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. 