either a reduction or distortion of
received energy caused by an intruder.
22
Photoelectric beam interruption Photoelectric beam detectors consist of
a light transmitter and a separate
receiver. The transmitter emits an
invisible infrared beam to the receiver.
If the beam is broken, the receiver
signals an alarm.
Acoustic glass break detection Glass breakage detectors use
microprocessor-based sound analysis
technology to listen for the specific
frequencies associated with breaking
glass. They can be used to detect
breakage of plate, tempered, laminated
and wired glass.
Vibration detection Vibration or seismic detectors use three
distinct detection systems to protect
against attack from heavy objects,
drilling or explosion. They are designed
specifically for protection of vaults,
safes and ATMs, but also can be used to
protect other reinforced areas such as
night deposit boxes, data storage
cabinets and filing cabinets.
Magnetic contacts Magnetic contacts are used primarily on
doors and windows and signal the control
equipment when an electrical connection
is broken due to a protected door or
window being opened.
These different types of detectors are needed for different types of
applications in commercial and mid- to high-end residential security systems
and complement each other in their system applications and the types of
environments in which they function best. Many alarm systems incorporate
several different types of detectors in a single alarm system to maximize the
effectiveness of the system.
Detectors can communicate with an alarm system's control equipment directly
(wired), indirectly (wireless) or on a combined or "hybrid" basis (where the
detector communicates via wireless transmission to a peripheral device which is
wired to the control equipment). The Company offers detectors which are used
in each of these types of systems. The information that detectors communicate
to the control equipment ranges from a simple communication that an alarm event
has occurred to, in a multiplex system, the identity of the detector sensing
the alarm condition, the nature of the alarm condition and diagnostic
information about the detector.
The Company believes that for the markets it serves it offers the widest
variety of detectors available from any single supplier and that its detectors
are among the most advanced detectors available from any source. The Company
believes that its detectors generally provide greater features, performance and
reliability than its competitors' products. These characteristics are
attractive to professional installers because they make installation easier,
reduce service calls and expense, minimize false alarms and increase end-user
satisfaction. Specific attributes of the Company's detectors include:
* FEATURES. The Company offers a wide variety of detector types
which incorporate certain special features such as field-
interchangeable optic systems which permit installers to use the same
detector for different coverage patterns by simply adjusting the mirror
configuration; sensitivity controls which allow the installer to adjust
the sensitivity of the detector as appropriate for the application to
minimize false alarms; multiple mounting options to provide more
installation flexibility; pointable optics that permit the coverage
pattern to be directed thereby providing more mounting alternatives and
allowing adjustment for changes in use without re-mounting; and a broad
range of operating voltages for many detectors permitting them to be
used in older or specialized security systems.
* PERFORMANCE. Some examples of how the Company's products maximize
performance are its patented signalling processing techniques ("motion
analyzer processing") incorporated into its passive infrared and
TriTech detectors which enables them to distinguish between the
electronic signatures of valid and false alarm conditions. The
Company's newest dual detectors can be used in residential or
commercial environments to prevent up to 100-pound animals from causing
the detector to detect an alarm condition but still be tripped by a
human weighing less than 100 pounds. The Company's newest passive
infrared models can distinguish and ignore smaller animals, such as
rodents. Another example of the Company's detectors' performance
capability is their ability to perform under a broad range of
temperatures from -40<circle> fahrenheit through 120<circle>
fahrenheit.
23
* RELIABILITY. Each of the Company's detectors undergoes computer-
based functional testing and in-circuit electrical testing to insure
that it functions as designed. The Company further enhances the
reliability of its more sophisticated detectors by incorporating
patented software-based diagnostic systems in them that confirm the
detectors are functioning in a number of respects and have not been
blocked or "masked-off."
CONTROL EQUIPMENT. The control components of a security system manage
all the functions of the system and provide the link between the system's
detectors and communications equipment. The Company markets control products
under the brand names Radionics, Detection Systems, DA Systems and Seri<e'>e.
The Company's control products include control panels which collect, interpret
and transmit the signals from the detectors and arming stations which are used
to program certain features of the system and to arm and disarm it. The
Company's control and communication product offering was greatly expanded in
1996 by its acquisition of the Radionics control product line, which had a
favorable industry reputation for alarm control and communication equipment.
The Company's security control product line includes products that are used
in all three types of systems installed by security professionals.
Conventional security systems include wired, wireless and hybrid (combination
wired and wireless) systems and simply communicate that an alarm condition
exists. In the next level, multiplex systems, each sensor is addressable,
which means that the specific location of the alarm condition is reported. At
the highest level, the Company's advanced multiplex systems feature the
capacity to report back addressable test and alarm condition information,
assuring that the system is working properly, and to report whether a detector
has been tampered with.
The Company has a wide range of control panels, ranging from its Detection
Systems' low-cost six-zone panel which can operate six detection device
circuits, to Radionics' recently introduced 246-zone fully integrated security,
fire and access control panel which can operate a combination of up to 246
intrusion detection, smoke detection and access control circuits and devices.
Features of the Company's control panels that enhance its ability to market its
control panels include: (i) the ability to quickly communicate data about
events occurring in the control system; (ii) the flexibility to select which
information is reported locally and which is transmitted to a central
monitoring station; (iii) the ability to specify how the keypad works for each
user at each location; (iv) "robust" power supplies which ensure adequate power
supply to the detectors, notification devices and other system components and
(v) enhanced transient immunity which protects the system from power surges and
lightning.
COMMUNICATIONS EQUIPMENT. The Company offers a broad line of
communications equipment, ranging from Radionics' central station receiving
equipment, which performs the function of receiving alarm signals from multiple
sources, to transmission equipment capable of accessing telephone lines, as
well as most of the alternative communication technologies which are
commercially available. One of these technologies is BellSouth's new
Cellemetry<reg-trade-mark> data service, which permits wireless transmission of
alarm signals to a central station using existing cellular networks. Another
is the ARDIS radio network, which offers a more secure alternative to telephone
lines as the means for contacting a central monitoring station, and ultimately
the police or fire department. In addition, the Company offers its Safecom
long-range wireless alarm transmission system which allows a monitoring company
to establish and maintain a proprietary two-way radio network to transmit and
receive alarm signals. The Company also offers its Fastlink system which
provides one-way radio communication of alarm signals to a remote monitoring
station. The Company, through its Radionics and DA Systems subsidiaries, is
licensed to manufacture and sell in the U.K. and U.S. derived channel
communication devices that transmit alarm signals over the unused bands of
standard telephone lines. This allows alarm signals to be transmitted at the
same time a telephone line is being used for voice communications.
SECURITY ESCORT. The Company's Security Escort product is a multiple
user help call system which allows a user to alert appropriate security
personnel as to their location, name, address and any handicap or other special
data by using a palm-size transmitter. Security Escort systems may be enabled
to permit a user to trigger a strobe and sound a siren as well. The primary
components of a Security Escort system are a central command station which is
monitored by security personnel, a Microsoft Windows<reg-trade-mark>-based
system software package, transceivers, receivers and individual transmitters.
This system uses a digital micro-cellular architecture which accommodates up to
16 million individual user ID codes. The system is now available through
several regional and national installation companies. It has been successfully
installed in college, prison, nursing home, psychiatric hospital, parking lot
complex and museum environments.
The Security Escort's advanced design features include: self-supervision
of the system's operational integrity by internally generating and monitoring
test transmissions; testing of transmitters by users; and system-generated
notices regarding system maintenance requirements. Security Escort allows a
user to test the system and his or her transmitter at any time and
24
receive visual confirmation that both are functioning properly. In addition,
the system software provides for full archiving of all system activity
including victim tracking and alarm map recall.
FIRE PRODUCTS
Fire detection systems work in the same manner as security systems. In
fact, many fire detection systems are operated in tandem with a security system
by the same control equipment. Fire alarm systems range from conventional
systems, which can sense and signal a fire condition or non-condition, to
addressable systems, which permit identification of the triggered detector
within the system, and analog systems, which permit communication of
information regarding the condition of the environment at the detector
location. The Company offers fire detection products under the brand names
Detection Systems and Radionics. The Company's fire detection product line,
which includes products for both residential and commercial applications,
features detection components, dedicated control panels, communication
equipment and notification devices.
DETECTORS. The Company's fire detection components sense the presence
of smoke and heat by employing a variety of technologies, including beam smoke
detectors, photoelectric spot smoke detectors, ionization spot smoke detectors
and heat probes. The Company's smoke detectors are differentiated by a
patented chamber which provides increased immunity to dust, which is the
leading cause of false fire alarms. The Company also has a patented automatic
test and calibration feature which continuously senses and signals if dust or
other conditions cause the detector's sensitivity to deviate from its
acceptable range. The Company's fire detectors offer many of the same features
as its security detectors and undergo the same stringent testing requirements.
CONTROL EQUIPMENT. As described above, many of the Company's control
panels operate both security and fire alarm systems; however, some of the
Company's control panels are designed exclusively for operating fire alarm
systems. The Company originally entered the fire detection business as an
extension of the security products line by providing fire detection features
and accessories through the security control panel. The Company is in the
process of introducing two new control product lines for the dedicated fire
market, a market which the Company has not historically addressed. One of
these products utilizes state-of-the-art analog fire monitoring technology.
COMMUNICATION EQUIPMENT. The technologies the Company's products
provide for communicating fire alarm signals are the same as those provided by
its security alarm communications equipment. In the fire systems market, the
Company's capabilities in communications take on added importance because of
National Fire Protection Association ("NFPA") guidelines requiring all local
fire systems to have communications capability permitting alarm and trouble
conditions to be monitored remotely. The Company was the first to develop a
supplementary communications product specifically designed to permit existing
systems to be updated to comply with NFPA guidelines. The Company's Safecom
long-range wireless system provides fully-supervised two-way fire reporting by
radio which provides enhanced security.
NOTIFICATION DEVICES. The Company distributes a full range of
notification devices such as strobes, horns and sirens varying in color and
intensity which fully comply with the Americans with Disabilities Act. These
products are distributed under the Company's name and are supplied by a leading
specialty manufacturer of such products.
ACCESS CONTROL PRODUCTS
Electronic access control systems consist of equipment that can identify an
authorized individual and permit that person to enter a restricted area. While
intrusion control products protect the property when no one is on-site, access
control products protect the property while it is occupied. The market for
access control systems is divided into three major end-user categories:
industrial, commercial, and governmental. Fear of crime, potential liability
and convenience have created a significant retrofit market for access control
products in addition to the new construction market.
Access control systems can include card-based systems, CCTV-based systems,
audio systems and bar code systems. The Company distributes access control
products on an OEM basis under the brand names Readykey, Easikey and Radionics.
Access control products sold by the Company include control systems, card
readers, cards and detector accessories. Card-based technology is currently
the most attractive option both in terms of price and reliability, and
card-based systems currently dominate the access control market. Card-based
systems are currently in place in a number of non-residential operations,
including office buildings and hotels, and are becoming more prevalent in
residential settings such as college campuses.
25
CCTV PRODUCTS
CCTV is a system of relaying video and audio signals from a camera to a
monitor or a recording device. The term CCTV refers to a closed-circuit system
sending signals to select receivers as opposed to a system broadcasting signals
to the general public. The Company distributes CCTV products under the brand
name DS Vision. These products consist of cameras, monitors, recorders,
control units and other accessories. The Company distributes color and black-
and-white as well as both high and low resolution cameras and monitors.
Professional CCTV security and surveillance systems can be simple or
complex. While a convenience store might employ a system consisting of a
single camera and monitor, an airport system would likely include hundreds of
cameras, monitors and video recorders along with computer-based control
equipment and video multiplexers. Professionally installed CCTV systems are
used in retail stores, banks, warehouses, office buildings, industrial sites,
government facilities, casinos, mines, airports, prisons and, increasingly, in
private homes. The Company is promoting a state-of-the-art system to enable
authorized personal computer users to remotely "look in" on the CCTV system
installed at their facility.
MARKETING
The Company's primary customers are: (i) national and regional installation
companies such as ADT, Ameritech, Checkpoint, Holmes Protection, Honeywell,
Simplex, Wells Fargo and Westar; (ii) national distributors such as ADI in the
U.S., Efsec in Sweden, Glastrak in the Netherlands and Rimi in Russia; and
(iii) original equipment manufacturers such as Pittway and ITI Technologies
that integrate the Company's components into their finished products.
End-users of the Company's products include federal and state governments,
Autozone, Boeing, J.C. Penney, Kmart, Northrop Grumman, Pepsico, Tandy and
Wal-Mart. The Company has a sales force of approximately 105 representatives
of which 50 are domestic and 55 are international. The Company presently has
approximately 137 distributors that accounted for 13.4% of the Company's net
sales during fiscal 1997.
The Company's products are installed in industrial, commercial,
institutional and residential buildings, in both new and upgraded system
installations. Radionics and DA Systems sell their products to national
dealer/installer networks which combine their products with those of other
suppliers to form complete systems. Historically, Radionics has sold its
products to installation companies in the high-end commercial, retail and
governmental markets. More recently, Radionics has broadened its product
offering by supplying products suitable for the residential market.
Conversely, DA Systems has historically sold its products to installation
companies and distributors for the small commercial and residential markets.
In connection with the Company's international marketing initiative, it has
opened six international sales offices. The Company's distributors and sales
representatives cover an additional 50 countries. Foreign sales (including
sales to Canada) accounted for approximately 16% of the Company's net sales in
fiscal 1997.
Domestically, large regional and national accounts are supported directly
by regional sales and service managers. The Company's sales managers provide
technical support to customers regarding system design, installation and
service. The Company also conducts regular training programs for its customers
as well as technical seminars at national and regional trade shows. A call to
the Company's 800 sales number typically results in same-day shipment of most
standard products from one of two warehouses. To support the on-site installer
or service person, toll-free 800 lines connect directly to the Technical
Service Department. Detection Systems and Radionics maintain regional
sales/training personnel in 14 states.
The Company markets the Security Escort multiple user help call system in
North America and in Australia. While the system was initially designed for
the protection of individuals on college and university campuses, it is
suitable for many other applications. The Company is seeking additional
distribution relationships to expand the market coverage for the system to
other environments, such as apartment complexes, condominiums, retirement
communities, hospitals, correctional facilities, governmental facilities and
manufacturing facilities.
The success of the Company depends heavily on the business it conducts
with a limited number of significant customers. In fiscal 1997, 10.7%, 10.6%
and 6.0% of the Company's net sales were attributable to Pittway, Ameritech and
Honeywell, respectively. Pittway is a competitor of the Company across many of
its product lines and purchases the Company's products to incorporate them into
its products and systems. During October 1996, Ameritech (an established
customer of the Company) began purchasing the Company's products through
Pittway to utilize Pittway's distribution facilities. The Company has had
long-standing relationships with most of its significant customers; however, it
generally does
26
not have supply contracts with them and they may unilaterally reduce or
discontinue their purchases without penalty. The Company's loss of (or failure
to retain a significant amount of business with) any of these customers could
have a material adverse effect on the Company. The Company's acquisitions, its
international marketing initiatives and its increased use of distributors have
reduced the potential for sales fluctuations associated with the Company's
largest customers.
COMPETITION
The markets in which the Company operates are highly competitive. The
Company's competitors include manufacturers of security and fire alarm
equipment from all over the world. The Company believes its three major
competitors are Pittway, the Berwind Group and C&K Systems. In addition, the
Company may face competition from new entrants into these markets and increased
competition from existing competitors. A number of the Company's competitors
have substantially greater financial and other resources than the Company. In
many cases the Company's competitors are concentrated in one market niche in
the electronic protection industry, allowing them to concentrate their
resources in that niche. The Company competes on the basis of providing
superior value to customers with respect to both products and services. When
selecting intrusion and fire detection equipment, professional installation and
service companies consider the breadth of products offered by manufacturers and
distributors, product performance and reliability, as well as the incorporation
of advanced technological features such as automatic testing, efficiency of
delivery, ease of installation and service, sales and technical support
services and price. There can be no assurance that the Company's products and
services will continue to be competitive and accepted by the market in the
future.
MANUFACTURING
The Company has manufacturing facilities in Fairport, New York; Zhuhai,
China; Salinas, California; and Southall, England; although it has ceased using
the Salinas and Southall plants for regular product manufacturing. The Company
is ISO 9002 certified at all four of its manufacturing facilities.
The Company designs its products and prepares specifications for the
component parts used in its products. The Company purchases certain
components from outside sources and then assembles them into finished products.
Before product assembly, components are sample tested for compliance with
quality control standards and critical components are individually tested. The
Company assembles circuit boards using both automatic and semi-automatic
assembly equipment utilizing both pin-through-hole and surface-mount
technologies. Intermediate quality control processes are used to evaluate
components and products being transferred between assembly departments.
Completed circuit boards are tested and calibrated against Company-defined
performance standards.
The Company's China manufacturing operations, which commenced during fiscal
1996, are conducted in a 70,000 square foot manufacturing facility in Zhuhai,
People's Republic of China. Manufacturing operations and the first product
shipments from the Company's China facility commenced in October 1995.
Initially, the Company duplicated in this facility the proven manufacturing
procedures historically used in its Fairport facility. Subsequently, the
Company's management at the China facility has fine-tuned the manufacturing
process to take advantage of local conditions. The Company has transitioned
the manufacturing of many Detection Systems' motion sensors and most of
Radionics' controls to the China manufacturing facility to take advantage of
its lower production costs. The Company has ceased using the Radionics plant
in Salinas, California for regular product manufacturing and is currently using
the production area there primarily for product configuration. During fiscal
1997, approximately 25% of the Company's manufacturing output was produced at
its China facility. The Company is in the process of consolidating its
purchasing for all its manufacturing materials, which it expects will result in
additional cost savings.
INTELLECTUAL PROPERTY
The Company has obtained over 40 patents related to its products. While
the Company obtains patents as appropriate and considers certain of its patents
valuable, it does not believe any one of them by itself is crucial to the
successful conduct of its business. The Company relies on a combination of
patents, trademark registrations, copyrights and confidentiality agreements to
protect its intellectual property.
During the fiscal 1995, 1996 and 1997, the Company expended approximately
$4.1 million, $4.7 million and $8.1 million, respectively, on research and
development activities relating to the development of new products and the
improvement of existing products.
27
SUPPLIERS
The Company purchases raw materials and components worldwide from numerous
suppliers. The vast majority of these materials are generally available from
more than one supplier and the Company has not encountered any serious
shortages or delays. Certain raw materials used in producing some of the
Company's products can be obtained only from one or two suppliers, the shortage
of which could adversely impact production of certain security equipment by the
Company. The Company believes that the loss of any other single source of
supply would not have a material adverse effect on its overall business.
REGULATION
Many of the Company's products require approval by the FCC before they can
be marketed in the United States. In addition, commercial acceptance of the
Company's products is typically dependent on UL listing. The Company has
successfully obtained FCC approval and UL listing of its products in the past;
however, it cannot predict whether it will obtain approvals for future products
or whether FCC regulations or UL listing requirements relating to the Company's
current or future products might change. Failure to comply with FCC
regulations or UL listing requirements, an inability to receive approval for
products under development or a change in existing regulations or listing
requirements that would make products non-compliant, could have a material
adverse effect on the financial condition and results of operations of the
Company. Most foreign countries have similar agencies and regulations, which
could have the same impact on sales of the Company's products within those
countries. In addition to the regulation of its products, the Company is
subject to local, state, federal and foreign laws regarding the discharge of
materials into the environment.
A number of municipalities have enacted or are considering enacting
legislation which penalizes false alarms which trigger responses by police or
fire departments. The Company is unable to quantify the effects such
legislation may have on the security and fire protection markets as a whole,
but believes that false alarm legislation is causing installation companies and
system buyers to be more inclined toward the use of higher quality equipment,
such as that manufactured and sold by the Company.
Compliance with federal, state and local laws and regulations regulating
the discharge of materials into the environment, or otherwise relating to the
protection of the environment have not had, and are not expected to have, a
material effect upon the capital expenditures, earnings or competitive position
of the Company.
EMPLOYEES
As of July 21, 1997, the Company directly employed 723 persons worldwide,
including 340 in manufacturing, 86 in engineering and product development, 68
in customer service, 104 in sales, 93 in management and administration and 32
in marketing. In addition, the Company's China facility employs 387 persons
who are under the supervision of the Company, including approximately 342 in
manufacturing, eight in engineering and product development, two in customer
service, two in sales and 33 in management and administration. None of the
Company's employees is represented by a collective bargaining organization, and
the Company's management believes employee relations are good.
PROPERTIES
The Company conducts manufacturing, research and general office operations
at its 92,000 square foot facility at 130 Perinton Parkway, Fairport, New York.
Radionics' research, product configuration and general office operations
are conducted at its 156,000 square foot facility located in Salinas,
California, the lease on which expires in July 1999. The manufacturing of
Radionics' products has been transitioned to the Company's China and Fairport
facilities.
The Company's China manufacturing operations are conducted in a 70,000
square foot manufacturing facility in Zhuhai, People's Republic of China.
Detection Systems (HK) Ltd., a subsidiary of the Company ("DS Hong Kong"),
leases the facility from the local Chinese government under a ten-year lease
which expires May 31, 2005. DS Hong Kong has also entered into a sub-
contracting agreement which runs through June 2000 and provides for the local
Chinese government to arrange for personnel and utilities and for DS Hong Kong
to furnish manufacturing equipment, raw materials and management
28
services. Pursuant to this agreement DS Hong Kong pays a fee and production
expenses to the local Chinese government and makes payments to the workers at
the facility.
LEGAL
The Company experiences routine litigation in the normal course of its
business. The Company occasionally receives, and may receive in the future,
communications from third parties claiming that the Company's products or
technologies infringe on such parties' intellectual property rights. The
Company does not believe that any pending or threatened litigation or
intellectual property claims will have a material adverse effect on the
financial condition or results of operation of the Company.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers and directors of the Company:
NAME AGE POSITION
-------------------- ------------ ----------------------------------------
Karl H. Kostusiak 58 Chairman of the Board, Chief Executive
Officer and President
David B. Lederer 57 Executive Vice President and Director
Lawrence R. Tracy 50 President of Detection Systems
International, Inc. and Radionics, Inc.,
subsidiaries of the Company
Frank J. Ryan 43 Vice President, Secretary and Treasurer
George E. Behlke 39 Vice President, Engineering
Gary Holroyd 38 Vice President, Operations
Donald R. Adair 53 Director
Mortimer B. Fuller, III 55 Director
Edward C. McIrvine 63 Director
KARL H. KOSTUSIAK has been President and Chief Executive Officer of the
Company since its founding in 1968. He has been a director of the Company
since 1968 and also serves as Chairman of the Board. He is a graduate of the
State University of New York at Buffalo with a Bachelor of Science in
Electrical Engineering and of the University of Rochester with a Master of
Science in Electrical Engineering. Mr. Kostusiak is a member of and actively
participates in the American Society for Industrial Security, the Central
Station Alarm Association, the National Burglar and Fire Alarm Association, the
National Fire Protection Association and the Security Industry Association.
DAVID B. LEDERER, one of the founders of the Company, has been Executive
Vice President of the Company since 1981 and a director since 1968. He is a
graduate of the State University of Nebraska with a Bachelor of Science and
Master of Science in Electrical Engineering. Mr. Lederer is a member of the
American Society for Industrial Security, the Central Station Alarm
Association, the National Burglar and Fire Alarm Association, the National
Electrical Manufacturers Association and the Security Industry Association.
LAWRENCE R. TRACY has been President of Detection Systems International,
President of Radionics since March 1996. Both DSII and Radionics are
subsidiaries of the
29
Company. Prior to joining the Company, Mr. Tracy was President and Chief
Executive Officer of C&K Systems, Inc., a position he held for 13 years. Mr.
Tracy is a member of the American Society for Industrial Security, the Central
Station Alarm Association, the National Burglar and Fire Alarm Association, the
National Fire Protection Association and the Security Industry Association.
FRANK J. RYAN has been Vice President of the Company since 1988 and has
served as the Company's Chief Financial Officer since 1982. He is also the
Company's Secretary and Treasurer. He is a graduate of the State University of
New York at Fredonia. Mr. Ryan is a member of the Institute of Management
Accountants, the Central Station Alarm Association and the National Association
of Manufacturing.
GEORGE E. BEHLKE has served as the Company's Vice President, Engineering
since May 1995. Mr. Behlke has been with the Company since 1977 and served as
its Engineering Manager from 1984 until May 1995. His efforts in the
development of intrusion and smoke sensors have resulted in numerous patents
held by the Company. Mr. Behlke is a graduate of Alfred State Agriculture and
Technical College.
GARY HOLROYD has served as the Company's Vice President of Operations since
November 1996, having held similar positions for Radionics and Expamet
International PLC, Radionics' previous parent company, since 1975. He is a
graduate of the University of Newcastle, United Kingdom.
DONALD R. ADAIR has been a director of the Company since 1991 and also
serves on the Board's Compensation, Stock Option and Audit Committees. He is
the principal of Adair Law Firm, which was established in 1988 and focuses on
serving businesses in Rochester, New York. He is a graduate of Harvard College
and Cornell Law School. Mr. Adair is also a director of Stone Construction
Equipment, Inc. in Honeoye, New York, and Victor Insulators, Inc. in Victor,
New York.
MORTIMER B. FULLER, III has been a director of the Company since 1990 and
also serves on the Board's Compensation, Stock Option and Audit Committees.
Since 1977, he has been President and Chief Executive Officer of Genesee and
Wyoming Industries, Inc., a holding company in Greenwich, Connecticut which
owns and operates regional and short line freight railroads and provides rail
related services to railroads and shippers. He is a graduate of Princeton
University, Boston University School of Law and Harvard Business School. Mr.
Fuller is also a director of Genesee and Wyoming Industries and the American
Short Line Railroad Association. He is a founding member of the Regional
Railroads of America, and serves on that Association's executive committee. He
is also a trustee of the Lawrenceville School.
EDWARD C. MCIRVINE has been a director of the Company since 1981 and also
serves on the Board's Compensation, Stock Option and Audit Committees. Since
1987, he has been a self-employed research and development management
consultant and, from 1987 through 1991, he served as Dean of the College of
Graphic Arts and Photography at the Rochester Institute of Technology in
Rochester, New York. He is a graduate of the University of Minnesota and
earned his Ph.D. in Theoretical Physics from Cornell University. He is an
elected Fellow of the American Physical Society and served on the Board of the
American Institute of Physics.
30
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the compensation
of the Company's Chief Executive Officer and certain other executive officers
of the Company (collectively, the "Named Executive Officers") for fiscal years
ended March 31, 1997, 1996 and 1995. The Company did not grant any restricted
stock awards or stock appreciation rights or make any long-term incentive plan
payouts during the years indicated.
[Enlarge/Download Table]
Long Term
Compensation
Annual Compensation Awards
------------------- -----------
Other Securities
Name and Annual Underlying All Other
Principal Fiscal Compen- Options/ Compen-
Position Year Salary($) Bonus($) sation($) SARS(#) sation($)(2)
----------- ------- --------- ------- -------- -------- -----------
Karl H. Kostusiak 1997 212,100 403,333 --(3) 0 3,266
Chairman, President 1996 205,926 1,419 26,186 0 2,542
and CEO 1995 196,110 184,746 --(3) 0 2,625
David B. Lederer 1997 169,700 322,670 --(3) 0 3,364
Executive Vice 1996 164,741 1,135 27,956 0 2,534
President 1995 156,897 147,794 --(3) 0 2,625
Lawrence R. Tracy 1997 148,470 282,377 --(3) 18,775 3,301
President of 1996 144,148 31,648 --(3) 0 0
Detection Systems 1995 21,000 102,405 --(3) 60,000 0
International, Inc.
and
Radionics, Inc.
George E. Behlke 1997 108,150 81,790 24,761(4) 9,650 1,964
Vice President, 1996 89,363 723 --(3) 0 2,272
Engineering 1995 N/A N/A N/A N/A N/A
Gary Holroyd(1) 1997 117,636 74,587 --(3) 1,460 238
Vice President, 1996 N/A N/A N/A N/A N/A
Operations 1995 N/A N/A N/A N/A N/A
Frank J. Ryan 1997 108,150 59,308 --(3) 2,190 1,973
Vice President, 1996 105,000 723 --(3) 0 2,298
Secretary and 1995 100,000 35,017 --(3) 2,250 2,242
Treasurer
_________________________
(1) Mr. Holroyd became an officer of the Company on November 7, 1996.
(2) Represents contributions by the Company to accounts of the named
executive officers under the Company's 401(k) retirement savings plan.
(3) Values are less than the minimum amount required to be reported.
(4) Includes $21,000 which represents the difference between the market value
and the exercise price for a nonqualified stock option awarded during the
fiscal year.
31
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth
information with respect to stock options granted to the Named Executive
Officers during fiscal 1997. Each grant was for incentive or nonqualified
stock options to purchase Common Stock under the Company's 1992 Restated Stock
Option Plan. All options are exercisable 40% after one year, 60% after two
years, 80% after three years and 100% after four years. Options awarded prior
to December 17, 1996 were adjusted to reflect the three-for-two stock split
effected on that date. The Company has not granted any stock appreciation
rights.
[Enlarge/Download Table]
Potential Realizable
Percent of Value at Assumed
Number of Total Annual Rates of Stock
Securities Options/SARs Exercise or Price
Underlying Granted to Base Price Market Price Appreciation for
Option/SARs Employee in Expiration Option Term
------------------------
Name Granted (#) Fiscal Year ($/Sh) ($/Sh) Date 5% ($) 10% ($)
---- ---------- ------------- ---------- ------------- ---------- ---------- ---------
K. Kostusiak 0 -- -- -- -- -- --
D. Lederer 0 -- -- -- -- -- --
L. Tracy 6,000 37.5% 10.00 13.50 11/6/06 37,740 95,640
12,775 19.25 19.25 1/21/02 67,963 150,106
G. Behlke 6,000 19.2% 10.00 13.50 11/6/06 37,740 95,640
3,650 19.25 19.25 1/21/02 19,418 42,888
G. Holroyd 1,460 2.9% 19.25 19.25 1/21/02 7,767 17,155
F. Ryan 2,190 4.4% 19.25 19.25 1/21/02 11,651 25,733
OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES. The
following table sets forth information with respect to the Named Executive
Officers concerning the exercise of options during fiscal 1997 and unexercised
options held as of March 31, 1997. The value of the underlying securities was
determined by taking the market value at year-end minus the exercise price.
The market price of the Company's stock on March 31, 1997 was $17.50 per share.
[Enlarge/Download Table]
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised In-the-Money Options at
on Value Options at March 31, 1997 (#) March 31, 1997 ($)
Name Exercise (#) Realized($) Exercisable / Unexercisable Exercisable/Unexercissable
---- ------------ ----------- ----------------------------- --------------------------
K. Kostusiak 0 0 0 / 0 0 / 0
D. Lederer 0 0 0 / 0 0 / 0
L. Tracy 0 0 36,000 / 42,775 474,000 / 338,644
G. Behlke 6,444 101,465 1,500 / 11,150 19,000 / 127,875
G. Holroyd 0 0 3,000 / 5,960 41,000 / 58,945
F. Ryan 3,240 19,408 1,800 / 2,640 22,800 / 1,868
At March 31, 1997, Messrs. Kostusiak, Lederer and Ryan had stock option
loans outstanding that totaled $182,910, $134,117 and $66,999, respectively.
As of June 6, 1996, the outstanding balances were $167,285, $121,210 and
$59,091, respectively. The loans carry interest rates ranging from 5.54% to
8.42%.
EMPLOYMENT AGREEMENTS
EXECUTIVE AGREEMENTS. The Company has employment agreements with three of
its executive officers, Messrs. Kostusiak, Lederer and Tracy (the "Executive
Agreements"). The Executive Agreements with Messrs. Kostusiak and Lederer are
through May 2002 and the agreement with Mr. Tracy is through February 1999.
The Executive Agreements provide for severance benefits under certain
circumstances. The terms "change of control," "cause" and "disability" are
used in the following description as defined in the Executive Agreements. The
Executive Agreements terminate upon the executive's death or permanent
disability except as described below.
Under the agreements with Messrs. Kostusiak and Lederer, if the Company
terminates the executive's employment without cause, the Company will continue
compensation and benefits to the executive for the then remaining balance of
the term of employment or for a period of three years from the date of
termination, whichever is longer. Under such circumstances, Mr. Tracy's
agreement provides that his compensation will continue for the then remaining
balance of the term
32
of employment or for a period of one year from the date of termination,
whichever is longer. The continuation of compensation and benefits includes
the executive's base salary plus participation in all applicable executive
incentive compensation plans and fringe benefit packages. Further, if Mr.
Kostusiak's or Mr. Lederer's employment is terminated by the Company without
cause after expiration of the agreement but prior to the Company and the
executive reaching agreement with respect to the executive's retirement
benefits, the Company will also continue the executive's compensation and
benefits for a period of two years from the date of termination.
If the Company terminates Mr. Kostusiak's or Mr. Lederer's employment for
cause, each will receive compensation and benefits for the remaining balance of
the term of employment or for a period of three years from the date of
termination, whichever is longer, provided that this compensation is reduced by
any monetary damage suffered by the Company due to the cause. The same applies
for Mr. Tracy, except that compensation and benefits will continue for the
remaining balance of the term of employment or for a period of one year from
the date of termination, whichever is longer.
If, within four months after a "change in control," as defined in the
Executive Agreements, Mr. Kostusiak's or Mr. Lederer's employment is terminated
by the Company or the executive, each would be entitled to receive: (a) the
base salary through the termination date, as in effect at the time of
termination or at the time the change in control occurs, whichever is higher,
plus any bonus which has been earned but not yet paid; (b) an amount equal to
three times the highest total base salary and bonus compensation paid to him in
any of the Company's preceding three fiscal years; and (c) the continuation of
fringe benefits for three years after termination. No provision relating to a
change of control is included in Mr. Tracy's agreement.
All three agreements restrict the executives from competing with the
Company for various periods subsequent to termination of employment, depending
on the circumstances of the termination.
PENSION PROVISIONS. Effective April 1996, the Company approved the
addition of a pension plan for Messrs. Kostusiak and Lederer in their Executive
Agreements. Under the terms of the Executive Agreements, the Company will pay
each of them retirement benefits for his lifetime and for his spouse's
lifetime, if his spouse survives him, as follows: (i) a retirement wage
benefit initially equal to 12% of his base salary on the date of his retirement
or death, increased each year thereafter by any increase, less 0.5%, in the
Consumer Price Index (except that the wage benefit shall be 75% of that amount
after executive's death); (ii) continuation of his full health insurance or
similar benefit for him and his spouse; and (iii) continuation of any other
benefit programs that provide continuation pursuant to their terms.
Based on a 5% compounded annual increase in their base compensation, and
assuming that they each retire at age 65, the estimated initial annual benefit
that would be payable to Messrs. Kostusiak and Lederer under the pension plan
provision in their Executive Agreements would be $34,108 and $27,290,
respectively.
The Executive Agreements further provide that: (i) the payment of
retirement benefits may be terminated if an executive has violated the non-
competition provisions of his Executive Agreement, and (ii) the Company will
purchase and maintain life insurance sufficient to fund the estimated benefits
for the spouse (any excess policy proceeds to be available, if agreed, to
purchase shares of the Company's Common Stock held in the executive's estate)
and the policy or policies of such insurance shall be held in a trust designed
for this purpose.
CHANGES IN MR. LEDERER'S EMPLOYMENT. Mr. Lederer has advised the Company
that, subject to the successful completion of this offering, he intends to
reduce the scope of his employment to part-time. The Company is willing to
employ Mr. Lederer on a part-time basis and is presently negotiating the terms
of such employment with Mr. Lederer.
33
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of the Common Stock as of July 21, 1997 and as adjusted to
reflect the sale of 1,072,000 shares of Common Stock by the Company and the
sale of 228,000 shares of Common Stock by the Selling Shareholders, by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each of the Selling Shareholders, (iii) each
director of the Company, (iv) each of the Named Executive Officers and (v) all
executive officers and directors of the Company as a group.
[Enlarge/Download Table]
Shares Beneficially Shares Beneficially
Owned Prior Shares to be Owned After
To Offering(1) Sold in Offering(1)
Name of Beneficial Owner Number Percent Offering Number Percent
_______________________ ----- ------ --------- ------ -------
Donald R. Adair 1,549(2) * 0 1,549 *
George E. Behlke 38,393(3)(4) * 0 38,393 *
Mortimer B. Fuller, III 5,670(5) * 0 5,670 *
Gary Holroyd 4,725(3) * 0 4,725 *
Karl H. Kostusiak 636,161(4) 12.9% 60,000 576,161 9.6%
David B. Lederer 451,276(4) 9.3% 150,000 301,276 5.1%
Edward C. McIrvine 25,325(6) * 0 25,325 *
Frank J. Ryan 78,212(3)(4)(7) 1.6% 8,000 70,212 1.2%
Lawrence R. Tracy 100,008(3)(4) 2.1% 10,000 90,008 1.5%
All Directors and Executive
Officers
as a Group (9 persons) 1,341,319(2)-(7) 26.2% 228,000 1,113,319 18.0%
Dimensional Fund Advisors, Inc. 253,572 5.3% 0 253,572 4.4%
_________________________
* Percentage of Common Stock owned is less than 1%.
(1) For all shares listed, each person possesses both sole voting and
investment power, except for those shares indicated in notes (2) - (7)
below. The share amounts include the shares of Common Stock actually
owned as of July 21, 1997 and the shares of Common Stock which the person
or group had the right to acquire within 60 days of such date. In
calculating the percentage of ownership, all shares of Common Stock which
the identified person or group had the right to acquire within 60 days of
July 21, 1997 upon the exercise of options or retirement are deemed to be
outstanding for the purpose of computing the percentage of shares of
Common Stock owned by such person or group, but are not deemed to be
outstanding for the purpose of computing the percentage of the shares of
Common Stock owned by any other person.
(2) Includes 1,173 shares held in custodianship for Mr. Adair's children under
the Uniform Gifts to Minors Act of New York for which shares Mr. Adair
disclaims beneficial ownership.
(3) Includes 1,500, 3,000, 1,800, 36,000 and 42,300 shares which may be
acquired upon exercise of warrants and options held by Messrs. Behlke,
Holroyd, Ryan, Tracy and all directors and executive officers as a group,
respectively.
(4) Includes 9,234, 179,840, 117,465, 8,492, 6,488 and 321,519 hypothetical
shares credited to the accounts of Messrs. Behlke, Kostusiak, Lederer,
Ryan, Tracy and all directors and executive officers as a group,
respectively, pursuant to the Company's deferred compensation plans, which
shares may be acquired upon retirement.
(5) Includes 2,025 shares held by Mr. Fuller's wife for which shares he
disclaims beneficial ownership.
(6) Includes 20,300 shares held by Dr. McIrvine's wife for which shares he
disclaims beneficial ownership.
(7) Includes 810 shares held in trust for Mr. Ryan's son under the Uniform
Gifts to Minors Act of New York for which shares Mr. Ryan disclaims
beneficial ownership.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company consists of 12,000,000 shares
of common stock, par value $0.05 per share (the "Common Stock"). As of the
date of this Prospectus, there are 4,743,894 issued and outstanding shares of
Common Stock. As of such date, there are outstanding options to purchase
319,120 shares of Common Stock pursuant to the Company's 1992 Restated Stock
Option Plan at exercise prices ranging from $3.75 per share to $22.75 per share
with a weighted average exercise price of $6.10 per share. In addition, the
Company has outstanding warrants to purchase 15,000 shares of Common Stock for
$3.83 per share and 1,500 shares of Common Stock for $13.50 per share. There
are also 98,019 shares of Common Stock issuable under the Company's Deferred
Compensation Plan and 278,528 shares of Common Stock issuable under the
Company's Deferred Stock Bonus Plan. The following description of the Common
Stock is qualified in
34
its entirety by reference to the Company's Certificate of Incorporation and By-
laws, which are exhibits to the Registration Statement of which this Prospectus
is a part.
COMMON STOCK
The Common Stock possesses ordinary voting rights, and the holders thereof
vote together as a single class for the election of directors and in respect of
other corporate matters. Holders of shares of Common Stock are entitled to one
vote per share, and cumulative voting of shares is not permitted. In the event
of the voluntary or involuntary liquidation, distribution or sale of assets,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive and share ratably in all net assets available for
distribution to shareholders after satisfaction of the Company's liabilities.
The Common Stock carries no preemptive rights and is not convertible,
redeemable or assessable. The holders of Common Stock are entitled to such
dividends as may be declared by the Company's Board of Directors and paid out
of funds legally available therefor. See "Dividend Policy."
CERTAIN PROVISIONS OF LAW
The Company is subject to anti-takeover provisions under New York law that
apply to a public corporation organized under New York law unless the
corporation has elected to opt out of such provisions in its Certificate of
Incorporation or, depending on the provision in question, its By-Laws. The
Company has not elected to opt out of these provisions. The Common Stock is
subject to the "affiliated transaction" provisions of Section 912 the New York
Business Corporation Law. These provisions, subject to certain exceptions,
restrict business combinations between the Company and interested shareholders
unless either the business combination or the acquisition of shares making a
person an interested shareholder (the "Triggering Acquisition") is approved by
the Board of Directors prior to the date of the Triggering Acquisition. Once
the provisions are triggered, a business combination must either (i) meet
stringent fairness requirements, or (ii) after five years from the Triggering
Acquisition have elapsed, be approved by the holders of a majority of the
outstanding voting shares of the Company excluding the interested shareholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
35
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through their
representatives, Raymond James & Associates, Inc. and Needham & Company, Inc.
(the "Representatives"), have severally agreed, subject to the terms and
conditions of the underwriting agreement (the "Underwriting Agreement") by and
among the Company, the Selling Shareholders and the Underwriters, to purchase
from the Company and the Selling Shareholders the number of shares of Common
Stock set forth below opposite their respective names, at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
Number of
Name Shares
--------------------------------- ---------
Raymond James & Associates, Inc.
Needham & Company, Inc.
-----------
Total
===========
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
purchased.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock directly to the public at the public offering price set forth on the
cover page of this Prospectus and to certain dealers, including the
Underwriters, at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the public offering,
the public offering price and other selling terms may be changed by the
Underwriters. The Representatives have informed the Company and the Selling
Shareholders that the Underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
Certain of the Underwriters and the selling group members that currently
act as market makers for the Common Stock may engage in "passive market making"
in the Common Stock on the Nasdaq National Market in accordance with Rule 103
of Regulation M under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Rule 103 permits, upon satisfaction of certain conditions,
underwriters and selling group members participating in a distribution that are
also Nasdaq market makers in the security being distributed to engage in
limited market making activity when Rule 101 would otherwise prohibit such
activity. Rule 103 prohibits underwriters and selling group members engaged in
passive market making generally from entering a bid or effecting a purchase at
a price that exceeds the highest bid for those securities displayed on the
Nasdaq National Market by a market maker that is not participating in the
distribution of the Common Stock. Each underwriter or selling group member
engaged in passive market making is subject to a daily net purchase limitation
equal to 30% of such entity's average daily trading volume during the two full
consecutive calendar months immediately preceding the date of the filing of the
Registration Statement of which this Prospectus forms a part.
36
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
aggregate of 195,000 additional shares of Common Stock, at the public offering
price, less the underwriting discounts and commissions, set forth on the cover
page of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the above table bears to the total shown,
and the Company will be obligated, pursuant to the option, to sell such shares
to the Underwriters. The Underwriters may exercise this option only to cover
over-allotments, if any, made in connection with the sale of the shares of
Common Stock offered hereby. If purchased, the Underwriters will sell such
additional shares on the same terms as those on which the shares are being
offered.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against, and to contribute to losses arising out of, certain civil
liabilities in connection with this offering, including liabilities under the
Securities Act.
The Company, its officers and directors and the Selling Shareholders have
agreed that for a period of 120 days following the date of this Prospectus,
they will not, except with the prior written consent of Raymond James &
Associates, Inc., acting for the Underwriters, sell, contract to sell or
otherwise dispose of any shares of Common Stock. This restriction does not
apply to shares sold by Selling Shareholders hereunder or certain issuances of
Common Stock by the Company pursuant to its stock option plans. See "Risk
Factors-Shares Eligible for Future Sale."
The foregoing includes a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy
of the Underwriting Agreement that is on file as an exhibit to the Registration
Statement of which this Prospectus forms a part.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company and for the Selling Shareholders by Nixon,
Hargrave, Devans & Doyle LLP, Rochester, New York, and for the Underwriters by
Fowler, White, Gillen, Boggs, Villareal and Banker, P.A., Tampa, Florida.
EXPERTS
The consolidated financial statements and financial statement schedule of
the Company as of March 31, 1995, 1996 and 1997, and for each of the three
fiscal years in the period ended March 31, 1997, included herein and/or
incorporated by reference from the Company's Annual Report on Form 10-K for the
year ended March 31, 1997, have been so included herein and/or incorporated by
reference in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information filed by the Company may
be inspected and copied (at prescribed rates) at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and at the following regional offices of the
Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. In addition, such reports, proxy statements and other
information can be obtained from the Commission's web site at
http://www.sec.gov. Quotations relating to the Common Stock appear on the
Nasdaq National Market. Such reports, proxy statements and other information
concerning the Company can also be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
The Company has filed with the Commission a Registration Statement on Form
S-2 (the "Registration Statement") under the Securities Act, with respect to
the shares of Common Stock offered hereby. This Prospectus, which is a part of
the Registration Statement, does not contain all the information set forth in,
or annexed as exhibits to, such Registration
37
Statement, certain portions of which have been omitted pursuant to rules and
regulations of the Commission. For further information with respect to the
Company and the shares of Common Stock offered hereby, reference is hereby made
to such Registration Statement, including the exhibits thereto. Copies of such
Registration Statement, including exhibits, may be obtained from the
aforementioned public reference facilities of the Commission upon payment of
the prescribed fees, or may be examined without charge at such facilities.
Statements contained herein concerning any document filed as an exhibit are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement. Each such
statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission under the
Exchange Act are incorporated by reference in and made a part of this
Prospectus:
(a) the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997;
(b) the Company's Proxy Statement relating to its 1997 Annual Meeting of
Shareholders; and
(c) the Company's Current Report on Form 8-K dated May 7, 1997 and filed
with the Commission on May 21, 1997.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein, or in any other subsequently filed documents, which also are
incorporated or deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. The Company hereby undertakes to provide,
without charge, to each person, including any beneficial owner, to whom a copy
of this Prospectus is delivered, on the written or oral request of such person,
a copy of any or all of the information incorporated herein by reference.
Exhibits to any of such documents, however, will not be provided unless such
exhibits are specifically incorporated by reference into such documents. The
requests should be addressed to the Company's principal executive offices:
Attn: Secretary, 130 Perinton Parkway, Fairport, New York 14450, telephone
number (716) 223-4060.
38
DETECTION SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants F-2
Consolidated Balance Sheets at March 31, 1995, 1996 and 1997 F-3
Consolidated Statement of Operations and Retained Earnings for the
years ended March 31, 1995, 1996 and 1997 F-4
Consolidated Statement of Cash Flows for the years ended March 31,
1995, 1996 and 1997 F-5
Notes to Consolidated Financial Statements F-6
F-1
Report of Independent Accountants
To the Board of Directors and
Shareholders of Detection Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and
the related consolidated statements of operations and retained
earnings and of cash flows present fairly, in all material
respects, the financial position of Detection Systems, Inc. and
its subsidiaries at March 31, 1995, 1996 and 1997 and the results
of their operations and their cash flows for each of the three
years in the period ended March 31, 1997 in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
Rochester, New York
June 2, 1997
F-2
DETECTION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
At Year Ended March 31, 1995 1996 1997
--------- --------- ---------
Assets
Current assets:
Cash and cash equivalents $4,597,047 $ 930,012 $2,244,265
4,597,047
Short term investments 2,421,546
Accounts receivable, less allowance
for doubtful accounts ($100,000 in
1995, $235,000 in 1996 and
$313,800 in 1997) 4,916,052 10,482,660 15,246,309
Inventories 5,255,724 14,065,843 29,995,215
Deferred income taxes 354,500 1,554,900 2,132,156
Prepaid expenses and other assets 408,406 1,392,913 883,137
---------- ---------- ----------
17,953,275 28,426,328 50,501,082
---------- ---------- ----------
Fixed assets, net 3,920,571 7,085,357 11,057,256
Property under capital lease, net 2,725,513 2,491,475 190,915
Deferred income taxes 3,983,200 3,046,200
Goodwill and other intangibles, net 3,762,327 2,942,626
Other assets 145,934 148,891 537,772
---------- ---------- ----------
$24,745,294 $45,897,578 $68,275,852
========== ========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $1,183,750
Current portion of long term debt $953,648
Current portion of capital
lease obligation $434,934 559,860 147,574
Accounts payable 1,213,958 6,231,737 12,259,380
Accrued payroll and benefits 1,074,103 1,566,777 2,818,487
Other accrued liabilities 266,526 3,171,914 3,254,593
---------- ---------- ----------
2,989,521 12,714,038 19,433,682
---------- ---------- ----------
Long term liabilities 288,200 1,931,900 1,173,694
Obligations under capital leases 745,733 186,471 54,125
Long term debt 17,750,000 28,031,802
Deferred compensation 1,527,638 1,745,886 1,751,281
Shareholders' equity:
Common stock, par value $.05 per
share
Authorized - 12,000,000 shares
Issued - 2,792,489 shares in 1995,
2,811,361 shares in 1996 and
4,478,993 shares in 1997 139,624 140,568 223,950
Capital in excess of par value 6,853,246 6,972,431 9,448,917
Retained earnings 12,724,265 4,869,022 8,594,306
---------- ---------- ----------
19,717,135 11,982,021 18,267,173
Less - Treasury stock, at cost (36,326) (12,363) (52,553)
Notes receivable for stock purchases (486,608) (392,514) (378,373)
Cumulative translation adjustment (7,861) (4,980)
---------- ---------- ----------
19,194,201 11,569,283 17,831,267
---------- ---------- ----------
$24,745,293 $45,897,578 $68,275,851
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-3
DETECTION SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Year ended March 31, 1995 1996 1997
Net sales $34,336,336 $41,857,809 $101,251,380
Costs and expenses:
Production 20,829,843 27,978,460 64,916,410
Research and development 4,070,443 4,699,643 8,114,671
Purchased in-process research
and development 9,350,000
Marketing, administrative and
general 6,788,924 10,514,797 21,411,444
--------- ---------- ----------
31,689,210 52,542,900 94,442,525
---------- ---------- ----------
Operating income (loss) 2,647,126 (10,685,091) 6,808,855
Interest income 113,420 340,311 206,049
Interest expense (168,557) (320,463) (1,764,620)
---------- ---------- ----------
Income (loss) before income taxes 2,591,989 (10,665,243) 5,250,284
Provision (benefit) for income
taxes 1,077,500 (2,810,000) 1,525,000
---------- ---------- ----------
Net income (loss) 1,514,489 (7,855,243) 3,725,284
Retained earnings at beginning
of year 11,209,776 12,724,265 4,869,022
---------- ---------- ----------
Retained earnings at end of year $12,724,265 $ 4,869,022 $8,594,306
4,869,022 8,594,306
========== ========== ==========
Earnings (loss) per common and
common equivalent share $.35 ($1.83) $.76
=== ===== ===
See accompanying notes to consolidated financial statements.
F-4
DETECTION SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended March 31, 1995 1996 1997
--------- --------- ---------
Cash flows from operating
activities:
Net income (loss) $1,514,489 ($7,855,243) $3,725,284
--------- ---------- ----------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,502,516 2,043,373 2,737,438
Purchased in-process research
and development 9,350,000
Loss (Gain) on disposition of
fixed assets 8,561 275,349 (14,670)
Deferred compensation 103,933 218,248 5,395
Deferred income taxes (123,500) (3,536,000) 177,800
Stock based compensation 48,800 34,763 146,950
Changes in operating assets and
liabilities:
Accounts receivable 480,783 (1,156,325) (4,763,649)
Inventories 590,227 (4,264,805)(15,929,372)
Prepaid expenses and other assets 3,069 (634,523) 120,895
Accounts payable 514,680 2,354,624 6,027,687
Accrued payroll and benefits 102,232 190,159 1,251,710
Other accrued liabilities (62,592) (460,930) (99,684)
--------- ---------- ----------
Total adjustments 3,168,709 4,413,933 (10,339,500)
Net cash provided by (used in)
operating activities 4,683,198 (3,441,310) (6,614,216)
--------- ---------- ----------
Cash flows from investing
activities:
Purchase of Radionics net of cash
acquired (17,965,381)
Capital expenditures (1,358,009) (3,376,867) (3,968,349)
Short term investments (2,437,842) 2,421,546
--------- ---------- ----------
Net cash (used in) investing
activities (3,795,851) (18,920,702) (3,968,349)
--------- ---------- ----------
Cash flows from financing
activities:
Notes payable 1,183,750
Proceeds from long term debt 17,750,000 10,047,007
Principal payments on long term
debt and capital lease obligations (401,815) (434,336) (539,939)
Issuance of common stock 140,375 94,295 2,238,805
Stock options exercised 47,733 109,129 148,064
--------- ---------- ----------
Net cash (used in) provided by
financing activities (213,707) 18,702,838 11,893,937
--------- ---------- ----------
Effect of exchange rate changes (7,861) 2,881
Net increase (decrease) in cash
and cash equivalents 673,640 (3,667,035) 1,314,253
Cash and cash equivalents at
beginning of year 3,923,407 4,597,047 930,012
--------- ---------- ----------
Cash and cash equivalents at
end of year $4,597,047 $ 930,012 $2,244,265
========= ========= =========
Cash paid during the year for:
Interest $ 173,709 $ 226,929 $1,574,812
========= ========= =========
Income taxes $1,141,276 $1,041,284 $1,095,754
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995, 1996 AND 1997
NOTE 1 - DESCRIPTION OF OPERATIONS AND ACCOUNTING POLICIES:
DESCRIPTION OF OPERATIONS -
Detection Systems, Inc. ("the Company") designs, manufactures
and markets electronic detection, control and communication
equipment for the security, fire protection, access control and
CCTV industries. From its inception 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 five
acquisitions, opened sales offices in six countries and successfully
established a manufacturing facility in China. These initiatives have
enabled the Company to significantly expand its product catalog and
market scope.
PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements of the Company include all
majority-owned U.S. and non-U.S. subsidiaries. Intercompany
accounts, transactions and profits are eliminated. Certain
amounts in the prior years' financial statements have been
reclassified to conform with the current year's presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at year-end as well as the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS -
Cash equivalents include time deposits and highly liquid
investments with original maturities of three months or less.
INVESTMENTS -
The Company accounts for its investment securities in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." All of the Company's reported investments are
classified as available for sale. Accordingly, unrealized
holding gains and losses, net of applicable taxes, are excluded
from income and recognized as a separate component of
shareholders' equity until realized.
INVENTORIES -
Inventories, which include materials, labor and overhead, are
recorded at the lower of cost, determined by the first-in, first-
out method, or market value.
FIXED ASSETS AND PROPERTY UNDER CAPITAL LEASE -
The building and related improvements are depreciated using the
straight-line method over an estimated useful life ranging from
26 to 40 years. Land improvements, machinery and equipment,
production tooling and furniture are depreciated on the
straight-line method over estimated useful lives ranging from
three to ten years. Expenditures for maintenance and repairs are
charged to expense as incurred. Major improvements are capitalized.
F-6
GOODWILL AND OTHER INTANGIBLES-
Goodwill and other intangibles represents the excess of the cost
of net tangible assets acquired in business combinations over
their fair value. Goodwill and other intangibles are amortized
using the straight-line method over periods ranging from three to
twenty years. The Company evaluates goodwill and intangibles for
impairment at least annually by comparing its best estimate of
undiscounted future cash flows to the respective carrying amount.
Accumulated amortization at March 31, 1996 and 1997 was
approximately $69,000 and $494,000, respectively.
RETIREMENT PLANS -
The Company has two defined contribution pension plans which, in
aggregate, cover substantially all domestic employees. The first
plan requires the Company to match 100% of an employee's
contribution up to one percent of the employee's base salary and
25% of an employee's contribution between two and four percent of
the employee's base salary. The second plan permits employees to
contribute up to 20% of their eligible earnings. Annual
contributions by the Company, out of its net profits, are in
amounts approved by the Company's Board of Directors.
The Company's contributions to these plans were approximately
$113,000, $117,000 and $155,000 in 1995, 1996 and 1997,
respectively.
During the first quarter of fiscal 1997 the Company established a
defined benefit pension plan for certain key executives. The
plan provides for an annual benefit of 12% of their ending annual
compensation and medical expense coverage for life after
retirement. The liability is being recognized over their
remaining service periods.
REVENUE RECOGNITION -
Revenues are recognized when product is shipped.
RESEARCH AND DEVELOPMENT COSTS -
All product development costs are charged to operations during
the period incurred.
FOREIGN CURRENCY TRANSLATION -
Assets and liabilities of non-U.S. subsidiaries are translated at
current exchange rates, and related revenues and expenses are
translated at average exchange rates in effect during the period.
Resulting translation adjustments are recorded as a separate
component of shareholders' equity.
STOCK BASED COMPENSATION -
The Company applies Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," which requires
compensation cost to be recognized based on the difference, if
any, between the quoted market price of the stock on the grant
date and the amount an employee must pay to acquire the stock.
INCOME TAXES -
The Company accounts for certain income and expense items
differently for financial reporting and income tax purposes in
accordance with SFAS No. 109, "Accounting for Income Taxes."
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of
assets and liabilities applying enacted statutory rates in effect
for the year in which the differences are expected to reverse.
STOCK SPLIT -
On November 7, 1996, a meeting of the Board of Directors was held
authorizing a three-for-two stock split effective December 17,
1996 for shareholders of record at the close of business on
November 27, 1996. All references in the consolidated financial
statements referring to share prices, per share amounts and stock
plans have been adjusted retroactively for the three-for-two
stock split.
F-7
EARNINGS PER SHARE -
The computation of earnings (loss) per common and common
equivalent share is based upon the weighted average number of
common and common equivalent shares outstanding during the
period. The weighted average common and common equivalent shares
used in this calculation, as adjusted to reflect the three-for-
two stock split, were 4,483,706, 4,285,238 and 4,933,541 in 1995,
1996 and 1997, respectively.
The earnings per share computations do not consider common
equivalent shares when the Company is in a loss position or when
the effect of such inclusion is anti-dilutive. There was no
material difference between primary and fully diluted earnings
per share in 1995, 1996 and 1997, respectively.
CONCENTRATION OF CREDIT RISK -
Financial instruments which potentially expose the Company to
concentration of credit risk consist principally of bank
deposits, temporary investments and accounts receivable. The
Company performs ongoing credit evaluations of its customers'
financial condition and the Company maintains an allowance for
uncollectible accounts receivable based upon the expected
collectibility of all accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS -
The carrying amount of the Company's financial instruments,
including cash and cash equivalents, short-term investments,
accounts receivable and notes payable, approximates their fair
value at March 31, 1996 and 1997 as the maturity of these
instruments is short term. The carrying amount of the Company's
long term debt obligations approximates their fair value as the
interest rates on such obligations approximate the market rate at
March 31, 1996 and 1997.
CASH FLOW STATEMENT -
The Company accepted notes receivable from employees for stock
purchases in the amount of $258,071, $13,314 and $22,758 in 1995,
1996 and 1997, respectively.
NEW ACCOUNTING STANDARDS -
In February 1997, SFAS No. 128, "Earnings Per Share," was issued
by the Financial Accounting Standards Board. SFAS No. 128
specified modifications to the calculation of earnings per share
from that currently used by the Company. Under SFAS No. 128,
"basic earnings per share" is calculated based upon the weighted
average number of common shares actually outstanding, and
"diluted earnings per share" is calculated based upon the
weighted average number of common shares outstanding and other
potential common shares (e.g. stock options and warrants) if they
are dilutive. SFAS No. 128 is effective for periods ending after
December 15, 1997 and will be adopted at that time. Had the
Company determined earnings per share in accordance with SFAS No.
128, for the years ended March 31, 1995, 1996 and 1997, basic pro
forma earnings (loss) per share would have been $.37, ($1.87) and
$.85, respectively, and pro forma diluted earnings (loss) per
share would have been $.34, ($1.87) and $.75, respectively.
NOTE 2 - ACQUISITION
In July 1996, the Company acquired certain assets and patent
rights of Senses International, Inc., a manufacturer of long
range wireless alarm transmission equipment. The Company paid
approximately $600,000 for these assets.
In February 1996, the Company acquired all of the stock of
Radionics, Inc. (Radionics) for a total cash purchase price,
including expenses, of approximately $18.2 million. Funding for
the acquisition was provided by borrowings from a commercial bank
pursuant to a term loan facility (Note 6).
F-8
The acquisition was accounted for under the purchase method, and
Radionics' results of operations have been consolidated with the
Company's results of operations effective as of the acquisition
date. The Company made a determination and allocation of the
purchase price as of the acquisition date and finalized this
allocation during fiscal 1997. The allocation of purchase price
consisted of the following:
Accounts receivable $ 4,410,300
Inventories 4,545,300
Other current assets 1,638,100
Accounts payable and other current liabilities (6,032,000)
-----------
Net working capital acquired 4,561,700
Fixed assets 1,803,600
Purchased in-process research and development 9,350,000
Goodwill and other intangibles 3,351,400
Other non-current items, net (899,500)
-----------
Total purchase price, including expenses $18,167,200
===========
The valuation of technology, including other intangibles, was
accomplished through the application of an income approach.
Projected debt-free income, revenue net of provision for
operating expenses, income taxes and returns on requisite assets
were discounted to a present value. This approach was used for
each of the Radionics product lines. Technology was divided into
two categories: current products and in-process research and
development.
Current products included those products currently in the market
place as of the acquisition date and products which, while still
in the development stage at the acquisition date, were
technologically feasible. The fair market value of the purchased
current products was determined to be $890,000. This amount is
recorded as an intangible asset and is being amortized on a
straight line basis over three years.
Purchased in-process research and development included the value
of products still in the development stage, but not considered to
have reached technological feasibility. As a result of the
valuation, the fair market value of the purchased in-process
research and development was determined to be $9,350,000. In
accordance with generally accepted accounting practice, this
amount was expensed upon acquisition in the fourth quarter of
fiscal 1996.
The following table summarizes, on an unaudited, pro forma basis,
the estimated combined results of operations of the Company as
though the acquisition was made at the beginning of 1995 and
1996. For purposes of preparing the unaudited pro forma
information, the results from Detection Systems' years ended
March 31, 1995 and 1996 have been combined with the results of
Radionics' years ended December 31, 1994 and 1995, respectively.
The pro forma amounts do not necessarily reflect the results that
actually would have been obtained had the transaction taken place
at the beginning of periods indicated, nor are they intended to
be a projection of future results:
1995 1996
------ ------
(Unaudited)
Net revenues $78,550,000 $81,285,000
Costs and expenses 84,671,000 93,509,000
Loss before taxes (6,121,000)
(12,224,000)
Net loss (3,780,000)
(7,706,000)
Net loss per share ($.88) ($1.80)
The charge for in process research and development of $9,350,000
is reflected in the fiscal year 1996 amounts above.
F-9
NOTE 3 - INVENTORIES:
Major classifications of inventory are as follows.
Year Ended March 31, 1995 1996 1997
---- ---- ----
Component parts $2,300,894 $ 6,924,870 $20,636,368
Work in process 475,927 705,473 2,697,459
Finished products 2,853,903 7,414,700 8,276,688
--------- ---------- ----------
5,630,724 15,045,043 31,610,515
Less-Reserve for obsolescence (375,000) (979,200) (1,615,300)
--------- ---------- ----------
$5,255,724 $14,065,843 $29,995,215
========= ========== ==========
NOTE 4 - FIXED ASSETS:
Major classifications of fixed assets are as follows.
Year Ended March 31, 1995 1996 1997
---- ---- ----
Land and improvements $ 211,735 $ 219,435 $ 714,582
Building and improvements 1,503,103 2,490,409 4,001,527
Machinery and equipment 7,099,144 9,802,633 14,080,783
Production tooling 3,140,152 3,134,229 3,865,900
Furniture 701,142 1,120,620 1,268,455
---------- ---------- ----------
12,655,276 16,767,326 23,931,247
Less - Accumulated depreciation (8,734,705) (9,681,969) (12,873,991)
---------- ---------- ----------
$3,920,571 $7,085,357 $11,057,256
========= ========= ==========
Total depreciation expense on fixed assets was approximately
$1,197,700, $1,711,100 and $2,126,700 in 1995, 1996 and 1997,
respectively.
NOTE 5 - CAPITAL LEASES:
During 1982, the Company entered into an agreement with a local
government agency under which the agency's bond proceeds of
$3,800,000 were used to purchase land and construct an operating
facility for lease to the Company. These expenditures had been
recorded as property under capital lease.
The lease, which required quarterly principal payments of $63,330
plus interest at two-thirds of a designated bank's prime lending
rate, extended to October 1997. However, all outstanding
principal on this obligation was repaid in June 1996, at which
time title to the property passed to the Company.
The Company has various equipment under capital lease agreements
which require payments of principal and interest of $156,117 in
1998; $38,934 in 1999 and $28,682 in 2000.
F-10
Property under capital leases consist of the following.
Year Ended March 31, 1995 1996 1997
---- ---- ----
Land and improvements $ 495,147 $ 495,147
Building 2,938,072 2,938,072
Machinery and equipment 1,327,591 1,327,591 $1,316,044
--------- --------- ---------
4,760,810 4,760,810 1,316,044
Less-Accumulated depreciation (2,035,297) (2,269,335) (1,125,129)
--------- --------- ---------
$2,725,513 $2,491,475 $ 190,915
========= ========= =========
Obligations under capital leases are summarized below.
Year Ended March 31, 1995 1996 1997
---- ---- ----
Operating facility $ 696,830 $443,510
Production and office equipment 483,837 302,821 $201,699
--------- ------- -------
1,180,667 746,331 201,699
Less - Current portion (434,934) (559,860) (147,574)
--------- ------- -------
$ 745,733 $186,471 $ 54,125
========= ======= =======
Total depreciation expense on property under capital leases was
approximately $294,800, $263,000 and $185,000 in 1995, 1996 and
1997, respectively.
NOTE 6 - INDEBTEDNESS
During 1996, the Company had a line of credit secured by general
business assets of the Company allowing borrowings of up to
$6,500,000. At March 31, 1996, borrowings on the line of credit
aggregated $1,183,750 at approximately 7.4%. The maximum amount
of borrowings on the line of credit outstanding during 1996 was
$1,183,750.
During 1997, the Company increased this line of credit to
$11,500,000. At March 31, 1997, borrowings on the line of credit
aggregated $11,230,757 at approximately 9.25%. This line
requires interest only payments through July 1998, at which time
all outstanding principal is due. Consequently, borrowings on
this line of credit outstanding as of March 31, 1997 are
classified as long term. The maximum amount of borrowings on the
line of credit outstanding during 1997 was $11,230,757.
In connection with the acquisition of Radionics, the Company
borrowed $17,750,000, of which $3,400,000 is secured by certain
real estate and matures in April 2006. The remaining $14,350,000
is secured by general business assets and matures in April 2003.
At March 31, 1997 and 1996, the interest rate on these borrowings
was approximately 7.4%.
Interest on the outstanding debt accrues based upon either the
federal funds rate, the prime rate or LIBOR, each adjusted by a
factor which varies based upon the rates of funded debt to
earnings before interest, tax, depreciation and amortization.
F-11
Pursuant to the terms of the debt agreements for the obligations
listed above, the Company has certain levels and covenants to
maintain with respect to such items as working capital, funded
debt and fixed charges. Failure to comply with these guidelines
constitutes default and obligations become currently due. The
Company is in compliance with all covenants and requirements under
the terms of the borrowing agreements.
Annual maturities of the Company's long term debt for the next
five years are approximately: 1998 - $953,600; 1999 -
$14,091,700; 2000 - $2,860,900; 2001 - $2,860,900; and 2002 -
$2,860,900.
NOTE 7 - DEFERRED COMPENSATION PLANS:
The Company's deferred compensation plan allows certain employees
to defer the receipt of salary or bonuses which they may be
entitled to receive. The compensation is normally payable at
retirement, and is fully vested when deferred. For salaries or
bonuses deferred, the employee elects, at the time of deferral,
to be paid in either stock or cash plus interest which has
accrued from the date of deferral.
Unissued common share equivalents are limited to 145,800 shares
under provisions of the plan. As of March 31, 1995, 1996 and
1997, unissued common share equivalents of 89,636, 97,537 and
98,019 respectively, existed under the plan.
The Company's stock bonus plan provides for bonuses payable in
stock to certain officers and key personnel if specified sales
growth, pretax profit growth and earning per share goals are
attained. The plan also provides that recipients may defer
receipt of stock bonuses until retirement. The bonus is fully
vested when deferred. Unissued common share equivalents existing
under the plan were 227,610 in 1995, 252,390 in 1996 and 252,390
in 1997.
NOTE 8 - SHAREHOLDERS' EQUITY:
The following table presents the changes in shareholders' equity
balances during the three years ended March 31, 1997.
Common stock Treasury Stock Capital in
--------------- ---------------- excess of
Shares Amount Shares Amount par value
Balances, March 31,
1994 2,771,489 $138,574 80,727 $322,778 $6,724,970
======== ======= ====== ======= =========
Distribution
of stock bonuses (6,550) (32,157) 16,643
Exercise of options and
warrants (69,184) (276,570) (27,692)
Treasury stock purchases 2,475 22,275
Common stock issued 21,000 1,050 139,325
-------- ------- ------ ------- ---------
Balances, March 31,
1995 2,792,489 $139,624 7,468 $ 36,326 $6,853,246
========= ======= ====== ======= =========
Distribution of stock
bonuses 2,400 120 (2,500) (11,953) 22,690
Exercise of options
and warrants 2,972 149 (7,029) (20,313) 2,875
Treasury stock
purchases 4,268 8,303
Common stock issued 13,500 675 93,620
-------- ------- ------ ------- ---------
Balances, March 31,
1996 2,811,361 $140,568 2,207 $ 12,363 $6,972,431
======== ======= ====== ======= =========
F-12
Common stock Treasury Stock Capital in
--------------- -------------- excess of
Shares Amount Shares Amount par value
Distribution of stock
bonuses 11,200 560 84,140
Exercise of options
and warrants 39,697 1,986 (7,679) (12,355) 172,127
Treasury stock 9,609 52,545
purchases
Three-for-two stock
split 1,482,449 74,122 1,786 (74,122)
Common stock issued 134,286 6,714 2,232,091
Other 62,250
--------- ------- ------ ------- ---------
Balances, March 31,
1997 4,478,993 $223,950 5,923 $ 52,553 $9,448,917
======== ======= ====== ======= =========
On December 17, 1996, the Company distributed a three-for-two
stock split effected in the form of a stock dividend to
shareholders of record on November 27, 1996. This distribution
increased the number of shares outstanding by 1,482,449. The
amount of $74,122 was transferred from capital in excess of par
to common stock. All per share amounts in this report have been
restated to reflect this stock split.
In October 1996, the Company authorized a private placement
offering for the sale of 114,286 shares from its authorized but
unissued shares of common stock at a pre-split price of $17.50
per share. The Company received approximately $2,000,000 in cash
from this transaction.
In May 1995, the Company's Board of Directors authorized the
repurchase of up to 100,000 shares of its outstanding common
stock for issuance in connection with incentive stock option and
stock bonus plans. As of March 31, 1997, the Company had not
repurchased any of its outstanding common stock pursuant to this
plan.
The Company has a fixed stock option plan whereby options for a
total of 250,000 shares of the Company's common stock may be
granted to key employees or non-employees of the Company by the
Board of Directors. The exercise price of the options must equal
or exceed the market value of the Company's common stock on the
date of grant. Options are generally exercisable at a rate of
40% in the second year after grant, 60% in the third year after
grant, 80% in the fourth year after grant and in full thereafter.
Options expire up to ten years after the date of grant.
Pro forma net earnings and earnings per share information, as
required by SFAS No. 123, "Accounting for Stock-Based
Compensation," has been determined as if the Company had
accounted for employee stock options under SFAS No. 123's fair
value method. The fair value of these options was estimated at
the grant date using a Black-Scholes option pricing model with
the following weighted-average assumptions: a risk-free interest
rate based on the anticipated length of time until exercise
ranging from 5.06% to 7.66%; expected life of 4 to 5 years;
and an expected volatility of 80%. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized
to expense over the options' vesting period (generally 4 years).
The Company's pro forma information follows:
Year ended March 31, 1995 1996 1997
------ ------ ------
Net earnings (loss)
As reported $1,514,000 ($7,855,000) $3,725,000
Pro forma $1,263,000 ($8,072,000) $3,439,000
Net earnings (loss) per
common and common equivalent share
As reported $.35 ($1.83) $.76
Pro forma $.28 ($1.88) $.70
F-13
This disclosure is not likely to be representative of the effects
on reported net earning for future years, because options vest
over four years and additional awards generally are made each
year.
A summary of the status of the Company's stock option plan as of
March 31, 1995, 1996 and 1997, and changes during the years
ending on those dates, is presented below:
1995* 1996* 1997
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning
of year 144,710 $2.92 227,690 $4.57 362,493 $ 4.45
Granted 184,500 4.64 171,825 4.17 50,100 14.54
Exercised (95,676) 2.31 (15,002) 3.19 (48,198) 4.65
Forfeited (5,844) 4.34 (22,020) 4.75 (25,875) 3.97
------- ------- -------
Outstanding at
end of year 227,690 4.57 362,493 4.45 338,520 5.95
======= ==== ======= ==== ======= ====
Options exercis-
able at year-
end 33,921 3.91 98,568 4.68 140,820 4.51
Weighted-
average
fair value of
options granted
during the year $2.11 $1.75 $8.18
*Amounts have been adjusted to reflect the three-for-two stock
split during fiscal 1997.
Options Outstanding Options Exercisable
------------------------------------------- --------------------
Weighted Weighted
Range of Number average Weighted Number average
Exercise Outstand Remaining average Outstand- Exercise
Prices ing at Contrac- Exercise ing at Price
Per March 31, tual Life Price Per March 31, Per
Share 1997 Years Share 1997 Share
-------- ------- ---- ------ ------- -----
$3 - $5 283,420 3.1 $ 4.43 139,270 $4.49
$5 - $7 5,000 2.2 $ 5.52 1,550 $6.06
$10 - $14 29,625 4.5 $11.24
$19 - $23 20,475 4.8 $19.32
-------- ------- ---- ------ ------- -----
$3 - $23 338,520 3.3 $5.95 140,820 $4.51
-------- ------- ---- ------ ------- -----
A summary of changes in outstanding warrants as of March 31,
1995, 1996 and 1997, and changes during the years ending on those
dates is presented below:
1995* 1996* 1997
----------------- --------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------- ------ ------- ------ -------
Outstanding at
beginning
of year 16,200 $4.40 8,100 $4.40 23,100 $ 4.03
Granted 15,000 3.83 1,500 13.50
Exercised (8,100) $4.40 (8,100) 4.40
------- ----- ------ ------ ------- ------
Outstanding at
end of year 8,100 $4.40 23,100 $4.03 16,500 $ 4.71
===== ==== ====== ==== ===== ====
* Amounts have been adjusted to reflect the three-for-two stock
split during fiscal 1997.
F-14
NOTE 9 - INCOME TAXES:
The provision (benefit) for income taxes consists of the
following.
Year Ended March 31, 1995 1996 1997
-------- ------- ---------
Federal
Current $997,200 $594,400 $1,184,000
Deferred (98,800) (2,433,600) (314,300)
State
Current 203,800 131,600 415,500
Deferred (24,700) (728,500) (73,100)
Foreign
Current 103,300
Deferred (373,900) 209,600
--------- --------- ---------
$1,077,500 ($2,810,000) $1,525,000
========= ========== =========
A reconciliation of the statutory federal income tax rate to the
effective rate is as follows.
Year Ended March 31, 1995 1996 1997
---- ---- ----
Statutory federal rate 34.0% (34.0%) 34.0%
State taxes, net of federal
benefit 7.9 (3.6) 4.5
Write-off of intangibles 6.4
Foreign tax rate differences 2.1 (8.1)
Change in valuation allowances 2.0 .8
Research and development
credits (3.0) (4.5)
Recapture of subsidiary excess
losses 6.5
Foreign sales corporation
benefit (2.1) (.5) (.6)
benefit
Other (1.7) 1.2 2.9
---- ---- ----
Effective income tax rate 41.6% (26.4%) 29.0%
==== ==== ====
F-15
Deferred tax assets (liabilities) are comprised of the following:
Year Ended March 31, 1995 1996 1997
Book accruals not currently
deductible for tax 42,200 1,593,500 1,200,900
Deferred compensation 618,200 706,500 733,200
Inventory obsolescence reserve 164,100 141,600 467,500
Accrued payroll and related costs 119,000 780,300 965,200
State investment tax credit
carryforwards 310,900 303,600 303,600
Subsidiary net operating loss
carryforwards 48,300 741,000 399,800
Tax basis of intangibles in
excess of book 2,688,300 2,796,400
Other 134,000 345,000 161,100
--------- --------- ---------
Total deferred tax assets 1,436,700 7,299,800 7,027,700
--------- --------- ---------
Depreciation (951,300) (1,016,200) (962,700)
Prepaid assets (34,900) (100,000) (61,500)
Other (25,000) (66,000) (121,700)
--------- --------- ---------
Total deferred tax liabilities (1,011,200) (1,182,200) (1,145,900)
--------- --------- ---------
Deferred tax asset valuation
reserve (359,200) (579,500) (703,400)
--------- --------- ---------
Net deferred tax asset $ 66,300 $5,538,100 $5,178,400
========= ========= =========
Realization of the tax loss and credit carryforwards, which
expire at various times between 2002 and 2011, is contingent on
future taxable earnings. Valuation allowances have been recorded
for these and other asset items which may not be realized.
Deferred income taxes have not been provided on the undistributed
earnings of foreign subsidiaries. The amount of such earnings
included in consolidated retained earnings at March 31, 1997 was
approximately $1.8 million. These earnings have been
substantially reinvested and the Company does not plan to
initiate any action that would precipitate the payment of income
taxes thereon.
NOTE 10 - GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
The Company currently operates in one industry segment. During
1995, the Company established a manufacturing and marketing
subsidiary in Hong Kong and a marketing subsidiary in Australia.
The Company also maintains a sales presence in Canada and Europe.
Net sales by the Company to unaffiliated customers outside the
United States represents 11.3%, 21.0% and 15.7% of consolidated net
sales for the years ended March 31, 1995, 1996 and 1997. Net
Sales by the Company's domestic operations to unaffiliated
customers outside the United States represent 11.3%, 12.3% and 7.0%
of the Company's consolidated net sales for the years ended March
31, 1995, 1996 and 1997, respectively.
The following table presents net sales, income (loss) before
income taxes and identifiable assets of the Company's domestic
and foreign operations. Net sales and income (loss) before
income taxes of the Company's domestic operations include the
impact of export sales. Inter-area sales are presented on a
basis intended to reflect the market value of the products as
nearly as possible. Identifiable assets are those assets of the
Company that are identified with the operations in the respective
geographic area.
F-16
Year Ended March 31, 1995 1996 1997
---------- ---------- ----------
Net sales
United States operations $34,336,336 $38,234,057 $92,442,003
Foreign operations 3,623,752 8,809,377
Inter-area 1,394,684 33,956,925
Eliminations (1,394,684) (33,956,925)
---------- ---------- -----------
$34,336,336 $41,857,809 $101,251,380
========== ========== ===========
Income (loss) before income
taxes
United States operations $2,591,989 ($8,917,291) $3,631,097
Foreign operations (1,432,217) 2,191,278
Eliminations (315,735) (572,091)
---------- ---------- -----------
$ 2,591,989 ($10,665,243) $5,250,284
========== ========== ===========
Identifiable assets
United States operations $24,745,293 $40,830,577 $48,142,435
Foreign operations 5,067,001 20,133,416
---------- ---------- -----------
$24,745,293 $45,897,578 $68,275,851
========== ========== ===========
During 1997 sales to the Company's three largest customers accounted
for 10.7%, 10.6% and 6.0% of the Company's net sales, respectively.
Accounts receivable from the Company's three largest customers represented
20.0%, 0.9% and 6.6% of the accounts receivable balances at March 31, 1997,
respectively. During 1996, sales to the Company's two largest customers
accounted for 13.8% and 9.7% of net sales, respectively. During 1995,
sales to the Company's two largest customers accounted for 19.3% and 18.7%
of net sales, respectively.
NOTE 11 - COMMITMENTS
The Company leases certain facilities pursuant to operating lease
agreements. Operating lease expense for offices and other
equipment was approximately $16,000 in 1995, $470,000 in 1996 and
$1,208,000 in 1997. Future minimum rental payments under
noncancelable operating lease agreements are as follows: 1998 -
$1,498,000; 1999 - $1,335,000 and 2000 - $379,000.
NOTE 12 - SUBSEQUENT EVENTS
On May 8, 1997, the Company announced its purchase of Digital
Audio Limited, (DA Systems), from Numerex Corporation in exchange
for 226,168 shares of the Company's common stock valued at $3.9
million. The shares are callable, at the Company's option, at
$17 per share plus interest at 8.25% until June 30, 1998, and may
be put by Numerex to the Company at that price after that date.
F-17
No dealer, salesperson or any other 1,300,000 SHARES
person has been authorized to give any
information or to make any
representation not contained in this
Prospectus in connection with this
offering, and, if given or made, such [DSI LOGO]
information or representation must not
be relied upon as having been
authorized by the Company, the Selling
Shareholders or the Underwriters. This
Prospectus does not constitute an offer DETECTION
to sell or a solicitation of an offer SYSTEMS, INC.
to buy any securities other than the
registered securities to which it
relates, or an offer to sell or
solicitation of an offer to buy such RADIONICS LOGO]
securities in any jurisdiction where,
or to any person to whom, it is
unlawful to make such an offer or
solicitation. Neither the delivery of
this Prospectus nor any sale made
hereunder shall, under any COMMON STOCK
circumstances, create any implication
that there has been no change in the
affairs of the Company since the date
hereof or that the information
contained herein is correct as of any
time subsequent to the date hereof.
PROSPECTUS
TABLE OF CONTENTS
PAGE
Prospectus Summary 3
Risk Factors 7 RAYMOND JAMES & ASSOCIATES, INC.
Use of Proceeds 11
Capitalization 11 NEEDHAM & COMPANY, INC.
Price Range of Common Stock 12
Dividend Policy 12
Selected Consolidated Financial Data 13 , 1997
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14
Business 18
Management 29
Principal and Selling Shareholders 34
Description of Capital Stock 34
Underwriting 36
Legal Matters 37
Experts 37
Available Information 37
Incorporation of Certain Documents
by Reference 38
Index to Consolidated Financial
Statements F-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company will pay all of the expenses incurred in connection with the
offering described in this registration statement. Such expenses are estimated
to be as follows:
Securities and Exchange Commission registration fee $8,551
Nasdaq National Market listing fee 17,500
NASD fee 3,322
Legal fees and expenses 80,000
Printing expenses 100,000
Accounting fees and expenses 25,000
Miscellaneous 15,627
--------
Total $250,000
=========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The New York Business Corporation Law (the "BCL") provides that if a
derivative action is brought against a director or officer of a corporation,
the corporation may indemnify him or her against amounts paid in settlement and
reasonable expenses, including attorneys' fees incurred by him or her, in
connection with the defense or settlement of such action, if such director or
officer acted in good faith for a purpose which he or she reasonably believed
to be in the best interests of the corporation, except that no indemnification
shall be made without court approval in respect of a threatened action, or a
pending action settled or otherwise disposed of, or in respect of any matter as
to which such director or officer has been found liable to the corporation. In
a nonderivative action or threatened action, the BCL provides that a
corporation may indemnify a director or officer against judgments, fines,
amounts paid in settlement and reasonable expenses, including attorneys' fees
incurred by him or her in defending such action, if such director or officer
acted in good faith for a purpose which he or she reasonably believed to be in
the best interests of the corporation.
Under the BCL, a director or officer who is successful, either in a
derivative or nonderivative action, is entitled to indemnification as outlined
above. Under any other circumstances, such director or officer may be
indemnified only if certain conditions specified in the BCL are met. The
indemnification provisions of the BCL are not exclusive of any other rights to
which a director or officer seeking indemnification may be entitled pursuant to
the provisions of the certificate of incorporation or the bylaws of a
corporation or, when authorized by such certificate of incorporation or bylaws,
pursuant to a shareholders' resolution, a directors' resolution or an agreement
providing for such indemnification.
The above is a general summary of certain provisions of the BCL and is
subject, in all cases, to the specific and detailed provisions of
Sections 721-725 of the BCL.
Article V, Section 2 of the Company's By-Laws contains provisions requiring
indemnification by the Company of its directors and officers against certain
liabilities and expenses which they may incur as directors and officers of the
Company or of certain other entities in accordance with Sections 722-723 of the
BCL.
Section 726 of the BCL also contains provisions authorizing a corporation
to obtain insurance on behalf of any director and officer against liabilities,
whether or not the corporation would have the power to indemnify against such
liabilities. The Company maintains insurance coverage under which the
directors and officers of the Company are insured, subject to the limits of the
policy, against certain losses, as defined in the policy, arising from claims
made against such directors and officers by reason of any wrongful acts as
defined in the policy, in their respective capacities as directors or officers.
II-1
ITEM 16. EXHIBITS.
[Download Table]
Exhibit
Number Exhibit Location
-------- ---------------------------- ------------------------
1 Underwriting Agreement To be filed by amendment
2(a) Definitive Stock Purchase Incorporated by reference
Agreement, dated February 12, as Exhibit 2 to the
1996, for purchase of stock of Company's Form 8K/A filed
Radionics, Inc. April 29, 1996
2(b) Asset Purchase Agreement, dated Incorporated by reference
July 22, 1996, for the purchase to Exhibit 2(b) of the
of the assets of Senses Company's 1997 Annual
International Report on Form 10-K
2(c) Stock Purchase Agreement, dated Incorporated by reference
May 7, 1997, for the purchase to Exhibit 2-1 of the
of the stock of Digital Audio Company's Form-8K filed
Limited May 21, 1997
2(d) Stock Purchase Agreement, dated Filed herewith
June 24, 1997, for the purchase
of shares of Seriee SA
2(e) Share Purchase Agreement, dated Filed herewith
June 25, 1997, for the purchase
of a portion of the stock of
Radio-Active Systems.
2(f) Share Purchase Agreement, Filed herewith
dated June 25, 1997, for the
purchase of a portion of the
stock of Radio-Active Systems.
4 Rights of Holders of common Incorporated by reference
stock - 1981 plan to Exhibit 4 of the
Company's 1993 Annual
Report on Form 10-K
5 Opinion of Nixon, Hargrave, To be filed by amendment
Devans & Doyle LLP
10(a) Non-employee director stock Incorporated by reference
option plan (warrant plan) to Exhibit 10(a) of the
Company's 1994 Annual
Report on Form 10-K
II-2
10(b) Medical reimbursement plan Incorporated by reference
to Exhibit 10(b) of the
Company's 1997 Annual
Report on Form 10-K
10(c) Employee stock purchase plan Incorporated by reference
to Exhibit 10 of the
Company's 1994 Annual
Report on Form 10-K
10(d) Amended & Restated Credit Filed herewith
Facility Agreement dated June
24, 1997 among Detection
Systems, Inc., Radionics, Inc.
and Fleet Bank, together with
Amended and Restated Term Loan
Note, Revolving Line Note and
Mortgage Loan Note, each dated
June 24, 1997
10(e) Deferred Compensation Plan and Incorporated by reference
Deferred Bonus Plan, both to Exhibit 10(e) of the
amended January 1997 Company's 1997 Annual
Report on Form 10-K
10(f) 1992 Restated Stock Option Plan Incorporated by reference
to Exhibit 22 of the
Company's 1995 Annual
Report on Form 10-K
10(g) Detection Systems, Inc. Incorporated by reference
Executive Bonus Plan to Exhibit 10(g) of the
Company's 1997 Annual
Report on Form 10-K
10(h) Executive employment contract Incorporated by reference
with Karl H. Kostusiak to Exhibit 10(h) of the
Company's 1996 Annual
Report on Form 10-K
10(i) Executive employment contract Incorporated by reference
with David B. Lederer to Exhibit 10(i) of the
Company's 1996 Annual
Report on Form 10-K
10(j) Executive employment contract Incorporated by reference
with Lawrence R. Tracy to Exhibit 10 of the
Company's 1995 Annual
Report on Form 10-K.
10(k) ECI Amended License and Mfg. Incorporated by reference
Agreement & Amendment No. 1 to Exhibit 10(k) of the
Company's 1996 Annual
Report on Form 10-K
II-3
10(l) Shareholders Agreements w/ ECI Incorporated by reference
to Exhibit 10 of the
Company's 1994 Annual
Report on Form 10-K
10(m) Stock Purchase Agreements with Incorporated by reference
Karl H. Kostusiak and David B. to Exhibit 10(n) of the
Lederer Company's 1997 Annual
Report on Form 10-K
10(n) Joint Venture Agreement for Incorporated by reference
Establishment of D.S. First to Exhibit 10(o) of the
Systems (Beijing) Limited Company's 1996 Annual
Report on Form 10-K
10(o) 1997 Stock Option Plan Filed herewith
10(p) Lease for China Facility dated To be filed by amendment
_______, 1995
11 Statement re: Computation of To be filed by amendment
Per Share Earnings
23(a) Consent of Nixon, Hargrave, Included in Exhibit 5
Devans & Doyle LLP
23(b) Consent of Independent Filed herewith
Accountants
24 Power of Attorney Reference is made to page
II-6 hereof
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Rochester, State of New York, on this 22nd day of
July, 1997.
DETECTION SYSTEMS, INC.
By: /s/ Karl H. Kostusiak
Karl H. Kostusiak, Chairman,
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
Name Title Date
/s/ Karl H. Kostusiak Chairman, President, Chief July 22, 1997
Karl H. Kostusiak Executive Officer and Director
Officer and Director
/s/Frank J. Ryan Vice President (Principal July 23, 1997
Frank J. Ryan Financial Officer and
Principal Accounting Officer)
/s/Donald R. Adair Director July 23, 1997
Donald R. Adair
/s/Mortimer B. Fuller, III Director July 23, 1997
Mortimer B. Fuller, III
/s/David B. Lederer Director July 23, 1997
David B. Lederer
/s/Edward C. McIrvine Director July 23, 1997
Edward C. McIrvine
II-5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below, hereby constitutes and appoints Karl H. Kostusiak and Frank J. Ryan, or
either of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution for him or her in any and all capacities, to
sign any or all amendments or post-effective amendments to this Registration
Statement, and any registration statement filed pursuant to Rule 462(b) of the
Securities Act prepared in connection therewith, and to file the same, with
exhibits thereto and other documents in connection therewith or in connection
with the registration of the Common Stock under the Exchange Act, with the
Securities and Exchange Commission, granting unto each of such attorneys-in-
fact and agents full power and authority to do and perform each and every act
and thing requisite and necessary in connection with such matters as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his or her substitute or substitutes may do or cause to be done by virtue
hereof.
Name Title Date
/s/ Karl H. Kostusiak Chairman, President, Chief July 22, 1997
Karl H. Kostusiak Executive Officer and Director
Officer and Director
/s/Frank J. Ryan Vice President (Principal July 23, 1997
Frank J. Ryan Financial Officer and
Principal Accounting Officer)
/s/Donald R. Adair Director July 23, 1997
Donald R. Adair
/s/Mortimer B. Fuller, III Director July 23, 1997
Mortimer B. Fuller, III
/s/David B. Lederer Director July 23, 1997
David B. Lederer
/s/Edward C. McIrvine Director July 23, 1997
Edward C. McIrvine
II-6
Dates Referenced Herein and Documents Incorporated By Reference
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