SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: March 31, 1995
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934.
Commission File Number: 0-8125
_____________________
DETECTION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
State of New York 16-0958589
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
130 Perinton Parkway
Fairport, New York 14450
(Address of principal executive offices) (Zip Code)
(716) 223-4060
(Registrant's telephone number, including area code)
_____________________
Securities registered pursuant to Section 12(b) of the Act: None
_____________________
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, Par Value $.05 Per Share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. Yes x
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. Yes x
As of June 23, 1995 the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $12,845,855
As of June 23, 1995 there were outstanding 2,804,238 shares of the
registrant's common stock, par value $.05 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Information on pages 14 through 24 of the Company's 1995 Annual Report
is incorporated by reference into Part II of this Form 10-K. Portions
of the Company's Proxy Statement for its 1995 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form
10-K.
PART I
ITEM l. BUSINESS
General
Detection Systems, Inc. ("Company") designs, manufactures and
markets electronic detection, control and signaling equipment for the
security and fire protection industries. An electronic alarm system
consists of intrusion and fire detectors as well as control and
signaling equipment. An alarm system is turned on by setting the
control instrument. When a break-in or fire occurs, the intrusion or
fire detector senses the incident and activates the control instrument,
which in turn triggers the signaling equipment and, in most cases, a
bell or siren to provide a local alarm. Signaling equipment may consist
of an automatic telephone dialer, a leased telephone line transmitter or
a radio transmitter and is used to transmit the alarm signal to a remote
central alarm monitoring service or directly to the police.
Since its founding in 1968, Detection Systems has established a
reputation for outstanding performance, quality and service. The
Company's product line includes electronic intrusion detectors, fire
detectors, microprocessor-based alarm control and signaling equipment,
and emergency call systems. These products are used worldwide by
professional installation and service companies to protect life and
property in commercial, industrial, institutional and residential
environments.
The Company has three subsidiaries. During fiscal 1995, the
Company provided an equity investment of $700,000 to its Detection
Systems International, Inc. ("DSII") subsidiary for the purpose of
pursuing international opportunities for its electronic security and
fire protection products. An experienced international executive was
appointed to lead this operation. Branch offices were established in
Australia, France and Hong Kong. A manufacturing facility was leased in
Southeast Asia, and manufacturing operations at this facility are
targeted to commence in October 1995. The Company owns 100 percent of
the common stock of DSII.
Another subsidiary, Emergency Communications, Inc. ("ECI"), is
involved in the development of a market for a new emergency call system
to be used for personal security on college campuses and in similar
environments. Total coverage systems are currently operational at two
colleges. The Company purchased all of ECI's common stock through an
initial equity investment of $100,000 and subsequently awarded a portion
of the shares to certain directors and employees. On each anniversary, a
portion of the stock is vested. At March 31, 1995, the Company owned
approximately 70% of ECI's common stock. At June 1, 1995, the Company
had advanced ECI approximately $850,000.
The third subsidiary, Activity Monitoring Systems, Inc. ("AMS"),
was involved in the development of wireless electronic house arrest
products to be used by various government agencies. The Company
purchased all of AMS' common stock through an initial equity investment
of $100,000 and subsequently awarded a portion of the shares to certain
directors and employees. On each anniversary, a portion of the stock is
vested. At March 31, 1995, the Company owned approximately 80% of AMS'
common stock. Further development and marketing efforts for the house
detention product line were put on hold for technical license
performance reasons.
Product Line
The Company's security detectors operate on five basic principles
(1) passive infrared body heat detection, (2) photoelectric beam
interruption, (3) combination passive infrared/microwave detection, (4)
acoustic glass break detection and (5) vibration detection. These five
types of detectors complement each other in their system applications
and the types of environments in which they function best. Several
different types of detectors are often used in a single alarm system.
The Company's intrusion detection products include both self-contained
detectors which are connected both directly (wired) and/or indirectly
(wireless) to the alarm system controller and detectors that are
connected to other detectors and to a detection zone control, which is
in turn connected to the system controller. The Company's products are
used in new alarm systems as well as to upgrade existing alarm systems.
Fiscal 1995 was a significant year for new product releases. All
of the Company's security detectors now feature enhanced signature
recognition techniques. As a result, its passive infrared detectors can
accommodate extreme environmental disturbances. Its newest duals can be
used in residential or commercial environments where animals may be
present. Its glass break detectors offer superior performance in both
glass breakage detection and false alarm immunity.
During the past several years the Company has introduced several
different specialty sensor products which have been manufactured to its
specifications by an offshore firm, for sale under the Detection Systems
name. During fiscal 1995, the Company contracted with another offshore
firm to supply vibration detectors intended for the protection of
vaults, safes, ATM machines, night deposit boxes and data storage
cabinets.
The Company has a family of microprocessor-based alarm control
equipment for use in security/fire system applications. The Company's
control line is comprised of controls for both residential and
commercial applications including multiplex systems to accomplish
monitoring in large security system applications. The Company continues
to work with a national customer to provide long-range transmissions of
security and fire alarm signals over the ARDIS radio network. ARDIS,
an acronym for Advanced Radio Data Information Service, offers an
alternative to telephone lines as the means for contacting a central
monitoring station, and ultimately the police or fire department. This
increases alarm system reliability and reduces vulnerability to
tampering.
ECI's Security Escort personal safety system uses a digital micro-
cellular architecture to provide its subscribers with 24 hour
protection. In a matter of seconds, a small, hand-held Security Escort
transmitter enables an individual to simultaneously trigger a strobe,
sound a siren alarm and alert the appropriate security personnel as to
the subscriber's name, location, address and any handicap. A unique
test feature allows the subscriber to test the system at any time and
receive visual confirmation that it is functioning properly.
Marketing
The Company's products are installed in industrial, commercial,
institutional and residential buildings. The Company engages in
wholesale marketing and partnering to promote its security and fire
detection products. The Company markets directly to professional
installation and service companies through its District Sales Managers,
who are compensated on a salary plus commission basis. The Company also
sells its security products to independent stocking distributors, who in
turn sell to alarm installation and service companies. The Company
sells security and fire detection products directly to several companies
who market electronic security and fire alarm systems under their own
"private label."
ECI is actively promoting the Security Escort System throughout
the United States. The DS system configuration continues to receive
"best performance" competitive evaluation ratings. While the system was
initially designed for the protection of individuals on college and
university campuses, the technology is also suitable for other
applications. The Company is exploring additional distribution
relationships to expand its market coverage for the system to other
environments, such as apartment complexes, condominiums, retirement
communities, hospitals and hotels.
The Company continues to develop and expand partnering and working
relationships with its national and international customers. Large
regional and national accounts are supported directly by a team of
Regional Sales and Service Managers. Smaller firms are supported by a
staff of highly trained Sales Coordinators. A call to the Company's 800
sales number, from 7 AM to 8 PM Eastern Time, results in same day
shipment of most standard products from two fully stocked warehouses.
Meetings with individual customers throughout North America and Europe,
as well as attendance at trade shows and seminars, complement this
program.
The Company's sales managers provide substantial technical support
to customers regarding system design, installation and service. The
Company provides regular training programs for its customers'
installation and service personnel and conducts technical seminars at
national and regional shows. To support the on-site installer or
service person, toll-free 800 lines connect directly to the Technical
Service Department to provide instant help from 8 AM to 8 PM Eastern
Time. The Company also participates in trade shows and advertises in
trade publications.
For the Company's international program, sales offices have been
opened in Australia, France and Hong Kong. Employees with significant
international security industry experience have been put in place to
promote our products, determine future customer needs and provide
technical support. Our products are currently available through
independent distributors in Belgium, Italy and Sweden. The Company's
DSII subsidiary is establishing relationships with qualified
distributors to promote our line in other targeted countries. New
distribution networks have been or are being established in China,
Czech, England, Estonia, Hungary, Latvia, Lithuania, Malaysia,
Netherlands, New Zealand, Russia, Singapore, Slovakia, South Africa,
Taiwan and Ukraine. The Company's sales strategy includes providing our
customers with an expanding product line to fulfill the majority of
their electronic security and fire protection needs. In some cases,
this will be accomplished through strategic alliances with other vendors
to allow us to be a full-line supplier. Foreign sales (including sales
to Canada) accounted for approximately 11% of net sales in fiscal 1995.
The Company maintains regional sales personnel in California,
Florida, Illinois, New Jersey, New York, Pennsylvania, Ohio, Tennessee,
Texas and Virginia. In addition to its plant at Fairport, New York, it
maintains distribution centers in Hixson, Tennessee, and Auburn,
California. International sales efforts are handled out of the
corporate office in Fairport; however, distribution centers have been
established in Australia, France and Hong Kong.
Although the Company has a broad customer base, it does have
several customers who individually account for substantial amounts of
business. In fiscal 1995, sales to National Guardian Corporation and to
ADT Security Systems, both of whom purchase the Company's products for
use as components in systems that they market, each accounted for
approximately 22% and 23% of the Company's total net sales,
respectively. Sales to 46 additional customers, including eleven
distributors, accounted for an additional 45% of net sales. Although
the Company s business is not seasonal, a significant change in
purchases by one of its customers could result in significant
fluctuations in sales. During the last quarter of fiscal 1995, sales
were down compared to the immediately prior quarter. This decrease was
impacted by reductions in purchases by one national account.
Manufacturing
The Company manufacturers electronic products intended primarily
for the security and fire protection industries at its Fairport, New
York, facility. It designs and prepares specifications for the component
parts used in its products, including circuit boards, transistors,
integrated circuits and cabinetry, all of which it purchases from
outside sources. These components are assembled into finished products.
Emphasis on technological innovation and reliability has resulted in our
products having an excellent field reputation. Many units manufactured
in the 1970's are still in active service today. The Company's
commitment to the use of advanced technology in manufacturing resulted
in a restructuring of the Company's manufacturing facility in fiscal
1994. Additions and modifications resulted in improved efficiency while
contributing to further improvement in product quality. The Company has
the capacity to produce 30,000 circuit boards a week.
Before product assembly, components are sample tested for
compliance with quality control standards and critical components are
individually tested. All solid state devices (i.e. transistors and
integrated circuits) are subjected to "stress conditioning." The
assembly of circuit boards is accomplished by Company personnel with the
aid of both automatic and semi-automatic assembly equipment. Assembled
circuit boards are flow soldered and cleaned. Intermediate quality
control processes are used to evaluate components and products being
transferred between assembly departments. Completed circuit boards are
tested on a computerized circuit board evaluator and they are calibrated
against performance standards. Most products are then subjected for
several days to a "burn-in" test at high temperatures prior to shipment.
The Company is establishing a second manufacturing facility in
Southeast Asia. It has leased a 70,000 square foot facility and
manufacturing operations at this facility are targeted to commence in
October 1995.
Competition
The security systems industry is highly competitive, with
approximately 40 manufacturers providing a wide range of products, from
simple sensor components to complete systems. Professional installation
and service companies consider product reliability, both in performance
and testing, as well as the incorporation of advanced technological
features, ease of installation, sales support and price when selecting
intrusion and fire detection equipment. The Company believes it competes
directly with several of these firms, at least four of which have
financial and other resources substantially greater than the Company's.
The Company competes on the bases of performance, features, quality,
reliability and delivery of its products; its technical support services
offered customers; and to a lesser extent, on the basis of price.
Although the Company's principal method of competition is not price,
competitive market conditions have caused average sales prices to
decrease steadily since the Company's founding. The Company is adding
reduced featured versions of its standard product line to accommodate
this trend.
Research and Development
During the fiscal years ended March 31, 1993, 1994 and 1995, the
Company expended approximately $3,534,000, $4,161,000 and $4,070,000
respectively, on research and development activities relating to the
development of new products and the improvement of existing products.
The Company has been granted over 25 patents related to its
products. While the Company obtains patents as appropriate and
considers certain of its patents valuable, it does not believe patents
to be of material importance in the successful conduct of its business.
Trademarks, licenses, franchises and concessions are not material
factors in the Company's business.
Employees
At March 31, 1995, the Company employed approximately 320 persons.
None of the Company's employees is represented by a collective
bargaining organization, and the Company's management believes employee
relations are good.
Backlog, Raw Materials, Environmental and Other Matters
Backlog is not significant in the business of the Company. In
general, orders are processed from inventory on a relatively current
basis.
Raw materials and components essential to the Company's business
are readily available and the Company is not materially dependent upon
any one source. The Company sources raw materials and components
internationally, including several Pacific Rim countries.
Compliance with federal, state and local laws and regulations
which have been enacted or adopted 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.
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 effect such legislation will have on the security and fire
protection markets as a whole, but believes false alarm legislation is
causing many installation companies to be more inclined toward the use
of high quality equipment.
ITEM 2. PROPERTIES.
The Company's manufacturing, research and general office
operations are conducted at its 92,000 square foot facility at 130
Perinton Parkway, Fairport, New York. This plant was financed by an
industrial development bond issue and the bond is secured by a lien on
the land and building and other assets acquired with the bond proceeds.
The Company also leases small amounts of office space for its
regional distribution center in Hixson, Tennessee, and Auburn,
California.
Internationally, the Company has leased a 70,000 square foot
manufacturing facility in Southeast Asia and has branch
offices/distribution centers located in Australia, France and Hong Kong.
ITEM 3. LEGAL PROCEEDINGS.
On January 26, 1995, the Company reached a settlement with C & K
Systems on patent infringement suits commenced in fiscal 1993. The
settlement was reached through an exchange of patent rights.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders
during the Company's fourth quarter ending March 31, 1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
The Company's common stock trades on The Nasdaq Stock Market under
the symbol: DETC. The information regarding the price range of the
Company's Common Stock presented on page 16 of the Company's 1995 Annual
Report to Shareholders ("Annual Report") is incorporated herein as
Exhibit 1. On June 23, 1995, the closing price, as reported by The
Nasdaq Stock Market, was $6.625 per share.
The Company has never paid cash dividends on its Common Stock.
The Company presently intends to retain all future earnings, if any, for
the operation and expansion of its business and does not expect to pay
any cash dividends on its Common Stock in the foreseeable future.
The Company's industrial development bond issued to finance the
Company's Fairport plant limits the amount of dividends the Company may
declare or pay in any fiscal year to 50% of its net income for the
preceding fiscal year.
ITEM 6. SELECTED FINANCIAL DATA.
Interim quarterly results for the Company over the past three
years were as follows (thousands of dollars, except per share data):
INCOME
Fiscal Year Ending NET GROSS NET PER
March 31, SALES MARGIN INCOME SHARE
- ------------------ ------ ------ ------ -----
1995
Fourth Quarter $8,075 $3,193 $ 27 --
Third Quarter 9,416 3,759 569 $.20
Second Quarter 8,672 3,362 460 .16
First Quarter 8,173 3,192 458 .16
1994
Fourth Quarter $8,145 $3,069 $402 $.14
Third Quarter 8,300 3,257 437 .15
Second Quarter 8,589 3,272 431 .15
First Quarter 6,321 2,215 5 --
1993
Fourth Quarter $8,265 $3,399 $517 $.18
Third Quarter 7,485 2,796 339 .12
Second Quarter 6,732 2,473 216 .08
First Quarter 6,949 2,728 365 .13
The Company's five year summary of operations is included as Exhibit 10 to
this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's discussion and analysis of financial condition and
results of operations is included as Exhibit 2 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Pages 17 through 24 of the Company's Annual Report for the year ended
March 31, 1995 contain the information required by Item 8 of Form 10-K.
This information is also included as Exhibit 3 of this Form 10-K.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Name and Age Position, Offices Held and Year Appointed
Karl H. Kostusiak (56) President (1968)
David B. Lederer (55) Executive Vice President, (1968)
George E. Behlke (37) Vice President, Engineering (1995)
R. Wayne Carlton (58) Vice President, National Sales (1993)
Frank J. Ryan (41) Vice President, Secretary and
Treasurer (1982)
Lawrence R. Tracy (48) President, Detection Systems,
International, Inc., a subsidiary of
Detection Systems, Inc. (1995)
Each officer is elected to serve until the first meeting of the Board
of Directors held after the next annual meeting of shareholders and until
his successor is elected and has qualified. There is no family
relationship between any of the above officers.
Messrs. Kostusiak and Lederer have been President and Executive Vice
President of the Company since it was formed in 1968. Mr. Ryan has been
employed by the Company in various financial positions since 1980 and was
promoted to Vice President in 1989. Mr. Carlton has been employed by the
Company in various sales positions since 1975 and was promoted to Vice
President in 1994. Mr. Tracy was hired in February 1995 as President of
the Company s Detection Systems, International, Inc. subsidiary. Mr.
Behlke has been employed by the Company in various engineering positions
since 1977 and was promoted in May 1995 to Vice President.
The Company's Proxy Statement for the 1995 Annual Meeting of
Shareholders contains the other information required by Item 10 of Form 10-
K. That information is incorporated in this report as Exhibit 5.
ITEM 11. EXECUTIVE COMPENSATION.
The Company's Proxy Statement for the 1995 Annual Meeting of
Shareholders contains the information required by Item 11 of Form 10-K.
That information is incorporated in this report as Exhibit 5.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company has stock purchase agreements with Messrs. Kostusiak and
Lederer which could in the future result in a change of control of the
registrant. These agreements are included as Exhibit 4 of this Form 10-K.
The Company's Proxy Statement for the 1995 Annual Meeting of
Shareholders contains the information required by Item 12 of Form 10-K.
The Proxy is included in this Form 10-K as Exhibit 5.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In the last fiscal year the Company and its subsidiaries contracted
with Adair & Stoner, of which Mr. Adair, a Director of the Company, is a
partner, for legal services rendered for the Company and its ECI
subsidiary. In addition, Mr. McIrvine, another Director of the Company,
performed consulting work for the Company during the last fiscal year.
Messrs. Adair and McIrvine also serve as members of the compensation and
stock option committees of the Board of Directors.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(I) and (2) The financial statements and schedules are included in
Exhibit 3 of this Report on Form 10-K.
(a)(3) See Exhibit Index attached to this Report on Form 10-K.
(b) No reports on Form 8-K have been filed during the last quarter of
the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
DETECTION SYSTEMS, INC.
(Registrant)
Date: June 27, 1995 By: /s/ Karl H. Kostusiak
Karl H. Kostusiak
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
Karl H. Kostusiak President and Director June 27, 1995
Karl H. Kostusiak (Principal Executive
Officer)
Frank J. Ryan Vice President June 27, 1995
Frank J. Ryan Secretary/Treasurer
(Principal Financial
Officer and Principal
Accounting Officer)
Donald R. Adair Director
David B. Lederer Director
By: /s/ Karl H. Kostusiak Attorney-in-Fact June 27, 1995
Karl H. Kostusiak
<PAGE>
EXHIBIT INDEX
Item Exhibits Location
3 Certificate of Incorporation Incorporated by reference to Exhibits
3(a) of the Company's 1993 Annual
Report on Form 10-K
3 By-Laws as amended Incorporated by reference to Exhibits
3(b) of the Company's 1993 Annual Report on
Form 10-K
4(a) Rights of Holders of common Incorporated by reference to Exhibit 4
stock - 1981 plan of the Company's 1993 Annual Report on
Form 10-K
6 5-year summary of operations Included as Exhibit 11 of this Form 10-K.
10(a)Non-employee director stock Incorporated by reference to Exhibit
option plan (warrant plan) 10(a) of the Company's 1994 Annual Report
on Form 10-K
10(b) Medical reimbursement plan Incorporated by reference to Exhibit
10(b) of the Company's 1994 Annual
Report on Form 10-K
10(c) Employee stock purchase plan Incorporated by reference to Exhibit
10(c) of the Company's 1994 Annual Report on
Form 10-K
10(d) Line of credit agreements Included as Exhibit 6 of this Form 10K
10(e) Industrial Development Bond Incorporated by reference to Exhibit 10
Purchase Agreement, Bond, of the Company's fiscal 1982 Annual
Lease Agreement, Mortgage Report on Form 10-K
and Guaranty
10(f) Deferred Compensation Plan Incorporated by reference to Exhibit 10
of the Company's 1993 Annual Report on
Form 10-K
10(g) 1992 Stock Option Plan Incorporated by reference to Exhibit
10(c) of the Company's 1994 Annual
Report on Form 10-K
10(h) Key employee bonus plan Incorporated by reference to Exhibit
10(h) of the Company's 1994 Annual
Report on Form 10-K
10(i) Executive employment Included as Exhibits 7 and 8 of this
contracts Form 10-K
10(j) License and Mfg. Agreement Incorporated by reference to Exhibit
Amendment No. 1 w/ ECI 10(j) of the Company's 1994 Annual
Report on Form 10-K
10(k) Shareholders Agreements w/ Incorporated by reference to Exhibit
ECI and AMS 10(k) of the Company's 1994 Annual
Report on Form 10-K
11 Statement re: Computation Included as Exhibit 9 of this Form 10-K
of Per Share Earnings
12 Stock Purchase Agreements Included as Exhibit 4 of this Form 10-K
17 Proxy Statement Included as Exhibit 5 of this Form 10-K
24 Report of Independent Included as Exhibit 12 of this Form
Accountants of Financial 10-K
Statement Schedules
25 Powers of Attorney Included as Exhibit 10 of this Form 10-K
26 Annual Report to Shareholders Incorporated by reference to paper
copies of the Company's Annual Report
to Shareholders mailed to the Securities and
Exchange Commission and The Nasda Stock
Market on June 22, 1995.
Schedule 8 - Reserves Included as Exhibit 13 of this Form 10-K
Computation of Net Income Included as Exhibit 9 of this Form 10-K
EDGAR EXHIBITS
Exhibit 1 Price Range of Common Stock
Exhibit 2 Management Discussion and Analysis
Exhibit 3 Financial and other Reports from 1995 Annual Report
--Report of Independent Accountant Consolidated Balance Sheet
--Consolidated Statement of Income and Retained Earnings
--Consolidated Statement of Cash Flows
--Notes to Consolidated Financial Statements
Exhibit 4 Stock Purchase Agreements
--Karl H. Kostusiak
--David B. Lederer
Exhibit 5 1995 Proxy Statement
Exhibit 6 Credit Agreements
--Fleet Bank (previously Norstar Bank)
--Chemical Bank
Exhibit 7 Employment Agreements
--Karl H. Kostusiak
--David B. Lederer
Exhibit 8 Employment Agreement
--Lawrence R. Tracy
Exhibit 9 Computation of Per Share Earnings Statement
Exhibit 10 Powers of Attorney
--Donald R. Adair
--Mortimer B. Fuller III
--Edward C. McIrvine
Exhibit 11 5-Year Summary of Operations
Exhibit 12 Report of Independent Accountants of Financial Statement
Schedules
Exhibit 13 Schedule 8 Reserves Statement
Exhibit 27 Financial Data Schedule
EXHIBIT 1 -- PRICE RANGE OF COMMON STOCK
The quarterly high and low bid of the Company's common stock during the past
three years. (In dollars)
<TABLE>
Fiscal Fiscal Fiscal Fiscal
1996 * 1995 1994 1993
High Low High Low High Low High Low
---- ---- ---- ---- ---- ----- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter
ended June 30 7-1/2 6-1/2 10-1/2 6 8-1/4 5-3/4 6-1/4 5
Second Quarter
ended Sept 30 9-1/2 6-1/8 6-3/4 5-3/4 6-1/8 5
Third Quarter
ended Dec 31 9-3/8 5-1/2 12 6-1/8 5-5/8 4-3/4
Fourth Quarter 8 5-3/4 13 9 9-1/2 5-1/4
* Through May 11, 1995
</TABLE>
EXHIBIT 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS
Sales increased 9.5% in fiscal 1995 compared to fiscal 1994, and
6.5% in fiscal 1994 compared to fiscal 1993. These increases reflect
unit sales growth in most product categories and continued preference
for our product line by professional alarm installation and service
companies. The Company s recent international initiative, further
described below, is a major commitment to the accomplishment of long
term sales growth.
Gross profit margins remained relatively consistent on a quarterly
basis during fiscal 1995, at approximately 39% of net sales. Overall,
gross profit margins improved in fiscal 1995 versus fiscal 1994 and
declined in fiscal 1994 versus 1993. During these three years, the
gross profit margins were approximately 39.3%, 37.7% and 38.7%,
respectively. These fluctuations were attributable to varying margins
associated with the products being sold during the corresponding
periods. Historically, competitive market conditions have caused
average sales prices to decrease. It is projected that prices will
continue to decline in fiscal 1996, consistent with historical trends.
The Company is adding reduced featured versions of its standard product
line to accommodate this trend. Gross profit margins in fiscal 1996 are
also projected to be impacted by the international initiative.
The Company believes that an aggressive foreign sales program
could eventually result in sales equal to the sales levels it has
accomplished in the United States. During fiscal 1995, an international
subsidiary was established to address this potential market. An
experienced international executive was appointed to lead this
operation. Branch offices were established in Australia, Hong Kong and
France. A manufacturing facility in Southeast Asia has been leased and
manufacturing operations at this facility are targeted to commence in
October 1995. The Company believes this facility will allow the Company
to achieve reduced manufacturing costs in the future when associated
volumes increase.
Interest expense for fiscal 1995 remained consistent with fiscal
1994 and decreased by 29% in fiscal 1994 from fiscal 1993. This
decrease was primarily due to the repayment of the Company's
subordinated convertible debentures in December 1992.
Production expenses increased by 6.5% and 8% for fiscal 1995
versus 1994 and fiscal 1994 versus 1993, respectively. These increases
are consistent with the corresponding increases in sales. The Company
expects production expenses to increase in fiscal 1996 due to the start-
up of its Southeast Asia manufacturing facility.
Except for a non-recurring licensing payment made during fiscal
1994, development expenses remained consistent with fiscal 1994. The
increase of 18% in 1994 versus 1993 resulted from the investment in
development expenses associated with the Company s wireless programs.
Marketing, administrative and general expenses increased by 11%,
relative to the prior years, in both fiscal years 1995 and 1994. These
increases are consistent with the increase in sales. Additionally,
fiscal 1995 reflects two receivable write-offs associated with
insolvency proceedings initiated by distributor accounts. The Company
expects marketing and administrative expenses to increase during fiscal
1996 due to the start-up of the international venture.
Pretax income was $2,592,000 in fiscal 1995 compared to $1,571,000
in fiscal 1994 and $2,356,000 in fiscal 1993. This reflects the sales
growth in fiscal 1995 of our DS250 series smoke detector and new
multiplex control line, which were introduced in fiscal 1994. Pretax
income also reflects bad debt write-offs associated with insolvency
filings by two distributors. The decline in pretax income for fiscal
1994 as compared with fiscal 1993 was the result of an increase in
development and marketing expenses associated with the Company s
wireless programs. The Company anticipates a reduction in pretax income
for the forthcoming fiscal year as overhead expenses are expected to
increase due to the start up of the international venture.
The Company s effective income tax rates for the three years ended
March 31, 1995 were 41.6%, 27.2% and 39.0%, respectively. The fiscal
1994 tax level was significantly lower than normal due to the
retroactive reinstatement of research and development credits available
to the Company by the Revenue Reconciliation Act of 1993 and the
cumulative effect of an accounting change, as discussed in Note 1 to the
financial statements. The fiscal 1995 increase was primarily due to a
return to a more normal tax level. It was also impacted by the
deconsolidation of Emergency Communications, Inc. in fiscal 1995 for
income tax purposes. This occurred in January 1995, when the Company's
equity ownership fell below 80%. Losses incurred after this date were
not included in the consolidated tax provision, and losses previously
recognized for tax purposes were recaptured. Net income as a percentage
of sales remained consistent for fiscal 1995 as compared with fiscal
1994. Net income for fiscal 1995 was negatively impacted by the above
noted increase in the provision for taxes.
Although the Company has a broad customer base, it does have
several customers who individually account for substantial amounts of
business. Sales to the Company s largest customers accounted for 22%
and 23%, 20% and 17% and 21% and 14% of total sales during fiscal 1995,
1994 and 1993, respectively. A significant change in purchases by one
of these customers could result in significant fluctuations in sales and
profit. During the last quarter of fiscal 1995, sales were down
compared to the immediately prior quarter. This decrease was impacted
by reductions in purchases by one national account. Although the sales
to this account are not expected to return to prior levels, the
Company s international venture is expected to minimize the impact by
reducing its dependence on several large customers.
The Security Escort personal safety system, marketed by the
Company s Emergency Communications subsidiary, continues to generate
considerable interest in the college and university community. The
system is currently operational at two colleges. Additionally, the
Company is exploring other distribution relationships to expand its
market coverage.
In fiscal 1994, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting of Income Taxes," which
resulted in a favorable impact on earnings of approximately $131,000.
This credit relates to deferred taxes previously recorded at higher tax
rates.
During fiscal 1995, 1994 and 1993 inflation did not have a
significant impact on the Company's business.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 1995, the Company had net working capital of $15.0
million, including approximately $7.0 million in cash, cash equivalents
and short-term investments. This compares with net working capital of
$13.5 million, including approximately $3.9 million in cash and cash
equivalents at the end of fiscal 1994.
The Company has bank commitments for revolving credit facilities
totaling $9,000,000, that extend into fiscal 1998. These commitments
include a five-year term loan provision for repayment of the balance
due, if necessary. Although the Company expects that the start-up of
its international venture will require significant amounts of cash, it
believes that current working capital, along with available lines of
credit are sufficient to meet such requirements. On a long term basis,
most cash requirements of the international venture are expected to be
derived from the operations of overseas subsidiaries.
Accounts receivable decreased 8.9% at March 31, 1995 as compared
with March 31, 1994. This decrease was attributed to the write-offs
associated with the insolvency proceedings of two distributor accounts.
Accounts receivable increased 5.6% in fiscal 1994 as compared with
fiscal 1993. This increase was due to the increase in sales activity.
The Company's standard credit terms are net 30 days, with variations
depending on pricing and prepayment discounts.
Inventories decreased by 10.1% at March 31, 1995 as compared with
March 31, 1994 and increased 19.1% at March 31, 1994 as compared with
March 31,1993. The increase in fiscal 1994 and the subsequent decrease
in fiscal 1995, relate to inventory buildups at the end of 1994
associated with several new products introduced during that time period.
As product demand levels were established, production levels were
adjusted accordingly. The Company expects inventory levels to increase
in fiscal 1996 in order to support its international venture. The
Company regularly reviews its reserve for obsolescence and adjusts it
accordingly. Occasionally, a new product will render another obsolete.
However, it has been the Company s policy to time the release of new
products to minimize this impact.
Prepaid expenses and other assets increased by 15.2% and 20.6% for
fiscal 1995 versus 1994 and fiscal 1994 versus 1993, respectively.
These increases were related to the timing of payments on the Company's
commercial insurance package and property taxes.
The Company continually reviews its capital assets and upgrades
them as required to insure that its technical and manufacturing
capabilities stay on the leading edge of the industries it serves. The
Company expects to spend approximately $700,000 on manufacturing
equipment for the Southeast Asia facility.
Accounts payable increased 73.6% in fiscal 1995 as compared to
fiscal 1994 and decreased by 42.8% in fiscal 1994 as compared to fiscal
1993. These changes were primarily attributable to timing of payments
at the respective year-ends.
Accrued payroll and benefits increased 16.4% for fiscal 1995
versus 1994 and decreased 22.4% for fiscal 1994 versus 1993. These
fluctuations were attributable to performance bonus accruals established
at the respective year-ends.
Other accrued liabilities decreased 19.0% in fiscal 1995 as
compared with fiscal 1994 and remained consistent for fiscal 1994 as
compared with fiscal 1993. The decrease was primarily due to payment of
unemployment insurance premiums during the last quarter of fiscal 1995
versus the accrual of such liabilities at the end of fiscal 1994.
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.
EXHIBIT 3
Report of Independent Accountants
To the Shareholders of
Detection Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and retained earnings and cash
flows present fairly, in all material respects, the financial position
of Detection Systems, Inc. and its subsidiaries at March 31, 1995, 1994
and 1993, and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 1995 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.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," in 1994.
/s/ Price Waterhouse LLP
Rochester, New York
May 11, 1995
DETECTION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<S> <C> <C> <C>
March 31, 1995 1994 1993
Assets
Current assets:
Cash and cash equivalents $4,580,751 $3,907,111 $1,761,591
Short term investments, at
cost which approximates
market value 2,437,842 3,242,049
Accounts receivable, less
allowance for doubtful
accounts ($100,000 in
1995, 1994 and 1993) 4,916,052 5,396,835 5,110,139
Inventories 5,255,724 5,845,951 4,907,628
Income taxes receivable 94,121 139,468
Deferred income taxes 354,500 273,400 516,000
Prepaid expenses and other assets 314,285 272,881 226,266
---------- ---------- ----------
17,953,275 15,835,646 15,763,673
---------- ---------- ----------
Fixed assets, net 3,920,571 3,820,085 3,921,556
Property under capital lease, net 2,725,513 2,969,051 2,698,720
Other assets 145,934 155,076 158,812
---------- ---------- ----------
$24,745,293 $22,779,858 $22,542,761
========== ========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of capital
lease obligations and long
term debt $434,934 $437,189 $513,145
Accounts payable 1,213,958 699,278 1,223,348
Accrued payroll and benefits 1,074,103 923,071 1,190,084
Other accrued liabilities 266,526 329,118 348,351
Income taxes payable 283,994
---------- ---------- ----------
2,989,521 2,388,656 3,558,922
---------- ---------- ----------
Obligations under capital leases 745,733 1,145,293 1,149,232
Deferred compensation 1,527,638 1,423,705 1,229,381
Deferred income taxes 288,200 330,600 546,400
Shareholders' equity:
Common stock, par value $.05 per share
Authorized - 12,000,000 shares
Issued - 2,792,489 shares in 1995
and 2,771,489 in 1994 and 1993 139,624 138,574 138,574
Capital in excess of par value 6,853,246 6,724,970 6,734,022
Retained earnings 12,724,265 11,209,776 9,934,335
---------- ---------- ----------
19,717,135 18,073,320 16,806,931
Less - Treasury stock, at cost (36,326) (322,778) (406,128)
Notes receivable for stock
purchases (486,608) (258,938) (341,977)
---------- ---------- ----------
19,194,201 17,491,604 16,058,826
---------- ---------- ----------
$24,745,293 $22,779,858 $22,542,761
=========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
DETECTION SYSTEMS, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
<S> <C> <C> <C>
Year ended March 31, 1995 1994 1993
Revenues:
Net sales $34,336,336 $31,354,835 $29,431,422
Interest income 113,420 195,875 239,171
----------- ----------- -----------
34,449,756 31,550,710 29,670,593
Costs and expenses:
Production 20,829,843 19,541,360 18,035,871
Development 4,070,443 4,160,532 3,534,078
Marketing, administrative an
general 6,788,924 6,111,691 5,510,588
Interest expense 168,557 165,886 234,204
----------- ----------- -----------
31,857,767 29,979,469 27,314,741
Income before taxes and cumulative
effect of a change in accounting
principle 2,591,989 1,571,241 2,355,852
Income taxes:
Current -
Federal 997,200 204,300 1,004,000
State 203,800 64,700 188,000
Deferred (123,500) 157,600 (273,000)
----------- ----------- -----------
1,077,500 426,600 919,000
=========== =========== ===========
Income before cumulative effect
of a change in accounting
principle 1,514,489 1,144,641 1,436,852
Cumulative effect of a change in
accounting principle 130,800
-----------
Net income 1,514,489 1,275,441 1,436,852
Retained earnings at beginning
of year 11,209,776 9,934,335 8,497,483
Retained earnings at end of year $12,724,265 $11,209,776 $9,934,335
=========== =========== ===========
Earning per common and common equiva-
lent share:
Income before cumulative effect of
a change in accounting principle $.52 $.40 $.51
Cumulative effect of a change in
accounting principle .04
---- ---- ----
Net Income $.52 $.44 $.51
==== ==== ====
See accompanying notes to consolidated financial statements.
</TABLE>
DETECTION SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
Year Ended March 31, 1995 1994 1993
Cash Flows from Operating Activities:
Net income $1,514,489 $1,275,441 $1,436,852
Adjustments to reconcile net
income to net cash
Provided by operating activities:
Depreciation and amortization 1,502,516 1,513,105 1,515,074
Change in obsolescence reserve 140,000 (30,000)
Loss (gain) on disposition of
fixed assets 8,561 (11,991) 21,346
Deferred compensation 103,933 194,324 72,715
Deferred income taxes (123,500) 26,800 (273,000)
Stock bonuses 48,800 152,100 199,000
Changes in operating assets and
liabilities:
Accounts receivable 480,783 (286,696) (1,346,796)
Inventories 450,227 (908,323) (397,627)
Prepaid expenses and other assets (42,278) (52,895) 54,762
Accounts payable 514,680 (524,070) 799,975
Accrued payroll and benefits 102,232 (419,113) 130,213
Other accrued liabilities (62,592) (19,233) 51,959
Income taxes receivable/payable 45,347 (423,462) 466,921
---------- ---------- ----------
Total adjustments 3,168,709 (789,454) 1,294,542
---------- ---------- ----------
Net cash provided by operating
activities 4,683,198 485,987 2,731,394
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (1,358,009) (1,162,917) (1,186,921)
Short term investments (2,437,842) 3,242,049 (1,560,639)
---------- ---------- ----------
Net cash (used in) provided by investing
activities (3,795,851) 2,079,132 (2,747,560)
---------- ---------- ----------
Cash flows from financing activities:
Principal payments on long term debt
and capital lease obligations (401,815) (576,936) (1,540,472)
Issuance of common stock 140,375 0 0
Stock options exercised 47,733 157,337 140,692
--------- ---------- ----------
Net cash used in financing activities (213,707) (419,599) (1,399,780)
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 673,640 2,145,520 (1,415,946)
Cash and cash equivalents at
beginning of year 3,907,111 1,761,591 3,177,537
---------- ---------- ----------
Cash and cash equivalents at end
of year $4,580,751 $3,907,111 $1,761,591
========== ========== ==========
Cash paid during the year for:
Interest $173,709 $117,869 $218,198
Income taxes $1,141,276 $698,205 $610,741
See accompanying notes to consolidated financial statements.
</TABLE>
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995, 1994 AND 1993
NOTE 1 - DESCRIPTION OF OPERATIONS AND ACCOUNTING POLICIES:
Operations -
Detection Systems. Inc.'s (the Company) only line of business is the
manufacture and sale of electronic instrumentation devices. Such
devices include intrusion detectors, fire detectors and alarm control
equipment for the security and fire protection industries and personal
security systems.
Consolidation -
The consolidated financial statements include the accounts of the
Company and its subsidiaries, Emergency Communications, Inc. (ECI)
Activity Monitoring Systems, Inc. (AMS) and Detection Systems
International, Inc. (DSII). Intercompany transactions and balances are
eliminated in consolidation.
Emergency Communications, Inc. -
During 1993, the Company formed a subsidiary, ECI, for the purpose of
pursuing final development and sale of certain new products to be used
for personal security on college campuses and in similar environments.
The Company purchased all of ECI's common stock and subsequently awarded
a portion of the shares to certain directors and employees. The stock
award was recorded as compensation expense in the consolidated statement
of income and retained earnings. At March 31, 1995 the Company owned
approximately 70% of ECI's common stock.
Activity Monitoring Systems, Inc. -
During 1994, the Company formed a subsidiary, AMS, for the purpose of
pursuing final development and sale of certain wireless electronic house
arrest products to various government agencies. The Company purchased
all of AMS's common stock and subsequently awarded a portion of the
shares to certain directors and employees. The stock award was recorded
as compensation expense in the consolidated statement of income and
retained earnings. At March 31, 1995, the Company owned approximately
80% of AMS's common stock.
Detection Systems International, Inc. -
During 1995, the Company reactivated its subsidiary, DSII, for the
purpose of manufacturing and selling electronic instrumentation devices
for better market penetration in foreign countries. At March 31, 1995,
branches in Australia and Hong Kong had been established.
Investments -
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and Equity
Securities in 1995. The Company s reported investments are classified
as "available for sale" under the provisions of SFAS No. 115, and
accordingly, any unrealized holding gains and losses, net of taxes, are
excluded from income and recognized as a separate component of
shareholders' equity until realized. Fair value of the securities is
determined based on quoted market prices. The Company has not recorded
any realized or unrealized holding gains and losses at March 31, 1995.
Inventories -
Inventories, which include materials, labor and overhead, are priced 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 on the straight-
line method over an estimated useful life of 40 years. Land
improvements, machinery and equipment, production tooling and furniture
are depreciated on the straight-line method over estimated useful lives
ranging from 3 to 10 years. Expenditures for maintenance and repairs
are charged to expense as incurred and major improvements are
capitalized.
Retirement Plan -
The Company has a defined contribution pension plan covering
substantially all employees. The 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 Company's contributions to this plan were approximately $113,000,
$111,000 and $98,400 in 1995, 1994 and 1993, respectively.
Debt issue costs -
Certain fees and other costs related to the financing of a capital lease
agreement are included in other assets in the accompanying consolidated
balance sheet, and are being amortized over the term of the agreement.
Amortization expense associated with these costs was approximately
$10,000 in 1995, 1994 and 1993.
Revenue recognition -
Revenues are recognized when product is shipped.
Development costs -
All product development costs are charged to operations in the period
incurred.
Income taxes -
In April 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. The adoption of
SFAS No. 109 changed the Company's method of accounting for income taxes
from the deferred method (APB 11) to an asset and liability approach.
Previously the Company deferred the past tax effects of timing
differences between financial reporting and taxable income. The asset
and liability approach requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of
other assets and liabilities. The adoption of SFAS No. 109 was
recognized in the financial statements as the cumulative effect of a
change in accounting principle and resulted in a $130,800 favorable
impact on 1994 earnings.
Earnings per share -
The computation of earnings 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 were 2,989,138,
2,938,073 and 2,917,489 in 1995, 1994 and 1993, respectively.
The earnings per share computations do not consider outstanding stock
options and warrants when the effect of such inclusion is anti-dilutive.
There was no material difference between primary and fully diluted
earnings per share at March 31, 1995, 1994 and 1993, respectively.
Stock Repurchase -
On May 9, 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.
Cash Flow Statement -
For purposes of this statement, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
The Company accepted notes receivable from employees for stock purchases
in the amount of $258,071, $6,993 and $204,136 in 1995, 1994 and 1993,
respectively. During 1995, 1994 and 1993, the Company acquired vehicles
and equipment under capital lease agreements of approximately $51,300,
$497,000 and $44,500, respectively.
NOTE 2 - INVENTORIES:
Major classifications of inventory are as follows.
March 31 1995 1994 1993
Component parts $2,300,894 $2,120,052 $1,662,312
Work in process 475,927 604,614 724,129
Finished products 2,853,903 3,356,285 2,786,187
---------- ---------- ----------
5,630,724 6,080,951 5,172,628
Less - Reserve for obsolescence (375,000) (235,000) (265,000)
---------- ---------- ----------
$5,255,724 $5,845,951 $4,907,628
========== ========== ==========
NOTE 3 - FIXED ASSETS:
Major classifications of fixed assets are as follows.
March 31 1995 1994 1993
Land improvements $211,735 $211,735 $211,735
Building improvements 1,503,103 1,488,827 1,369,417
Machinery and equipment 7,099,144 6,284,455 5,720,221
Production tooling 3,140,152 2,707,804 2,368,059
Furniture 701,142 687,171 653,228
---------- ---------- ----------
12,655,276 11,379,992 10,322,660
Less - Accumulated depreciation (8,734,705) (7,559,907) (6,401,104)
---------- ---------- ----------
$3,920,571 $3,820,085 $3,921,556
========== ========== ==========
Total depreciation expense on fixed assets was $1,197,700, $1,293,800
and $1,337,900 in 1995, 1994 and 1993, respectively.
NOTE 4 - 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 have been recorded as property under
capital lease.
The lease term extends to October 1997, at which time title to the
property passes to the Company. Rental payments coincide with the
agency's bond repayment obligation, which requires quarterly principal
payments of $63,330 plus interest at two-thirds of a designated bank's
prime lending rate. The bank's prime rate at March 31, 1995 was 9.00%.
The lease imposes certain restrictions on the levels of capital
expenditures, working capital and net worth, and limits potential
dividends to one half of the prior year's net income.
At March 31, 1995, the Company was in compliance with the various
provisions of this lease agreement.
The Company has various equipment under capital lease agreements which
require payments of principal and interest of $205,200 in 1996, $147,300
in 1997, $146,500 in 1998 and $29,300 in 1999.
Property acquired under capital leases consists of the following.
<TABLE>
<S> <C> <C> <C>
March 31 1995 1994 1993
Land $ 270,000 $ 270,000 $ 270,000
Land improvements 225,147 225,147 225,147
Building 2,938,072 2,938,072 2,938,072
Machinery and equipment 1,327,591 1,322,445 825,404
---------- ---------- ----------
4,760,810 4,755,664 4,258,623
Less - Accumulated depreciation (2,035,297) (1,786,613) (1,559,903)
----------- ---------- ----------
$2,725,513 $2,969,051 $2,698,720
========== ========== ==========
Obligations under capital leases are summarized below.
March 31 1995 1994 1993
Operating facility $ 696,830 $ 950,150 $1,203,470
Production and office equipment 483,837 632,332 292,240
---------- ---------- ----------
1,180,667 1,582,482 1,495,710
Less - Current portion (434,934) (437,189) (346,478)
---------- ---------- ----------
$ 745,733 $1,145,293 $1,149,232
========== ========== ==========
</TABLE>
Total depreciation expense on assets under capital lease was $294,800,
$209,300 and $167,200 in 1995, 1994 and 1993, respectively.
NOTE 5 - LINES OF CREDIT:
The Company has two unsecured lines of credit each allowing borrowings
up to $4,500,000. Interest is charged at either banks' stated prime
rate or LIBOR plus 1%. The rates for these lines were 9.00% at March
31, 1995. No amounts were borrowed under these agreements at March 31,
1995, 1994 or 1993.
NOTE 6 - LONG TERM DEBT
During 1991, the Company obtained a $600,000 loan for the construction
of a product testing facility. The loan, which matured in 1994,
required principal payments of $166,700 and $200,000, plus interest at
9.15%, in 1994 and 1993.
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 may elect 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 97,200 shares under provisions of the plan.
As of March 31, 1995, 1994 and 1993, unissued common share equivalents
of 59,757, 57,430 and 53,269, respectively, were outstanding 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 and pretax
profit 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 outstanding
under the plan were 151,740 at March 31, 1995 and 1994, and 134,460 at
March 31, 1993.
NOTE 8 - SHAREHOLDERS' EQUITY:
The following table presents the changes in shareholders' equity
balances during the three years ended March 31, 1995.
<TABLE>
Capital in
Common stock Treasury stock excess of
Shares Amount Shares Amount par value
<S> <C> <C> <C> <C> <C>
Balances, March 31, 1992 2,771,489 $138,574 172,207 $864,290 $6,908,484
========= ======== ======= ======== ==========
Exercise of options and
warrants (102,813) (584,319) (216,662)
Treasury stock purchases 18,082 126,157
Tax benefit derived from
stock incentive plans 42,200
-------
Balances, March 31, 1993 2,771,489 $138,574 87,476 $406,128 $6,734,022
========= ======== ======== ======== ==========
Distribution of stock bonus (3,000) (14,405) 8,095
Exercise of options and
warrants (16,612) (97,886) (17,147)
Treasury stock purchases 3,039 31,117
Other 9,824 (2,176)
--------- -------- -------- --------- ---------
Balances, March 31, 1994 2,771,489 $138,574 80,727 $322,778 $6,724,970
========= ======== ======== ======== ==========
Distribution of stock bonus (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
========= ======== ======== ======== ==========
</TABLE>
Under the terms of the Company's incentive stock option plan, common
stock options may be granted to key employees by the Board of Directors.
Related option exercise prices must equal or exceed the market value of
the Company s common stock on the date of grant. Options are
exercisable at a rate of 35% to 40% in the second year after grant, 60%
in the third year, 80% in the fourth year and in full thereafter.
Options expire up to ten years after they are granted.
A summary of the changes in outstanding stock options is as follows.
<TABLE>
<S> <C> <C> <C> <C>
Prices during Shares under option
fiscal years 1995 1994 1993
Outstanding at beginning
of year $3.056 - 9.875 96,473 103,885 208,441
Granted $5.250-9.875 123,000 7,500 6,000
Exercised $3.056-6.769 (63,784) (13,912) (102,813)
Cancelled $3.472-7.500 (3,896) (1,000) (7,743)
------- ------- --------
Outstanding at end
of year $3.056-9.875 151,793 96,473 103,885
======= ======= ========
</TABLE>
Options for 22,614 shares were exercisable at March 31, 1995.
<TABLE>
A summary of changes in outstanding warrants is as follows.
<S> <C> <C> <C> <C>
Prices during Shares under warrant
fiscal years 1995 1994 1993
Outstanding at beginning
of year $3.519-6.597 10,800 13,500 16,200
Exercised $3.519-5.961 (5,400) (2,700)
Cancelled $5.278 (2,700)
------ ------ ------
Outstanding at end
of year $3.519-6.597 5,400 10,800 13,500
====== ====== ======
</TABLE>
Warrants outstanding expire five years after they are issued.
NOTE 9 - INCOME TAXES:
<TABLE>
A reconciliation of the statutory federal income tax rate to the effective
rate is as follows.
<S> <C> <C> <C>
Year Ended March 31, 1995 1994 1993
Statutory federal rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 7.9 4.1 4.0
Research and development credits (3.0) (11.3) (.6)
Recapture of subsidiary excess
losses 6.5
Foreign sales corporation benefit (2.1) (1.9)
Other 1.7) 2.3 1.6
----- ----- ----
Effective income tax rate 41.6% 27.2% 39.0%
===== ===== =====
</TABLE>
<TABLE>
Deferred tax assets (liabilities) are comprised of the following.
March 31, 1995 1994
<S> <C> <C>
Allowance for doubtful accounts $44,500 $44,500
Book accruals not currently deductible
for tax 42,200 46,800
Deferred compensation 618,200 576,100
Inventory obsolescence reserve 164,100 121,500
Vacation accrual 119,000 107,700
Valuation reserve - land held for sale 43,300 43,300
State investment tax credit
carryforwards 310,900 302,200
Subsidiary net operating loss
carryforwards 48,300
Other 46,200 37,000
---------- ----------
Total deferred tax assets 1,436,700 1,279,100
---------- ----------
Depreciation (951,300) (941,500)
Prepaid assets (34,900) (58,700)
Other (25,000) (33,900)
--------- ----------
Total deferred tax liabilities (1,011,200) (1,034,100)
---------- ----------
Deferred tax asset valuation allowance (359,200) (302,200)
---------- ----------
Net deferred tax asset (liability) $66,300 ($57,200)
========== ==========
</TABLE>
The state investment tax credit carryforwards expire at various times
over the next seven years. As the Company has historically generated
investment tax credits in excess of the amount utilized on an annual
basis, a valuation allowance of $310,900 and $302,200 was recorded at
March 31, 1995 and 1994, respectively.
As the Company s equity ownership in ECI fell below 80% during January,
1995, losses incurred by ECI subsequent to that date are not included in
the consolidated tax provision. The net operating loss carryforwards
relating to the results of ECI's operations subsequent to January, 1995
expire in 2010.
NOTE 10 - OTHER MATTERS:
Operating lease expense for sales offices and other equipment was
approximately $16,000 in 1995, 1994 and 1993.
During 1995, sales to the Company's largest customers were $6,626,000
and $6,410,000, representing 19% and 19%, respectively, of total sales.
During 1994, sales to the Company's largest customers were $6,381,000
and $5,304,000, representing 20% and 17%, respectively, of total sales.
During 1993, sales to the Company's largest customers were $6,197,000
and $4,005,000, representing 21% and 14%, respectively, of total sales.
During 1995, 1994 and 1993 sales to foreign customers were $3,867,000,
$3,567,000 and $3,691,000, respectively.
Financial instruments which potentially subject the Company to
concentrations of credit risk consists principally of trade receivables.
Concentrations of credit risk which respect to trade receivables are
relatively limited due to the number of customers comprising the
Company's customer base and their dispersion across different
geographical regions. At March 31, 1995, 1994 and 1993, the Company had
two significant concentrations of credit risk totalling approximately
$1,539,000, 2,128,000 and 1,762,000, respectively.
EXHIBIT 4
STOCK PURCHASE AGREEMENT
KARL H. KOSTUSIAK
THIS AGREEMENT, dated October 20, 1994, is between DETECTION
SYSTEMS, INC. ("Company"), a New York corporation, and the "Shareholder"
who has signed below.
The Shareholder is an executive officer and director of the
Company and owns a substantial block of the issued and outstanding
shares of its Common Stock, par value $0.05 per share ("Shares").
Believing it in their mutual best interests to provide for the
purchase and sale of some of the Shares owned by the Shareholder upon
his death, the parties hereby agree as follows:
1. Death of Shareholder
(a) Option on Death. Upon the death of the Shareholder, his
estate shall have the option to sell Shares to the Company pursuant to
the terms of this Agreement. This option may be exercised by the
executor or administrator of his estate at any time within twelve months
of the date of death (or, if later, three months of the date of the
executor's or administrator's appointment) by giving written notice of
exercise to the Company personally or by registered or certified mail,
postage prepaid. The option may be exercised with respect to any number
of the Shares owned by the Shareholder at his death, up to the maximum
number calculated as provided in Subsection 1(c) below. The purchase
price for the Shares shall be as provided in Section 2 below and shall
be tendered within 30 days after the notice of exercise is given or, if
later, 20 days after the Company receives the proceeds of the life
insurance described below.
(b) Life Insurance. The Company agrees to maintain life
insurance on the life of the Shareholder to provide proceeds for the
purpose of paying the purchase price under Section 2 for the
Shareholder's Shares. That life insurance is listed on Exhibit A
attached hereto, and the Company agrees to execute a new Exhibit A if at
any time the facts stated thereon should change. The Company agrees to
hold the proceeds of such life insurance in trust for use in paying the
purchase price for the deceased Shareholder's Shares, and, except as
provided in Section 3 below, those proceeds shall not be an asset of the
Company for use for any purpose other than repurchasing Shares under
this Section 1. If the Company breaches the foregoing agreement to
maintain life insurance, that breach shall not give rise to any
liability of the Company hereunder unless: (1) the Shareholder ceases
to be an executive officer of the Company, or ceases to be a director of
the Company, and the breach occurs thereafter or (2) the breach is made
pursuant to a directive of the Company's board of directors. The
Company
additionally agrees that it will promptly pay the premiums on the
policies, will not transfer the policies or any interest therein except
as provided in this Agreement, and will not borrow against the policies.
(c) Shares to be Purchased. Promptly upon the Shareholder's
death, the board of directors of the Company shall value the Company's
Shares as provided in Section 2 below. The per Share value thus
determined shall be divided into the amount of the total life insurance
proceeds received; and the result thus obtained (rounded down to the
nearest whole Share) shall be the maximum number of Shares that the
Company shall be obligated to purchase pursuant to this Section 1.
(d) Right of First Refusal. If the Shareholder's estate
receives a "Third Party Offer" at any time within 12 months of the date
of the Shareholder's death, then the Shareholder's estate shall first
offer to sell the Shares involved to the Company as provided in this
Subsection. For these purposes, a Third Party Offer shall be a bona
fide written offer made by another person to purchase Shares. Upon
receipt of the Third Party Offer, the Shareholder's estate shall send a
copy of it to the Company, along with a statement that the estate offers
the Shares to the Company and that, unless purchased by the Company
pursuant to this Subsection, the estate intends to transfer the Shares
pursuant to that Third Party Offer. Upon receipt of those items, the
Company shall have 30 days to accept the offer. Acceptance shall be
made in a writing delivered personally or sent registered or certified
mail, postage prepaid, to the estate within the required acceptance
period. The Company may accept the offer for some or all of the Shares
involved and may use the proceeds from life insurance provided for in
this Section. Any shares not sold to the Company pursuant to this
Subsection may be sold pursuant to the Third Party Offer, provided that
the sale is completed within 20 days after expiration of the 30 day
period described above, and provided that the sale is made pursuant to
the same price and terms as those set forth in the Third Party offer.
(e) During the 12 month period after the Shareholder's death,
the Shareholder's estate and his heirs and legatees shall not sell any
Shares except that: (i) Shares may be sold as provided in this Section
1, (ii) this Section 1 shall no longer bind any party after the maximum
number of Shares described in Subsection (c) above have been sold to the
Company under this Section 1, and (iii) the Shareholder's estate may
sell Shares to or through others during any six month period up to 1% of
the outstanding shares of the Company's Common Stock.
2. Price
The purchase price to be paid for each Share purchased pursuant to
Section 1 shall be the fair market value as provided in this Section,
calculated as of the date of death (without consideration of the proceeds of
the life insurance to be received as provided in Section 1). The fair market
value per Share for these purposes shall be 95% of the closing sale price of the
stock as reported on NASDAQ for the last day immediately preceding the day of
death for which trades are reported, provided, however, that the fair market
value (i) shall not be less than 95% of the book value per Share calculated
in accordance with generally accepted accounting principles as of the end
of the Company's fiscal quarter ended most recently prior to the death
and (ii) shall not be less than the weighted market price per Share
calculated as follows:
(a) Mean Sale Price. The "Mean Sale Price" for trading reported
on NASDAQ for a given day shall be the midpoint between the
reported high and low trade prices for the day, calculated to the
nearest tenth of a cent.
(b) Dollar Volume Per Day. The "Dollar Volume" for a given
trading day shall be the Mean Sale Price thus calculated for each
day multiplied by the reported total number of shares traded that
day.
(c) Calculation Periods. The Dollar Volume for each trading day
shall be calculated for the five years preceding the date of death
and then the Total Dollar Volume (defined below) shall be
calculated for each of three time periods, namely the one year
preceding the date of death, the three years preceding that date,
and the five years preceding that date (each such time period
being a "Calculation Period").
(d) Total Dollar Volumes. The Dollar Volumes for all days for
which trades are reported during each Calculation Period shall be
added together to reach "Total Dollar Volume" for that Calculation
Period.
(e) Total Shares Traded. The reported number of shares traded
each day during each Calculation Period shall be added to the same
number for each such other day to reach the "Total Shares Traded"
during that Calculation Period.
(f) Weighted Fair Market Value. The Total Dollar Volume for
each Calculation Period shall be divided by the Total Shares
Traded during that Calculation Period to reach a weighted market
price for that Calculation Period. The weighted market price for
purposes of this Agreement shall be the highest price calculated
with respect to the three Calculation Periods.
For purposes of this Agreement: (1) "NASDAQ" shall mean the National
Association of Securities Dealers Automated Quotation System for each
day during the Calculation Period on which that System is the principal
United States market for the Shares, and for any day when it is not,
then whatever established public trading market may be the principal
United States market, and (2) reported trading volume and prices shall
be based on the most reliable sources from which that information is
received regularly by the Company.
3. Proceeds Available to Company.
To the extent that the proceeds of life insurance received by the
Company pursuant to Section 1 above are not used to purchase Shares
owned by the Shareholder on his death, the proceeds may be retained and
used by the Company for its own business purposes.
4. Delivery of Shares
Upon tender of the purchase price pursuant to this Agreement, the
Shareholder's estate shall deliver certificates representing the Shares
to be sold, duly endorsed in blank or accompanied by duly executed stock
transfer powers in blank, with signatures guaranteed and with any
necessary stock transfer stamps attached, and accompanied by an
incumbency certificate of the person or persons who signed the
endorsements or powers and by necessary inheritance tax waivers or
affidavits.
5. Notice
Any notice or other writing mailed pursuant to this Agreement
shall be sent (a) to the Company at its principal place of business, to
the attention of the Company's Secretary, and (b) to the Shareholder or
his estate at his latest address as set forth in the Company's records.
The Company agrees to use its reasonable efforts to keep its records
current for these purposes. Any such writing is sent or given when
delivered personally or when deposited in the U.S. mail with proper
postage thereon.
6. Termination of Agreement
This Agreement shall terminate in its entirety upon the happening
of the following event: the written consent of the Shareholder and the
Company.
7. Transfer of Policies
If as a result of a bankruptcy proceeding, sheriff's levy, or for
any other reason, the Company is required by law to sell or transfer the
life insurance policies called for in Section 1 above, or if the Company
(contrary to its obligations hereunder) determines to sell the policies
or to cease making premium payments thereon or takes any other action
contrary to the terms of this Agreement, the Shareholder shall have the
first option to acquire those policies while they remain in force. The
purchase price for the policies shall be equal to 85% of their
respective cash surrender values at the time of purchase, and that price
may be paid by delivery to the Company of the Shareholder's promissory
note for that amount, bearing interest at the Applicable Federal Rate as
of the date of transfer, with principal and all interest becoming due 60
days after the death of the Shareholder. The Company agrees that, upon
request by the Shareholder, the Shareholder (or some other person or
entity designated by the Shareholder to be the Shareholder's agent for
these purposes) shall be granted a security interest in or a contingent
assignment of the policies, with at least 30 days prior notice of any
transfer, cancellation, or borrowing, so as to assure that the
Shareholder's option will be enforced. Nothing in this Section 7 shall
relieve the Company from its obligations to secure and maintain those
life insurance policies as provided in Section 1 above and nothing in
this Section or consequent to its provisions shall limit the liability
of the Company resulting from a breach of this Agreement by the Company.
8. Miscellaneous
(a) Law Applicable. This Agreement shall be governed and
construed under the laws of the State of New York without regard to its
principles of conflict of laws.
(b) Amendment. This Agreement may not be amended except by a
writing signed by the parties.
(c) Rights of Others. Except as expressly provided herein,
neither the Company, nor any holder or beneficial owner of Shares, nor
any other person, shall acquire or enforce any rights under this
Agreement.
(d) Heirs, Successors and Assigns. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties
and their respective heirs, legatees, executors, administrators,
successors and assigns, but the rights and obligations under this
Agreement shall not be assignable.
(e) Mergers, Etc. In case of any merger, consolidation or other
reorganization of the Company or any recapitalization of the capital
stock of the Company, the "Shares" as used herein shall include the
securities received by the Shareholder in respect of or in exchange for
his existing Shares.
(f) Additional Actions. Each party agrees to execute and
deliver all such documents and to take such further action as may be
necessary to carry out the purposes and provisions of this Agreement.
Without limiting the preceding sentence, (i) the Company agrees that,
upon written request of the Shareholder, the Company will transfer
ownership in the life insurance policies to a grantor trust or will
arrange for the proceeds of the policies to be paid directly to a trust,
so as to better assure the attainment of the purposes and provisions of
this Agreement and (ii) the Shareholder agrees that, upon written
request of the Company, the Shareholder will submit Share certificates
for placement thereon of a restrictive legend referring to the
provisions of this Agreement.
IN WITNESS WHEREOF the Company and the Shareholder have executed
this Agreement.
Company: DETECTION SYSTEMS INC.
By: /s/ Donald R. Adair, Director
Shareholder:
/s/ Karl H. Kostusiak
EXHIBIT A
To Stock Purchase Agreement
LIST OF INSURANCE POLICIES
In connection with Section 1 of the Stock Purchase Agreement, the
Company maintains life insurance (with the Company as the beneficiary
and with the proceeds to be received, held and paid out as provided in
Section 1 of the Agreement) as follows:
Death
Policy Company Insured Benefit
9 626 691 Massachusetts Mutual Karl H. Kostusiak $1,000,000
2 660 835 Phoenix Home Mutual Karl H. Kostusiak $1,000,000
DETECTION SYSTEMS, INC.
By: /s/ Donald R. Adair
Its: Chairman, Compensation Committee
<PAGE>
STOCK PURCHASE AGREEMENT
DAVID B. LEDERER
THIS AGREEMENT, dated October 24, 1994, is between DETECTION
SYSTEMS, INC. ("Company"), a New York corporation, and the "Shareholder"
who has signed below.
The Shareholder is an executive officer and director of the
Company and owns a substantial block of the issued and outstanding
shares of its Common Stock, par value $0.05 per share ("Shares").
Believing it in their mutual best interests to provide for the
purchase and sale of some of the Shares owned by the Shareholder upon
his death, the parties hereby agree as follows:
1. Death of Shareholder
(a) Option on Death. Upon the death of the Shareholder, his
estate shall have the option to sell Shares to the Company pursuant to
the terms of this Agreement. This option may be exercised by the
executor or administrator of his estate at any time within twelve months
of the date of death (or, if later, three months of the date of the
executor's or administrator's appointment) by giving written notice of
exercise to the Company personally or by registered or certified mail,
postage prepaid. The option may be exercised with respect to any number
of the Shares owned by the Shareholder at his death, up to the maximum
number calculated as provided in Subsection 1(c) below. The purchase
price for the Shares shall be as provided in Section 2 below and shall
be tendered within 30 days after the notice of exercise is given or, if
later, 20 days after the Company receives the proceeds of the life
insurance described below.
(b) Life Insurance. The Company agrees to maintain life
insurance on the life of the Shareholder to provide proceeds for the
purpose of paying the purchase price under Section 2 for the
Shareholder's Shares. That life insurance is listed on Exhibit A
attached hereto, and the Company agrees to execute a new Exhibit A if at
any time the facts stated thereon should change. The Company agrees to
hold the proceeds of such life insurance in trust for use in paying the
purchase price for the deceased Shareholder's Shares, and, except as
provided in Section 3 below, those proceeds shall not be an asset of the
Company for use for any purpose other than repurchasing Shares under
this Section 1. If the Company breaches the foregoing agreement to
maintain life insurance, that breach shall not give rise to any
liability of the Company hereunder unless: (1) the Shareholder ceases
to be an executive officer of the Company, or ceases to be a director of
the Company, and the breach occurs thereafter or (2) the breach is made
pursuant to a directive of the Company's board of directors. The
Company additionally agrees that it will promptly pay the premiums on the
policies, will not transfer the policies or any interest therein except
as provided in this Agreement, and will not borrow against the policies.
(c) Shares to be Purchased. Promptly upon the Shareholder's
death, the board of directors of the Company shall value the Company's
Shares as provided in Section 2 below. The per Share value thus
determined shall be divided into the amount of the total life insurance
proceeds received; and the result thus obtained (rounded down to the
nearest whole Share) shall be the maximum number of Shares that the
Company shall be obligated to purchase pursuant to this Section 1.
(d) Right of First Refusal. If the Shareholder's estate
receives a "Third Party Offer" at any time within 12 months of the date
of the Shareholder's death, then the Shareholder's estate shall first
offer to sell the Shares involved to the Company as provided in this
Subsection. For these purposes, a Third Party Offer shall be a bona
fide written offer made by another person to purchase Shares. Upon
receipt of the Third Party Offer, the Shareholder's estate shall send a
copy of it to the Company, along with a statement that the estate offers
the Shares to the Company and that, unless purchased by the Company
pursuant to this Subsection, the estate intends to transfer the Shares
pursuant to that Third Party Offer. Upon receipt of those items, the
Company shall have 30 days to accept the offer. Acceptance shall be
made in a writing delivered personally or sent registered or certified
mail, postage prepaid, to the estate within the required acceptance
period. The Company may accept the offer for some or all of the Shares
involved and may use the proceeds from life insurance provided for in
this Section. Any shares not sold to the Company pursuant to this
Subsection may be sold pursuant to the Third Party Offer, provided that
the sale is completed within 20 days after expiration of the 30 day
period described above, and provided that the sale is made pursuant to
the same price and terms as those set forth in the Third Party offer.
(e) During the 12 month period after the Shareholder's death,
the Shareholder's estate and his heirs and legatees shall not sell any
Shares except that: (i) Shares may be sold as provided in this Section
1, (ii) this Section 1 shall no longer bind any party after the maximum
number of Shares described in Subsection (c) above have been sold to the
Company under this Section 1, and (iii) the Shareholder's estate may
sell Shares to or through others during any six month period up to 1% of
the o}tstanding shares of the Company's Common Stock.
2. Price
The purchase price to be paid for each Share purchased pursuant to
Section 1 shall be the fair market value as provided in this Section,
calculated as of the date of death (witho}t consideration of the proceeds of
the life insurance to be received as provided in Section 1). The fair market
value per Share for these purposes shall be 95% of the closing sale price of
the stock as reported on NASDAQ for the last day immediately preceding the day
of death for which trades are reported, provided, however, that the fair market
value (i) shall not be less than 95% of the book value per Share calculated in
accordance with generally accepted accounting principles as of the end
of the Company's fiscal quarter ended most recently prior to the death
and (ii) shall not be less than the weighted market price per Share
calculated as follows:
(a) Mean Sale Price. The "Mean Sale Price" for trading reported
on NASDAQ for a given day shall be the midpoint between the
reported high and low trade prices for the day, calculated to the
nearest tenth of a cent.
(b) Dollar Volume Per Day. The "Dollar Volume" for a given
trading day shall be the Mean Sale Price thus calculated for each
day multiplied by the reported total number of shares traded that
day.
(c) Calculation Periods. The Dollar Volume for each trading day
shall be calculated for the five years preceding the date of death
and then the Total Dollar Volume (defined below) shall be
calculated for each of three time periods, namely the one year
preceding the date of death, the three years preceding that date,
and the five years preceding that date (each such time period
being a "Calculation Period").
(d) Total Dollar Volumes. The Dollar Volumes for all days for
which trades are reported during each Calculation Period shall be
added together to reach "Total Dollar Volume" for that Calculation
Period.
(e) Total Shares Traded. The reported number of shares traded
each day during each Calculation Period shall be added to the same
number for each such other day to reach the "Total Shares Traded"
during that Calculation Period.
(f) Weighted Fair Market Value. The Total Dollar Volume for
each Calculation Period shall be divided by the Total Shares
Traded during that Calculation Period to reach a weighted market
price for that Calculation Period. The weighted market price for
purposes of this Agreement shall be the highest price calculated
with respect to the three Calculation Periods.
For purposes of this Agreement: (1) "NASDAQ" shall mean the National
Association of Securities Dealers Automated Quotation System for each
day during the Calculation Period on which that System is the principal
United States market for the Shares, and for any day when it is not,
then whatever established public trading market may be the principal
United States market, and (2) reported trading volume and prices shall
be based on the most reliable sources from which that information is
received regularly by the Company.
3. Proceeds Available to Company.
To the extent that the proceeds of life insurance received by the
Company pursuant to Section 1 above are not used to purchase Shares
owned by the Shareholder on his death, the proceeds may be retained and
used by the Company for its own business purposes.
4. Delivery of Shares
Upon tender of the purchase price pursuant to this Agreement, the
Shareholder's estate shall deliver certificates representing the Shares
to be sold, duly endorsed in blank or accompanied by duly executed stock
transfer powers in blank, with signatures guaranteed and with any
necessary stock transfer stamps attached, and accompanied by an
incumbency certificate of the person or persons who signed the
endorsements or powers and by necessary inheritance tax waivers or
affidavits.
5. Notice
Any notice or other writing mailed pursuant to this Agreement
shall be sent (a) to the Company at its principal place of business, to
the attention of the Company's Secretary, and (b) to the Shareholder or
his estate at his latest address as set forth in the Company's records.
The Company agrees to use its reasonable efforts to keep its records
current for these purposes. Any such writing is sent or given when
delivered personally or when deposited in the U.S. mail with proper
postage thereon.
6. Termination of Agreement
This Agreement shall terminate in its entirety upon the happening
of the following event: the written consent of the Shareholder and the
Company.
7. Transfer of Policies
If as a result of a bankruptcy proceeding, sheriff's levy, or for
any other reason, the Company is required by law to sell or transfer the
life insurance policies called for in Section 1 above, or if the Company
(contrary to its obligations hereunder) determines to sell the policies
or to cease making premium payments thereon or takes any other action
contrary to the terms of this Agreement, the Shareholder shall have the
first option to acquire those policies while they remain in force. The
purchase price for the policies shall be equal to 85% of their
respective cash surrender values at the time of purchase, and that price
may be paid by delivery to the Company of the Shareholder's promissory
note for that amount, bearing interest at the Applicable Federal Rate as
of the date of transfer, with principal and all interest becoming due 60
days after the death of the Shareholder. The Company agrees that, upon
request by the Shareholder, the Shareholder (or some other person or
entity designated by the Shareholder to be the Shareholder's agent for
these purposes) shall be granted a security interest in or a contingent
assignment of the policies, with at least 30 days prior notice of any
transfer, cancellation, or borrowing, so as to assure that the
Shareholder's option will be enforced. Nothing in this Section 7 shall
relieve the Company from its obligations to secure and maintain those
life insurance policies as provided in Section 1 above and nothing in
this Section or consequent to its provisions shall limit the liability
of the Company resulting from a breach of this Agreement by the Company.
8. Miscellaneous
(a) Law Applicable. This Agreement shall be governed and
construed under the laws of the State of New York without regard to its
principles of conflict of laws.
(b) Amendment. This Agreement may not be amended except by a
writing signed by the parties.
(c) Rights of Others. Except as expressly provided herein,
neither the Company, nor any holder or beneficial owner of Shares, nor
any other person, shall acquire or enforce any rights under this
Agreement.
(d) Heirs, Successors and Assigns. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties
and their respective heirs, legatees, executors, administrators,
successors and assigns, but the rights and obligations under this
Agreement shall not be assignable.
(e) Mergers, Etc. In case of any merger, consolidation or other
reorganization of the Company or any recapitalization of the capital
stock of the Company, the "Shares" as used herein shall include the
securities received by the Shareholder in respect of or in exchange for
his existing Shares.
(f) Additional Actions. Each party agrees to execute and
deliver all such documents and to take such further action as may be
necessary to carry out the purposes and provisions of this Agreement.
Without limiting the preceding sentence, (i) the Company agrees that,
upon written request of the Shareholder, the Company will transfer
ownership in the life insurance policies to a grantor trust or will
arrange for the proceeds of the policies to be paid directly to a trust,
so as to better assure the attainment of the purposes and provisions of
this Agreement and (ii) the Shareholder agrees that, upon written
request of the Company, the Shareholder will submit Share certificates
for placement thereon of a restrictive legend referring to the
provisions of this Agreement.
IN WITNESS WHEREOF the Company and the Shareholder have executed
this Agreement.
Company: DETECTION SYSTEMS INC.
By: /s/ Frank J. Ryan
Vice President/Sec./Treasurer
Shareholder:
/s/ David B. Lederer
EXHIBIT A
To Stock Purchase Agreement
LIST OF INSURANCE POLICIES
In connection with Section 1 of the Stock Purchase Agreement, the
Company maintains life insurance (with the Company as the beneficiary
and with the proceeds to be received, held and paid out as provided in
Section 1 of the Agreement) as follows:
Death
Policy Company Insured Benefit
9 626 695 Massachusetts Mutual David B. Lederer $800,000
2 660 836 Phoenix Home Mutual David B. Lederer $800,000
DETECTION SYSTEMS, INC.
By: /s/ Frank J. Ryan 10/24/94
Its: Vice President/Secretary/Treasurer
EXHIBIT 5
June 22, 1995
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of
Shareholders of Detection Systems, Inc. to be held on Thursday,
August 3, 1995 at 130 Perinton Parkway, Fairport, New York,
commencing at 1:00 p.m., Eastern Time. Your Board of Directors
and management look forward to greeting personally those
shareholders able to attend.
This year, in addition to electing five directors and ratifying
independent auditors, you are being asked to amend the 1992 Stock
Option Plan. These matters are discussed in greater detail in
the
accompanying proxy statement.
Your Board of Directors recommends a vote FOR the election of
directors, FOR approval of independent auditors and FOR amendment
of the 1992 Stock Option Plan.
Regardless of the number of shares you own or whether you plan to
attend, it is important that your shares are represented and
voted
at the meeting. You are requested to sign, date and mail the
enclosed proxy promptly.
Your interest and participation in the affairs of the Company are
most appreciated.
Sincerely,
/s/ Karl H. Kostusiak
Karl H. Kostusiak
President
<PAGE>
DETECTION SYSTEMS, INC.
130 Perinton Parkway
Fairport, New York 14450
(716) 223-4060
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 3, 1995
TO THE SHAREHOLDERS:
The Annual Meeting of Shareholders of Detection Systems,
Inc. will be held in the Company's facility at 130 Perinton
Parkway, Fairport, NY, on August 3, 1995, at 1:00 p.m. for the
following purposes:
(l) To elect five directors;
(2) To elect independent auditors for fiscal year 1996;
(3) To amend the 1992 Stock Option Plan; and
(4) To transact such other business as may properly come before
the meeting or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on
June 15, 1995 as the record date for the determination of
shareholders entitled to notice of and to vote at the meeting.
By Order of the Board of Directors
FRANK J. RYAN
Secretary
Fairport, New York
June 22, 1995
Shareholders are cordially invited to attend the meeting in
person. Even if you plan to attend, please complete, sign and
date the enclosed proxy and return it promptly in the enclosed
return envelope.
<PAGE>
DETECTION SYSTEMS, INC.
130 Perinton Parkway
Fairport, New York 14450
PROXY STATEMENT
First sent to Shareholders on June 22, 1995
The enclosed proxy is solicited by the Board of Directors of
Detection Systems, Inc. (the ''Company") for use at the Annual
Meeting of Shareholders to be held August 3, 1995, and at any
adjournments thereof. The record date for the determination of
shareholders entitled to notice of and to vote at this meeting is
the close of business June 15, 1995, at which time the Company
had outstanding 2,804,238 shares of Common Stock. Shareholders
are entitled to one vote for each share owned.
Directors are elected by a plurality of votes cast. A
majority of the votes cast is required to ratify the appointment
of auditors and a majority of outstanding shares entitled to vote
is required to amend the 1992 Stock Option Plan. Abstentions,
broker non-votes and withheld votes will not be considered votes
cast.
All shares represented by a proxy will be voted in
accordance with the specifications made thereon by the
shareholder
and, if no specification is made, will be voted for the election
as directors of the five nominees proposed by the Board of
Directors, for the election of Price Waterhouse as independent
auditors and for the amendment to the Company s 1992 Stock Option
Plan.
Shareholders can ensure that their shares are voted at the
meeting by signing and dating the enclosed proxy and returning it
in the envelope provided. Sending in a signed proxy will not
affect the right to attend the meeting and vote in person. A
shareholder may revoke a proxy at any time before it is voted by
notifying the Company s Transfer Agent, Chemical Mellon
Shareholder Services, 85 Challenger Road, Ridgefield Park, NJ
07660 in writing, or by executing a subsequent proxy, which
revokes the previously executed proxy.
ELECTION OF DIRECTORS
At the annual meeting, five directors, constituting the
entire Board of Directors, are to be elected to hold office for
the ensuing year and until their successors are elected and
qualified. The Board of Directors proposes to nominate the
following persons for election as directors: Donald R. Adair,
Mortimer B. Fuller, Karl H. Kostusiak, David B. Lederer and
Edward C. McIrvine. Each of these persons has consented to be
named in this proxy statement and to serve if elected. The
persons named in the proxy will vote for the election of these
nominees unless a shareholder giving a proxy withholds authority
to vote for one or more of them. If for any reason any of these
nominees become unavailable for election, the proxies may exercise
discretionary authority to vote for substitutes proposed by the Board
of Directors.
Messrs. Kostusiak and Lederer have held the indicated
positions since they founded the Company in 1968. Mr. Adair is a
partner of Adair & Stoner, a law firm in Rochester, New York. Mr.
Fuller is President and C.E.O. of Genesee and Wyoming Industries,
Inc., a holding company in Greenwich, Connecticut, which operates
regional and short line freight railroads and leases rail cars.
Dr. McIrvine is self-employed as a research and development
management consultant. Until 1991, he served as Dean of the
College of Graphic Arts and Photography at the Rochester Institute
of Technology.
During the fiscal year ended March 31, 1995, the Board of
Directors held five meetings, in which all directors participated.
The Board of Directors has an audit committee consisting of
Messrs. Adair, Fuller and McIrvine. This committee, which met
once during the last fiscal year, reviews reports of the
Company's financial condition, financial controls and accounting
procedures and approves and oversees services performed by the
Company's independent auditors. It also serves as a direct access
for the independent accountants to the non-employee members of the
Board of Directors.
There is a compensation committee consisting of Messrs.
Adair, Fuller and McIrvine. This committee, which is responsible
for establishing general compensation policies, establishing and
administering compensation plans and programs in which officers
participate and establishing the compensation arrangements for the
Company s executive officers, met three times during the last
fiscal year. Messrs. Adair, Fuller and McIrvine also serve on the
stock option committee. This committee, which met four times
during the year, is responsible for the granting of options
pursuant to the Company's 1992 Stock Option Plan. There is no
nominating committee of the Board of Directors. All of the
Directors attended more than 75 percent of the aggregate of all
meetings of the Board of Directors and the committees on which
they served during the fiscal year.
Directors who are not employees of the Company are paid an
annual fee of $10,000 as well as $1,000 plus travel expenses, if
any, for each day on which they attend Board meetings. Directors
receive $500 for Board meetings held by teleconference. Certain
information concerning the nominees and all officers and directors
of the Company, as a group, is set forth below.
<TABLE>
Shares
Beneficially
Name, Age, Principal Owned as of Percent
Occupation and Positions June 1, 1995(1) of Class Since
- ----------------------- ------------ --------- ------
<S> <C> <C> <C>
Donald R. Adair (51) 1,034 0.03% 1991
Director of the Company
and Partner of Adair &
Stoner
Mortimer B. Fuller, III (53) 3,780(2) 0.13% 1990
Director of the Company
and President of Genesee
and Wyoming Industries, Inc.
Karl H. Kostusiak (56) 417,928(3) 13.81% 1968
Director and President
of the Company
David B. Lederer (55) 305,501(3) 10.09% 1968
Director and Executive Vice
President of the Company
Edward C. McIrvine (61) 19,550(2) 0.65% 1981
Director of the Company and
Self-employed Research and
Development Management
Consultant
All officers and directors 865,241(2)(3) 28.58%
as a group (8 persons
including those named above)
______________________
</TABLE>
Footnotes to Officers and Directors Table:
(1) For all shares listed, the nominees possess both sole voting
and investment power, except for those shares indicated in notes
(2) and (3) below.
(2) Includes 2,700, 2,700 and 16,720 shares which may be
acquired upon exercise of warrants and options held by Messrs.
Fuller, McIrvine and all officers and directors as a group,
respectively.
(3) Includes 113,714, 73,366 and 222,417 hypothetical shares
credited to the accounts of Messrs. Kostusiak, Lederer and all
officers and directors as a group, respectively, pursuant to the
Company's deferred compensation plans, which shares may be
acquired upon termination of employment.
The Board of Directors recommends a vote FOR the election of
Messrs. Adair, Fuller, Kostusiak, Lederer and McIrvine as
Directors of the Company for the 1996 fiscal year. Proxies
received by the Board of Directors will be so voted unless share
owners specify in their proxies a contrary choice.
EXECUTIVE COMPENSATION
The Company is committed to building shareholder value
through improved performance and growth. To achieve this
objective, the Company seeks to create an environment in which
employees are motivated to make the greatest possible
contribution
to shareholder value.
The Company uses a merit-based system of compensation to
encourage individual employees to achieve their productive and
creative potential and to link individual financial goals to
Company performance. The Company periodically compares its
compensation system with those of competitors and refines its
system as necessary to encourage maximum productivity.
Summary Compensation Table:
The following table sets forth information with respect to
the compensation of the Company s Chief Executive Officer and
other executive officers for services in all capacities to the
Company in fiscal years ended March 31, 1995, 1994 and 1993.
<TABLE>
Other All Other
Name and Annual Options/ Compen-
Principal Fiscal Salary Bonus Compen- SARS sation
Position Year ($) ($)(2) sation($)(#)(3) ($)(4)
- ---------- ---- ------ ------ -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Karl H. Kostusiak 1995 $196,110 $184,746 $ N/A 0 $ 2,625
President & Chief 1994 183,280 71,943 68,442 0 33,491
Executive Officer 1993 171,290 176,084 N/A 0 34,428
R. Wayne Carlton(1) 1995 $100,000 $ 28,386 $ N/A 2,500 $ 2,309
Vice President, 1994 94,320 19,299 7,760 0 3,049
National Sales 1993 N/A N/A N/A N/A N/A
David B. Lederer 1995 $156,897 $147,794 $ N/A 0 $ 2,625
Executive Vice 1994 146,633 57,554 59,880 0 27,592
President 1993 137,040 140,867 N/A 0 28,048
Frank J. Ryan 1995 $100,000 $ 35,017 $ N/A 1,500 $ 2,242
Vice President, 1994 93,890 10,774 8,497 0 3,032
Secretary/Treasurer 1993 88,180 23,278 N/A 0 2,741
Lawrence R. Tracy(1) 1995 $21,000 $102,154 $ N/A 40,000 $ 0
President of 1994 N/A N/A N/A N/A N/A
Detection Systems 1993 N/A N/A N/A N/A N/A
International, Inc.
All Executive 1995 $574,007 $498,349 $ N/A 44,000 $ 9,801
Officers as a Group 1994 518,123 159,570 144,580 0 67,164
(5 persons) 1993 396,510 340,229 N/A 0 65,217
</TABLE>___________________
Footnotes to Compensation Table:
(1) Mr. Carlton was promoted to Vice President, National Sales
on July 29 of fiscal 1994 and Mr. Tracy joined the Company as
President of Detection Systems International, Inc. on February 7
of fiscal 1995.
(2) Messrs. Kostusiak s, Lederer s and Ryan s bonuses were
primarily based on profit performance, Mr. Carlton s on sales
performance and Mr. Tracy s included a one-time employment bonus.
(3) These options are exercisable 35-40 percent after one year,
60 percent after two years, 80 percent after three years and 100
percent after four years.
(4) Contributions to the named executive officers under the
Company s 401(k) retirement savings plan.
Option/SAR Grants in Last Fiscal Year:
The following table sets forth information with respect to
options granted during fiscal 1995 to the named executive
officers.
<TABLE>
<S> <C> <C> <C> <C> <C>
Potential Reali-
Percent of zable Value at
Number of Total Op- Assumed Annual
Securities tions/SARs Exercise Rates of Stock
Underlying Granted to or Base Price Appreciation
Option/SARs* Employees Price Expir. for Option Term
Name Granted(#) in Fis Yr ($/Sh) Date 5%($)/10%($)
- ---- ---------- --------- ------ ----- ---------------
K. Kostusiak 0 0 0 n/a 0/0
R. Carlton 2,500 2.0% 7.25 7/12/99 5,025/11,075
D. Lederer 0 0 0 n/a 0/0
F. Ryan 1,500 1.2% 7.25 7/12/99 3,015/6,645
L. Tracy 40,000 32.5% 6.50 2/06/00 72,000/158,800
</TABLE>
*Each grant was for incentive stock options to purchase stock
under the Company s 1992 Stock Option Plan at an exercise price
equal to the market price on the date of grant. Options are
exercisable 35-40 percent after one year, 60 percent after two
years, 80 percent after three years and 100 percent after four
years.
<PAGE>
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 1995 and unexercised options held as of March 31,
1995. The value of the underlying securities was determined by
taking the market value at exercise or year end, as appropriate,
minus the exercise price. The market price of the Company's
stock
on March 31, 1995 was $7.625 per share.
<TABLE>
<S> <C> <C> <C> <C>
Value of
Number of Unexercised
Unexercised In-the Money
(#)Shares Options at Options at
Acquired ($) 3/31/95 3/31/95
Name on Value Exer'ble/ Exerc'ble/
Exercise Realized Unexer'ble Unexer'ble
Kostusiak 31,450 $92,589 0/0 0/0
Carlton 2,160 7,565 4,968/2,932 $10,810/$1,308
Lederer 20,000 58,880 0/0 0/0
Ryan 6,480 7,941 3,888/1,932 $7,700/$933
Tracy 0 0 0/40,000 0/$45,000
</TABLE>
Recipients of options may elect to exercise their options
through an installment loan arrangement with the Company. During
fiscal 1995, Messrs. Kostusiak and Lederer had stock option loans
outstanding that totaled $203,401 and $153,739, respectively. As
of June 1, 1995, the outstanding balances of these loans were
$193,219 and $142,644, respectively. The loans were charged
interest rates ranging from 6.78% to 8.42%.
Subsidiaries:
Emergency Communications, Inc. (ECI) was formed in fiscal
1993 for the purpose of accomplishing further development, sales,
installation, servicing and financing (on a partnership basis
where appropriate) of a micro-cellular emergency call system,
called Security Escort, to be used on college campuses and other
similar environments. The Company provided the initial
capitalization by purchasing 6,000 shares of ECI's common stock
for $16.67 per share.
Activity Monitoring Systems, Inc. (AMS) was formed in fiscal
1994 for the purpose of accomplishing further development, sales,
installation, servicing and financing (on a partnership basis
where appropriate) of a wireless electronic house arrest product
line to be used by various government agencies. The Company
provided the initial capitalization by purchasing 6,001 shares of
AMS' common stock for $16.66 per share.
The Company entered into five-year renewable License and
Manufacturing Agreements with ECI and AMS. ECI and AMS were
granted nontransferable, exclusive licenses to exploit certain of
the Company's radio technology in the "emergency call" and "house
arrest" markets, respectively. The subsidiaries agreed to pay the
Company royalties on products sold under these licenses and that
the Company would be the exclusive manufacturer and supplier of
those products.
A portion of the ECI and AMS shares were subsequently
awarded to certain Company officers and employees during fiscal
1993 and 1994. Twenty percent of the shares awarded vested
immediately, and an additional twenty percent vest annually
thereafter. Subject to the completion of that vesting schedule,
Messrs. Kostusiak, Carlton, Lederer and Ryan will acquire from the
Company 1,500, 40, 1,200 and 40 shares, respectively, of each of
these two subsidiaries. The shares of ECI and AMS shares are
currently valued at $60 and $20 respectively.
During fiscal 1995, the Company provided an equity
investment of $700,000 to its Detection Systems International,
Inc. (DSII) subsidiary for the purpose of pursuing international
opportunities for its electronic security and fire protection
products. The Company owns 100 percent of the common stock for
this subsidiary.
The Board of Directors authorized the Company to make loans
to ECI, AMS and DSII while external sources of financing are
being investigated. As of June 1, 1995, outstanding loans were
$851,500, $0 and $4,000, respectively, to these subsidiaries.
The executive officers received no compensation from the subsidiaries
in fiscal 1995.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is
responsible for (a) establishing general compensation policies,
(b) establishing and administering compensation plans and programs
in which officers participate and (c) establishing the specific
compensation arrangements for the Company s executive officers.
The members of this Committee also serve on the Stock option
committee under the Company s Stock Option Plan.
Committee Objectives:
The Compensation Committee has sought four key objectives
for the Company s executive compensation plans, programs and
arrangements. These are to (a) tie executive compensation to the
Company s financial performance, (b) encourage equity ownership
in the Company by all executives, (c) tie executive compensation
programs to the achievement of long-term company strategic
objectives and (d) provide overall executive compensation that
will attract and retain an effective management team. The
Committee recognizes that different plans or arrangements will
serve one or more of those objectives in varying degrees, that the
relative significance of the stated objectives may shift from time
to time and that new objectives may arise and become key.
Tying Compensation to Company Financial Performance:
Beginning in 1988, the Company has entered into five-year
employment agreements with Messrs. Kostusiak and Lederer. Each
year, the agreements have been re-examined, reviewed and revised
as appropriate and then re-executed for a new five-year period.
Among other goals, the agreements seek to create a strong tie
between the compensation of Messrs. Kostusiak and Lederer and the
Company s financial performance. The agreements do this by
providing for (a) an opportunity for an annual cash bonus based
on pre-tax profits and (b) an opportunity for an annual stock bonus
based on growth of both sales and pre-tax profits.
Specifically, the cash bonus for Mr. Kostusiak is a
percentage of the amount by which the Company s pre-tax profits
for the fiscal year exceed $250,000. The stock bonus for Mr.
Kostusiak is a maximum of 20,000 shares of Company common stock if
sales for the fiscal year have increased at least 10 percent over
the previous year and if the Company s pre-tax profits are at
least equal to 10 percent of the total sales. The stock bonus is
scaled back for lower performance levels, so that it will be zero
shares for zero sales growth and it will be zero shares if pre-tax
profit is 5 percent or less of total sales. The intention is to
provide strong incentives for managing the Company's financial
performance so that pre-tax profits will be greater than 5 percent
of sales and so that sales will increase significantly each year.
(Other aspects of these agreements are described below under
"Executive Agreements.") Since the cash bonuses are directly
dependent on pre-tax profits and the stock bonuses are directly
dependent on growth in both sales and pre-tax profits, the
Committee believes that a significant portion of the compensation
of Messrs. Kostusiak and Lederer is tied to corporate
performance. (See the table under "Executive Compensation.")
The Committee believes that these provisions of the
employment agreement functioned as intended during the past three
years. In particular, Mr. Kostusiak s bonus compensation was as
follows:
Fiscal Cash Stock Pre-Tax
Year Bonus Bonus Sales Profit
- ----- ------- ------ ------ -------
1995 $116,734 $59,290 $34,336,000 $2,592,000
1994 71,943 -- 31,355,000 1,571,000
1993 112,484 63,600 29,431,000 2,356,000
When the Company's employment agreement with Mr. Kostusiak
was renewed and extended at the beginning of fiscal 1995, the
Committee concluded that (a) the factors and criteria previously
used for bonuses, as described above, continued to be sound and
should be continued and (b) Mr. Kostusiak's base salary should be
increased as shown in the compensation table on page five to
reflect his sound general performance as Chief Executive Officer.
Thus, a very significant portion of his potential earnings
continue to depend on the Company's financial performance.
Equity Ownership by Management:
In addition to the stock bonus plan described above, the
Company maintains a plan for granting stock options to key
employees. Under the plan, options are granted at exercise prices
that equal or exceed the fair market value of the option shares
on the date of grant, and the option rights vest incrementally over
four years. From time to time, options are granted under the
plan by the Option Committee to Company executives and other key
employees. No options have been granted to Messrs. Kostusiak or
Lederer since 1987. The Committee believes that the options
themselves, even when unexercised, provide incentives for key
personnel to improve shareholder value, since only then will the
options become valuable.
In previous fiscal years, at the Committee's recommendation,
the Board of Directors awarded shares of certain Company
subsidiaries to key personnel including Mr. Kostusiak. It is the
Committee's belief that direct equity ownership in the Company's
subsidiaries, in selected cases, can provide added incentives for
key personnel to pursue the Company s strategic objectives in the
markets addressed by those subsidiaries, including the Company's
rights to manufacture products for those markets and to earn
royalties on the products sold.
Achievement of Long-Term Company Objectives:
The Committee believes that having officers who own
substantial equity positions in the Company and, in selected
cases, its subsidiaries, as discussed in the preceding sections,
provides considerable incentive for executive officers to pursue
the Company s long-term strategic objectives.
Attracting and Retaining Management:
The Committee believes that the Company is attracting and
retaining effective management personnel and that the Company's
approach to executive compensation is appropriate for achieving
that objective. The Committee anticipates that from time to
time, independent studies of the Company's overall executive
compensation and other investigations will be conducted so as to
test the Company's compensation approach against compensation
programs offered by others.
Compensation Committee
Donald R. Adair, Chairman
Mortimer B. Fuller
Edward C. McIrvine
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION:
In the last fiscal year the Company and its subsidiaries
paid $15,980 to Adair & Stoner, of which Mr. Adair is a partner,
for legal services rendered for the Company and its Emergency
Communications Inc. subsidiary and $7,500 to Edward C. McIrvine
for consulting work performed for the Company regarding the house
arrest market. Messrs. Adair and McIrvine also served as members
of the compensation and stock option committees of the Board of
Directors.
EXECUTIVE AGREEMENTS
The Company has employment agreements with three of its
executive officers, Messrs. Kostusiak, Lederer and Tracy. The
agreements with Messrs. Kostusiak and Lederer are through May
2000 and the agreement with Mr. Tracy is through February 1999. The
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 agreements. These agreements terminate upon the executive's
death or permanent disability.
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 Mr. Tracy s agreement, the same
applies except that compensation will continue for the then
remaining balance of the term 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, 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
cash and stock 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.
PRINCIPAL HOLDERS OF COMMON STOCK
Based on reports filed with the Securities and Exchange
Commission, the following persons beneficially own more than 5% of
the Company's outstanding Common Stock as of June 15, 1995.
BENEFICIAL OWNERSHIP TABLE
Number of
Name of Shares Percent
Title of Beneficial Beneficially of
Class Owner Owned Class
- ------ ------ ------ ------
Common Stock Karl H. Kostusiak
130 Perinton Parkway
Fairport, NY 14450 417,928 13.81%
Common Stock David B. Lederer
130 Perinton Parkway
Fairport, NY 14450 305,501 10.09%
Common Stock Dimensional Fund Advisors, Inc.
1299 Ocean Ave.
11th Floor
Santa Monica, CA 90401 160,448 5.76%
- --------------------
Footnotes to Beneficial Ownership Table:
(1) Messrs. Kostusiak and Lederer currently possess both sole
voting and investment power except for 113,714 and 73,366 shares
respectively, which may be acquired upon termination of employment
pursuant to the Company s deferred compensation plans.
(2) The shares held by Dimensional Fund Advisors Inc., a
registered investment advisor, are held in portfolios of DFA
Investment Dimensions Group Inc., a registered open-end investment
company, or in series of the DFA Investment Trust Company, a
Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified
employee benefit plans, all of which Dimensional Fund Advisors
Inc. serves as investment manager. Dimensional disclaims
beneficial ownership of all such shares. Persons who are officers
of Dimensional Fund Advisors Inc. also serve as officers of DFA
Investment Dimensions Group Inc. (the "Fund") and the DFA
Investment Trust Company (the "Trust"). In their capacities as
officers, these persons vote 44,124 additional shares which are
owned by the Fund and have shared power to vote 12,200 shares
which are owned by the Trust.
COMPARISON OF TOTAL SHAREHOLDER RETURN
The Company s common stock trades on The Nasdaq Stock Market
under the symbol: DETC. The following graph sets forth Detection
Systems Total Shareholder Return Index as compared to The Nasdaq
Index and the Nasdaq Electronic Component Stock Industry Index.
The graph is based on the assumption that $100 was invested in
each entity on March 31, 1990, and that all dividends were
reinvested.
Graph follows with the following data points:
Detection NASDAQ Nasdaq Electronic
Date Systems, Inc. Index Industry Index
- ----- ------------- ------ ---------------
3/28/91 124 114 111
3/31/91 97 146 137
3/31/93 143 167 225
3/31/94 171 181 273
3/31/95 132 201 359
PROPOSAL TO AMEND THE 1992 STOCK OPTION PLAN
The Board of Directors has adopted, subject to approval by
the shareholders, the Detection Systems, Inc. Restated 1992 Stock
Option Plan (the "Plan"), a copy of which is set forth as Exhibit
A to this proxy statement. The Plan was amended, restated and
renamed as a result of the Board's decision to increase the number
of authorized shares by 100,000 shares, to expand eligibility to
include certain nonemployees who perform services to or on behalf
of Detection Systems, Inc. and its subsidiaries and to remove
Messrs. Kostusiak and Lederer as potential recipients of option
shares under the Plan.
1992 Stock Option Plan as Amended:
The purpose of the Plan is to enable eligible key employees
and nonemployees of the Company and its subsidiaries to purchase
shares of Common Stock of the Company by means of stock options.
Through the use of such options, the Company expects to be able
to
attract and retain the best available talent and to encourage the
highest level of performance of its key personnel.
A total of 250,000 shares of Common Stock of the Company,
par value $.05 per share, shall be available for options under
the
Plan (with appropriate change in that number in the event of a
stock split, stock dividend or other change in the Company's
Common Stock). These shares may be either authorized and
unissued
shares or may be treasury shares. Options may be either incentive
stock options, as defined in Section 422 of the Internal Revenue
Code, or options which do not meet the requirements of that
section (nonqualified options). If an option expires, terminates
or is canceled without being exercised, new options may be
thereafter granted covering such shares. No stock option may be
granted more than ten years after the effective date of the Plan.
The Plan is administered by the stock option committee of
the Board of Directors ("Committee"), none of the members of which
is, or shall within a year prior to serving on the Committee, have
been eligible to receive any options under the Plan. The
Committee determines who shall be granted options under the Plan,
the number of shares to be awarded and the terms of such award,
and interprets the provisions of the Plan. The Board of Directors
may amend or terminate the Plan, without the approval of the
shareholders, except that it may not, without such approval,
materially increase the benefits accruing to participants under
the Plan, increase the number of shares subject to options, change
the minimum exercise price, change the class of employees eligible
to receive awards or extend the period during which awards may be
granted or exercised. No amendment of the Plan may, without a
recipient's consent, adversely affect his rights under an option
or warrant then held by him.
The Plan provides that options may be granted to key
employees or nonemployees of the Company and its subsidiaries.
However, options may not be granted to members of the Committee,
to directors who are not officers or employees of the Company or
its subsidiaries, nor to Mr. Kostusiak or Mr. Lederer. The Plan
places no limitation on the number of shares with respect to which
options may be granted to any such individual, except that
incentive options may not be granted in excess of any limitations
imposed by the Code. The Code presently imposes a limit on the
grant of incentive options. It imposes no limit on the grant of
nonqualified options.
The purchase price for each option may not be less than the
fair market value of the stock at the time such option is granted.
If an option is granted to an employee who, at the time of such
grant, owns stock possessing more than 10% of the voting power of
all stock of the Company, the purchase price shall be at least
110% of the fair market value of the stock subject to the option.
An option shall be exercised upon written notice to the
Company accompanied by payment in full for the shares being
acquired. The payment shall be made in cash; by check; by
delivery of certificates for Common Stock of the Company endorsed
in blank, the value of which will be deemed equal to the closing
market price of such shares on the date of delivery; by a
loan/installment payment arrangement, if the Committee permits and
upon such terms as the Committee specifies, or by a combination of
the foregoing. With respect to a loan/installment payment
arrangement to an optionee who is a director of the Company,
approval of the Plan by the shareholders will constitute
authorization of such loan in accordance with Section 714 of the
New York Business Corporation Law.
Each option will have a maximum term of ten years, or such
lesser period as the Committee specifies, except that an incentive
option granted to an employee who, at the time of the grant, owns
stock possessing more than 10% of the voting power of all stock of
the Company will have a term not in excess of five years. Options
are exercisable at such time or times and under such conditions as
may be impaired by the Committee and set forth in an option agreement.
The benefits or amounts that will be received or allocated
in the future under the Plan are not determinable. The following
table indicates the number of options granted under the plan for
fiscal year 1995, subject to shareholder approval.
Number of Dollar Value
Name and Position Options of Options
Granted Granted
- ------------------ --------- -----------
K. Kostusiak, President (1) 0 0
R. Carlton, Vice President,
National Sales 2,500 18,125
D. Lederer, Executive
Vice President (1) 0 0
F. Ryan, Vice President 1,500 10,875
L. Tracy, President of
Detection Systems
International, Inc. 40,000 260,000
Executive Group 44,000 289,000
Non-Executive Director Group (1) 0 0
Non-Executive Officer Employee
Group(3) 110,000 807,875
__________________________
Footnotes to above table:
(1) Neither Mr. Kostusiak, Mr. Lederer nor the Company's non-
executive directors are eligible for benefits under the revised
plan.
(2) Options were granted at prices ranging from $6.50 to $7.625
and with expiration dates ranging from 7/12/99 and 3/9/00.
(3) Includes a total of 32,000 shares valued at $240,000 that
were granted subject to shareholder approval of the Restated 1992
Stock Option Plan.
There are currently outstanding options exercisable for
122,000 shares and there are 28,000 shares available for grant
under the Plan. An additional 32,000 shares have been granted
subject to shareholder approval of the revised Plan. On June 1,
1995, the high, low and closing bids for the Company's Common
Stock, as reported by The Nasdaq Stock Market, were each $6.750.
Should the amendment not be approved, the 1992 Plan will
remain in force as originally adopted, and the option grants as
described above will not be effective.
The Board of Directors recommends a vote FOR the proposal to
amend the 1992 Stock Option Plan. Proxies received by the Board
of Directors will be so voted unless share owners specify in their
proxies a contrary choice.
ELECTION OF AUDITORS
The Board of Directors has recommended that Price Waterhouse
LLP be elected independent auditors of the Company for the fiscal
year ending March 31, 1996. They have served the Company as
independent auditors since 1968. Representatives of that firm
will be present at the meeting, will have an opportunity to make a
statement if they desire to do so and will be available to respond
to appropriate questions from shareholders.
The Board of Directors recommends a vote FOR the proposal to
ratify the appointment of Price Waterhouse LLP as independent
auditors of the company for the 1996 fiscal year. Proxies
received by the Board of Directors will be so voted unless share
owners specify in their proxies a contrary choice.
EXPENSES OF SOLICITATION
The cost of the solicitation of proxies will be borne by the
Company. In addition to solicitation by mail, employees of the
Company may, without extra remuneration, solicit proxies
personally, or by telephone or facsimile. The Company has
retained D. F. King & Co., Inc. to aid in the solicitation of
proxies for shares held of record by banks, brokers and other
custodians, nominees and fiduciaries. The Company will pay D. F.
King & Co., Inc. an anticipated fee of $4,500, plus expenses, for
these services, and will also reimburse such record holders for
their expenses in forwarding proxies and proxy soliciting material
to the beneficial owners of the shares held by them.
OTHER MATTERS
The Board of Directors knows of no matters to be presented
at the meeting other than those described in this proxy statement.
However, if any other matters properly come before the meeting,
it is intended that the persons named in the enclosed proxy will vote
on such matters in accordance with their best judgment.
Section 16(a) of the Securities Exchange Act of 1934
requires the Company's directors and executive officers and
persons who own more than 10 percent of a registered class of the
Company's equity securities, to file with the Securities and
Exchange Commission reports of ownership of common stock of the
Company. Officers, directors and greater than 10-percent
shareholders are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. To the
Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that
no other reports are required, all Section 16(a) filing
requirements applicable to its officers, directors and greater
than 10-percent beneficial owners were complied during the fiscal
year ended March 31, 1995.
The Company paid a premium of $34,885 in fiscal 1995 for
director and officer liability insurance. This policy is renewed
annually and provides protection for the directors and officers of
Detection Systems and its subsidiaries.
In order to be eligible for inclusion in the Company's proxy
materials for next year's Annual Meeting, shareholder proposals
for presentation at that meeting must be received at the
Company's principal executive offices by February 28, 1996.
Shareholders are urged to sign, date and return the enclosed
proxy in the enclosed return envelope. Prompt response is
helpful, and your cooperation will be appreciated.
SHAREHOLDERS MAY OBTAIN WITHOUT CHARGE A COPY OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-K. REQUESTS SHOULD BE
DIRECTED TO:
Detection Systems, Inc.
Ella D. Gardner, Accounting Manager
130 Perinton Parkway
Fairport, New York 14450
Dated: June 22, 1995
EXHIBIT 6
Dated as of December 31, 1991
CREDIT AGREEMENT
Norstar Bank, National Association, a national banking corporation
with offices at One East Avenue, Rochester, New York 14638 (called the
"Bank") and Detection Systems, Inc., a New York corporation doing
business at 130 Perinton Parkway, Fairport, New York 14450 (called the
"Borrower") agree as follows:
The definitions for all capitalized terms used in this Agreement
and not appearing in the text of this Agreement may be found under
Article 12 of this Agreement.
ARTICLE I
LOANS
A. Line of Credit. The Bank shall make available to Borrower a
revolving line of credit (the "Line of Credit") in a maximum aggregate
amount not to exceed $3,000,000.
Borrower from time to time may request advances and may reborrow
hereunder so long as aggregate amounts outstanding under the Line of
Credit at any time never exceed the maximum amount available hereunder.
Advances may be requested in person, in writing, or by telephone.
Checks written on Borrower's Cash Concentration Account (described
herein) shall be treated as requests for advances under the Line of
Credit.
The principal amount of all loans outstanding from time to
time under the Line of Credit shall bear interest, payable on the first
day of each calendar month and at the Expiration Date, at a rate per
year equal to the "prime" commercial loan rate of the Bank established
or announced from time to time (or the equivalent thereof), but never
exceeding the maximum rate allowed by law. All changes in the interest
rate due to a change in the prime rate shall take place automatically
and without notice to Borrower as of the effective date of the change in
such prime rate. Interest shall be calculated on the basis of a 360 day
year.
All cash or cash equivalent proceeds from the sale of Borrower's
inventory, and all proceeds from the collection of Borrower's accounts
receivable shall be deposited in a Cash Concentration Account with the
Bank. So long as amounts are outstanding under the Line of Credit, said
Account shall be accessible only by the Bank and all collected funds in
excess of $125,000 shall be applied daily to payment of Borrower's
indebtedness under the Line of Credit, which indebtedness shall be
evidenced by a Master Note (a "Master Note") in substantially the form
of Exhibit A attached hereto and made a part hereof. The Line of Credit
shall terminate on the Expiration Date.
B. Term Loan. Subject to the terms and conditions of this
Agreement, the Bank shall loan to Borrower on the Expiration Date the
unpaid principal balance of the Line of Credit outstanding on the
Expiration Date (the "Term Loan"). The Term Loan shall be evidenced by
a Term Loan Note in substantially the form attached hereto as Exhibit B
(the "Term Loan Note"). Proceeds of the Term Loan shall be used to
repay the Line of Credit.
The Term Loan Note shall be dated the date of the loan and shall
bear interest until paid at a rate per annum equal to six-tenths of one
percent (.6% or .006) above the "prime" commercial loan rate of the Bank
established or announced from time to time (or the equivalent thereof),
but never exceeding the maximum rate allowed by law. All changes in the
interest rate due to a change in the prime rate shall take place
automatically and without notice to Borrower as of the effective date of
the change in such prime rate. Interest shall be calculated on the
basis of a 360 day year.
The Borrower shall make sixty (60) equal monthly principal
payments pursuant to the Term Loan Note in substantially equal amounts
based upon the principal amount of the Term Note and pursuant to a
schedule to be annexed to the Term Note commencing on the first day of
the second calendar month following the Expiration Date (September 1,
1994), and continuing on the first day of each of the next succeeding
fifty-nine (59) months. Each principal payment shall be accompanied by
a payment of all accrued interest. All remaining principal and interest
shall be due and payable in full on August 1, 1999.
C. Late Payments. Any payment of any kind (including without
limitation a payment of principal, interest, or expenses) not made
within ten days after the same shall become due under this Agreement or
the Notes shall be subject to an additional late payment charge equal to
two percent (2%) of the payment due.
ARTICLE II
PARTICIPATION RIGHTS
The Bank shall have the right to sell or repurchase participations
in the obligations of the Borrower covered by this Agreement without
giving prior notice to the Borrower.
ARTICLE III
PREPAYMENTS
The Borrower shall have the right, at its option, to prepay
obligations outstanding under the Line of Credit in whole or in part
without penalty at any time. The Borrower shall have the right, at its
option, to prepay obligations outstanding under the Term Loan Note in
whole or in part at any time. All prepayments shall be applied first to
items described in Article IV hereof, then to all accrued interest and
then unless otherwise specifically directed by Borrower, in such order
and to such obligations as the Bank in its sole discretion may choose
without penalty.
ARTICLE IV
EXPENSES
A. Placement and Administration Expense. The Borrower shall
pay any fees, expenses, and disbursements, including legal fees, of the
Bank related to preparation and execution of this Agreement and any
loans made hereunder.
B. Collection Costs. At the request of the Bank, the Borrower
shall promptly pay any expenses, reasonable attorney's fees, costs, or
disbursements in connection with collection of any of Borrower's
obligations or enforcement of any of the Bank's rights hereunder or
under any security agreement, guarantee, or other agreement given by
Borrower to the Bank. This obligation shall survive the payment of any
notes or other obligations executed hereunder. The Bank may apply any
payments of any nature received by it first to the payment of obliga
tions under this section, notwithstanding any conflicting provision
contained in any other agreement with the Borrower.
C. Facility Fees. The Borrower shall pay the following fees to
the Bank for providing this loan facility:
1. $18,000 due at closing;
2. $18,000 due on the anniversary of the closing date;
3. $13,500 on the second anniversary of the closing date; and
4. an additional $4,500 on the Expiration Date if the Term Loan
is made by the Bank on the Expiration Date.
ARTICLE V
COLLATERAL
A. Security Agreement. As collateral for the Borrower's
obligations hereunder, the Borrower shall execute and deliver to the
Bank a Security Agreement and ancillary UCC-1 Financing Statements (the
"Security Documents") which by their terms grant to the Bank a first
security interest in certain of the personal property of Borrower, as
follows: accounts, inventory, chattel paper and general intangibles.
All collateral first shall be applied to secure the Borrower's
obligations under the Master Note, and only after satisfaction of same
shall it be applied to all other obligations of the Borrower to the
Bank.
B. Springing Lien.
B.1 Safekeeping of the Security Documents. The Bank shall hold
the Security Documents received by it in safekeeping in escrow in
accordance with the provisions of this Agreement. The Financing
Statements shall be filed only as provided in Section B.2 hereof. If,
prior to such filing, all of the Loans shall be paid in full and the
commitments of the Bank under this Agreement shall be terminated in
full, the Bank shall surrender the Security Documents to the Borrower.
Except as expressly provided in the immediately preceding sentence, the
Borrower shall not be entitled to obtain possession of the Security
Documents following delivery thereof to the Bank, nor shall the Borrower
be entitled at any time to give any instructions or directions to the
Bank with respect to the safekeeping or recording thereof or any other
matter relating thereto.
B.2 Filing of the Financing Statements.
B.2.1 Promptly upon receipt by the Bank of information
indicating that a Specified Event has occurred, the Bank, in its sole
discretion, may give notice thereof to the Borrower, and take the
Security Documents out of escrow and cause the Financing Statements to
be duly filed in the appropriate public offices, and once filed the
Financing Statements shall remain filed until all the Loans shall be
paid in full and all the commitments of the Bank under this Agreement
shall be terminated in full, regardless of whether or not the Specified
Event which resulted in such filing continues.
B.2.2 Effective upon the occurrence of a Specified Event ,
the Borrower irrevocably appoints the Bank as its lawful attorney and
agent to execute any Financing Statements in the Borrower's name and on
the Borrower's behalf, and to file Financing Statements naming the
Borrower as debtor signed by the Bank alone in any appropriate public
office.
C. Further Assurances. The Borrower shall execute such
documentation and deliver such items as the Bank deems necessary from
time to time to perfect its interests in all collateral provided
hereunder, and authorizes the Bank to file financing statement without
its signature from time to time.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants as follows:
A. Organization and Power. The Borrower is duly formed,
validly existing and in good standing under the laws of the State of New
York, is duly qualified to transact business and is in good standing in
all states and countries in which it owns properties or in which the
failure to do so could materially adversely affect the Borrower's
financial condition or business operations. The Borrower has full power
and authority to own its properties, to carry on its business as now
being conducted, to execute and perform this Agreement, and to borrow
hereunder. The Borrower has no subsidiaries, defined to include
companies at least fifty percent (50%) of the stock of which is owned by
Borrower.
B. Proceedings of Borrower. All necessary action on the part
of the Borrower and any other persons relating to authorization of the
execution and delivery of this Agreement and the performance of other
obligations hereunder including, but not limited to, the delivery of any
notes and security agreements contemplated hereunder, has been taken.
All of the same are valid and enforceable in accordance with their
respective terms. Said action will not violate any provision of law or
the Borrower's Certificate of Incorporation or By-laws. Such action
will not violate, be in conflict with, result in a breach of, or
constitute a default under any agreement to which the Borrower is a
party or by which any of its properties is bound, or any order, writ,
injunction or decree of any court or governmental instrumentality, and
will not result in the creation or imposition of any lien, charge or
encumbrance upon any of its properties with the sole exception of those
in favor of the Bank contemplated hereby. No consent or approval of any
court or governmental instrumentality is required in connection with
authorization, execution, delivery, and performance of this Agreement
and any related notes and security agreements.
C. Litigation. At the date of the Agreement, there is no
action, suit or proceeding at law or in equity or by or before any
governmental instrumentality or other agency pending or, to its
knowledge, threatened against or affecting the Borrower which, if
adversely determined would have a material adverse effect on the
financial condition or the business thereof.
D. Financial Statements. All financial statements furnished by
the Borrower to the Bank are complete and correct, have been prepared in
accordance with generally accepted accounting principles consistently
followed throughout the period indicated, and fairly present the
financial condition of the Borrower as of the respective dates thereof
and the results of its operations for the respective periods covered
thereby.
E. Adverse Changes. Since the latest financial statements
described in Section D of Article VI, there has been no material,
adverse change in the condition, financial or otherwise, of the
Borrower.
F. Taxes. The Borrower has filed or caused to be filed all tax
returns which, to the knowledge of its officers are required to be
filed, and has paid or caused to be paid all taxes as shown on said
returns or any assessment received to the extent that such taxes have
become due.
G. Properties. The Borrower has good and marketable title to
all of its property and assets, including without limitation, the
property and assets set forth in the financial statements referred to in
Section D of Article VI hereof. The Borrower has undisturbed peaceable
possession under all leases under which it is operating, none of which
contains unusual or burdensome provisions which may materially affect
its operations, and all such leases are in full force and effect. The
Borrower is the sole owner of all of its assets given as collateral
pursuant to Article V hereof, which collateral is free of any liens,
security interests, assignments, pledges, or encumbrances of any kind
excluding only interests held by the Bank. Upon the execution of the
security agreements related hereto and upon the occurrence of a
Specified Event, the Bank will have a valid and enforceable first lien
covering such collateral.
H. Indebtedness. The Borrower has no outstanding indebtedness
other than that shown on the financial statements referred to in Section
D of Article VI hereof, and other than trade payables not yet due
incurred in the ordinary course of its business.
I. Franchises, Permits. The Borrower has all franchises,
permits, licenses, and other authority as is necessary to enable it to
conduct their businesses as now being conducted, and is not in default
under such franchises, permits, licenses, and authority.
J. ERISA. No action, event, or transaction has occurred which
could give rise to a lien or encumbrance on Borrower's assets as a
result of the application of relevant provisions of the Employee
Retirement Income Security Act of 1974.
K. Margin Securities. No proceeds of any borrowing hereunder
will be used by Borrower for the purpose of carrying margin securities
within the meaning of Regulation U of the Board of Governors of the
Federal Reserve.
L. Pre-Existing Debt and Pre-Existing Liens. Annexed hereto as
Schedule 1 is a true and complete list of all Pre-Existing Debt and
Pre-Existing Liens. The previous representations in this Article VI are
subject to the exception of the items listed on Schedule 1.
M. Compliance With Law. The Borrower is not in violation of
any laws, ordinances, governmental rules or regulations to which it is
subject which violation might materially adversely affect the condition
(financial or otherwise) of the Borrower. The Borrower has obtained and
is in compliance with all licenses, permits, franchises, and governmen
tal authorizations necessary for the ownership of its properties and the
conduct of its business, for which failure to comply could materially
adversely affect the condition (financial or otherwise of Borrower).
N. Patents, Trademarks, and Authorizations. The Borrower owns
or possesses all patents, trademarks, service marks, tradenames,
copyrights, licenses, authorizations, and all rights with respect to the
foregoing, necessary to the conduct of its business as now conducted
without any material conflict with the rights of others.
ARTICLE VII
CONDITIONS OF LENDING
The following conditions must be satisfied by the Borrower before
the Bank shall have any obligation to make any advance under the Line of
Credit or to make the Term Loan under this Agreement:
A. Representations and Warranties. The representations and
warranties of the Borrower contained in Article VI shall be true and
correct as of the time of the making of each Loan with the same effect
as if made on and as of such date.
B. No Defaults. There shall exist no condition or event
constituting an event of default under Article X hereof at the time of
making of each loan hereunder.
C. Performance. The Borrower shall have performed and complied
with all agreements and conditions required to be performed or complied
with by it prior to or at the time of making each loan hereunder.
D. Officer's Certificate. The Borrower shall have delivered to
the Bank, at the Bank's request, a signed certificate dated the date of
each Loan made hereunder certifying to the matters covered by Sections
A, B, and C of this Article VII.
E. Opinions of Counsel. The Borrower shall deliver an opinion
of its counsel, dated the date of this Agreement and, if the Term Loan
is to be made, dated the date of the execution of the Term Loan Note, in
substantially the form of Exhibits C-1 and C-2 annexed hereto,
respectively.
F. Documents to be Delivered. The Borrower shall have
delivered to the Bank the Security Documents and any other related
documents as may be reasonably required by the Bank. The Borrower also
shall deliver such consents and waivers as may be required by the Bank
from landlords and lessors to assure that the Bank's interest in the
collateral described in Article V hereof is not subject to any claim by
such landlords or lessors. The Borrower also shall have delivered such
other items and documents as may be required or by the Bank including
without limitation the Master Note and, if the Term Loan is to be made,
the Term Loan Note.
G. Certified Resolutions. The Borrower shall have delivered
the Certificates of its Secretary, certifying as of the date of this
Agreement, resolutions of its Board of Directors authorizing execution
and delivery of this Agreement and any other agreements and notes to be
delivered hereunder.
H. Fees and Taxes. The Borrower shall have paid all filing
fees, taxes, and assessments related to the borrowings and the
perfection of any collateral security required hereunder.
I. Insurance. The Borrower shall have delivered evidence
satisfactory to the Bank of the existence of insurance required
hereunder.
ARTICLE VIII
AFFIRMATIVE COVENANTS OF BORROWER
So long as any obligations of Borrower to the Bank shall be
outstanding unless the Bank shall otherwise consent in writing, the
Borrower shall:
A. Financial Statements. Furnish to the Bank as soon as
available, but in no event more than ninety (90) days after the close of
each fiscal year of Borrower, copies of annual consolidated and
consolidating financial statements of Borrower, prepared in accordance
with generally accepted accounting principles and certified and
accompanied by an unqualified opinion by an independent certified public
accountant satisfactory to the Bank. Said financial statements shall
include at least a balance sheet, and a statement of profit and loss.
Financial statements shall be accompanied by a certificate to the effect
that to the best knowledge of said accountant and after due investiga
tion, no Event of Default, or event which with the passage of time or
notice or both would constitute an Event of Default, has occurred
pursuant to Article X hereof (or specifying any such defaults).
Borrower shall also furnish to the Bank unaudited unconsolidated
financial statements not more than forty-five (45) days after the close
of each fiscal quarter. Said statements shall: (i) be in reasonable
detail satisfactory to the Bank, (ii) be prepared in accordance with
generally accepted accounting principles, (iii) include at least a
balance sheet and a statement of profit and loss, (iv) be accompanied by
a certificate of the chief financial officer of Borrower to the effect
that no Event of Default, or event which with the passage of time or
notice or both would constitute an Event of Default, has occurred
pursuant to Article X hereof (or specifying any such default), and (v)
be certified to be true and correct by the chief financial officer of
Borrower.
B. Payments. Make all payments promptly and as the same become
due under this Agreement and the notes related hereto.
C. Existence. Cause to be done all things necessary to
preserve and to keep in full force and effect its existence, rights, and
franchises and to comply with all valid laws and regulations now in
effect or hereafter promulgated by any properly constituted governmental
authority having jurisdiction.
D. Maintenance of Properties. At all times maintain, preserve,
protect, and keep its property used or useful in conducting its
businesses in good repair, working order, and condition and from time to
time, make all needful and proper repairs, renewals, replacements,
betterments and improvements thereto, so that the business carried on
may be properly and advantageously conducted at all times. In the event
Borrower purchases additional vehicles or equipment covered by
certificates to title, it shall promptly furnish such titles to the
Bank.
E. Current Ratio. Maintain its Consolidated Current Assets in
relation to its Consolidated Current Liabilities so that the ratio of
its Consolidated Current Assets to its Consolidated Current Liabilities
is at least equal to 2.5 to 1 measured as at the end of each fiscal
quarter.
F. Minimum Working Capital. Maintain Borrower's Consolidated
Working Capital so that it is not less than $7,360,000 as at the end of
each fiscal quarter.
G. Minimum Tangible Net Worth. Maintain Borrower's Consoli
dated Tangible Net Worth so that it is not less than $11,000,000 as at
the end of each fiscal quarter.
H. Debt to Worth Ratio. Maintain Borrower's Consolidated
Indebtedness in relation to its Consolidated Tangible Net Worth so that
the ratio of Borrower's Consolidated Indebtedness to its Consolidated
Tangible Net Worth does not exceed a ratio of 1 to 1 measured as at the
end of each fiscal quarter.
I. Material Changes, Judgments, Defaults. Notify the Bank
immediately of any material adverse change in its financial condition
including the filing of any suits, judgments, or liens. Borrower shall
notify the Bank of any change in its name, identity, or corporate or
organizational structure. Borrower shall notify the Bank immediately of
the occurrence of any Event of Default under Article X hereof, or of any
event that with notice or the passage of time or both would constitute
such an Event of Default.
J. Other Reports and Inspections. Furnish to the Bank
additional information, reports, or financial statements as the Bank
may, from time to time, reasonably request.
The Borrower shall permit any person designated by the Bank to
inspect the property, assets, and books of the Borrower at reasonable
times, and shall discuss its affairs, finances, and accounts at
reasonable times with the Bank from time to time as often as may be
reasonably requested.
K. Taxes. Pay and discharge all taxes, assessments, levies,
and governmental charges upon the Borrower, its income and property,
prior to the date on which penalties are attached thereto, provided,
however, that the Borrower may challenge any tax by appropriate
proceedings diligently pursued so long as no lien or charge against the
assets of the Borrower attaches prior to the resolution of such contest.
L. Insurance. Maintain or cause to be maintained insurance, of
kinds and in amounts satisfactory to the Bank, with responsible
insurance companies on all of its real and personal properties in such
amounts and against such risks as are prudent, including but not limited
to, insurance against loss by fire and theft, worker's compensation
insurance, and liability insurance. The Borrower shall also maintain
flood insurance covering any of its properties located in flood zones.
The Borrower shall provide to the Bank, upon its request, a detailed
list of its insurance carriers and coverage and shall obtain such
additional insurance as the Bank may reasonably request. Insurance
policies shall show the Bank as loss payee as its interests may appear
and shall provide for at least thirty (30) day's prior notice of
cancellation to the Bank.
M. ERISA Compliance. Comply in all material respects with the
provisions of ERISA and regulations and interpretations related thereto.
N. Franchises/Permits/Laws. Preserve and keep in full force
and effect all franchises, permits, licenses, and other authority as are
necessary to enable it to conduct its business as being conducted on the
date of this Agreement and comply with all laws, regulations, and
requirements now in effect or hereafter promulgated by any properly
constituted governmental authority having jurisdiction over it.
ARTICLE IX
NEGATIVE COVENANTS OF BORROWER
So long as any obligations of Borrower to the Bank shall be
outstanding unless the Bank shall otherwise consent in writing, the
Borrower shall not, directly or indirectly:
A. Mortgages and Liens. Create, incur, assume, or allow to
exist, voluntarily or involuntarily, any mortgage, pledge, lien or other
encumbrance of any kind (including the charge upon property purchased
under conditional sales or other title retention agreements) upon, or
any security interest in, any assets of the Borrower, except: (i) a
springing lien similar to that provided to the Bank pursuant to Article
V hereof may be granted to another financial institution in the
Specified Collateral to secure up to an aggregate principal amount of
$3,000,000 of Indebtedness provided that such other financial institu
tion shall enter into an Inter-Creditor Agreement with the Bank which is
reasonably satisfactory to the Bank in form and substance, (ii) any
mortgage or security interest in real estate (including fixtures)
securing indebtedness in any amount (provided that the Borrower shall
remain in full compliance with all other covenants hereunder after
giving effect to such Indebtedness), and (iii) any mortgage, security
interest, pledge or assignment pertaining to assets of the Borrower
other than the Specified Collateral securing Indebtedness in addition to
that referred to in clauses "(i)" and "(ii)" above up to an aggregate
principal amount of $500,000.
B. Borrowings and Contingent Liabilities. Incur loans or
become liable in any manner with respect to borrowed monies excluding:
(1) trade accounts payable in the ordinary course of business, (2)
Pre-Existing Debt, and (3) Indebtedness from another financial
institution up to an aggregate principal amount of $3,000,000, (4)
Indebtedness secured by real estate (including fixtures) in any amount
(provided that Borrower shall remain in full compliance with all other
covenants hereunder after giving effect to such indebtedness), and (5)
other Indebtedness up to an aggregate amount of $500,000. Borrower
shall not assume, guarantee, endorse, contingently agree to purchase, or
otherwise become liable in any manner upon any obligation, contingent or
otherwise, whether funded or current, or guarantee the dividends of any
person, firm, corporation, or other entity, except for endorsement of
negotiable instruments for deposit, collection, or similar transactions
in the ordinary course of business and except for guarantees of the
obligations of persons or entities provided to the Bank.
C. Loans and Investments. Make loans or advances to any
person, firm, joint venture, corporation or other entity whatsoever
except for (i) normal advances to cover travel or similar expenses of
employees in the ordinary course of business, (ii) loans to or
investments in subsidiaries or affiliates of the Borrower not in excess
of One Hundred Thousand Dollars ($100,000) in the aggregate at any time
outstanding, provided however, that such affiliate loans or investments
may be prohibited at any time by the Bank in its sole discretion, and
(iii) loans which are subordinated in right of payment to the Bank in a
form reasonably acceptable to the Bank.
D. Mergers, Sales and Acquisitions. Without the prior written
consent of the Bank which will not be unreasonably withheld, (i) enter
into any merger or consolidation (including inter-company mergers and
consolidations), (ii) acquire all or substantially all the stock or
assets of any person, firm, joint venture, corporation, or other entity,
or (iii) sell, lease, transfer, or otherwise dispose of any of its
assets except in the ordinary course of its business; provided that such
mergers, consolidations and acquisitions shall be permitted if
immediately after giving effect thereto (i) Borrower shall be in full
compliance with all terms, conditions and covenants of this Agreement,
and (ii) the management or control of the Borrower shall not have been
materially changed (except for material changes approved in writing by
the Bank), and (iii) the type of business conducted by the Borrower is
not materially changed (except for material changes approved in writing
by the Bank).
E. Amendments. Without the prior written consent of the Bank
which will not be unreasonably withheld, amend or modify its Certificate
of Incorporation, By-laws, or other governing instruments.
F. Dividends and Purchase of Borrower Stock; Distributions.
Declare or pay any dividends or apply any of its property to the
purchase, redemption or other retirement of, or set apart any sum for
the payment of any dividends on, or make any other distribution by
reduction of capital or otherwise in respect of, any shares of the
Borrower's capital stock; provided, however, that (i) with respect to
any year Borrower may pay dividends and make capital distributions to
the Shareholders or may repurchase stock if and only if the sum of such
payments and distributions and purchases does not exceed 50% of
Borrower's Consolidated Net Income for such fiscal year, and (ii) no
Event of Default shall exist.
G. Judgments. Allow any judgments to exist against it in
excess of Fifty Thousand Dollars ($50,000) which are not fully covered
by insurance or for which an appeal or other proceeding for the review
thereof shall not have been taken and for which a stay of execution
pending such appeal shall not have been obtained.
H. Material Changes. Permit any material adverse change to be
made in the basic character of its business, management, nature of
operations as carried on at the date of execution of this Agreement, or
financial condition.
I. ERISA. Allow any action, event, or transaction to occur
which could give rise to a lien or encumbrance on Borrower's assets as a
result of the application of relevant provisions of the Employee
Retirement Income Security Act of 1974.
J. Margin Securities. Allow any proceeds of the Term Loan or
the Line of Credit to be used for the purpose of carrying margin
securities within the meaning of Regulation U of the Board of Governors
of the Federal Reserve.
ARTICLE X
DEFAULTS
A. Defaults. The following events (hereinafter called "Events
of Default") shall constitute defaults under this Agreement and under
any notes or obligations executed in connection herewith, provided
however, (i) with respect to subsections 2, 3, 6 and 7 of this Section
A that the Bank has given Borrower twenty (20) days notice of same and
such default remains unremedied within said twenty (20) day period, or
(ii) that twenty (20) days have passed since notice pursuant to Section
I of Article VIII hereof has been given to Bank by Borrower and such
default remains unremedied within said twenty (20) days period, or (iii)
that twenty (20) days have passed since Borrower should have given
notice pursuant to said Section I of Article VIII with respect to
defaults pursuant to subsection 2 of this section A.
1. Nonpayment. Failure to make any payments of any type under
the terms of this Agreement, or of any of the agreements contemplated
hereunder, or under the terms of any notes related hereto, within ten
(10) days after the same have become past due.
2. Performance. Failure by Borrower or any guarantor of
obligations covered hereby to observe or perform any other condition,
covenant, or term of this Agreement or any other agreement with the
Bank, excluding, however, Section I of Article VIII.
3. Reports. Failure to provide any report or financial
statement or certificate of no default, or to allow any inspection for
which this Agreement provides.
4. Representations. Failure of any representation or warranty
made in connection with the execution and performance of this Agreement
or any certificate of officers pursuant hereto, to be truthful, accurate
or correct in any material respect.
5. Financial Difficulties. Financial difficulties of Borrower
as evidenced by:
a. any admission in writing of inability to pay debts as they
become due; or
b. the filing of a voluntary petition in bankruptcy, or under
any chapters of the Bankruptcy Code, or under any Federal or
state statute providing for the relief of debtors, or any
similar proceeding shall be commenced against the Borrower
without the application or consent of the Borrower and such
proceeding shall continue undismissed for a period of 60
days, or an order for relief against the Borrower shall be
entered against the Borrower in an involuntary case under
the Bankruptcy Code; or
c. making an assignment for the benefit of creditors; or
d. consenting to the appointment of a trustee or receiver for
all or a major part of its property; or
e. the entry of a court order appointing a receiver or a
trustee for all or a major part of its property; or the
occurrence of any event, action, or transaction which could
give rise to a lien or encumbrance on Borrower's assets as a
result of application of relevant provisions of the Employee
Retirement Income Security Act of 1974.
6. Documents and Guarantees. Failure of any agreement,
document, or guarantee executed in connection herewith to remain in full
force and effect, or any repudiation of the same by any party thereto.
7. Repayment Impaired. Material or reasonably projected
material change or any other condition by reason of which the Bank in
good faith believes the Borrower's ability to timely repay its
obligations is impaired.
8. Cash Flow Failure. Failure by the Borrower to maintain its
Consolidated Debt Coverage Cash Flow in relation to its Consolidated
Current Portion of funded Indebtedness so that the ratio of its
Consolidated Debt Coverage Cash Flow to its Consolidated Current Portion
of Funded Debt fails to be greater than 1.5 to 1 measured at the end of
six consecutive quarters.
9. Default Under Other Indebtedness. The occurrence and
continuation of an event of default (after the expiration of applicable
notice, grace, or cure periods, if any) with respect to any Indebtedness
of Borrower in excess of $100,000.
B. Remedies. If any one or more Events of Default occur, the
Bank may, at its option, take either or both of the following actions at
the same or different times: (i) terminate any further commitments or
obligations of the Bank, and (ii) accelerate all obligations of Borrower
to the Bank such that the same become forthwith due and payable without
presentment, demand, protest, or other notice of any kind, all of which
are hereby expressly waived.
In case any such Events of Default shall occur, the Bank shall be
entitled to use any legal remedy, and the Bank shall be entitled to
recover judgment against the Borrower for all obligations of Borrower to
the Bank either before, or after, or during the pendency of any
proceedings for the enforcement of any security interests or guarantees
and, in the event of realization of any funds from any security or
guarantee and application thereof to the payment of the obligations due,
the Bank shall be entitled to enforce payment of and recover judgment
for all amounts remaining due and unpaid upon such obligations. The
Bank may proceed to protect and enforce its rights by any other
appropriate proceedings, including action for the specific performance
of any covenant or agreement contained in this Agreement and other
agreements contemplated hereunder held by the Bank.
ARTICLE XI
MISCELLANEOUS
A. Waiver. No failure on the part of the Bank to exercise and
no delay in exercising, and no course of dealing with respect to, any
right, power or privilege under this Agreement or the Notes shall
operate as a waiver thereof, nor shall any single or partial exercise of
any right, power or privilege under this Agreement or the Notes preclude
any other or further exercise thereof or the exercise of any other
right, power or privilege. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
B. Notices. All notices and other communications provided for
herein (including, without limitation, any modifications of, or waivers
or consents under, this Agreement) shall be given or made by telex,
telegraph, cable or in writing and telexed, telecopied, telegraphed,
cabled, mailed or delivered to the intended recipient at the "Address
for Notices" specified below its name on the signature page hereof or,
as to any party, at such other address as shall be designated by such
party in a notice to each other party. Except as otherwise provided in
this Agreement, all such communications shall be deemed to have been
duly given when transmitted by telex or telecopier, delivered to the
telegraph or cable office or personally delivered or, in the case of a
mailed notice, upon receipt, in each case given or addressed as
aforesaid.
C. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that the Bank may not assign
its rights under the Security Documents so long as the Security
Documents are held in escrow pursuant to Section B.1 of Article V.
D. Confidentiality. The Bank will use its best efforts to
maintain the confidentiality of all non-public information obtained by
the Bank pursuant to this Agreement and designated in writing by the
Borrower as confidential and useful to trade competitors or investors
("Confidential Information"); provided, however, that the Bank may
disclose any such Confidential Information to its officers, employees
and agents and to the independent auditors and counsel of the Bank, and
may disclose to other Persons any such Confidential Information (a) as
shall be required or requested by any municipal, state or federal
regulatory body or any successor thereto having or claiming to have
jurisdiction over the Bank, (b) as shall be required by or appropriate
in response to any summons or subpoena or in connection with any
litigation or (c) to the extent that the Bank shall believe it
appropriate in order to protect the Bank's interests in the Loans or in
order to comply with any law, order, regulation or ruling applicable to
the Bank.
E. Entire Agreement. This Agreement contains the entire
agreement and is the final expression between the Borrower and the Bank
with respect to all subject matters contained herein, and may not be
contradicted by evidence of any prior or contemporaneous agreement.
This Agreement cannot be amended, modified or changed in any way except
by a written instrument executed by the Borrower and the Bank.
F. Severability. In the event that any one or more of the
provisions contained in the Revolving Line Note of this Agreement, or
any other agreement, document, or guarantee related hereto shall, for
any reason, be held invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any
other provision of the Revolving Line Note, this Agreement, or such
other agreement, document, or guarantee.
G. Governing Law. This Agreement and the notes and agreements
hereunder, together with all of the rights and obligations of the
parties hereto, shall be construed, governed and enforced in accordance
with the laws of the State of New York.
H. Set-off. The Bank shall have a right of set-off, in the
full amount of all of Borrower's obligations to the Bank, against any
deposits, assets held by, or other amounts owed by the Bank to or held
by the Bank for, the Borrower as well as a lien on any and all property
of the Borrower, which is or may be in the Bank's possession.
ARTICLE XII
Definitions
A. Accounting Terms and Determinations, Generally. Unless
otherwise specified herein, all accounting terms used and/or defined
herein shall be interpreted, all determinations with respect to
accounting matters hereunder shall be made, and all financial statements
and certificates and reports as to financial matters required to be
furnished to the Bank hereunder shall be prepared, in accordance with
GAAP as in effect from time to time, applied on a basis consistent with
the audited consolidated financial statements of the Borrower and its
consolidated Subsidiaries (if any). The term "inter-company items"
means debits and credits between a Person and its Subsidiaries or
between such Subsidiaries. All references to a Subsidiary or subsidiar
ies of any Person shall be deemed to mean if any shall exist. For so
long as such Person has no Subsidiary, all definitions and covenants
referring to such Person and its Subsidiaries on a consolidated basis
and all references to consolidated financial statements shall be deemed
to refer to such Person alone, but shall remain applicable in all other
respects.
B. As used in this Agreement, the following terms shall have the
following meanings.
"Consolidated Current Assets" means, in respect of a Person and
its Subsidiaries on a consolidated basis, all assets of such Person and
its Subsidiaries which should, in accordance with GAAP be classified as
current
assets after eliminating inter-company items, but in any event excluding
any assets which are pledged or deposited as security for, or for the
purpose of paying, any Indebtedness (other than Indebtedness incurred
pursuant to and under this Agreement).
"Consolidated Current Liabilities" means, in respect of a Person
and its Subsidiaries on a consolidated basis, all Indebtedness of such
Person and its Subsidiaries which should, in accordance with GAAP, be
classified as current liabilities after eliminating inter-company items.
"Consolidated Debt Coverage Cash Flow" means, in respect of a
Person and its Subsidiaries on a consolidated basis and in respect of
any period of calculation, the sum of Consolidated Net Income, plus
Consolidated Depreciation, plus Consolidated Non-Cash Expense Items.
"Consolidated Depreciation" means, in respect of a Person and its
Subsidiaries on a consolidated basis and in respect of any period of
calculation, the economic depreciation of the assets of such Person and
its Subsidiaries computed in accordance with GAAP and as such item is
utilized from time to time in the computation of such Person's
Consolidated Net Income.
"Consolidated Current Portion of Funded Indebtedness" means, in
respect of a Person and its Subsidiaries on a consolidated basis and in
respect of any period of calculation, all principal paid in respect of
current maturities of Consolidated Funded Indebtedness.
"Consolidated Funded Indebtedness" means, in respect of a Person
and its Subsidiaries on a consolidated basis, all Funded Indebtedness of
such Person and its Subsidiaries after eliminating inter-company items.
"Consolidated Net Income" means, in respect of a Person and its
Subsidiaries on a consolidated basis and in respect of any period of
calculation, the net income of such Person and its Subsidiaries computed
in accordance with GAAP and as such item is reported from time to time
on such Person's consolidated statement of income and retained earnings.
"Consolidated Non-Cash Expense Items" means, in respect of a
Person and its Subsidiaries on a consolidated basis and in respect of
any period of calculation, all non-cash charges or credits deducted from
income to obtain net income.
"Consolidated Tangible Net Worth" means, in respect of Borrower
and its Subsidiaries on a consolidated basis, the consolidated
stockholders' equity in such Person and its Subsidiaries determined in
accordance with GAAP, except that there shall be deducted therefrom all
intangible assets (other than leasehold improvements) of the Borrower
and its Subsidiaries, such as organization costs, unamortized debt
discount and expense, goodwill, patents, trademarks, copyrights,
contractual franchises, research and development expenses, any amount
reflected as treasury stock and all amounts due from Affiliates.
"Consolidated Working Capital" means the excess of Consolidated
Current Assets over Consolidated Current Liabilities on any date on
which such computation is made.
"Expiration Date" means July 31, 1994.
"Funded Indebtedness" means and includes (i) any Indebtedness
which matures more than one year from the date of determination, (ii)
any Indebtedness regardless of its term, if such Indebtedness is
renewable pursuant to the terms thereof, or of a revolving credit or a
similar agreement, to a date more than one year from the date of
determination, and (iii) any Indebtedness, regardless of its term, which
by its terms or the agreement pursuant to which it is issued may be paid
with the proceeds of another Indebtedness which may be incurred pursuant
to the terms of such first mentioned Indebtedness or of such agreement,
which other Indebtedness matures more than one year from the date of
determination.
"GAAP" shall mean generally accepted accounting principles
consistently applied in the United States.
"Guaranty" shall mean, with respect to any Person, all guaranties
of, and all other obligations which in effect guaranty any Indebtedness,
dividend or other obligation of any other Person (the "primary obligor")
in any manner, including obligations incurred through an agreement,
contingent or otherwise, by such Person:
(1) to purchase such Indebtedness or obligation or any Property
constituting security therefor;
(2) to advance or supply funds
(A) for the purchase or payment of such Indebtedness or
obligation, or
(B) to maintain working capital or any balance sheet or
income statement condition;
(3) to lease Property or to purchase securities or other
property or services, primarily for the purpose of assuring
the owner of such Indebtedness or obligation of the ability
of the primary obligor to make payment of the indebtedness
or obligation; or
(4) otherwise to assure the owner of such Indebtedness or
obligation, or the primary obligor, against loss;
but excluding endorsements in the ordinary course of business of
negotiable instruments for deposit or collection.
The amount of any Guaranty shall be deemed to be the maximum
amount for which such Person may be liable upon the occurrence of any
contingency or otherwise, under or by virtue of the Guaranty.
"Indebtedness" shall mean all items (other than capital stock,
additional paid-in capital, retained earnings and deferred credits)
which in accordance with GAAP would be included in determining total
liabilities as shown on the liability side of a balance sheet as at the
date on which Indebtedness is to be determined. "Indebtedness" shall
also include, whether or not so reflected, (i) indebtedness, obliga
tions, and liabilities secured by any mortgage, pledge or lien existing
on property owned subject to such mortgage, pledge or lien whether or
not the indebtedness, obligations or liabilities secured thereby shall
have been assumed, (ii) all Guaranties, (iii) obligations as lessee
under leases which should have been or should be reported as capital
leases in accordance with GAAP, and (iv) the amount of any reimbursement
obligation in respect of any letter of credit, but, if such letter of
credit is issued in connection with the account party's ordinary course
of business such as but not limited to performance bonds or other
similar bonds, the purchase of goods and the payment of insurance
premiums, only to the extent that drafts under such letter of credit
shall have been honored and, in any case, only to the extent that the
liability covered by such letter of credit would not be included in
determining total liabilities as shown on the liability side of a
balance sheet as at the date on which Indebtedness is to be determined,
but shall not include (a) any indebtedness evidences of which are held
in treasury (but the subsequent resale of such indebtedness shall be
deemed to constitute the creation thereof), (b) any particular
indebtedness if, upon or prior to the maturity thereof, there shall have
been deposited with the proper depository, in trust, money (or evidence
of such indebtedness as permitted by the instrument creating such
indebtedness) in the necessary amount to pay, redeem or satisfy such
indebtedness, and (c) any portion of any indebtedness to the extent that
there shall have been deposited with the proper depository, in trust,
money or cash equivalents to pay, redeem or satisfy a portion of such
indebtedness, whether pursuant to sinking fund payments or any similar
or other arrangement, provided, however, that, in subclauses (b) and
(c), if such deposit is not irrevocable, it must be expressly required
by the terms of such indebtedness or by a financing arrangement with
respect thereto with a party which is not an Affiliate.
"Loans" means the principal amount of all debt evidenced by the
Notes (including all advances under the Line of Credit) and all interest
and charges due thereon.
"Notes" means the Master Note and the Term Loan Note.
"Person" means an individual, a corporation, a company, a
voluntary association, a partnership, a joint venture, a trust, an
unincorporated organization or a government or any agency, instrumental
ity or political subdivision thereof.
"Pre-Existing Debt" means all debt of the Borrower for payment of
borrowed money (and excluding trade debt) and all commitments by any
Person to make loans of money to Borrower in existence on the date of
this Agreement, including refinancing of such debt on substantially
similar terms.
"Pre-Existing Liens" means all contractual liens, mortgages and
security interests in existence on the date of this Agreement whereby an
interest in the Borrower's property is granted as security for payment
of Indebtedness.
"Security Agreement" shall mean the Security Agreement executed
and delivered by the Borrower to the Bank of even date herewith pursuant
to Section A of Article V hereof.
"Specified Collateral" means all of the Borrower's "Accounts",
"Inventory", "Chattel Paper" and "General Intangibles", as such terms
are further defined in the Security Agreement.
"Specified Event" means the failure by the Borrower to maintain
its Consolidated Debt Coverage Cash Flow in relation to its Consolidated
Current Portion of Funded Indebtedness so that the ratio of its
Consolidated Debt Coverage Cash Flow to its Consolidated Current Portion
of Funded Debt is greater than 1.5 to 1 measured at the end of any
fiscal quarter of the Borrower.
"Subsidiary" shall mean, in respect of any Person, any corpora
tion, association or partnership of which at least a majority of the
outstanding Voting Stock, voting power or ownership interest is at the
time directly or indirectly owned or controlled by such Person or one or
more of the Subsidiaries or by such Person and one or more of the
Subsidiaries.
"Voting Stock" shall mean the shares of stock of a corporation
having by the terms thereof ordinary voting power to elect the board of
directors of such corporation (irrespective of whether or not at the
time stock of any other class or classes of such corporation shall have
or might have voting power by reason of the happening of any contin
gency).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the day and year first above written.
DETECTION SYSTEMS, INC.
By: /s/ Frank J. Ryan
Name: Frank J. Ryan
Title: Vice President
Address for Notices:
130 Perinton Parkway
Fairport, New York 14450
Attention: Frank J. Ryan
Vice President
NORSTAR BANK, National Association
By: /s/ Jeffrey S. Holmes
Name: Jeffrey S. Holmes
Title: Vice President
Payment Office and Address for Notices:
One East Avenue
Rochester, New York 14638
Attention: Detection Systems
Account Officer
<PAGE>
EXHIBIT B
TERM LOAN NOTE
Rochester, New York
Date: July 31, 1994
$
FOR VALUE RECEIVED, THE UNDERSIGNED, DETECTION SYSTEMS, INC., a
New York corporation ("Borrower"), hereby promises to pay to the order
of NORSTAR BANK, NATIONAL ASSOCIATION ("Bank") at its principal office
at One East Avenue, Rochester, New York 14638, the principal sum of
Dollars ($ ) on August 1, 1999.
Unpaid principal shall bear interest at a rate per annum equal to
six-tenths of one percent (.6% or .006) above the "prime" commercial
loan rate of the Bank established or announced from time to time (or the
equivalent thereof) until paid in full, but never exceeding the maximum
rate allowed by law. All changes in the interest rate due to a change
in the prime rate shall take place automatically and without notice to
Borrower as of the effective date of the change in such prime rate.
Interest shall be calculated on the basis of a 360 day year. Accrued
interest is due and payable on the first business day of each calendar
month beginning September 1, 1994 and continuing until the principal is
paid in full.
The Borrower shall make sixty (60) monthly principal payments in
the amount of $ commencing on September 1, 1994 and
continuing on the first day of each of the next succeeding fifty-nine
(59) months. All remaining principal and interest shall be due and
payable in full on August 1, 1999.
This Note is the "Term Loan Note" referred to in, and is entitled
to the benefits of the Credit Agreement dated as of December 31, 1991,
between Borrower and the Bank which Agreement among other things
contains provisions for prepayment and for the acceleration of the
maturity hereof upon the happening of certain stated events.
Any payment not received within ten (10) days after the date due
may be subject to an additional late charge equal to two percent (2%) of
the payment due.
This Note is freely prepayable at any time in whole or in part
without premium or penalty.
DETECTION SYSTEMS, INC.
By
Its
<PAGE>
EXHIBIT C-1
DRAFT OF OPINION OF COUNSEL
, 1991
Norstar Bank, National Association
One East Avenue
Rochester, New York 14238
We are general legal counsel to Detection Systems, Inc. (the
"Company"), a corporation having a principal place of business at 130
Perinton Parkway, Rochester, New York 14450. As such, we are familiar
with the character and operation of the Company. We are admitted to
practice law in the State of New York.
We have reviewed the following documents executed and delivered by
the Company and the Subsidiaries this date (hereinafter collectively
referred to as the "Contract Documents").
1. Credit Agreement between the Company and you.
2. Master Note issued by the Company to you pursuant to the
Credit Agreement.
3. Accounts, Inventory, Chattel Paper and General Intangibles
Securities Agreement granted by the Company to you.
We have examined the originals or conformed copies of such
corporate records, agreements and instruments of the Company, certifi
cates of public officials and of officers of the Borrower, and such
other documents and records, and such matters of law, as we have deemed
appropriate as a basis for the opinions hereinafter expressed.
In rendering this opinion, we have assumed, without investigation,
the authenticity of any document or other instrument submitted to us as
an original, the conformity to the originals of any documents or other
instruments submitted to us as a copy, and the genuineness of all
signatures on such originals or copies.
Based upon and subject to the foregoing, and upon an examination
of such other documents and instruments and an investigation of such
other matters of law as we have deemed necessary to render this opinion,
we are of the opinion that:
1. The Company is a corporation, duly organized, validly
existing and in good standing under the laws of the State of New York
and is duly qualified in those jurisdictions where the nature of the
business transacted by the Company makes such qualification necessary.
2. The Company has all necessary power and authority to enter
into the Contract Documents and to perform the terms and provisions
thereof.
3. The Company has taken all necessary action to authorize the
execution, delivery and performance of the Contract Documents such that
the Contract Documents constitute legal, valid, and binding agreements
of the Company and the Subsidiaries, enforceable in accordance with
their terms, except
(a) to the extent that enforceability may be subject to
limitations imposed by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or
at law) including, among others, limitations on the availability of
equitable remedies; and
(b) to the extent that enforceability may be limited by
applicable bankruptcy, reorganization, arrangements, insolvency,
moratorium or similar laws affecting the enforcement of creditors'
rights generally as at the time in effect.
4. The execution, delivery, and performance by the Company and
the Subsidiaries of the Contract Documents does not and will not violate
or contravene any law applicable to the Company or the Subsidiaries,
their assets, any provision of their constitutional documents, any
governmental rule, regulation, or order applicable to the Company and
the Subsidiaries, or the provisions of any indenture, mortgage, contract
or other agreement or instrument to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiar
ies is bound.
5. All governmental and other consents that are required to
have been obtained by the Company or the Subsidiaries with respect to
the Contract documents or any supporting documents to which the Company
or any of the Subsidiaries is a party have been obtained and are in full
force and effect, and all conditions of any such consents have been
complied with.
6. There is no action, proceeding or investigation pending or
threatened (or any basis known therefor) which might result, either in
any case or in the aggregate, in any material adverse change in the
business, operations, affairs, condition (financial or otherwise),
properties or prospects of the Company or in any material liability on
the part of the Company.
Very truly yours,
<PAGE>
EXHIBIT C-2
DRAFT OF OPINION OF COUNSEL
, 1994
Norstar Bank, National Association
One East Avenue
Rochester, New York 14238
We are general legal counsel to Detection Systems, Inc. (the
"Company"), a corporation having a principal place of business at 130
Perinton Parkway, Rochester, New York 14450. As such, we are familiar
with the character and operation of the Company. We are admitted to
practice law in the State of New York.
We have reviewed the following documents executed and delivered by
the Company and the Subsidiaries this date (hereinafter collectively
referred to as the "Contract Documents").
1. Credit Agreement between the Company and you.
2. Term Note issued by the Company to you pursuant to the
Credit Agreement.
3. Accounts, Inventory, Chattel Paper and General Intangibles
Securities Agreement granted by the Company to you.
We have examined the originals or conformed copies of such
corporate records, agreements and instruments of the Company, certifi
cates of public officials and of officers of the Borrower, and such
other documents and records, and such matters of law, as we have deemed
appropriate as a basis for the opinions hereinafter expressed.
In rendering this opinion, we have assumed, without investigation,
the authenticity of any document or other instrument submitted to us as
an original, the conformity to the originals of any documents or other
instruments submitted to us as a copy, and the genuineness of all
signatures on such originals or copies.
Based upon and subject to the foregoing, and upon an examination
of such other documents and instruments and an investigation of such
other matters of law as we have deemed necessary to render this opinion,
we are of the opinion that:
1. The Company is a corporation, duly organized, validly
existing and in good standing under the laws of the State of New York
and is duly qualified in those jurisdictions where the nature of the
business transacted by the Company makes such qualification necessary.
2. The Company has all necessary power and authority to enter
into the Contract Documents and to perform the terms and provisions
thereof.
3. The Company has taken all necessary action to authorize the
execution, delivery and performance of the Contract Documents such that
the Contract Documents constitute legal, valid, and binding agreements
of the Company and the Subsidiaries, enforceable in accordance with
their terms, except
(a) to the extent that enforceability may be subject to
limitations imposed by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or
at law) including, among others, limitations on the availability of
equitable remedies; and
(b) to the extent that enforceability may be limited by
applicable bankruptcy, reorganization, arrangements, insolvency,
moratorium or similar laws affecting the enforcement of creditors'
rights generally as at the time in effect.
4. The execution, delivery, and performance by the Company and
the Subsidiaries of the Contract Documents does not and will not violate
or contravene any law applicable to the Company or the Subsidiaries,
their assets, any provision of their constitutional documents, any
governmental rule, regulation, or order applicable to the Company and
the Subsidiaries, or the provisions of any indenture, mortgage, contract
or other agreement or instrument to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiar
ies is bound.
5. All governmental and other consents that are required to
have been obtained by the Company or the Subsidiaries with respect to
the Contract documents or any supporting documents to which the Company
or any of the Subsidiaries is a party have been obtained and are in full
force and effect, and all conditions of any such consents have been
complied with.
6. There is no action, proceeding or investigation pending or
threatened (or any basis known therefor) which might result, either in
any case or in the aggregate, in any material adverse change in the
business, operations, affairs, condition (financial or otherwise),
properties or prospects of the Company or in any material liability on
the part of the Company.
Very truly yours,
<PAGE>
CREDIT AGREEMENT AMENDMENT
THIS CREDIT AGREEMENT AMENDMENT is made this 31st day of March,
1992 between Norstar Bank, National Association, a national banking
corporation with offices at One East Avenue, Rochester, New York 14638
(called the "Bank") and Detection Systems, Inc., a New York corporation
doing business at 130 Perinton Parkway, Fairport, New York 14450 (called
the "Borrower").
WHEREAS, the Bank and the Borrower entered into a Credit Agreement
dated as of December 31, 1991 (the "Credit Agreement"); and
WHEREAS, the Bank has agreed with the Borrower to modify certain
terms of the Credit Agreement; and
WHEREAS, the Borrower has agreed that its obligations under the
Credit Agreement shall continue notwithstanding the modifications,
NOW, THEREFORE, the Borrower and the Bank agree as follows:
1. The second paragraph of Article VIII, Section A, shall be
amended to read as follows:
Borrower shall also furnish to the Bank its unaudited
financial statements not more than forty-five (45) days after the close
of each fiscal quarter. Said statements shall: (i) be in reasonable
detail satisfactory to the Bank, (ii) be prepared in accordance with
generally accepted accounting principles, (iii) include at least a
balance sheet and a statement of profit and loss, (iv) be accompanied by
a certificate of the chief financial officer of Borrower to the effect
that no Event of Default, or event which with the passage of time or
notice or both would constitute an Event of Default, has occurred
pursuant to Article X hereof (or specifying any such default), and (v)
be certified to be true and correct by the chief financial officer of
Borrower. If the Borrower shall create or acquire any Subsidiary, the
financial statements required by this paragraph shall be deemed to refer
to consolidated and consolidating statements of each type that is
required.
2. Article IX, Section F, shall be amended to read as
follows:
F. Dividends and Purchase of Borrower Stock; Distributions.
Declare or pay any dividends or apply any of its property to the
purchase, redemption or other retirement of, or set apart any sum for
the payment of any dividends on, or make any other distribution by
reduction of capital or otherwise in respect of, any shares of the
Borrower's capital stock; provided, however, that (i) with respect to
any year Borrower may pay dividends and make capital distributions to
the Shareholders or may repurchase stock if and only if the sum of such
payments and distributions and purchases does not exceed 50% of
Borrower's Consolidated Net Income for the immediately preceding fiscal
year, and (ii) no Event of Default shall exist.
IN WITNESS WHEREOF, the parties have caused this Credit Agreement
Amendment to be executed by their duly authorized officers as of the
date above written.
NORSTAR BANK, N.A.
By: /s/ Jeffery S. Holmes
Title: Vice President
DETECTION SYSTEMS, INC.
By: /s/ Frank J. Ryan
Title: Vice President
<PAGE>
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT, is made this 29th day
of March, 1995, between FLEET BANK, successor by merger to Norstar Bank,
National Association, at One East Avenue, Rochester, New York 14638
(called the "Bank") and DETECTION SYSTEMS, INC., at 130 Perinton
Parkway, Fairport, New York 14450 (called the "Borrower") agree as
follows:
WHEREAS, the Bank and the Borrower entered into a certain Credit
Agreement dated as of December 31, 1991, which credit agreement was
amended by a certain Credit Agreement Amendment dated March 31, 1992
(collectively, the "Credit Agreement"); and
WHEREAS, the Bank has agreed with the Borrower to modify certain
terms of the Credit Agreement; and
WHEREAS, the Borrower has agreed that its obligations under the
Credit Agreement shall continue notwithstanding the modifications,
NOW THEREFORE, the Bank and the Borrower agree as follows:
1. Article I of the Credit Agreement is hereby amended to read in its
entirety as follows:
LOANS
A. Line of Credit. The Bank shall make available to the Borrower a
revolving line of credit (the "Line of Credit") in a maximum aggregate
amount not to exceed $4,500,000.
The Borrower from time to time may request advances and may
reborrow hereunder so long as aggregate amounts outstanding under the
Line of Credit at any time never exceed the maximum amount available
hereunder. Advances may be requested in person, in writing, or by
telephone. Checks written on the Borrower's Cash Concentration Account
(described herein) shall be treated as requests for advances under the
Line of Credit.
The principal amount of all loans outstanding from time to time
under the Line of Credit shall bear interest, payable on the first day
of each calendar month and at the Expiration Date, at one hundred (100)
basis points above the LIBOR Rate, but never exceeding the Prime Rate,
and never exceeding the maximum rate allowed by law. Changes in the
rate of interest applicable to the Line of Credit shall become effective
automatically and without notice on each Rate Change Date. Interest
shall be calculated based on actual days elapsed divided by a year of
360 days.
The Bank may increase the rate of interest on loans outstanding
under the Line of Credit by one hundred (100) basis points in the event
that the Borrower fails to maintain all of its depository relationships
with the Bank.
All cash or cash equivalent proceeds from the sale of the
Borrower's inventory, and all proceeds from the collection of the
Borrower's accounts receivable shall be deposited in a Cash
Concentration Account with the Bank. So long as amounts are outstanding
under the Line of Credit, said Account shall be accessible only by the
Bank and all collected funds in excess of $125,000 shall be applied
daily to payment of the Borrower's indebtedness under the Line of
Credit, which indebtedness shall be evidenced by an Amended and Restated
Master Note in substantially the form of Exhibit A attached hereto and
made a part hereof (the "Amended and Restated Master Note"). The Line
of Credit shall terminate on the Expiration Date.
The Borrower shall pay to the Bank in advance each year an annual
facility fee equal to sixty (60) basis points (.60%) of the maximum
available credit under the Line of Credit.
B. Term Loan. Subject to the terms and conditions of this Agreement,
the Bank shall loan to the Borrower on the Expiration Date the unpaid
principal balance of the Line of Credit outstanding on the Expiration
Date (the "Term Loan"). The Term Loan shall be evidenced by an Amended
and Restated Term Note in substantially the form attached hereto as
Exhibit B (the "Amended and Restated Term Note"). Proceeds of the Term
Loan shall be used to repay the Line of Credit.
Outstanding amounts of the Term Loan shall bear interest until
paid in full at one hundred sixty (160) basis points above the LIBOR
Rate, but never exceeding the Prime Rate plus .60%, and never exceeding
the maximum rate allowed by law. Changes in the rate of interest
applicable to the Amended and Restated Term Note shall become effective
automatically and without notice on each Rate Change Date. Interest
shall be calculated based on actual days elapsed divided by a year of
360 days.
The Bank may increase the rate of interest on outstanding amounts
of the Term Loan by one hundred (100) basis points in the event that the
Borrower fails to maintain all of its depository relationships with the
Bank.
The Borrower shall make sixty (60) equal monthly principal
payments pursuant to the Amended and Restated Term Note in substantially
equal amounts based upon the principal amount of the Amended and
Restated Term Note and pursuant to a schedule to be annexed to the
Amended and Restated Term Note commencing on the first day of the second
calendar month following the Expiration Date (December 1, 1997), and
continuing on the first day of each of the next succeeding month. Each
principal payment shall be accompanied by a payment of all accrued
interest. All remaining principal and interest shall be due and payable
in full on October 31, 2002.
C. Late Payments. Any payment of any kind (including without
limitation a payment of principal, interest, or expenses) not made
within ten (10) days after the same shall become due under this
Agreement or the Notes shall be subject to an additional late payment
charge equal to five percent (5%) of the payment due.
2. Article III of the Credit Agreement is hereby amended to read in
its entirety as follows:
PREPAYMENTS
The Line of Credit shall be freely prepayable in whole or in part
at the option of the Borrower, but only on a Rate Change Date and after
five (5) business days' prior written notice, or upon payment of all
Break Costs. The Term Loan shall be freely prepayable in whole or in
part at the option of Borrower, but only on a Rate Change Date and after
five (5) business days' prior written notice, or upon payment of all
Break Costs. All prepayments shall be applied first to items described
in Article IV hereof, then to all accrued interest and then unless
otherwise specifically directed by the Borrower, in such order and to
such obligations as the Bank in its sole discretion may choose without
penalty.
3. (a) Article VIII, Sections F and G of the Credit Agreement are
hereby amended to read in their entireties as follows:
F. Minimum Working Capital. Maintain the Borrower's
Consolidated Working Capital so that it is not less than $9,000,000 as
at the end of each fiscal quarter.
G. Minimum Tangible Net Worth. Maintain the Borrower's
Consolidated Tangible Net Worth so that it is not less than $15,000,000
as at the end of each fiscal quarter.
(b) Article VIII, is hereby further amended to redesignate
Sections "I," "J," "K," "L," "M," and "N" to "J," "K," "L," "M," "N,"
and "O" respectively.
(c) Article VIII, is hereby further amended to add new Section
"I" to read in its entirety as follows:
I. Minimum Debt Service Coverage. Maintain the Borrower's
Consolidated Debt Coverage Cash Flow in relation to its Consolidated
Current Portion of funded Indebtedness so that the ratio of its
Consolidated Debt Coverage Cash Flow to its Consolidated Current Portion
of Funded Debt is at least equal to 1.5 to 1 measured as at the end of
each fiscal quarter.
4. Article X, Section 8 of the Credit Agreement is hereby amended to
read in its entirety as follows:
8. Cash Flow Failure. Failure by the Borrower to maintain its
Consolidated Debt Coverage Cash Flow in relation to its Consolidated
Current Portion of funded Indebtedness so that the ratio of its
Consolidated Debt Coverage Cash Flow to its Consolidated Current Portion
of Funded Debt fails to be greater than 1.5 to 1 measured at the end of
each fiscal quarter.
5. Article XII of the Credit Agreement is hereby amended to include
the following definitions in their entireties in alphabetical order as
follows:
"Break Costs" shall mean an amount equal to the amount (if
any) required to compensate the Bank for any additional losses
(including without limitation any loss, cost, or expense incurred by
reason of the liquidation or reemployment of deposits or funds acquired
by the Bank to fund or maintain the Line of Credit and Term Loan),
costs, and expenses (including without limitation penalties) it may
reasonably incur as a result of or in connection with prepayments by the
Borrower.
"Increased Cost" means any additional amounts sufficient to
compensate any Bank for any increased costs of funding or maintaining
the Borrower's obligations to the Bank, including those related to this
Agreement and obligations under the Amended and Restated Master Note and
the Amended and Restated Term Note, as a result of any law or guideline
adopted pursuant to or arising out of the July 1988 report of the Basle
Committee on Banking Regulations and Supervisory Practices entitled
"International Convergence of Capital Measurement and Capital
Standards", or the adoption after the date of this Agreement of any law
or guideline regarding capital adequacy, or any change in any of the
foregoing or in the interpretation or administration of any of the
foregoing by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or
compliance by the Bank or the Bank's holding company, if any, with any
request or directive regarding capital adequacy (whether or not having
the force of law) of any such authority, central bank or comparable
agency, which has or would have the effect of reducing the rate of
return on the Bank's capital or on the capital of the Bank's holding
company, if any, as a consequence of the transactions contemplated by
this Agreement and all related documents and agreements, the existence
of the Bank's commitment, or the notes bearing interest at a rate based
on the LIBOR Rate, to a level below that which the Bank or the Bank's
holding company could have achieved but for such adoption, change or
compliance (taking into consideration such Bank's policies on capital
adequacy).
"LIBOR Rate" shall mean, with respect to any interest rate
period, the rate per anum equal to the quotient obtained by dividing
(and rounding to the nearest 1/100 of 1%) (i) LIBOR as defined below by
(ii) a percentage equal to 100% minus the then stated maximum rate of
all reserve requirements pursuant to Regulation D of the Federal Reserve
Board, including without limitation any marginal, emergency,
supplemental, special, or other reserves required by applicable law. The
LIBOR Rate shall be further adjusted to reflect any Increased Cost.
LIBOR is the rate per annum equal to the rate of interest per annum at
which deposits in United States Dollars are offered to prime banks in
the London interbank market at 11:00 a.m. (London time) on the day (the
"Interest Setting Date") two banking days prior to the respective Rate
Change Date determined on the basis of the provisions set forth below:
(A) On the Interest Setting Date, the Bank will determine
the interest rate for deposits in U.S. Dollars for a one-month period
which appears on the Telerate Page 3750 as of 11:00 a.m., London time on
such date or if such page on such service ceases to display such
information, such other page as may replace it on that service for the
purpose of display of such information (the "Telerate Rate"). If such
rate does not appear on the Telerate, then the rate will be determined
in accordance with (B) below.
(B) If the Bank is unable to determine the Telerate Rate,
then on the Interest Setting Date, the Bank will determine the
arithmetic mean (rounded if necessary to the nearest one-hundredth
percent (1/100%)) of the interest rate for a one-month period quoted on
Reuters Screen page "LIBO" or (1) if such page on such service ceases to
display such information, such other page as may replace it on that
service for the purpose of displaying such information or (2) if that
service ceases to display such information, such page as displays such
information on such other service (or, if more than one, that one
approved by the Bank as may replace the Reuters Screen) as at or about
11:00 a.m. (London time) on that Interest Setting Date (the rate quoted
as aforesaid being the "LIBO Screen Rate"). If the Bank is to make a
determination pursuant to this paragraph and one or more of the LIBO
Screen Rates required for such determination shall be unavailable, the
determination shall be made on the basis of those rates which are
available.
If, subsequent to the date of this Agreement, LIBOR cannot be
determined pursuant to this formula or there is any change in any law or
application thereof that makes it unlawful, or any central bank or other
governmental authority asserts that it is unlawful, for the Bank to hold
obligations of the Borrower to the Bank if the rate is determined with
reference to the LIBOR Rate (collectively, a "LIBOR End Date"), then the
last determinable LIBOR Rate shall be used to calculate interest during
the period between the LIBOR End Date and the earlier of (i) the date on
which the Bank and the Borrower agree upon a mutually acceptable
alternative base rate, or (ii) the date five (5) business days after the
LIBOR End Date. If the Bank and the Borrower cannot agree upon a
mutually acceptable base rate within five (5) business days after a
LIBOR End Date, commencing on the next day interest shall be calculated
at the prime commercial loan rate of the Bank established or announced
from time to time (the "Prime Rate").
"Rate Change Date" shall mean the first day of each month.
6. The term "Expiration Date" defined in Article XII of the Credit
Agreement is hereby amended to be defined as "October 31, 1997."
7. The terms "Master Note" and "Term Note" in the Credit Agreement
are hereby amended to read "Amended and Restated Master Note" and
"Amended and Restated Term Note," respectively, throughout the Credit
Agreement.
8. Exhibits A and B to the Credit Agreement are respectively amended
to read in their entirety in the form of Exhibits A and B attached to
and made a part of this Amendment.
9. All other terms and conditions of the Credit Agreement shall
continue unchanged in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized, respective officers as of the day and
year first written above.
FLEET BANK
By: /s/ Jeffery S. Holmes
Title: Vice President
DETECTION SYSTEMS, INC.
By: Frank J. Ryan
Title: Vice President
<PAGE>
STATE OF NEW YORK)
COUNTY OF MONROE ) SS.:
On the 29th day of March, 1995, before me personally came FRANK
RYAN, to me known, who, being by me duly sworn, did depose and say that
he resides at PITTSFORD, NY; that he is the VICE PRESIDENT of DETECTION
SYSTEMS, INC., the corporation described in the foregoing instrument,
and that he executed said instrument by authority of the Board of
Directors of said corporation.
/S/ Betty L. Green
Notary Public
Betty L. Green
Notary Public, State of New York
No. 4999625
Qualified in Ontario County
Commission Expires 7/27/96
STATE OF NEW YORK)
COUNTY OF MONROE ) SS.:
On the 19th day of April, 1995, before me personally came Jeffery
S. Holmes, to me known, who, being by me duly sworn, did depose and say
that he resides in Pittsford, New York; that he is the Vice President of
FLEET BANK, the bank described in the foregoing instrument, and that he
executed said instrument by authority of the Board of Directors of said
bank.
/s/ Ellen R. Gerhardy-Morgan
Notary Public
Ellen R. Gerhardy-Morgan
Notary Public, State of New York
Qualified in Genesee County
My commission expires 3/30/97
<PAGE>
EXHIBIT A
AMENDED AND RESTATED MASTER NOTE
$4,500,000 March , 1995
Rochester, New
York
FOR VALUE RECEIVED, DETECTION SYSTEMS, INC., a New York
corporation with offices at 130 Perinton Parkway, Fairport, New York
14450 (the "Borrower") hereby promises to pay to the order of FLEET BANK
("Bank"), the principal sum of Four Million Five Hundred Thousand
Dollars ($4,500,000), or if less, the aggregate unpaid principal amount
of all advances made by Bank to the Borrower pursuant to the Line of
Credit.
The Bank shall maintain a record of amounts of principal and
interest payable by the Borrower from time to time, and the records of
the Bank maintained in the ordinary course of business shall be prima
facie evidence of the existence and amounts of the Borrower's
obligations recorded therein. In addition, the Bank may send by
facsimile transmission (with confirmed receipt) or deliver a credit memo
to the Borrower indicating the date and amount of each advance hereunder
(but any failure to do so shall not relieve the Borrower of the
obligation to repay any advance). Unless the Borrower questions the
accuracy of a credit memo within two (2) business days after such
transmission or delivery by the Bank, the Borrower shall be deemed to
have accepted and be obligated by the terms of each such credit memo as
accurately representing an advance hereunder. In the event of transfer
of this Amended and Restated Note, or if the Bank shall otherwise deem
it appropriate, the Borrower hereby authorizes the Bank to endorse on
this Amended and Restated Note the amount of advances and payments to
reflect the principal balance outstanding from time to time. The Bank
is hereby authorized to honor borrowing and other requests received from
the purported Chief Executive Officer, President, or Chief Financial
Officer of the Borrower orally, by telecopy, in writing, or otherwise.
Bank's crediting of the Borrower's account with the amount requested
shall conclusively establish the Borrower's obligation to repay the
amount advanced.
Credit Agreement. This Amended and Restated Master Note is
made in connection with a certain Credit Agreement between the Borrower
and the Bank dated as of December 31, 1991, as modified and amended by
that certain Credit Agreement Amendment dated March 31, 1992, and as
modified and amended by that certain Second Amendment to Credit
Agreement, and as further modified, extended, or replaced from time to
time (collectively the "Credit Agreement") and evidences all loans made
by the Bank under Section A of Article I thereof. This Amended and
Restated Master Note is entitled to the benefits of and is subject to
the Credit Agreement. Capitalized terms not otherwise defined herein
shall have the meanings given to them in the Credit Agreement.
Interest. This Amended and Restated Master Note shall bear
interest on outstanding balances, until paid in full, at one hundred
(100) basis points above the LIBOR Rate, but never more than the Prime
Rate, and never more than the maximum rate allowed by law. Changes in
the LIBOR Rate shall become effective automatically and without notice
on each respective Rate Change Date. Interest shall be calculated on
the basis of actual days elapsed in a year of 360 days. All payments
shall be in lawful money of the United States in immediately available
funds. Interest shall continue to accrue after maturity at the note
rate until this note is paid in full.
The Bank may increase the rate of interest on loans outstanding
hereunder by one hundred (100) basis points in the event that the
Borrower fails to maintain all of its depository relationships with the
Bank.
Payments. The Borrower shall pay all accrued interest
hereunder on the first day of each month. All remaining outstanding
principal and accrued interest shall be due and payable in full on the
Expiration Date.
Late Charge. Any payment not received within ten (10) days
of the date due may be subject to an additional late charge equal to
five percent (5%) of the payment due.
Prepayment. This Amended and Restated Master Note is freely
prepayable in whole or in part at the option of the Borrower, but only
on a Rate Change Date and after five business days' prior written
notice, or upon payment of all Break Costs.
Maximum Rate. At no time shall the Borrower be obligated or
required to pay interest under this Amended and Restated Master Note at
a rate which exceeds the maximum rate permitted by applicable law or
regulation. If by the terms of this Amended and Restated Master Note
the Borrower is at any time required or obligated to pay interest at a
rate in excess of such maximum rate, the rate of interest under this
Amended and Restated Master Note shall be deemed to be immediately
reduced to such maximum rate and each payment of interest that exceeds
such maximum rate shall be deemed a voluntary prepayment of principal.
Holidays. If this Amended and Restated Master Note or any
payment hereunder becomes due on a Saturday, Sunday or other holiday on
which the Bank is authorized to close, the due date for this Amended and
Restated Master Note or payment shall be extended to the next succeeding
business day, but any interest or fees shall be calculated based upon
the actual time of payment.
Events of Default. If not sooner demanded, this Amended and
Restated Master Note shall, at the Bank's option, become immediately due
and payable without presentment, demand, protest, or other notice of any
kind, all of which are hereby expressly waived, upon the happening of an
Event of Default.
Modification of Terms. The terms of this Amended and
Restated Master Note cannot be changed, nor may this Amended and
Restated Master Note be discharged in whole or in part, except by a
writing executed by the holder. In the event that holder demands or
accepts partial payments of this Amended and Restated Master Note, such
demand or acceptance shall not be deemed to constitute a waiver of the
right to demand the entire unpaid balance of this Amended and Restated
Master Note at any time in accordance with the terms hereof. Any delay
by holder in exercising any rights hereunder shall not operate as a
waiver of such rights.
Collection Costs. The Borrower on demand shall pay all
expenses of Bank, including without limitation reasonable attorneys'
fees, in connection with enforcement and collection of this Amended and
Restated Master Note.
Miscellaneous. Except for such notice as may be required
under the Credit Agreement, to the fullest extent permissible by law,
the Borrower waives presentment, demand for payment, protest, notice of
nonpayment, and all other demands or notices otherwise required by law
in connection with the delivery, acceptance, performance, default, or
enforcement of this Amended and Restated Master Note. The Borrower
consents to extensions, postponements' indulgences, amendments to notes
and agreements, substitutions or releases of collateral, and
substitutions or releases of other parties primarily or secondarily
liable herefor, and agrees that none of the same shall affect the
Borrower's obligations under this Amended and Restated Master Note which
shall be unconditional.
Laws. The Borrower agrees that this Amended and Restated
Master Note shall be governed by the laws of the State of New York. The
Borrower consents to exclusive jurisdiction in the courts of Monroe
County, State of New York and in the courts of the United States
(Western District of New York) having jurisdiction thereof.
This Note amends and restates, to the extent applicable, the terms
of indebtedness of the Borrower to the Bank in the original principal
sum of Three Million and 00/100 Dollars ($3,000,000), dated December 31,
1991 (the "Prior Note"), as previously amended. Following the execution
and delivery of this Amended and Restated Master Note to the Bank, this
Amended and Restated Master Note shall evidence all of the indebtedness
evidenced by the Prior Note and this Amended and Restated Master Note.
DETECTION SYSTEMS, INC.
By: __________________________
Title: _______________________<PAGE>
EXHIBIT B
AMENDED AND RESTATED TERM NOTE
$ July 31, 1997
Rochester, New York
FOR VALUE RECEIVED, DETECTION SYSTEMS, INC., a New York
corporation with offices at 130 Perinton Parkway, Fairport, New York
14450 (the "Borrower"), hereby promises to pay to the order of FLEET
BANK (the "Bank"), at any of its banking offices, or at such other
places as Bank may specify in writing to the Borrower, the principal sum
of Dollars ($ ), or
if less, the aggregate unpaid principal amount of all advances made by
Bank to the Borrower, on the terms specified below.
Credit Agreement. This Amended and Restated Term Note is made in
connection with a certain Credit Agreement between the Borrower and the
Bank dated as of December 31, 1991, as modified and amended by that
certain Credit Agreement Amendment dated March 31, 1992, and as further
modified and amended by that certain Second Amendment to Credit
Agreement, and as further modified, extended, or replaced from time to
time (collectively the "Credit Agreement"), and evidences all loans made
by the Bank under Section B of Article I thereof. This Amended and
Restated Term Note is entitled to the benefits of and is subject to the
Credit Agreement. Capitalized terms not otherwise defined herein shall
have the meanings given to them in the Credit Agreement.
Interest. This Amended and Restated Term Note shall bear interest
on outstanding principal balances, calculated on the basis of a 360 day
year and using the actual number of days elapsed, at a rate per annum of
one hundred sixty (160) basis points above the LIBOR Rate, but never
more than the Prime Rate plus .60%, and never more than the maximum rate
allowed by law. Changes in the rate of interest applicable to this
Amended and Restated Term Note shall become effective automatically and
without notice on each respective Rate Change Date. All payments shall
be in lawful money of the United States in immediately available funds.
Interest shall continue to accrue after maturity at the note rate until
this note is paid in full.
The Bank may increase the rate of interest on loans outstanding
hereunder by one hundred (100) basis points in the event that the
Borrower fails to maintain all of its depository relationships with the
Bank.
Payments. Payments of all accrued interest under this Amended and
Restated Term Note shall be made on the first day of each month
beginning December 1, 1997 and continuing until the principal is paid in
full. The Borrower shall make sixty (60) equal monthly principal
payments in the amount of Dollars ($ )
commencing on December 1, 1997 and continuing on the first day of each
succeeding month. All remaining principal and interest with respect to
this Amended and Restated Term Note shall be due and payable in full on
October 31, 2002.
Late Charge. Any payment not received within ten (10) days after
the date due may be subject to an additional late charge equal to five
percent (5%) of the payment due.
Prepayment. This Amended and Restated Term Note is freely
prepayable in whole or in part at the option of the Borrower, but only
on a Rate Change Date and after five business days' prior written
notice, or upon payment of all Break Costs.
Maximum Rate. This Amended and Restated Term Note is subject to
the express condition that at no time shall the Borrower be obligated or
required to pay interest on the principal balance of this Amended and
Restated Term Note at a rate which could subject the holder of this
Amended and Restated Term Note to either civil or criminal liability as
a result of being in excess of the maximum rate which the Borrower is
permitted by law to contract or agree to pay. If by the terms of this
Amended and Restated Term Note, the Borrower is at any time required or
obligated to pay interest on the principal balance of this Amended and
Restated Term Note at a rate in excess of such maximum rate, the rate of
interest under this Amended and Restated Term Note shall be deemed to be
immediately reduced to such maximum rate and interest payable hereunder
shall be computed at such maximum rate and the portion of all prior
interest payments in excess of such maximum rate shall be applied and
shall be deemed to have been payments in reduction of the principal
balance of this Amended and Restated Term Note.
Holidays. If this Amended and Restated Term Note or any payment
hereunder becomes due on a Saturday, Sunday or other holiday on which
the Bank is authorized to close, the due date for this Amended and
Restated Term Note or payment shall be extended to the next succeeding
business day, but any interest or fees shall be calculated based upon
the actual time of payment.
Events of Default. This Amended and Restated Term Note shall, at
the Bank's option, become immediately due and payable without
presentment, demand, protest, or other notice of any kind, all of which
are hereby expressly waived, upon the occurrence of an Event of Default.
Modification of Terms. The terms of this Amended and Restated
Term Note cannot be changed, nor may this Amended and Restated Term Note
be discharged in whole or in part, except by a writing executed by Bank.
In the event that the Bank demands or accepts partial payments of this
Amended and Restated Term Note, such demand or acceptance shall not be
deemed to constitute a waiver of the right to demand the entire unpaid
balance of this Amended and Restated Term Note at any time in accordance
with the terms hereof. Any delay or omission by Bank in exercising any
rights hereunder shall not operate as a waiver of such rights.
Collection Costs. The Borrower on demand shall pay all expenses
of Bank, including without limitation reasonable attorneys' fees, in
connection with enforcement and collection of this Amended and Restated
Term Note.
Miscellaneous. Except for such notice as may be required under
the Credit Agreement, to the fullest extent permissible by law, the
Borrower waives presentment, demand for payment, protest, notice of
nonpayment, and all other demands or notices otherwise required by law
in connection with the delivery, acceptance, performance, default, or
enforcement of this Amended and Restated Term Note. The Borrower
consents to extensions, postponements' indulgences, amendments to notes
and agreements, substitutions or releases of collateral, and
substitutions or releases of other parties primarily or secondarily
liable herefor, and agrees that none of the same shall affect the
Borrower's obligations under this Amended and Restated Term Note which
shall be unconditional.
Laws. The Borrower agrees that this Amended and Restated Term
Note shall be governed by the laws of the State of New York. The
Borrower consents to exclusive jurisdiction in the courts of Monroe
County, State of New York and in the courts of the United States
(Western District of New York) having jurisdiction thereof.
DETECTION SYSTEMS, INC.
By: ___________________________
Title: ________________________
<PAGE>
Chemical Bank
300 Linden Oaks
Rochester, NY 14625
March 29, 1995
Frank J. Ryan, Vice President
Detection Systems, Inc.
130 Perinton Parkway
Fairport, NY 14450
Dear Frank:
We are pleased to advise you that Chemical Bank (the "Bank") has approved
a Revolving Credit facility for up to $4,500,000 to Detection Systems, Inc.
(the "Borrower") for general corporate purposes and to replace an existing
credit facility with National Westminister Bank.
The proposed transaction is subject to the negotiation of a new Credit
Agreement between the Borrower and the Bank which is substantially the same,
in terms and conditions, as an existing Credit Agreement dated December 31,
1991 between the Borrower and Norstar Bank.
The significant aspects of this commitment are as follows:
BORROWER: Detection Systems, Inc.
AMOUNT: Up to $4,500,000
PURPOSE: General corporate purposes and to replace a similar existing
facility with National Westminister Bank.
GUARANTORS: All current or future subsidiaries of the Borrower.
TERM: Revolving for a 3 year period from the date of closing (the
"Revolver"). Any balance outstanding on the third anniversary of
the closing date will be converted to a five (5) year term loan
(the "Term Loan"). This Term Loan shall be amortized in sixty
(60) equal monthly principal payments plus interest commencing one
month after the conversion from the Revolver to the Term Loan.
INTEREST RATE: For the Revolver, the Borrower shall be able to choose either:
A) The Bank's Prime Rate.
B) Subject to availability at the Bank, the London Interbank
Offering Rate (LIBOR) adjusted for statutory reserves, if
any, plus 100 basis points for periods of 30, 60, or 90
day maturities, subject to three days written notice.
For the Term Loan, the Borrower shall be able to choose either:
A) The Bank's Prime Rate plus one half of one percent (1/2%).
B) Subject to availability at the Bank, the London Interbank
Offering Rate (LIBOR) adjusted for statutory reserves, if
any, plus 150 basis points for periods of 30, 60, or 90
day maturities, subject to three days written notice.
COMMITMENT FEE
ON UNUSED PORTION: One half of one percent on the average unused amount of the
Revolver, payable quarterly in arrears.
FINANCIAL TESTS: Financial covenants include current ratio, minimum working
capital, minimum tangible net worth, debt to worth, and
consolidated debt coverage cash flow ratio. (For the
purposes of calculating the above current ratio and working
capital, any outstanding under this Revolving Credit will
be classified as current liabilities and included in said
calculation.)
This commitment is based upon the information you have provided to us and is
subject to the execution of a satisfactory loan agreement containing the usual
covenants, terms and conditions for such facilities. In addition, this
commitment is subject to the Borrower executing a modified loan agreement with
Norstar Bank, which will be identical to the loan agreement contemplated
hereunder, in all material terms and conditions. As such, the text of this
letter is intended to provide a general description of the transaction as
contemplated by us and will not be considered as prejudicing the terms and
conditions to be contained in the final documentation.
If this letter correctly sets forth your understanding of the terms that we
have discussed, please indicate your approval by signing and returning this
letter to us. Based upon your acceptance of this commitment letter, we shall
authorize our special counsel to prepare the necessary legal documentation,
the costs and charges of which shall be for your account whether or not the
transaction is completed. This commitment is additionally contingent upon
your acceptance not later than April 4, 1995, and to final documentation
for the transaction being concluded and executed not later than April 30,
1995.
We appreciate this opportunity to be of service to you and look forward to
establishing a mutually beneficial relationship.
Very truly yours,
CHEMICAL BANK
By: /s/ Philip M. Hendrix
Vice President
Accepted this 29th day of March, 1995
DETECTION SYSTEMS, INC.
By: Frank J. Ryan
EXHIBIT 7a
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 9th day of May, 1995 between KARL H.
KOSTUSIAK ("Executive") and Detection Systems, Inc., a New York
corporation ("Company").
WITNESSETH:
In consideration of the mutual covenants contained herein, the
parties agree as follows:
1. Offer of Employment and Term. The Company agrees to employ
Executive in the capacity of President and Chief Executive Officer for
the Term of Employment commencing as of the date of this Agreement (the
"Commencement Date"). The Company agrees to provide Executive with such
office, operational and administrative support as is consistent with his
position. Executive's employment under this agreement will be in the
vicinity of Rochester, New York. "Term of Employment" as used herein
shall mean the period commencing on the Commencement Date and continuing
thereafter for a period of five years, unless the Company and Executive
agree in writing to extend the Term of Employment, in which case the
Term of Employment shall have the meaning as determined at that time;
provided, however, that Executive's employment may be earlier terminated
as hereinafter set forth, in which event the Term of Employment shall
mean the period from the Commencement Date through the date of such
earlier termination.
Notwithstanding any of the other provisions of this
Agreement, however, this Agreement will automatically terminate upon
Executive's death and thereupon all payments and non-vested benefits
payable hereunder shall cease, except death benefits provided under the
Company's employee plans. The Company may terminate this Agreement due
to Executive's permanent disability, as determined by the Board of
Directors in good faith based on the certification of an independent
M.D., and thereupon all payments and non-vested benefits hereunder shall
cease.
2. Executive's Acceptance. Executive agrees to accept the
executive employment described in this Agreement. Executive further
agrees that he will devote his full time and best efforts during
reasonable business hours to performance of the duties and
responsibilities of his office during the Term of Employment. Executive
also agrees not to disclose trade secrets of the Company, or to engage
in any other activity which is detrimental to the interests of the
Company, during the Term of Employment.
3. Compensation and Benefits. The compensation and benefits
which the Company shall provide Executive for his services during the
Term of Employment shall include but not be limited to:
(i) Base salary equal to or greater than $205,916 per
year;
(ii) Participation in all Company executive incentive
compensation plans. Such incentive compensation plans shall include:
an annual cash bonus of not less than 5% of the amount by which the
Company's pre-tax profits exceed $250,000, and an annual stock bonus to
a maximum of 20,000 shares per year based on a formula that allows the
maximum in the case of sales growth greater than 10% for a fiscal year
and a pre-tax profit greater than 10% of sales. This bonus will be
scaled linearly according to both sales and profit performance. The
sales factor for this calculation will be 100% for 10% sales growth, and
0% for no sales growth. The profit factor will be 100% for 10% pre-tax
profit, and 0% for 5% pre-tax profit.
(iii) Grants of options under any Company employee stock
option plan in such amounts as are determined by the Board of Directors
or the Committee of the Board administering such plan;
(iv) Participation in all Company pension, deferred
compensation, insurance, health and welfare or other benefit plans in
which the Company's senior executives are entitled to participate; and
(v) Continuation of all plans in which the Executive
participates, including existing fringe benefits and executive
perquisites to which Executive is entitled as of the date of this
Agreement, except that such plans, benefits and perquisites as are
generally available to the Company's senior executives may be changed
consistent with business conditions in a manner which does not
discriminate against Executive.
4. Termination Without Cause. The Company may terminate
Executive's employment without Cause as hereinafter defined and for any
reason. If Executive is terminated without Cause, Company will continue
to compensate and provide benefits to Executive as if he had continued
in the Company's employment under this Agreement for the then remaining
balance of the Term of Employment or for a period of three (3) years
from the date of termination, whichever is longer. Executive will
comply with Section 8 of this Agreement while receiving such
compensation.
If Executive's employment is terminated by the Company
without Cause and for any reason after termination of the term of
employment but prior to the Company and the Executive reaching a written
agreement with respect to the Executive's retirement benefits, Company
will continue to compensate and provide benefits to Executive as if he
had continued in the Company's employment under this Agreement for a
period of two (2) years from the date of termination. Executive will
comply with Section 8 of this Agreement while receiving such
compensation.
5. Termination for Cause. The Company may terminate
Executive's employment immediately and without prior notice to Executive
for "Cause" as defined below. The existence of Cause shall be
determined by the Company's Board of Directors (other than Executive)
acting in good faith. "Cause" is defined, and shall be limited to, a
good faith determination by the Board of Directors that any of the
following have occurred:
(a) Executive has misappropriated a material amount of funds or
property of the company;
(b) Executive has obtained a material personal profit from any
unlawful Company transaction with a third party;
(c) Executive has obtained a material personal profit from the
use of the Company's trade secrets other than on its behalf and/or if
the Company has suffered material financial harm from the disclosure of
trade secrets by Executive; or
(d) Willful and prolonged absence from work by Executive or
willful refusal by Executive to perform his duties and responsibilities
under circumstances which, in either case, constitute a substantial
abdication of Executive's duties and responsibilities of his office.
If Executive's employment is terminated by the Company for Cause,
he shall be paid compensation and provided benefits in accordance with
the provisions of the first paragraph of Section 4 above, provided that
his cash compensation shall be reduced by the amount of any monetary
damage suffered by the Company due to the Cause, prorated over the term
of such payments.
6. Resignation. Executive may voluntarily resign from the
Company after giving 90 days' prior written notice of his intention to
resign and the Term of Employment shall terminate on the effective date
of such resignation. If Executive resigns or otherwise voluntarily
leaves the Company's employment prior to a Change in Control, he shall
forfeit all compensation and non-vested benefits, from and after the
effective date of such resignation, provided in this Agreement.
7. Change in Control.
(i) A "Change in Control" of the Company shall be deemed
to have occurred if:
(a) any "person," as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (other than the Company or any corporation owned,
directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the
Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company representing 25% or more of the combined voting power of the
Company's then outstanding securities;
(b) there is elected 35% or more of the members of
the Board of Directors of the Company without the approval of the
nomination of such members by a majority of the Board serving prior to
such election;
(c) the shareholders of the Company approve a merger
or consolidation of the Company with any other corporation, other than
(i) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent more than 75% of the combined voting power of
the voting securities of the Company, or such surviving entity,
outstanding immediately after such merger or consolidation; or (ii) a
merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no "person" (as defined above)
acquires more than 50% of the combined voting power of the Employer's
then-outstanding securities; or
(d) the Shareholders of the Company approve an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets.
(ii) If any Change in Control of the Company occurs and
Executive's employment is terminated by the Company or the Executive
within four months after the date of the Change in Control for any
reason other than Executive's Death, the Company shall pay and provide
to Executive the following amounts and benefits:
(a) the sum of Executive's full base salary thro}gh
the date of termination of his employment at the rate in effect at the
time of termination or at the time the Change in Control occurs,
whichever is higher, and an amount equal to the amount of any bonus
which has been earned by him but not yet paid to him. These two amounts
shall be paid to Executive in a lump sum within five days following the
date of termination, or in the case of a bonus which is not readily
calculable at such time, within five days after such bonus can be
calculated; and
(b) an amount equal to three times the highest total
cash and stock bonus cash value compensation (including base salary and
bonuses) paid Executive in any of the Company's last three fiscal years
completed prior to such termination. This amount shall be paid to
Executive as provided in the last sentence of subsection (a) above; and
(c) the benefits provided Executive under Section
3(iv), such as, but not limited to, life, accident, disability, health
and travel insurance, and other benefits in effect for Executive at the
time notice of termination is given or at the time the Change in Control
occurs, whichever may be higher in the case of each benefit, shall be
provided to Executive by the Company to the same extent as if Executive
had continued to be an employee of the Company for three (3) years from
such termination, and such benefits shall, to the extent that they may
not be provided or paid under any benefit plan or program, be provided
or paid for by the Company by means other than such plan or program.
(iii) If applicable, the provisions of Section 7(ii) shall
control over the provisions of Sections 4 and/or 5. In the event that
Executive's employment is not terminated by the Company or the Executive
for any reason other than the Executive's death within the four month
period specified in Section 7(ii), the provisions of Sections 4 and 5
shall once again be applicable thereafter.
(iv) In the event that the payments and benefits specified
in this Section 7 would be subject to the tax (the "Excise Tax") imposed
by Section 4999 of the Internal Revenue Code of 1986 (the "Code"), as
amended (or any similar tax that may hereinafter be imposed) because of
"excess parachute payments," as defined in Section 280G of the Code,
Executive and Employer agree that the amounts payable pursuant to this
Section 7 shall be reduced by such amount as shall be necessary to avoid
the imposition of the Excise Tax.
8. Noncompetition. If prior to a Change in Control Executive's
employment terminates due to his resignation, other voluntary departure
or due to termination by the Company for Cause or without Cause, for
eighteen (18) months subsequent to such termination, Executive shall
not, without the prior written consent of the Board of Directors of the
Company, engage, as an employee, partner, consultant, venturer,
entrepreneur or otherwise, in the development or sale of any product or
service which is competitive with any product or service of the Company.
If subsequent to a Change in Control Executive's employment terminates
as above provided, Executive shall similarly refrain from competing with
the Company for a period of twelve (12) months subsequent to such
termination. In the event the Company terminates Executive's employment
due to permanent disability as provided in Section 1, whether prior to
or after a Change in Control, Executive shall not be restricted from
competing with the Company immediately upon such termination.
9. Expenses. If the Company is found by a court of competent
jurisdiction to have breached this Agreement, the Company shall pay the
costs and expenses incurred by Executive in any litigation seeking
damages in respect of such breach or to enforce the performance of this
Agreement by Company.
10. Notices. Any notice required or permitted to be given
hereunder shall be in writing and may be given by prepaid and certified
return receipt requested first class mail addressed:
(i) if to the Company, to each member of the Board of
Directors at the address to which the Company then addresses
correspondence to such persons;
(ii) if to Executive, at his home mailing address on file
with the Company; and
(iii) to such other address as the party to which such
notice is to be given shall have notified (in accordance with the
provisions of this Section 10) as its substitute address for the purpose
of this Agreement.
Any notice given as aforesaid shall be deemed conclusively to have
been received on the fifth business day after such mailing.
11. Amendment. It is agreed that no change or modification of
this Agreement shall be made except in a writing signed by both parties.
12. Severability. In the event that any one or more of the
provisions of this Agreement shall be or become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability
of the remaining provisions shall not be affected thereby.
13. Law Governing. The validity, interpretation and effect of
this Agreement shall be governed by the laws of the State of New York.
14. Entire Agreement. This Agreement contains the entire
understanding of the parties with respect to the employment of Executive
by the Company. There are no restrictions, agreements, promises,
warranties, covenants or undertakings other than those expressly set
forth herein. This Agreement supersedes all prior agreements,
arrangements and understandings between the parties, whether oral or
written, with respect to the employment of Executive.
IN WITNESS WHEREOF, Executive for himself, and the undersigned
director of the Company on behalf of the Company by authority of its
Board of Directors, have executed this Agreement as of the day and year
first above written.
Executive
/s/ Karl H. Kostusiak
6/9/95
DETECTION SYSTEMS, INC.
/s/ Donald R. Adair
6/21/95
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 9th day of May, 1995 between DAVID B.
LEDERER ("Executive") and Detection Systems, Inc., a New York
corporation ("Company").
WITNESSETH:
In consideration of the mutual covenants contained herein, the
parties agree as follows:
1. Offer of Employment and Term. The Company agrees to employ
Executive in the capacity of Executive Vice President for the Term of
Employment commencing as of the date of this Agreement (the
"Commencement Date"). The Company agrees to provide Executive with such
office, operational and administrative support as is consistent with his
position. Executive's employment under this agreement will be in the
vicinity of Rochester, New York. "Term of Employment" as used herein
shall mean the period commencing on the Commencement Date and continuing
thereafter for a period of five years, unless the Company and Executive
agree in writing to extend the Term of Employment, in which case the
Term of Employment shall have the meaning as determined at that time;
provided, however, that Executive's employment may be earlier terminated
as hereinafter set forth, in which event the Term of Employment shall
mean the period from the Commencement Date through the date of such
earlier termination.
Notwithstanding any of the other provisions of this
Agreement, however, this Agreement will automatically terminate upon
Executive's death and thereupon all payments and non-vested benefits
payable hereunder shall cease, except death benefits provided under the
Company's employee plans. The Company may terminate this Agreement due
to Executive's permanent disability, as determined by the Board of
Directors in good faith based on the certification of an independent
M.D., and thereupon all payments and non-vested benefits hereunder shall
cease.
2. Executive's Acceptance. Executive agrees to accept the
executive employment described in this Agreement. Executive further
agrees that he will devote his full time and best efforts during
reasonable business hours to performance of the duties and
responsibilities of his office during the Term of Employment. Executive
also agrees not to disclose trade secrets of the Company, or to engage
in any other activity which is detrimental to the interests of the
Company, during the Term of Employment.
3. Compensation and Benefits. The compensation and benefits
which the Company shall provide Executive for his services during the
Term of Employment shall include but not be limited to:
(i) Base salary equal to or greater than $164,742 per
year;
(ii) Participation in all Company executive incentive
compensation plans. Such incentive compensation plans shall include:
an annual cash bonus of not less than 4% of the amount by which the
Company's pre-tax profits exceed $250,000, and an annual stock bonus to
a maximum of 16,000 shares per year based on a formula that allows the
maximum in the case of sales growth greater than 10% for a fiscal year
and a pre-tax profit greater than 10% of sales. This bonus will be
scaled linearly according to both sales and profit performance. The
sales factor for this calculation will be 100% for 10% sales growth, and
0% for no sales growth. The profit factor will be 100% for 10% pre-tax
profit, and 0% for 5% pre-tax profit.
(iii) Grants of options under any Company employee stock
option plan in such amounts as are determined by the Board of Directors
or the Committee of the Board administering such plan;
(iv) Participation in all Company pension, deferred
compensation, insurance, health and welfare or other benefit plans in
which the Company's senior executives are entitled to participate; and
(v) Continuation of all plans in which the Executive
participates, including existing fringe benefits and executive
perquisites to which Executive is entitled as of the date of this
Agreement, except that such plans, benefits and perquisites as are
generally available to the Company's senior executives may be changed
consistent with business conditions in a manner which does not
discriminate against Executive.
4. Termination Without Cause. The Company may terminate
Executive's employment without Cause as hereinafter defined and for any
reason. If Executive is terminated without Cause, Company will continue
to compensate and provide benefits to Executive as if he had continued
in the Company's employment under this Agreement for the then remaining
balance of the Term of Employment or for a period of three (3) years
from the date of termination, whichever is longer. Executive will
comply with Section 8 of this Agreement while receiving such
compensation.
If Executive's employment is terminated by the Company
without Cause and for any reason after termination of the term of
employment but prior to the Company and the Executive reaching a written
agreement with respect to the Executive's retirement benefits, Company
will continue to compensate and provide benefits to Executive as if he
had continued in the Company's employment under this Agreement for a
period of two (2) years from the date of termination. Executive will
comply with Section 8 of this Agreement while receiving such
compensation.
5. Termination for Cause. The Company may terminate
Executive's employment immediately and without prior notice to Executive
for "Cause" as defined below. The existence of Cause shall be
determined by the Company's Board of Directors (other than Executive)
acting in good faith. "Cause" is defined, and shall be limited to, a
good faith determination by the Board of Directors that any of the
following have occurred:
(a) Executive has misappropriated a material amount of funds or
property of the company;
(b) Executive has obtained a material personal profit from any
unlawful Company transaction with a third party;
(c) Executive has obtained a material personal profit from the
use of the Company's trade secrets other than on its behalf and/or if
the Company has suffered material financial harm from the disclosure of
trade secrets by Executive; or
(d) Willful and prolonged absence from work by Executive or
willful refusal by Executive to perform his duties and responsibilities
under circumstances which, in either case, constitute a substantial
abdication of Executive's duties and responsibilities of his office.
If Executive's employment is terminated by the Company for Cause,
he shall be paid compensation and provided benefits in accordance with
the provisions of the first paragraph of Section 4 above, provided that
his cash compensation shall be reduced by the amount of any monetary
damage suffered by the Company due to the Cause, prorated over the term
of such payments.
6. Resignation. Executive may voluntarily resign from the
Company after giving 90 days' prior written notice of his intention to
resign and the Term of Employment shall terminate on the effective date
of such resignation. If Executive resigns or otherwise voluntarily
leaves the Company's employment prior to a Change in Control, he shall
forfeit all compensation and non-vested benefits, from and after the
effective date of such resignation, provided in this Agreement.
7. Change in Control.
(i) A "Change in Control" of the Company shall be deemed
to have occurred if:
(a) any "person," as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (other than the Company or any corporation owned,
directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the
Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company representing 25% or more of the combined voting power of the
Company's then outstanding securities;
(b) there is elected 35% or more of the members of
the Board of Directors of the Company without the approval of the
nomination of such members by a majority of the Board serving prior to
such election;
(c) the shareholders of the Company approve a merger
or consolidation of the Company with any other corporation, other than
(i) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent more than 75% of the combined voting power of
the voting securities of the Company, or such surviving entity,
outstanding immediately after such merger or consolidation; or (ii) a
merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no "person" (as defined above)
acquires more than 50% of the combined voting power of the Employer's
then-outstanding securities; or
(d) the Shareholders of the Company approve an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets.
(ii) If any Change in Control of the Company occurs and
Executive's employment is terminated by the Company or the Executive
within four months after the date of the Change in Control for any
reason other than Executive's Death, the Company shall pay and provide
to Executive the following amounts and benefits:
(a) the sum of Executive's full base salary through
the date of termination of his employment at the rate in effect at the
time of termination or at the time the Change in Control occurs,
whichever is higher, and an amount equal to the amount of any bonus
which has been earned by him but not yet paid to him. These two amounts
shall be paid to Executive in a lump sum within five days following the
date of termination, or in the case of a bonus which is not readily
calculable at such time, within five days after such bonus can be
calculated; and
(b) an amount equal to three times the highest total
cash and stock bonus cash value compensation (including base salary and
bonuses) paid Executive in any of the Company's last three fiscal years
completed prior to such termination. This amount shall be paid to
Executive as provided in the last sentence of subsection (a) above; and
(c) the benefits provided Executive under Section
3(iv), such as, but not limited to, life, accident, disability, health
and travel insurance, and other benefits in effect for Executive at the
time notice of termination is given or at the time the Change in Control
occurs, whichever may be higher in the case of each benefit, shall be
provided to Executive by the Company to the same extent as if Executive
had continued to be an employee of the Company for three (3) years from
such termination, and such benefits shall, to the extent that they may
not be provided or paid under any benefit plan or program, be provided
or paid for by the Company by means other than such plan or program.
(iii) If applicable, the provisions of Section 7(ii) shall
control over the provisions of Sections 4 and/or 5. In the event that
Executive's employment is not terminated by the Company or the Executive
for any reason other than the Executive's death within the four month
period specified in Section 7(ii), the provisions of Sections 4 and 5
shall once again be applicable thereafter.
(iv) In the event that the payments and benefits specified
in this Section 7 would be subject to the tax (the "Excise Tax") imposed
by Section 4999 of the Internal Revenue Code of 1986 (the "Code"), as
amended (or any similar tax that may hereinafter be imposed) because of
"excess parachute payments," as defined in Section 280G of the Code,
Executive and Employer agree that the amounts payable pursuant to this
Section 7 shall be reduced by such amount as shall be necessary to avoid
the imposition of the Excise Tax.
8. Noncompetition. If prior to a Change in Control Executive's
employment terminates due to his resignation, other voluntary departure
or due to termination by the Company for Cause or without Cause, for
eighteen (18) months subsequent to such termination, Executive shall
not, without the prior written consent of the Board of Directors of the
Company, engage, as an employee, partner, consultant, venturer,
entrepreneur or otherwise, in the development or sale of any product or
service which is competitive with any product or service of the Company.
If subsequent to a Change in Control Executive's employment terminates
as above provided, Executive shall similarly refrain from competing with
the Company for a period of twelve (12) months subsequent to such
termination. In the event the Company terminates Executive's employment
due to permanent disability as provided in Section 1, whether prior to
or after a Change in Control, Executive shall not be restricted from
competing with the Company immediately upon such termination.
9. Expenses. If the Company is found by a court of competent
jurisdiction to have breached this Agreement, the Company shall pay the
costs and expenses incurred by Executive in any litigation seeking
damages in respect of such breach or to enforce the performance of this
Agreement by Company.
10. Notices. Any notice required or permitted to be given
hereunder shall be in writing and may be given by prepaid and certified
return receipt requested first class mail addressed:
(i) if to the Company, to each member of the Board of
Directors at the address to which the Company then addresses
correspondence to such persons;
(ii) if to Executive, at his home mailing address on file
with the Company; and
(iii) to such other address as the party to which such
notice is to be given shall have notified (in accordance with the
provisions of this Section 10) as its substitute address for the purpose
of this Agreement.
Any notice given as aforesaid shall be deemed conclusively to have
been received on the fifth business day after such mailing.
11. Amendment. It is agreed that no change or modification of
this Agreement shall be made except in a writing signed by both parties.
12. Severability. In the event that any one or more of the
provisions of this Agreement shall be or become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability
of the remaining provisions shall not be affected thereby.
13. Law Governing. The validity, interpretation and effect of
this Agreement shall be governed by the laws of the State of New York.
14. Entire Agreement. This Agreement contains the entire
understanding of the parties with respect to the employment of Executive
by the Company. There are no restrictions, agreements, promises,
warranties, covenants or undertakings other than those expressly set
forth herein. This Agreement supersedes all prior agreements,
arrangements and understandings between the parties, whether oral or
written, with respect to the employment of Executive.
IN WITNESS WHEREOF, Executive for himself, and the undersigned
director of the Company on behalf of the Company by authority of its
Board of Directors, have executed this Agreement as of the day and year
first above written.
Executive
/s/ David B. Lederer
6/9/95
DETECTION SYSTEMS, INC.
by: /s/ Donald R. Adair
6/21/95
EXHIBIT 7b
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 7th day of February 1995 between LAWRENCE
R. TRACY ("Executive") and Detection Systems, Inc., a New York
corporation ("Company").
WITNESSETH:
In consideration of the mutual covenants contained herein, the
parties agree as follows:
1. Offer of Employment and Term. The Company agrees to employ
Executive in the capacity of President, International Division (or
business equivalent) for the Term of Employment commencing as of the
date of this Agreement (the "Commencement Date"). The Company agrees to
provide Executive with such office, operational and administrative
support as is consistent with his position. Executive's employment
under this agreement will be in the vicinity of his home in Auburn,
California or as convenient to that as practicable with an appropriate
comparable office to be provided at the Company s corporate headquarters
in Fairport, New York. The Company will not require the Executive to
travel more than fifty percent (50%) of his time in the first year of
this Agreement and thirty percent (30%) thereafter in order to fulfill
Executives responsibilities. "Term of Employment" as used herein shall
mean the period commencing on the Commencement Date and continuing
thereafter for a period of four years, unless the Company and Executive
agree in writing to extend the Term of Employment, in which case the
Term of Employment shall have the meaning as determined at that time;
provided, however, that Executive's employment may be earlier terminated
as hereinafter set forth, in which event the Term of Employment shall
mean the period from the Commencement Date through the date of such
earlier termination.
Notwithstanding any of the other provisions of this
Agreement, however, this Agreement will automatically terminate upon
Executive's death and thereupon all payments and non-vested benefits
payable hereunder shall cease, except death benefits provided under the
Company's employee plans. The Company may terminate this Agreement due
to Executive's permanent disability, as determined by the Board of
Directors in good faith based on the certification of an independent
M.D., and thereupon all payments and non-vested benefits hereunder shall
cease. For the purposes of this Agreement, permanent disability shall
be defined as any illness, injury or physical or mental condition which
shall prevent the Executive from performing his usual duties and
services for the Company on substantially the same basis under which he
was performing or was obligated to perform them prior to the occurrence
or onset of such illness, injury or condition for a period of (i) three
consecutive months, or (ii) more than six months in any twelve month
period.
2. Executive's Acceptance. Executive agrees to accept the
executive employment described in this Agreement. Executive further
agrees that he will devote his full time and best efforts during
reasonable business hours to performance of the duties and
responsibilities of his office during the Term of Employment. Executive
also agrees not to disclose Confidential Information of the Company, or
to engage in any other activity which is detrimental to the interests of
the Company, during the Term of Employment.
3. Compensation and Benefits. The compensation and benefits
which the Company shall provide Executive for his services during the
Term of Employment shall include but not be limited to the following,
subject to adjustment to maintain a compensation level at 70 percent of
the equivalent Detection Systems cash bonus amounts paid to the
Company s CEO beginning the third fiscal year of employment and at 70
percent of the equivalent Detection Systems stock bonus amounts paid to
the Company s CEO beginning with the fiscal year beginning April 1,
1995, except for the Company s regular quarterly profit sharing bonus
without vesting requirement for the quarter beginning April 1, 1995.:
(i) Base salary at this time equal to $140,000 per year;
(ii) Participation in all Company executive incentive
compensation plans effective the fiscal year beginning April 1, 1995.
Such incentive compensation plans shall include an annual cash bonus at
this time of 3-1/2% of the amount by which the Company's pre-tax profits
exceed $250,000. The amount of this bonus shall be reduced by $48,000
each year for the first two years, Such incentive compensation plan
shall also include an annual stock bonus at this time of 14,000 shares
per year based on a formula that allows the maximum in the case of sales
growth greater than 10% for a fiscal year and a pretax profit greater
than 10% of sales. This bonus will be scaled linearly according to both
sales and profit performance. The sales factor for this calculation
will be 100% for 10% sales growth, and 0% for no sales growth. The
profit factor will be 100% for 10% pre-tax profit, and 0% for 5% pre-tax
profit. For example, if sales increase in a particular year by 5% and
if pre-tax profit is 7-1/2%, then the stock bonus would be 3,500 shares
(14,000 * .5 * .5 = 3,500).
(iii) Executive can draw cash advances from first two year
future annual cash bonuses, as described in section (ii) above to
achieve a total monthly cash payment of $15,000, for two years. During
years three and four of this Agreement, monthly cash compensation will
be paid (and/or advanced against cash bonus formulas) at a rate equal to
the trailing twelve month cash compensation that was earned per the
formulas, not to exceed $19,000 per month, with the balance of earned
annual bonuses paid approximately two months after fiscal year end.
Repayment of the first two year advances will only be made from cash
income in excess of $15,000 per month from first two year total cash
compensation. All obligations for repayment will be forgiven if
Executive leaves the Company for any reason;
(iv) Executive will be granted an option of 40,000 shares
under the Company s employee stock option plan, with a grant date
effective the date of employment, which shall be the date of this
Agreement, with up to two-fifths of the shares exercisable after one
year has elapsed, up to three-fifths of the shares exercisable after two
years have elapsed, up to four-fifths of the shares exercisable after
three years have elapsed and up to five-fifths of the shares exercisable
after four years have elapsed. (For other specific terms and
conditions, see the attached plan);
(v) Participation in all existing executive fringe
benefits and executive perquisites to which non-founder executives are
entitled as of the date of this Agreement including car allowance,
pension, deferred compensation, insurance, health, disability and other
benefit plans, except that such plans, benefits and perquisites as are
generally available to the Company's senior executives may be changed
consistent with business conditions in a manner which does not
discriminate against Executive.
(vi) Vacation time at the rate of three (3) weeks per year
to be increased to four (4) weeks per year after five (5) years of
service.
(vii) Executive will receive a car allowance of $500 per
month plus fuel expense.
4. Termination Without Cause. The Company may terminate
Executive's employment without Cause as hereinafter defined and for any
reason. If Executive is terminated without Cause, Company will pay the
Executive cash compensation as per the above cash compensation plan and
provide benefits to Executive as if he had continued in the Company's
employment under this Agreement except for stock bonuses for the then
remaining balance of the Term of Employment or for a period of one (1)
year from the date of termination, whichever is longer. The stock
options will cease vesting and the stock bonuses will no longer be
payable from the date of termination. Executive will comply with
Sections 7, 8, 9, 10 and 11 of this Agreement while receiving such
compensation.
5. Termination for Cause. The Company may terminate
Executive's employment immediately and without prior notice to Executive
for "Cause" as defined below. The existence of Cause shall be
determined by the Company's Board of Directors (other than Executive)
acting in good faith. "Cause" is defined, and shall be limited to, a
good faith determination by the Board of Directors that any of the
following have occurred:
(a) Executive has misappropriated a material amount of funds or
property of the company;
(b) Executive has obtained a material personal profit from any
unlawful Company transaction with a third party;
(c) Executive has obtained a material personal profit from the
use of the Company's trade secrets other than on its behalf and/or if
the Company has suffered material financial harm from the disclosure of
trade secrets by Executive; or
(d) Willful and prolonged absence from work by Executive or
willful refusal by Executive to perform his duties and responsibilities
under circumstances which, in either case, constitute a substantial
abdication of Executive's duties and responsibilities of his office.
If Executive's employment is terminated by the Company for Cause, he
shall be paid compensation and provided benefits in accordance with the
provisions of the first paragraph of Section 4 above, provided that his
cash compensation shall be reduced by the amount of any monetary damage
suffered by the Company due to the Cause, prorated over the term of such
payments, and Executive shall not receive any stock bonus.
6. Resignation. Executive may voluntarily resign from the
Company after giving 90 days' prior written notice of his intention to
resign and the Term of Employment shall terminate on the effective date
of such resignation. If Executive resigns or otherwise voluntarily
leaves the Company's employment, he shall forfeit all compensation and
non-vested benefits, from and after the effective date of such
resignation, provided in this Agreement. Executive will comply with
Sections 7, 8, 9, 10 and 11 of this Agreement in the event of such
resignation. If Executive resigns or otherwise voluntarily leaves the
Company s employment during the 90-day period following a change in the
chief executive officer of the Company, the provisions of Section 11
shall not apply, at the Executive s option.
7. Executive s Acknowledgments. a. The Executive acknowledges
and agrees that: (i) in the course of the Executive s employment by the
Company [it will be necessary for the Executive to acquire or develop]
confidential information relating to the Company and its business,
including but not limited to information concerning the Company s sales,
sales volume, sales methods, sales proposals, trade secrets,
confidential information of customers, pricing information, the
Company s processes, computer programs, system documentation, ideas,
improvements, inventions or other confidential or proprietary
information belonging to the Company, or relating to the Company s
affairs (collectively referred to here as the Confidential
Information ); (ii) the Confidential Information is the property of the
Company; (iii) the use, misappropriation or disclosure of the
Confidential Information would constitute a breach of trust and could
cause irreparable injury to the Company; (iv) it is essential to the
protection of the Company s good will and to the maintenance of the
Company s competitive position that the Confidential Information be kept
secret and that the Executive not disclose the Confidential Information
to others or use the Confidential Information to the Executive s own
advantage; and (v) the covenants in Sections 7, 8, 9, 10 and 11 are (x)
reasonable under all circumstances of this particular situation as to
time, area and scope of activity, (y) necessary to protect the
legitimate interests of the Company and (z) are not unduly burdensome to
the Executive.
b. The Executive further recognizes and agrees that the
Executive s duties for the Company may include the preparation of
materials, including written or graphic materials for the Company, and
that any such materials conceived or written by the Executive shall be
done within the scope of his employment as a work made for hire, as
defined and used in the Copyright Act of 1976, as amended (17 U.S.C. 101
et seq.). The Executive agrees that because any such work is a work
made for hire, the Company will solely retain and own all rights in
said materials, including rights of copyright.
c. The Executive certifies that he has not, and covenants that he
will not, disclose or use during his employment by the Company any
confidential information which the Executive acquired as a result of any
previous employment, and Executive will not violate any agreement with a
prior employer. Additionally, Employer agrees to not ask Executive for
any such previously obtained confidential information.
8. Intellectual Property Rights. The Executive agrees to
disclose and assign to the Employer his entire right, title and interest
in and to all inventions and improvements related to the Employer s
business (including but not limited to all financial and sales
information), whether patentable or not, whether made or conceived by
him individually or jointly with others at any time during his
employment by the Company hereunder. Such inventions and improvements
are to become and remain the property of the Company whether or not
patent applications are filed thereon, and the Executive agrees, upon
request and at the expense of the Company, to make and execute
applications for letters patent, in the United States and any other
countries, through attorneys designated by the Company and to assign all
applications and patents which may issue thereon to the Company or its
nominees and to make all such other applications and execute all such
documents as may be necessary to effectuate the purpose of this Section
8. The Company shall determine, in its reasonable judgment after
consulting the Executive, whether any invention or improvement is
related to the business of the Company.
9. Non-Disclosure of Confidential Information. The Executive
agrees to hold and safeguard the Confidential Information in trust for
the Company, its successors and assigns and agrees that the Executive
shall not, without the prior written consent of the Company, use for
personal gain or private purposes or misappropriate or disclose or make
available to anyone for use outside the Company s organization at any
time during the Executive s employment with the Company or subsequent to
the termination of the Executive s employment with the Company for any
reason, including without limitation termination by the Company for
Cause or without Cause, any of the Confidential Information, whether or
not developed by the Executive, except as required in the performance of
the Executive s duties to the Company.
10. Non-Solicitation of Employees and Former Employees. The
Executive agrees that, during the Executive s employment with the
Company, or while receiving termination compensation for any reason,
the Executive shall not actively solicit any employee of the Company to
leave the Company for any reason whatsoever or hire any employee of the
Company or person who was employed by the Company at any time during the
two years preceding the termination of the Executive s employment.
11. Noncompetition. If Executive s employment is terminated by
the Company without Cause, for a period of twelve (12) months subsequent
to such termination, or the period during which the Company continues to
compensate Executive, if longer, Executive shall not, without the prior
written consent of the Board of Directors of the Company, engage, as an
employee, partner, consultant, venturer, entrepreneur or otherwise, in
the development, manufacture or sale of any product or service which is
competitive with any product or service of the Company. If Executive s
employment is terminated due to Cause, his resignation or other
voluntary departure, for a period of eighteen (18) months subsequent to
such termination, or the period during which the Company continues to
compensate Executive, if longer, Executive shall not, without the prior
written consent of the Board of Directors of the Company, engage, as an
employee, partner, consultant, venturer, entrepreneur or otherwise, in
the development, manufacture or sale of any product or service which is
competitive with any product or service of the Company. For the
purposes of this Agreement, a competitive product is defined as any
electronic security or fire protection product, including CCTV and
Access Control, to all existing and potential customers of Company.
This Agreement shall not prohibit Executive from engaging, as an
employee, partner, consultant, venturer, entrepreneur or otherwise, with
a company whose primary business purpose is as an electronic security or
fire protection installation company, provided the company is not
otherwise competitive with the Company, after the date of termination.
At the end of the term of the Agreement and thereafter,
Executive agrees that he shall not compete in any way as defined above
for a period of twelve (12) months if the Company elects to pay a
monthly compensation equal to the average monthly cash compensation of
the previous four (4) years of employment during that twelve (12) month
period
12. Notices. Any notice required or permitted to be given
hereunder shall be in writing and may be given by prepaid and certified
return receipt requested first class mail addressed:
(i) if to the Company, to Detection Systems, Inc., 130
Perinton Parkway, Fairport, NY 14450, Attention: President;
(ii) if to Executive, at his home mailing address on file
with the Company; and
(iii) to such other address as the party to which such
notice is to be given shall have notified (in accordance with the
provisions of this Section 12) as its substitute address for the purpose
of this Agreement.
Any notice given as aforesaid shall be deemed conclusively to have
been received on the fifth business day after such mailing.
13. Amendment. It is agreed that no change or modification of
this Agreement shall be made except in a writing signed by both parties.
14. Severability. In the event that any one or more of the
provisions of this Agreement shall be or become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability
of the remaining provisions shall not be affected thereby.
15. Law Governing. The validity, interpretation and effect of
this Agreement shall be construed and interpreted in accordance with the
laws of the State of New York, without regard to conflict of laws
principles. All disputes, controversies, or differences which may arise
between the parties, out of or in relation to or in connection with this
Agreement, or for the breach thereof, which cannot be resolved between
the parties shall be submitted to the exclusive jurisdiction of the
courts of New York State sitting in Rochester, New York, USA.
Prevailing party in any dispute shall be reimbursed for reasonable legal
fees as part of their settlement.
16. Assignment. This Agreement shall not be assignable except
to a successor by merger or purchase of substantially all of the stock
or assets of the Company. This Agreement shall be binding upon the
parties and any corporation, other entity or individual which, directly
or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the respective parties.
17. Entire Agreement. This Agreement contains the entire
understanding of the parties with respect to the employment of Executive
by the Company. There are no restrictions, agreements, promises,
warranties, covenants or undertakings other than those expressly set
forth herein. This Agreement supersedes all prior agreements,
arrangements and understandings between the parties, whether oral or
written, with respect to the employment of Executive.
IN WITNESS WHEREOF, Executive for himself, and the undersigned
director of the Company on behalf of the Company by authority of its
Board of Directors, have executed this Agreement as of the day and year
first above written.
EXECUTIVE
/s/ Lawrence R. Tracy
DETECTION SYSTEMS, INC.
/s/ Karl H. Kostusiak, President
Exhibit 8
DETECTION SYSTEMS, INC.
COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Year Ended March 31, 1995 1994 1993
------- --------- ---------
Income before cumulative effect of
a change in accounting principle $1,514,489 $1,144,641 $1,436,852
Add - Interest on 9% convertible 13,500
debentures (2)
Add - Interest on deferred compensation 51,032 30,296 33,071
---------- ---------- ----------
Income before cumulative effect of a
change in accounting principle
applicable to common stock 1,565,521 1,174,937 1,483,423
Cumulative effect of change
in accounting principle 130,800
---------- ---------- ----------
Adjusted net income applicable to
common stock $1,565,521 $1,305,737 $1,483,423
========== ========== ==========
Number of shares:
Weighted average number of shares 2,746,756 2,682,542 2,632,812
Add - Common stock equivalents due to
Assumed exercise of stock options and
warrants 30,885 46,361 65,307
Assumed conversion of shares earned in
deferred compensation plan 211,497 209,170 187,729
Assumed conversion of convertible
debentures(2) 31,641
--------- ---------- ----------
Total common and common equivalent
shares 2,989,138 2,938,073 2,917,489
========== ========== ==========
Earnings per common and common equivalent
share (1):
Income before cumulative effect of a
change in accounting principle $.52 $.40 $.51
Cumulative effect of a change in accounting
principle .04
---- ---- ----
Net income $.52 $.44 $.51
NOTES:
(1) All per share amounts reflect the September 13, 1991 8% stock dividend.
(2) During 1993, convertible debentures were dilutive only in the first
quarter.
<PAGE>
Exhibit 10
DETECTION SYSTEMS, INC.
COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Year Ended March 31, 1992 1991
--------- ---------
Income before cumulative effect of
a change in accounting principle $1,494,128 $1,907,976
Add - Interest on 9% convertible 54,000 59,400
debentures (2)
Add - Interest on deferred compen-
sation 26,240 30,700
--------- ---------
Income before cumulative effect of a
change in accounting principle
applicable to common stock 1,574,368 1,998,076
Cumulative effect of change in
accounting principle
--------- ---------
Adjusted net income applicable to
common stock $1,574,368 $1,998,076
========== ==========
Number of shares:
Weighted average number of shares 2,573,604 2,569,200
Add - Common stock equivalents due to -
Assumed exercise of stock options and
warrants 115,237 125,635
Assumed conversion of shares earned in
deferred compensation plan 134,460 162,686
Assumed conversion of convertible
debentures(2) 126,563 117,188
-------- --------
Total common and common equivalent
shares 2,949,864 2,974,709
========== ==========
Earnings per common and common equivalent
share (1):
Income before cumulative effect of a
change in accounting principle $.53 $.67
Cumulative effect of a change in accounting
principle
---- ----
Net income $.53 $.67
NOTES:
(1) All per share amounts reflect the September 13, 1991 8% stock dividend.
(2) During 1993, convertible debentures were dilutive only in the first
quarter.
EXHIBIT 9
POWER OF ATTORNEY
The undersigned, being a director of Detection Systems, Inc.
("Company"), hereby constitutes and appoints Karl H. Kostusiak, Frank J.
Ryan and David B. Lederer, or any of them, his true and lawful attorneys
and agents, each with full power and authority to act as such without
the other, to sign the name of the undersigned to the Company's fiscal
1995 Annual Report on Form 10-K, and any amendments thereto, filed with
the Securities and Exchange Commission under the Securities Exchange Act
of 1934 and the related rules and regulations thereunder, the
undersigned hereby ratifying and confirming all that said attorneys and
agents, or any of them, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed and delivered these
presents as of this 9th day of May, 1995.
/s/ Donald R. Adair
POWER OF ATTORNEY
The undersigned, being a director of Detection Systems, Inc.
("Company"), hereby constitutes and appoints Karl H. Kostusiak, Frank J.
Ryan and David B. Lederer, or any of them, his true and lawful attorneys
and agents, each with full power and authority to act as such without
the other, to sign the name of the undersigned to the Company's fiscal
1995 Annual Report on Form 10-K, and any amendments thereto, filed with
the Securities and Exchange Commission under the Securities Exchange Act
of 1934 and the related rules and regulations thereunder, the
undersigned hereby ratifying and confirming all that said attorneys and
agents, or any of them, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed and delivered these
presents as of this 9th day of May, 1995.
/s/ Mortimer B. Fuller III
POWER OF ATTORNEY
The undersigned, being a director of Detection Systems, Inc.
("Company"), hereby constitutes and appoints Karl H. Kostusiak, Frank J.
Ryan and David B. Lederer, or any of them, his true and lawful attorneys
and agents, each with full power and authority to act as such without
the other, to sign the name of the undersigned to the Company's fiscal
1995 Annual Report on Form 10-K, and any amendments thereto, filed with
the Securities and Exchange Commission under the Securities Exchange Act
of 1934 and the related rules and regulations thereunder, the
undersigned hereby ratifying and confirming all that said attorneys and
agents, or any of them, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed and delivered these
presents as of this 9th day of May, 1995.
/s/ Edward C. McIrvine
<TABLE>
FIVE YEAR SUMMARY OF OPERATIONS
<S> <C> <C> <C>
Year Ended March 31, 1995 1994 1993
FOR THE YEAR
Net Sale s $34,336,000 $31,355,000 $29,431,000
Income Before Taxes and
Cumulative Effect of a
Changes in Accounting
Principle 2,592,000 1,571,000 2,356,000
Provision for Taxes 1,078,000 427,000 919,000
Cumulative Effect of a
Change in Accounting
Principle 131,000
Net Income 1,514,000 1,275,000 1,437,000
AT YEAR END
Current Assets $17,953,000 $15,836,000 $15,764,000
Current Liabilities 2,990,000 2,389,000 3,559,000
Working CapitaL 14,963,000 13,447,000 12,205,000
Total AssetS 24,745,000 22,780,000 22,543,000
Long-term Debt and
Obligations under
Capital Lease 746,000 1,145,000 1,149,000
Deferred Compensation 1,528,000 1,424,000 1,229,000
Shareholders' Equity 19,194,000 17,492,000 16,059,000
Number of EmployeeS 320 354 389
Number of Shareholders 3,000 3,000 2,800
PER SHARE AMOUNTS
Net Income $.52 $.44 $.51
Shareholders' Equity $6.89 $6.50 $5.98
RATIOS/PERCENTAGES
Gross Profit/Sales 39.3% 37.7% 38.7%
Pre-Tax Profit/Sales 7.5% 5.0% 8.0%
Net Income/Sales 4.4% 4.1% 4.9%
Current Ratio 6.0 to 1 6.6 to 1 4.4 to 1
<PAGE>
Year Ended March 31, 1992 1991*
FOR THE YEAR
Net Sales $27,254,000 $28,135,000
Income Before Taxes and
Cumulative Effect of a
Changes in Accounting
Principle 2,351,000 2,958,000
Provision for Taxes 857,000 1,050,000
Cumulative Effect of a
Change in Accounting
Principle
Net Income 1,494,000 1,908,000
AT YEAR END
Current Assets $13,852,000 $13,755,000
Current Liabilities 3,117,000 2,778,000
Working CapitaL 10,734,000 10,977,000
Total AssetS 20,942,000 20,630,000
Long-term Debt and
Obligations under
Capital Lease 1,622,000 3,120,000
Deferred Compensation 1,157,000 1,156,000
Shareholders' Equity 14,481,000 12,952,000
Number of EmployeeS 301 340
Number of Shareholders 2,300 2,200
PER SHARE AMOUNTS
Net Income $.53 $.67
Shareholders' Equity $5.57 $5.06
RATIOS/PERCENTAGES
Gross Profit/Sales 38.8% 40.2%
Pre-Tax Profit/Sales 8.6% 10.5%
Net Income/Sales 5.5% 6.8%
Current Ratio 4.4 to 1 5.0 to 1
* Restated to give effect to the September 13, 1991 8% stock dividend.
</TABLE>
EXHIBIT S-2
Report of Independent Accountants
on Financial Statement Schedules
To the Shareholders of
Detection Systems, Inc.
Our audits of the financial statements referred to in our report dated
May 11, 1995 appearing on page 24 of the 1995 Annual Report to
Shareholders of Detection Systems, Inc. (which report and financial
statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the Financial Statement Schedules listed
in the preceding index of this Form 10-K. In our opinion, these
Financial Statement Schedules present fairly, in all material respects,
the information set forth therein when read in conjunction with the
related financial statements.
PRICE WATERHOUSE LLP
Rochester, New York
May 11, 1995
Exhibit S-8
DETECTION SYSTEMS, INC.
SCHEDULE VIII - RESERVES
Year ended March 31, 1995
Additions
Balance at charged to Deduction: Balance
beginning costs and Write-off at end
Description of year expenses of assets of year
- ------------------------------- -------- -------- -------- --------
Allowance for doubtful accounts $100,000 $349,550 $349,550 $100,000
Allowance for obsolete inventory 235,000 178,742 38,742 375,000
-------- -------- -------- --------
$335,000 $528,292 $388,292 $475,000
======== ======== ======== ========
Year ended March 31, 1994
Additions
Balance at charged to Deduction: Balance
beginning costs and Write-off at end
Description of year expenses of assets of year
- ------------------------------- -------- ------- ------- --------
Allowance for doubtful accounts $100,000 $ 779 $ 779 $100,000
Allowance for obsolete inventory 265,000 10,090 40,090 235,000
-------- ------- ------- --------
$365,000 $10,869 $40,869 $335,000
======== ======= ======= ========
Year ended March 31, 1993
Additions
Balance at charged to Deduction: Balance
beginning costs and Write-off at end
Description of year expenses of assets of year
- ------------------------------- -------- ------- -------- --------
Allowance for doubtful accounts $100,000 $ 46,028 $ 46,028 $100,000
Allowance for obsolete inventory 265,000 119,537 119,537 265,000
-------- ------- -------- --------
$365,000 $165,565 $165,565 $365,000
======== ======== ======== ========
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000028365
<NAME> DETECTION SYSTEMS INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 4,580,751
<SECURITIES> 2,437,842
<RECEIVABLES> 5,016,052
<ALLOWANCES> (100,000)
<INVENTORY> 5,255,724
<CURRENT-ASSETS> 17,953,275
<PP&E> 17,416,086
<DEPRECIATION> (10,770,002)
<TOTAL-ASSETS> 24,745,293
<CURRENT-LIABILITIES> 2,989,521
<BONDS> 0
<COMMON> 6,469,936
0
0
<OTHER-SE> 12,724,265
<TOTAL-LIABILITY-AND-EQUITY> 24,745,293
<SALES> 34,336,336
<TOTAL-REVENUES> 34,449,756
<CGS> 20,829,843
<TOTAL-COSTS> 31,689,210
<OTHER-EXPENSES> 10,859,367
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 168,557
<INCOME-PRETAX> 2,591,989
<INCOME-TAX> 1,077,500
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,514,489
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
