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, 1996
[ ] 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:
Common Stock, Par Value $.05 Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
the filing requirements for the past 90 days. Yes [x] No [ ]
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. [x]
As of June 21, 1996 the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $26,791,996
As of June 26, 1996 there were outstanding 2,834,159 shares of the
registrant's common stock, par value $.05 per share.
<PAGE>
PART I
ITEM l. BUSINESS
GENERAL
Detection Systems, Inc. ("Company") designs, manufactures and markets
electronic detection, control and communication equipment for the security
and fire protection industries. An electronic alarm system consists of
intrusion and fire detectors as well as control and communication 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
communication equipment and, in most cases, a bell or siren to provide a
local alarm. Communication 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 a broad line of security, fire and access control components
and systems. These products are used worldwide by professional installation
and service companies to protect life and property in commercial,
industrial, institutional and residential environments.
On February 12, 1996, Detection Systems acquired all of the outstanding
stock of Radionics, Inc., a leading U.S. manufacturer of security, fire and
access control systems, from Expamet, Inc., a wholly-owned subsidiary of
Expamet International PLC, a United Kingdom corporation. This acquisition
more than doubled the sales rate of the Company. Radionics designs and
manufactures keypads, control/communicators and central station receivers
for the intrusion alarm, fire alarm and access control markets. In addition
to selling its own manufactured products, Radionics buys and resells certain
access control products manufactured by PAC, its former U.K. affiliate, and
certain sensors manufactured by third parties. Radionics sells its products
to a national dealer/installer network which combines its products with
other components from other suppliers, including Detection Systems, to form
complete systems.
The acquisition of Radionics was accounted for as a purchase for financial
reporting purposes and accordingly, the assets and liabilities were restated
to reflect their fair market value as of the acquisition date.
The Company has several subsidiaries other than Radionics. During fiscal
1995, the Company provided an equity investment of $100,000 to its Detection
Systems International, Inc. ("DSII") subsidiary for the purpose of
marketing international opportunities for its electronic security and fire
protection products. As a result of this investment, two foreign
subsidiaries were established, one in Hong Kong and the other in Sydney,
Australia. The Company provided an equity investment of $300,000 each to
Detection Systems (HK) Limited and Detection Systems (AUST) Pty. Ltd. ("DS
Australia"). Control of Hong Kong changes from British rule to Chinese rule
as of July 1, 1997. The Company does not believe it is possible to
determine the impact this change will have on its operations. During fiscal
1996, DS Australia established branch offices in Melbourne and Brisbane. In
addition, DSII established a branch office in Paris, France, and opened a
branch office in the United Kingdom during the first quarter of 1997. Also,
a manufacturing facility was leased in Southeast Asia, The Company began
manufacturing operations and product shipments to customers from that
facility during the third fiscal quarter of 1996. The Company owns 100
percent of the common stock of DSII and its foreign subsidiaries.
The Company maintains a separate Security Escort subsidiary, Emergency
Communications, Inc. ("ECI"), to facilitate joint ventures in the help call
market, where there may be financial requirements in excess of the Company's
internal financing capability. The Company initiated a promotional campaign
of its Security Escort multiple user help call system in fiscal 1996 to
engineered system companies, for use in diverse environments such as
apartment complexes, condominiums, retirement communities, hospitals,
correctional institutions, government facilities and manufacturing
facilities. Sales have been made in Australia for use in correctional
facilities and total coverage systems are operational in two U.S. 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, 1996, the Company owned approximately 61.5% of
ECI's common stock. Once all shares are fully vested, the Company will own
approximately 51.8% of ECI's common stock. At June 1, 1996, the Company had
provided ECI with approximately $1.1 million in loans.
A former subsidiary, Activity Monitoring Systems, Inc. ("AMS"), was involved
in the development of wireless electronic house arrest products to be used
by various government agencies. Further development and marketing efforts
were stopped and on December 20, 1995, this corporation was legally
dissolved.
The Company's DSII subsidiary entered into a joint venture agreement with
the Chinese government for the purpose of designing, manufacturing and
distributing security products internationally. The Company does not
believe this agreement will have a material impact on revenues and earnings
in fiscal 1997.
PRODUCT LINE
The Company's product lines consist of its traditional security/fire
detection line, its newly acquired Radionics control system line (which
greatly expands its existing control system line), and the Company's
Security Escort multiple user help call system.
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 ("duals"), (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.
Many of the Company's security detectors feature enhanced signature
recognition techniques. The Company's newest duals can be used in
residential or commercial environments where animals may be present.
During the past several years the Company has worked with outside
contractors for special purpose limited volume devices important to its
catalog that are sold under the Detection Systems name.
The Company's fire detection product line includes beam smoke detectors,
photoelectric spot smoke detectors and ionization spot smoke detectors. The
photoelectric spot and ionization spot detectors have interchangeable 2- and
4-wire bases. The Company's smoke detector line is comprised of detectors
for both residential and commercial applications. The acquisition of
Radionics adds fire control panels to the Company's product line.
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 used to monitor large security system
applications. The acquisition of Radionics enhances the Company's control
system product lines. Radionics has been considered one of the leading U.S.
based manufacturers of control and communication equipment, partially due to
their success in marketing their products to dealer networks.
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.
The use of ARDIS increases alarm system reliability and reduces
vulnerability to tampering.
Detection Systems Security Escort multiple user help call system uses a
digital micro-cellular architecture to provide its subscribers with 24 hour
protection. A 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."
Radionics sells its products to a national dealer/installer network which
combines its products and other supplier components to form complete
systems. From its inception, Radionics has sold its products to end users
in the high-end commercial, retail and governmental markets. More recently,
Radionics has broadened its product offering by supplying lower-end products
suitable for the residential market where there is considerable growth.
Detection Systems is actively promoting the Security Escort multiple user
help call system throughout the United States and in Australia. 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,
correctional facilities, governmental facilities and manufacturing
facilities.
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 Regional Sales and Service
Managers. The Company's sales managers provide technical support to
customers regarding system design, installation and service. The Company
also conducts regular training programs for its customers' as well as
technical seminars at national and regional shows. A call to the Company's
800 sales number typically results in same day shipment of most standard
products from two warehouses. To support the on-site installer or service
person, toll-free 800 lines connect directly to the Technical Service
Department.
For the Company's international program, sales offices have been opened in
Australia, China, France, Hong Kong and the United Kingdom. Each office is
staffed with qualified professionals with extensive security industry sales
experience. They are charged with the responsibility of promoting the
Company's products in the targeted countries, determining future customer
needs and providing technical support. In addition, the company has
established distributors and/or sales representatives in 26 additional
countries. These include Belgium, Brazil, Colombia, Czech, Estonia, Hungary,
India, Latvia, Lithuania, Malaysia, the Netherlands, New Zealand, Norway,
Russia, Singapore, Slovakia, South Africa, Sweden, Taiwan, Thailand and the
Ukraine.
The Company's sales strategy includes providing its customers with a full
product catalog to fulfill the majority of their electronic security and
fire protection detector and system needs. An example of this strategy was
the Radionics acquisition. In other cases, this will be accomplished
through strategic alliances with other vendors to allow the Company to be a
full-line supplier. Foreign sales (including sales to Canada) accounted for
approximately 21% of net sales in fiscal 1996. See Note 10 to the Company's
consolidated financial statements for more detailed information about
foreign operations and export sales.
Domestically, the combined companies of Detection Systems and Radionics
maintain regional sales/training personnel in Arizona, California, Georgia,
Florida, Illinois, Indiana, Massachusetts, Nebraska, Pennsylvania, Ohio,
Tennessee, Texas, Virginia and Washington. In addition, Detection Systems
maintains stock at the Radionics' facility in Salinas, California. Some of
the Company's international sales efforts are handled out of the corporate
office in Fairport; however, distribution centers have been established in
Australia and Hong Kong. Stocking for the Company's United Kingdom
distribution center is scheduled for July of 1996.
Although the Company has a broad customer base, it does have several
customers who individually account for substantial amounts of business. In
fiscal 1996, sales to Securitylink from Ameritech (formerly known as the
National Guardian Corporation) accounted for approximately 14% of the
Company's consolidated total net sales. Sales to 47 additional customers,
including fourteen distributors, accounted for an additional 53% of net
sales. Although the Company s business is not seasonal, a significant
change in purchases by one of these customers could result in fluctuations
in sales and profit. In fiscal 1995 and 1994, sales to National Guardian
and ADT, both of whom purchased the Company's products for use as components
in systems that they marketed, accounted for 22% and 23% in fiscal 1995 and
17% and 20% in fiscal 1994 of the Company's total net sales respectively.
The acquisition of Radionics in February 1996, the Company's international
initiative and its increased use of distributors have reduced the effect of
sales fluctuations associated with the Company's largest customers.
MANUFACTURING
The Company manufactures 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 at the Fairport facility. Emphasis on
technological innovation and reliability has resulted in the Company's
products having an excellent field reputation. Many units manufactured in
the 1970's are still in active service today.
Before product assembly, components are sample tested for compliance with
quality control standards and critical components are individually tested.
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.
The Company established a second manufacturing facility in Southeast Asia
during fiscal 1996. Manufacturing operations and first product shipments
began in October 1995. Detection Systems has duplicated in its Southeast
Asia facility the same proven manufacturing procedures and processes used in
its Fairport facility. The Company expects to transition products from
Detection Systems and Radionics to the Southeast Asia manufacturing facility
to take advantage of lower production costs at this facility.
The Radionics' manufacturing facility also utilizes the same quality proven
technology as used in Fairport. One difference is that Radionics uses a
pull style production process whereby production is scheduled to fulfill
certain finished goods stock levels each day. Because of this scheduling
process, Radionics is able to maintain lower levels of finished goods
inventory.
COMPETITION
The Company believes it is in the top five of security industry
manufacturers in the United States market. The U.S. security systems
industry consists of approximately 40 manufacturers providing a wide range
of products, from simple sensor components to complete systems. The Company
believes its three major competitors are Pittway Corporation, the Berwind
Group and C&K 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 competes on the bases of performance, features,
quality, reliability and delivery of its products; its customer technical
support services offered; and 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.
RESEARCH AND DEVELOPMENT
During the fiscal years ended March 31, 1994, 1995 and 1996, the Company
expended approximately $4,161,000, $4,070,000 and $4,700,000 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, 1996, the Company employed approximately 595 persons worldwide.
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. It is
the Company's practice to maintain four weeks of finished goods inventory
for all products in order to meet customer requirements.
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 re-financed as part of the Radionics
acquisition and the mortgage loan is secured by a lien on the land and
building.
Radionics manufacturing, research and general office operations are
conducted at its leased 156,000 square foot facility located in Salinas,
California. The lease extends to July of 1999.
Internationally, the Company has leased a 70,000 square foot manufacturing
facility in Southeast Asia and has offices/distribution centers located in
Australia, France, Hong Kong and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable
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, 1996.
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 National Market tier of The
Nasdaq Stock Market under the symbol: DETC. On June 21, 1996, the closing
price, as reported by The Nasdaq Stock Market, was $14.00 per share, and the
number of shareholders was approximately 3,200. Certain information
regarding the price range of the Company's Common Stock (quarterly high and
low) is presented below:
PRICE RANGE OF COMMON STOCK
(The quarterly high and low bid price for the Company's common stock during
the past three years in dollars)
Fiscal Fiscal Fiscal Fiscal
1997* 1996 1995 1994
High Low High Low High Low High Low
First Quarter
Ended June 30 18-1/2 9-1/2 7-3/4 6-1/2 10-1/2 6 8-1/4 5-3/4
First Quarter
Ended September 30 7-3/4 5-1/2 9-1/2 6-1/8 6-3/4 5-3/4
Third Quarter
Ended December 31 7-7/8 5-7/8 9-3/85-1/2 12 6-1/8
Fourth Quarter
Ended March 31 9-3/4 5-1/2 8 5-3/4 13 9
*Through June 24, 1996
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.
ITEM 6. SELECTED FINANCIAL DATA.
The fourth quarter fiscal 1996 results are not comparable to the earlier
periods due to the acquisition of Radionics on February 12, 1996. Interim
quarterly results for the Company over the past three years were as follows
(thousands of dollars, except per share data):
Fiscal INCOME
Year Ending NET GROSS NET PER
March 31, SALES MARGIN INCOME SHARE
- ------------------ ------ ------ -----------
1996
Fourth Quarter $15,204 $4,359 $(7,353) ($2.57)
Third Quarter 8,564 2,572 (596) (.21)
Second Quarter 9,299 3,380 (69) (.02)
First Quarter 8,791 3,568 163 .06
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 --
<PAGE>
The Company's five year summary of operations is presented below:
For the Year Ended
March 31, 1996 1995 1994
----------- ----------- -----------
Net Sales $41,858,000 $34,336,000 $31,355,000
Income Before Taxes
and Cumulative
Effect of a Change
in Accounting Principle (10,665,000) 2,592,000 1,571,000
Provision for Taxes (2,810,000) 1,078,000 427,000
Cumulative Effect
of a Change in
Accounting Principle -- -- 131,000
Net (Loss) Income (7,855,000) 1,514,000 1,275,000
At Year End
Current Assets $28,426,000 $17,953,000 $15,836,000
Current Liabilities 12,714,000 2,990,000 2,389,000
Working Capital 15,712,000 14,963,000 13,447,000
Total Assets 48,898,000 24,745,000 22,780,000
Long Term Debt and
Obligations Under
Capital Lease 17,936,000 746,000 1,145,000
Deferred Compensation 1,746,000 1,528,000 1,424,000
Shareholders' Equity 11,569,000 19,194,000 17,492,000
Number of Employees 595 320 354
Number of Shareholders 3,200 3,000 3,000
Per Share Amounts
Net Income ($2.74) $.52 $.44
Shareholders' Equity 4.12 6.89 6.50
Ratios/Percentages
Gross Profit/Sales 33.2% 39.3% 37.7%
Pre-tax (Loss)Profit/Sales (25.5%) 7.5% 5.0%
Net (Loss) Income/Sales (18.8%) 4.4% 4.1%
Current Ratio 2.2 to 1 6.0 to 1 6.6 to 1
March 31, 1993 1992
----------- -----------
Net Sales $29,431,000 $27,254,000
Income Before Taxes
and Cumulative
Effect of a Change
in Accounting Principle 2,356,000 2,351,000
Provision for Taxes 919,000 857,000
Cumulative Effect
of a Change in
Accounting Principle -- --
Net (Loss) Income 1,437,000 1,494,000
At Year End
Current Assets $15,764,000 $13,852,000
Current Liabilities 3,559,000 3,117,000
Working Capital 12,205,000 10,734,000
Total Assets 22,543,000 20,942,000
Long Term Debt and
Obligations Under
Capital Lease 1,149,000 1,622,000
Deferred Compensation 1,229,000 1,157,000
Shareholders' Equity 16,059,000 14,481,000
Number of Employees 389 301
Number of Shareholders 2,800 2,300
Per Share Amounts
Net Income $.51 $.53
Shareholders' Equity 5.98 5.57
Ratios/Percentages
Gross Profit/Sales 38.7% 38.8%
Pre-tax (Loss)Profit/Sales 8.0% 8.6%
Net (Loss) Income/Sales 4.9% 5.5%
Current Ratio 4.4 to 1 4.4 to 1
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company's sales increased 21.9% in fiscal 1996 compared to fiscal 1995,
and 9.5% in fiscal 1995 compared to fiscal 1994. Sales in fiscal 1996
benefited from $5.98 million in sales from the Company's subsidiary,
Radionics, which was acquired on February 12, 1996. In addition,
international sales increased as a result of the Company's international
initiative to $8.77 million as compared to $3.94 million in fiscal 1995.
These increases offset a decline in domestic national account sales. The
fiscal 1995 increase was reflective of unit sales growth in most product
categories and a continued preference for the Company's product line by
professional alarm installation and service companies. The Company's
commitment to the accomplishment of long term sales growth is reflected by
both the acquisition of Radionics and investments in its international
marketing initiative.
Gross profit margins were 33.2% for the fiscal year ending March 31, 1996 as
compared to 39.3% for the same period a year ago. Gross margins were
reduced by startup costs associated with the Company's international
initiative including its new Southeast Asia manufacturing facility, as well
as by a decline in average selling prices. The Company believes its new
manufacturing facility will allow it to achieve reduced manufacturing costs
and improved profit margins in the future.
The acquisition of Radionics by Detection Systems in February 1996 has more
than doubled the sales volume of the Company on an ongoing basis. This
acquisition and the Company's aggressive foreign sales program are expected
to facilitate the Company's long-term growth. It is management's goal that
within the next five years international sales will represent 50% of the
Company s sales.
To facilitate the marketing of the Company's products internationally, the
Company established one domestic and two foreign subsidiaries in late fiscal
1995. Detection Systems International Inc., currently operating out of
Salinas, California, was established to oversee the international program.
Detection System (HK) Limited was established in Hong Kong to penetrate
Asian markets and to oversee the Southeast Asia manufacturing facility.
Detection Systems (AUST) Pty. Ltd. was established in Australia to develop
and promote the Company s products in that marketplace. This Australian
subsidiary now has three distribution branches in operation. In addition to
these subsidiaries, the Company has branch offices in France and the United
Kingdom.
On February 12, 1996, Detection Systems, Inc. purchased all of the equity in
Radionics, Inc. for approximately $18 million. Funding was provided by a
commercial lending institution pursuant to a bridge loan facility. This
loan was subsequently refinanced into a permanent facility consisting of a
mortgage loan and term loan. Both the mortgage loan and term loan provide
for the payment of interest only for the first 18 months. The repayment of
principal begins on December 1, 1997. Interest is currently calculated
based on LIBOR plus 200 points. The points will decrease if the Company
satisfies certain financial performance objectives.
The Radionics acquisition was treated as a purchase for financial reporting
purposes. Accordingly, the assets and liabilities were adjusted to reflect
their fair market value as of the acquisition date. In connection with this
transaction, certain liabilities were recorded related to actions the
Company must perform to efficiently combine the operations of Detection
Systems and Radionics.
The Company engaged a nationally recognized, independent appraisal firm to
express an opinion on the fair market value of the assets acquired. This
opinion served as the basis for allocation of the purchase price to the
various classes of assets. The appraisal included both tangible and
identifiable intangible assets.
The Company allocated the total purchase price as follows:
Accounts receivable $ 4,410,300
Inventories 4,545,300
Other current assets 2,477,400
Accounts payable and other
current liabilities (6,332,000)
----------
Net working capital acquired 5,101,000
Fixed assets 1,803,600
Identifiable intangible assets 1,950,000
Existing product lines 890,000
Purchased in-process research and
development 9,350,000
Goodwill 1,004,500
Deferred tax liabilities related to
identifiable intangible assets (1,931,900)
----------
Total $18,167,200
==========
The identifiable intangible assets, which consisted of Radionics' tradename
and customer lists, will be amortized over 20 years. The valuation for both
the existing product lines and in-process research and development, was
accomplished through the application of an income approach. Projected debt-
free income, revenue net of provision for operating expenses, income taxes
and returns on requisite assets from such items were discounted to a present
value.
Existing product lines included both "current products," representing
products currently in the marketplace at the date of acquisition, and "in-
process research and development," for products still in the development
stage and technically proven. The fair market value for current products
was determined to be $890,000. This amount was recorded as an asset and
will be amortized on a straight line basis over three years. The fair
market value of the purchased "in-process research and development" was
valued at $9,350,000. In accordance with generally accepted accounting
practices, this amount was expensed upon acquisition in the fourth quarter
of fiscal 1996.
Interest expense increased 90.1% for fiscal 1996 as compared to fiscal 1995
and remained consistent in fiscal 1995 versus fiscal 1994. The increase in
fiscal 1996 was the direct result of the debt financing associated with the
Radionics acquisition.
Production expenses increased 34.3% for fiscal 1996 versus fiscal 1995 and
increased 6.6% for fiscal 1995 versus fiscal 1994. The fiscal 1996 increase
was primarily attributable to the expensing of startup costs associated with
the Company's Southeast Asia manufacturing facility. The fiscal 1995
increase was consistent with the increase in sales in fiscal 1995.
Development expenses increased by approximately $629,000 for fiscal 1996
versus fiscal 1995 and decreased by approximately $90,000 for fiscal 1995
versus fiscal 1994. The increase in 1996 was attributable to Radionics'
research and development efforts since the acquisition date. Development
expenses in 1995 compared to 1994 remained consistent. It is anticipated
that combined Detection Systems and Radionics product line development
expenses will be between $7.0 and $8.0 million in fiscal 1997.
A non-recurring charge of $9.3 million was recorded to operations in the
last quarter of fiscal 1996. This represented the value assigned to
Radionics technology that was determined to be under development and
technically unproven at the time of the acquisition. Sales of products
incorporating some of this developing technology are expected to begin in
fiscal 1997.
Marketing, administrative and general expenses increased 54.9%, for fiscal
1996, as compared to fiscal 1995 and increased 11.1% in fiscal 1995 compared
to fiscal 1994. The increase in fiscal 1996 resulted from the startup of the
two foreign subsidiaries and several branch offices. It was also affected
by the write-off of business system software in fiscal 1996.
The Company incurred a pretax loss of $10.7 million for the fiscal year
ended March 31, 1996. This compares with pretax income of $2.6 million for
fiscal 1995 and $1.6 million for fiscal 1994. The pretax loss was mainly
attributable to the non-recurring technology under development charge
resulting from the acquisition of Radionics as discussed above. However,
the expensing of international startup activities also contributed to pretax
losses in fiscal 1996. International startup expenses included product
conversions, product approval costs, the opening of the Company's Southeast
Asia manufacturing facility and market introduction costs.
The Company s effective income tax rate for fiscal 1996 was a benefit of
26.4% as compared to a provision of 41.6% and 27.2% for fiscal 1995 and
1994, respectively. The benefit rate for fiscal 1996 resulted from the
Company s inability to fully recognize tax benefits associated with certain
subsidiary losses in the current fiscal year. However, the Company will
recognize a benefit from these losses when recognition of the benefit
becomes more likely than not. The exceptionally low tax rate for fiscal
1994 was due to the 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.
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 two largest customers accounted for 14% and 10%
during fiscal 1996 and 22% and 23% of total sales during fiscal 1995,
respectively. A significant change in purchases by one of these customers
could result in fluctuations in sales and profit. The Company's continued
emphasis on partnership opportunities with its national and regional
accounts, the increased support of domestic and international wholesale
distribution companies for the promotion of the Company's products, the
acquisition of Radionics, and the Company s international initiative have
collectively reduced the effect of sales fluctuations associated with the
Company's largest customers.
The Company initiated a promotional campaign of its Security Escort multiple
user help call system to prospective engineered system companies, both
domestically and internationally, in fiscal 1996. This was the first time
the system had been offered to markets other than colleges and universities.
Potential opportunities for the system include diverse environments such as
apartment complexes, condominiums, retirement communities, hospitals,
correctional institutions and manufacturing facilities. As a result of this
broader marketing initiative, sales have been made in Australia for use in
correctional facilities.
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 1996, 1995 and 1994, inflation did not have a significant
impact on the Company s business.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 1996, the Company had net working capital of $15.7 million,
including approximately $0.9 million in cash, cash equivalents and short-
term investments. This compares with net working capital of $15.0 million,
including approximately $7.0 million in cash, cash equivalents and short-
term investments at the end of fiscal 1995. The decrease is due to
increased levels of inventory and other costs associated with the startup of
the Company's international initiative.
The Company has a $6.5 million bank commitment for a revolving line of
credit facility that extends into fiscal 1999. This commitment includes an
interest rate based on the London Interbank Offered Rate plus applicable
points based on the Company s performance. The balance becomes fully due
and payable on the Revolving Line Termination Date. At March 31, 1996, the
Company had short-term borrowings of $1.2 million from its line of credit.
The Company believes that current levels of cash, cash equivalents and
short-term investments, together with its available line of credit, will
meet its foreseeable working capital needs. Toward the end of fiscal 1996,
most cash requirements for the international initiative were derived from
operations of overseas subsidiaries. This trend is expected to continue.
The acquisition of Radionics, Inc. on February 12, 1996 resulted in the
addition of $5.1 million in working capital. This significantly impacts the
March 31, 1996 asset and liability balances as they compare with the prior
fiscal year ended March 31, 1995.
The Company expects to continue expenditures on the development of new
products and markets. These expenditures will include continued investment
in security detection, fire detection, security, fire and access control
products as well as several wireless projects. The Company s efforts to
market its products internationally will continue as well.
Accounts receivable increased 113.2% at the end of fiscal 1996 as compared
with fiscal 1995, and decreased 8.9% at the end of fiscal 1995 as compared
with fiscal 1994. The increase at March 31, 1996, was attributable to the
addition of Radionics receivables outstanding, and to a much lesser extent,
to special promotional startup terms offered to international customers.
The Company s standard credit terms are net 30 days, with variations
depending on pricing and prepayment discounts.
Inventories increased by 167.6% at March 31, 1996 as compared with March 31,
1995 and decreased by 10.1% at March 31, 1995 as compared with March 31,
1994. The increase was primarily attributable to the addition of Radionics'
inventory levels at year end. Inventory levels were also higher due to the
build-up of inventory to support the international sales initiative. The
decrease between fiscal 1995 and fiscal 1994 related to shipments of built-
up inventory prior to new product releases. The Company regularly reviews
its reserve of 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 173.6% and 15.2% for fiscal
1996 versus 1995 and fiscal 1995 versus 1994, respectively. A portion of
the increases related to the timing of payments on the Company s commercial
insurance package and property taxes. However, the bulk of the increase
resulted from Radionics' prepaid expenses.
The Company continually reviews its capital assets and upgrades them as
required to insure that its technical and manufacturing capability stay on
the leading edge of the industries it serves. The Company spent
approximately $1 million on manufacturing equipment for its new Southeast
Asia facility during fiscal 1996. The Radionics acquisition resulted in an
increase of $1.8 million in net capital assets.
Accounts payable increased 413.3% at March 31, 1996, as compared with March
31, 1995, and increased 73.6% at March 31, 1995, as compared with March 31,
1994. The fiscal 1996 increase is attributable to the addition of
Radionics' payables at year end and the increase in inventory levels. The
fiscal 1995 increase was attributable to the timing of payments at year end.
Accrued payroll and benefits increased by 45.9% and 16.4% for fiscal 1996
versus 1995 and fiscal 1995 versus 1994, respectively. The fiscal 1996
increase is attributable to the addition of Radionics' and other payroll
accruals. The fiscal 1995 increase was attributable to performance bonus
accruals established at year end.
Other accrued liabilities increased approximately $2.9 million for the year
ended March 31, 1996, as compared with the year ended March 31, 1995. Of
this increase, $2.5 million resulted from the purchase method of accounting
adjustments related to the acquisition of Radionics. These adjustments
pertain to severance and certain other reserves. The remaining $0.4 million
pertains to the Company's international subsidiaries as well as some small
increases in reserves for domestic operations. Other accrued liabilities
decreased 19.0% in fiscal 1995 as compared with fiscal 1994. This decrease
was attributable to the payment of unemployment insurance premiums during
the last fiscal quarter of 1995.
The addition of $17.75 million in long term debt at March 31, 1996 is from
the financing related to the purchase of Radionics, Inc. The addition of
other long term liabilities at March 31, 1996, resulted from a purchase
method of accounting adjustment relating to the acquisition of Radionics.
This adjustment pertains to an unfavorable lease obligation.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required in this section are
included as Exhibit 13 of this Form 10-K.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The officers of the Company are as follows:
Name and Age Position, Offices Held and Year Appointed
Karl H. Kostusiak (57) President (1968)
David B. Lederer (56) Executive Vice President (1968)
George E. Behlke (38) Vice President, Engineering (1995)
R. Wayne Carlton (59) Vice President, National Sales (1993)
Frank J. Ryan (42) Vice President, Secretary and Treasurer (1982)
Lawrence R. Tracy (49) 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 and was named
President of Radionics, Inc. on February 13, 1996. Mr. Behlke has been
employed by the Company in various engineering positions since 1977 and was
promoted in May 1995 to Vice President.
The Company's Proxy Statement for the 1996 Annual Meeting of Shareholders
("Proxy Statement")contains the other information required by Item 10 of
Form 10-K. That information is incorporated into this report in Exhibit 22.
ITEM 11. EXECUTIVE COMPENSATION.
The Company's Proxy Statement contains the information required by Item 11
of Form 10-K. This information is presented in the "Executive Compensation"
section of the Proxy which is incorporated into this report in Exhibit 22.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company has stock purchase agreements with Messrs. Kostusiak and Lederer
which could in the future result in a change of control of the registrant.
These agreements are included in Exhibit 10 of this Form 10-K.
The Company's Proxy Statement contains the information required by Item 12
of Form 10-K. This information is presented in the Proxy which is
incorporated into this report in Exhibit 22.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In the last fiscal year the Company and its subsidiaries contracted with
Adair Law Firm, of which Mr. Adair, a Director of the Company, is the
principal, for legal services rendered for the Company. Mr. Adair also
serves as a member 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 required financial statements and schedules are contained
herein or as exhibits.
(a)(3) See Exhibit Index attached to this Report on Form 10-K.
(b) Forms 8-K and 8K/A have been filed during the last quarter of
the period covered by this report as required for the
acquisition of Radionics. These Forms included for
Radionics, Inc. audited Balance Sheets for the two years
ended December 31, 1995 and three years ending December 31,
1995 for Statement of Operations and Statement of Cash Flows
as well as the accompanying notes. Pro forma financial
statements were also filed with these Forms.
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 28, 1996 By: /s/ Karl H. Kostusiak
Karl H. Kostusiak
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- -----
/s/ Karl H. Kostusiak President and Director June 28, 1996
Karl H. Kostusiak (Principal Executive
Officer)
/s/ Frank J. Ryan Vice President June 28, 1996
Frank J. Ryan Secretary/Treasurer
(Principal Financial
Officer and Principal
Accounting Officer)
Donald R. Adair Director
Mortimer B. Fuller, III Director
David B. Lederer Director
By: s/s Karl H. Kostusiak Attorney-in-Fact June 28, 1996
Karl H. Kostusiak
<PAGE>
EXHIBIT INDEX
Item
No. Exhibits Location
2 Definitive Stock Purchase Incorporated by reference as exhibit
Agreement, dated February 12, 2 of the Company's Form 8K/A filed
1996, for purchase of stock April 29, 1996
of Radionics, Inc.
3(a) Certificate of Incorporation Incorporated by reference to
Exhibit 3(a) of the Company's
1993 Annual Report on Form
10-K
3(b) By-Laws as amended Incorporated by reference to Exhibit
3(b) of the Company's 1993 Annual
Report on Form 10-K
4 Rights of Holders of common Incorporated by reference to Exhibit
stock - 1981 plan 4 of the Company's 1993 Annual Report
on 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 of the Company's 1994 Annual
Report on Form 10-K
10(d) Fleet Amended & Restated Included as Exhibit 10(d) of this
Credit Facility Agreement Form 10-K
10(e) Deferred Compensation Plan Incorporated by reference to Exhibit
10 of the Company's 1993 Annual
Report on Form 10-K
10(f) 1992 Restated Stock Option Incorporated by reference to Exhibit
Plan 22 of the Company's 1995 Annual
Report on Form 10-K
10(g) Key employee bonus plan Incorporated by reference to Exhibit
10 of the Company's 1994 Annual Report
on Form 10-K
10(h) Executive employment contract Included as Exhibit 10(h) of this
with Karl H. Kostusiak Form 10-K
10(i) Executive employment contract Included as Exhibit 10(i) of this
with David B. Lederer Form 10-K
10(j) Executive employment contract Incorporated by reference to Exhibit
with Lawrence R. Tracy 10 of the Company's 1995 Annual
Report on Form 10-K.
10(k) ECI Amended License and Mfg. Included as Exhibit 10(k) of this
Agreement & Amendment No. 1 Form 10-K
10(l) Shareholders Agreements w/ Incorporated by reference to Exhibit
ECI 10 of the Company's 1994 Annual
Report on Form 10-K
10(n) Stock Purchase Agreements Incorporated by reference to Exhibit
10 of the Company's 1995 Form 10-K
10(o) Joint Venture Agreement for Included as Exhibit 10(o) of this
Establishment of D.S. First Form 10-K
Systems (Beijing) Limited
11 Statement re: Computation of Included as Exhibit 11 of this Form
Per Share Earnings 10-K
13 Excerpts from Annual Report Included as Exhibit 13 of this Form
10-K
22 Proxy Statement Included as Exhibit 22 of this Form
10-K
24 Powers of Attorney Included as Exhibit 24 of this Form
10-K
27 Financial Data Schedule Included as Exhibit 27 of this Form
10-K
<PAGE>
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
/s/ PRICE WATERHOUSE LLP
Rochester, New York
May 11, 1995
<PAGE>
Exhibit 11
DETECTION SYSTEMS, INC.
COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Year Ended March 31, 1996 1995 1994
---- ---- ----
Income before cumulative effect
of a change in accounting principle $(7,855,243) $1,514,489 $1,144,641
Add - Interest on deferred compensation 15,277 51,032 30,296
--------- --------- ---------
Income before cumulative effect of a
change in accounting principle
applicable to common stock (7,839,966) 1,565,521 1,174,937
Cumulative effect of change in
accounting principle 130,800
--------- --------- ---------
Adjusted net income applicable to
common stock (7,839,966) $1,565,521 $1,305,737
========= ========= =========
Number of shares:
Weighted average number of shares 2,797,943 2,746,756 2,682,542
Add - Common stock equivalents due to
Assumed exercise of stock options and
warrants 1,530 30,885 46,361
Assumed conversion of shares earned in
deferred compensation plan 57,353 211,497 209,170
---------- ---------- ----------
Total common and common equivalent
shares 2,856,826 2,989,138 2,938,073
========= ========= =========
Earnings per common and common equivalent
share (1):
Income before cumulative effect of a
change in accounting principle ($2.74) $.52 $.40
Cumulative effect of a change in
accounting principle .04
---- ---- ---
Net income ($2.74) $.52 $.44
NOTES:
(1) All per share amounts reflect the September 13, 1991 8% stock dividend.
<PAGE>
Exhibit 11
DETECTION SYSTEMS, INC.
COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Year Ended March 31, 1993 1992
---- ----
Income before cumulative effect of
a change in accounting principle $1,436,852 $1,494,128
Add - Interest on 9% convertible 13,500 54,000
debentures (2)
Add - Interest on deferred compensation 33,071 26,240
---------- ---------
Income before cumulative effect of a
change in accounting principle applicable
to common stock 1,483,423 1,574,368
Cumulative effect of change in accounting
principle
--------- ---------
Adjusted net income applicable to common
stock $1,483,423 $1,574,368
========== ==========
Number of shares:
Weighted average number of shares 2,632,812 2,573,604
Add - Common stock equivalents due to -
Assumed exercise of stock options and
warrants 65,307 115,237
Assumed conversion of shares earned in
deferred compensation plan 187,729 134,460
Assumed conversion of convertible
debentures(2) 31,641 126,563
-------- ---------
Total common and common equivalent shares 2,917,489 2,949,864
========= =========
Earnings per common and common equivalent
share (1):
Income before cumulative effect of a
change in accounting principle $.51 $.53
Cumulative effect of a change in accounting
principle
---- ----
Net income $.51 $.53
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 13
DETECTION SYSTEMS, INC.
SCHEDULE VIII - RESERVES
Year ended March 31, 1996
-------------------------
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 $270,000 $135,000 $235,000
Allowance for obsolete inventory 375,000 1,025,000 420,800 979,200
-------- -------- -------- --------
$475,000 $1,295,000 $555,800 $1,214,200
======== ======== ======== =========
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
======== ======= ======= ========
AMENDED AND RESTATED CREDIT FACILITY AGREEMENT
THIS AGREEMENT is made as of the 31st day of May, 1996, by and
among DETECTION SYSTEMS, INC., a corporation formed under the laws of the
State of New York with offices at 130 Perinton Parkway, Fairport, New York
14450 ("Detection"), RADIONICS, INC., a corporation formed under the laws of
the State of California with offices at 1800 Abbott Street, Salinas,
California 93901 ("Radionics"), and FLEET BANK, a bank and trust company
formed under the laws of the State of New York with offices at One East
Avenue, Rochester, New York 14638 ("Bank").
This Agreement amends, restates, and replaces in its entirety
the Credit Facility Agreement among the parties to this Agreement dated as
of February 12, 1996.
The parties hereby agree as follows:
ARTICLE 1 - DEFINITIONS
1.1 The following terms shall have the following meanings
unless otherwise expressly stated herein:
"Affiliate" shall mean any entity which directly or indirectly,
or through one or more intermediaries, Controls or is Controlled By or is
Under Common Control with the Borrower.
"Agency" shall mean the County of Monroe Industrial Development
Agency, a public benefit corporation formed under the laws of the State of
New York.
"Applicable Base Rate Margin" shall mean the following amounts
for the following respective ratios of Funded Debt to EBITDA, calculated for
the Borrower and Eligible Subsidiaries on a consolidated basis and without
duplication in accordance with GAAP:
Ratio Margin (Basis Points)
5 to 1 or greater 75.0
4 to 1 or greater and less than 5 to 1 50.0
3 to 1 or greater and less than 4 to 1 37.5
2 to 1 or greater and less than 3 to 1 12.5
Less than 2 to 1 0.0
The Applicable Base Rate Margin shall be adjusted at the beginning of
each three month period commencing either March 1, June 1, September 1, and
December 1 respectively, and shall be established for that period based upon
the average rolling ratios shown by the Borrower s financial statements for
the four fiscal quarters ending on the most recent December 31, March 31,
June 30, or September 30 respectively.
"Applicable LIBOR Margin" shall mean the following amounts for
the following respective ratios of Funded Debt to EBITDA, calculated for the
Borrower and Eligible Subsidiaries on a consolidated basis and without
duplication in accordance with GAAP:
Ratio Margin (Basis Points)
5 to 1 or greater 200.0
4 to 1 or greater and less than 5 to 1 175.0
3 to 1 or greater and less than 4 to 1 162.5
2 to 1 or greater and less than 3 to 1 125.0
Less than 2 to 1 112.5
The Applicable LIBOR Margin shall be adjusted at the beginning of each
three month period commencing either March 1, June 1, September 1, and
December 1 respectively, and shall be established for that period based upon
the average rolling ratios shown by the Borrower s financial statements for
the four fiscal quarters ending on the most recent December 31, March 31,
June 30, or September 30 respectively.
"Bank" shall mean Fleet Bank and its successors, legal
representatives, and assigns.
"Base Rate" shall mean the higher of the Federal Funds Rate plus
100 basis points, or the Prime Rate.
"Borrower" shall mean Detection and Radionics, collectively and
both of them, and their respective successors, legal representatives, and
assigns.
"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 Obligations), costs, and expenses (including without limitation
penalties) it may reasonably incur as a result of or in connection with such
prepayment.
"Business Day" shall mean any day except for a Saturday, Sunday,
or banking holiday in the State of New York.
"Controls" (including the terms "Controlled By" or "Under Common
Control") shall mean but not be limited to the ownership of twenty-five
percent (25%) or more of the outstanding shares of capital stock of any
corporation having voting power for the election of directors, whether or
not at the same time stock of any other class or classes has or might have
voting power by reason of the happening of any contingency, or ownership of
twenty-five percent (25%) or more of any interest in any partnership, or any
other interest by reason of which a controlling influence over the affairs
of the entity may be exercised.
"Current Assets" shall mean all assets treated as current assets
in accordance with GAAP.
"Current Liabilities" shall mean treated as current liabilities
in accordance with GAAP, including without limitation all obligations
payable on demand or within one year after the applicable measurement date
as well as installment, reimbursement, or sinking fund payments payable
within one year after the applicable measurement date, but excluding any
such liabilities which are renewable or extendable at the option of the
obligor to a date more than one year after the applicable measurement date.
"Current Ratio" shall mean Current Assets compared to Current
Liabilities.
"Debt" for any person or entity shall mean (i) indebtedness of
such person or entity for borrowed money, (ii) obligations of such person or
entity for the deferred purchase price of property or services (except trade
payables incurred in the ordinary course of business), (iii) capitalized or
capitalizable obligations of such person or entity with respect to leases,
(iv) the amount available for drawing under outstanding standby letters of
credit issued for the account of such person or entity and the amount of
other off-balance sheet obligations or liabilities, each to the extent not
otherwise treated separately as Debt, (v) all obligations endorsed (other
than for collection in the ordinary course of business) or guaranteed by
such person or entity directly or indirectly in any manner including without
limitation contingent obligations to purchase, pay or supply funds to any
person or entity to assure a creditor against loss, (vi) obligations of such
person or entity arising under acceptance facilities, and (vii) obligations
secured by a lien, security interest, or other arrangement for the purpose
of security on property owned by such person or entity whether or not the
underlying obligations have been assumed by such person or entity.
"Distributions" shall mean (i) dividends, payments, or
distributions of any kind in respect of the capital stock, securities or
other equity interests or rights to acquire such equity interests of the
applicable entity (except distributions in the form of such stock, equity
securities, equity interests, or rights to acquire equity interests), and
(ii) repurchases, redemptions, or acquisitions of capital stock, securities,
or other equity interests or rights to acquire such equity interests.
"EBITDA" shall mean, for any period and determined in accordance
with GAAP, net operating income (calculated before Interest Expense, taxes,
extraordinary and unusual items, and income or loss attributable to equity
in Affiliates) plus depreciation and amortization of intangibles less
Distributions.
"Eligible Subsidiaries" shall mean consolidated Subsidiaries
wholly owned by Detection or Radionics that are Guarantors, that have
provided the Bank with security interests in all of their assets unless
otherwise agreed by the Bank, and that, except for intercompany transactions
with the Borrower and other Eligible Subsidiaries, comply in all respects
with Articles 8, 9, 10, and 11 of this Agreement.
"Environment" means any water including but not limited to
surface water and ground water or water vapor; any land including land
surface or subsurface; stream sediments; air; fish; wildlife; plants; and
all other natural resources or environmental media.
"Environmental Laws" means all federal, state and local
environmental, land use, zoning, health, chemical use, safety and sanitation
laws, statutes, ordinances, regulations, codes and rules relating to the
protection of the Environment and/or governing the use, storage, treatment,
generation, transportation, processing, handling, production or disposal of
Hazardous Substances and the regulations, rules, ordinances, bylaws,
policies, guidelines, procedures, interpretations, decisions, orders and
directives of federal, state and local governmental agencies and authorities
with respect thereto.
"Environmental Permits" means all licenses, permits, approvals,
authorizations, consents or registrations required by any applicable
Environmental Laws and all applicable judicial and administrative orders in
connection with ownership, lease, purchase, transfer, closure, use and/or
operation of the Improvements and/or as may be required for the storage,
treatment, generation, transportation, processing, handling, production or
disposal of Hazardous Substances.
"Environmental Report" means written reports, if any, prepared
for the Bank by an environmental consulting or environmental engineering
firm.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
"Event of Default" shall mean the occurrence of any event
described in Article 12 hereof.
"Federal Funds Rate" shall mean, for any period, a fluctuating
interest rate per annum equal for each day during such period to the
weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers, as
published for such day (or if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day which is a Business Day, the average of
the quotations for such day on such transactions received by the Bank from
three Federal funds brokers of recognized standing selected by it.
"Fee Rate" shall mean the rate used in computing the unused fee
and computed as described in Section 2.7 of this Agreement.
"Fixed Charges" shall mean for the applicable period, (i)
Interest Expense, (ii) rentals payable on leases not capitalized or
capitalizable in accordance with GAAP, (iii) taxes, (iv) capital
expenditures not funded by Funded Debt, and (v) principal or other payments
due with respect to Debt which are Current Liabilities.
"Funded Debt" shall mean all Debt that is not a Current
Liability.
"GAAP" shall mean generally accepted accounting principles.
"Guarantors" shall mean all persons or entities that have
jointly and severally guaranteed all of the Obligations in form satisfactory
to the Bank.
"Hazardous Substances" means, without limitation, any
explosives, radon, radioactive materials, asbestos, urea formaldehyde foam
insulation, polychlorinated biphenyls, petroleum and petroleum products,
methane, hazardous materials, hazardous wastes, hazardous or toxic
substances and any other material defined as a hazardous substance in the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, 42 U.S.C. Sections 9601, et. seq.; the Hazardous Materials
Transportation Act, as amended, 49 U.S.C. Sections 1801, et. seq.; the
Resource Conservation and Recovery Act, as amended, 42 U.S.C. Sections 6901,
et. seq.; Articles 15 and 27 of the New York State Environmental
Conservation Law or any other federal, state, or local law, regulation,
rule, ordinance, by-law, policy, guideline, procedure, interpretation,
decision, order, or directive, whether existing as of the date hereof,
previously enforced or subsequently enacted.
"Improvements" shall mean any real property owned or used by the
Borrower.
"Increased Cost" means any additional amounts sufficient to
compensate any Bank for any increased costs of funding or maintaining the
Obligations 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 note 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).
"Interest Expense" shall mean, for the applicable period, for
the Borrower and Eligible Subsidiaries determined on a consolidated basis
without duplication, all interest paid, capitalized, or accrued, and
amortization of debt discount with respect to all Debt less all related
interest income during such period and determined after giving effect to the
net cost associated with financial arrangements of any kind made to protect
against fluctuations in interest rates such as interest rate swap contracts,
interest rate cap agreements, and the like.
"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 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" shall mean 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 onemonth, three month, or
six month period, as applicable, 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, three month, or six-month period, as
applicable, 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 if the rate is determined with reference to the LIBOR Rate
(collectively, a "LIBOR End Date"), then borrowings with interest based upon
the LIBOR Rate shall not be available after the LIBOR End Date.
"Mortgage" shall mean the mortgage described in Section 5.5 of
this Agreement.
"Mortgage Loan" shall mean the mortgage loan described in
Article 3 of this Agreement.
"Mortgage Loan Note" shall mean the note evidencing the
Obligations related to the Mortgage Loan as described in Section 3.2 of
this Agreement.
"Mortgaged Property" shall mean the property and improvements
covered by and more specifically described in the Mortgage.
"Obligations" shall include all of the Borrower's obligations
related to this Agreement of any kind or nature, arising now or in the
future, including without limitation obligations under the Revolving Line
Note, the Mortgage Loan Note, and the Term Loan Note.
"Prime Rate" shall mean the rate of interest designated by the
Bank as its prime rate from time to time as a guide for establishing lending
rates to customers, irrespective of the actual rate charged to any specific
customer with respect to any specific transaction.
"Rate Change Date" shall mean the first day of each one-month,
three-month, or six-month period for which any LIBOR Rate applies.
"Release" has the same meaning as given to that term in Section
101(22) of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, 42 U.S.C. Section 9601(22), and the
regulations promulgated thereunder.
"Revolving Line" shall mean the revolving line of credit
established pursuant to Section 2.1 of this Agreement.
"Revolving Line Note" shall mean the note evidencing Obligations
related to the Revolving Line as described in Section 2.2 of this Agreement.
"Revolving Line Termination Date" shall mean the date on which
the Revolving Line terminates as described in Section 2.5 of this Agreement.
"Subsidiary" shall mean for any person or entity any corporation
of which at least a majority of the securities, equity, or other ownership
interests having absolute or contingent voting power are directly or
indirectly owned by such person or entity.
"Tangible Assets" shall mean total assets, after deduction of
depreciation, depletion, and reserves, but excluding accounts from and other
obligations payable by officers and Affiliates and further excluding all
assets required to be classified as intangible assets in accordance with
GAAP (including without limitation organizational expense, good will,
unamortized debt discount, research and development costs, patents,
trademarks, copyrights, other intellectual property rights, franchises, and
deferred assets).
"Tangible Net Worth" shall mean Tangible Assets less Total
Liabilities as determined by GAAP.
"Term Loan" shall mean the Term Loan described in Article 3A of
this Agreement.
"Term Loan Note" shall mean the Term Loan Note the note
evidencing Obligations related to the Term Loan as described in Section 3A.2
of this Agreement.
"Total Liabilities" shall mean the sum of all liabilities shown
on the Borrower's balance sheet as of the applicable date of determination,
determined in accordance with GAAP.
ARTICLE 2 - REVOLVING LINE
2.1 REVOLVING LINE. Subject to the terms and conditions of
this Agreement, the Bank hereby establishes for the benefit of the Borrower
a revolving line of credit in the maximum principal amount of Six Million
Five Hundred Thousand Dollars ($6,500,000) outstanding at any one time. The
proceeds of the Revolving Line shall be used for Borrower's working capital
purposes. Subject to the terms of this Agreement, the Borrower (or either
of them) may borrow, repay, and reborrow under the Revolving Line so long as
the aggregate principal amount outstanding at any time to the Borrower does
not exceed $6,500,000.
2.2 REVOLVING LINE NOTE. The Borrower shall execute, together
with this Agreement, a note evidencing Obligations related to the Revolving
Line in the form of EXHIBIT A attached hereto and made a part hereof.
2.3 INTEREST RATE AND PAYMENTS. All outstanding amounts under
the Revolving Line, except as specifically provided herein, shall bear
interest until paid in full at the Base Rate plus the Applicable Base Rate
Margin. Changes in the rate of interest applicable to the Revolving Line
Note shall become effective automatically and without notice at the time of
changes in the Base Rate.
The Borrower, however, at least two business days prior to each
Rate Change Date may notify the Bank of its election to have a portion of
the outstanding principal amount under the Revolving Line (which must be at
least $1,000,000 and must be an increment of $100,000) bear interest for a
one-month, three-month, or six month period commencing on such Rate Change
Date at the LIBOR Rate plus the Applicable LIBOR Margin.
Interest shall be calculated based on actual days elapsed
divided by a year of 360 days.
2.4 PAYMENTS. Payments of all accrued interest under the
Revolving Line Note shall be due and payable on the first day of each month.
Principal payments also shall be due and payable such that there
is no outstanding principal under the Revolving Line for one (1) day in each
of Borrower s fiscal years.
All remaining outstanding principal and accrued interest shall
be due and payable in full on the Revolving Line Termination Date.
2.5 REVOLVING LINE TERMINATION. Unless extended in writing by
the Bank on terms and conditions then acceptable to the Bank, the Revolving
Line will terminate on, the earlier of (i) May 31, 1998 and (ii) the date of
an Event of Default.
2.6 BREAK COSTS. Any payment of any principal outstanding
under the Revolving Line Note which principal amount is then bearing
interest at a rate based upon the LIBOR Rate shall be accompanied by a
payment of all Break Costs unless such payment is on the Rate Change Date
applicable to that particular principal amount outstanding.
2.7 UNUSED FEE. The Borrower shall pay to the Bank an unused
fee computed at the following applicable Fee Rate for the respective
applicable ratio of Funded Debt to EBITDA, calculated for the Borrower and
Eligible Subsidiaries on a consolidated basis and without duplication in
accordance with GAAP:
Ratio Fee Rate (Basis Points)
5 to 1 or greater 25.00
4 to 1 or greater and less than 5 to 1 18.75
3 to 1 or greater and less than 4 to 1 18.75
2 to 1 or greater and less than 3 to 1 18.75
Less than 2 to 1 12.50
Each Fee Rate shall be adjusted at the beginning of each three month period
commencing either March 1, June 1, September 1, and December 1 respectively,
and shall be established for that period based upon the average rolling
ratios shown by the Borrower s financial statements for the four fiscal
quarters ending on the most recent December 31, March 31, June 30, or
September 30 respectively.
The unused fee shall be computed as follows: $6,500,000, minus
the average daily outstanding principal balance of the Revolving Line, times
the Fee Rate per annum. At the end of each fiscal quarter, the Bank will
bill the Borrower for the unused fee.
2.8 LETTERS OF CREDIT. Subject to the terms and conditions of
this Agreement, the Bank will make letters of credit available for the
account of the Borrower. The aggregate amount available for drawing under
all letters of credit outstanding shall reduce, dollar for dollar, the
amount then available for advances under the Revolving Line. The letters of
credit shall be in form satisfactory to the Bank and the expiration dates
thereof shall not be later than the Revolving Line Termination Date.
The Borrower will pay the Bank s customary letter of credit
commissions in connection with each letter of credit.
The Borrower, if requested by the Bank, will execute
reimbursement agreements in form satisfactory to the Bank, documenting its
Obligations with respect to the Letter of Credit. All drawings under any
letter of credit shall be treated as immediate advances under the Revolving
Line.
ARTICLE 3 - MORTGAGE LOAN
3.1 MORTGAGE LOAN. Subject to the terms and conditions of this
Agreement, the Bank shall make a mortgage loan to the Detection in the
principal amount of Three Million Four Hundred Thousand Dollars
($3,400,000). The proceeds of the Mortgage Loan shall be used to repay a
portion of "Bridge Loan" Obligations to the Bank as defined in the Credit
Facility Agreement among the Bank and the Borrower dated as of February 12,
1996.
3.2 MORTGAGE LOAN NOTE. The Mortgage Loan shall be evidenced
by a note dated the date hereof in the form of EXHIBIT B attached hereto and
made a part hereof.
3.3 INTEREST RATE. Outstanding amounts of the Mortgage Loan
except as specifically provided herein, shall bear interest until paid in
full at the Base Rate plus the Applicable Base Rate Margin. Changes in the
rate of interest applicable to the Mortgage Loan Note shall become effective
automatically and without notice at the time of changes in the Base Rate.
Detection, however, at least two business days prior to each
Rate Change Date may notify the Bank of its election to have a portion of
the outstanding principal amount under the Mortgage Loan (which must be at
least $1,000,000 and must be an increment of $100,000) bear interest for a
one-month, three-month, or six month period commencing on such Rate Change
Date at the LIBOR Rate plus the Applicable LIBOR Margin.
Interest shall be calculated based on actual days elapsed
divided by a year of 360 days.
Detection will make arrangements satisfactory to the Bank, such
as the purchase of interest rate caps, providing for protection of at least
an aggregate of $11,537,500 of Obligations under the Mortgage Loan and the
Term Loan from interest rate increases.
3.4 PAYMENTS. Commencing on June 1, 1996, payments of all
accrued interest under the Mortgage Loan Note shall be due and payable on
the first day of each month. In addition, commencing on December 1, 1997,
principal payments of $20,987.65 each shall be due and payable on the first
day of each month.
The Mortgage Loan Note shall be due and payable in full on the
earlier of (I) a Revolving Line Termination Date, and (ii) May 31, 2006.
3.5 BREAK COSTS. Any payment of any principal outstanding
under the Term Loan Note, which principal amount is then bearing interest at
a rate based upon the LIBOR Rate, shall be accompanied by a payment of all
Break Costs unless such payment is on the Rate Change Date applicable to
that particular principal amount outstanding.
ARTICLE 3A - TERM LOAN
3A.1 TERM LOAN. Subject to the terms and conditions of this
Agreement, the Bank shall make a term loan to the Detection in the principal
amount of Fourteen Million Three Hundred Fifty Thousand Dollars
($14,350,000). The proceeds of the Term Loan shall be used to repay a
portion of "Bridge Loan" Obligations to the Bank as defined in the Credit
Facility Agreement among the Bank and the Borrower dated as of February 12,
1996.
3A.2 TERM LOAN NOTE. The Term Loan shall be evidenced by a
note dated the date hereof in the form of EXHIBIT C attached hereto and made
a part hereof.
3A.3 INTEREST RATE. Outstanding amounts of the Term Loan
except as specifically provided herein, shall bear interest until paid in
full at the Base Rate plus the Applicable Base Rate Margin. Changes in the
rate of interest applicable to the Term Loan Note shall become effective
automatically and without notice at the time of changes in the Base Rate.
Detection, however, at least two business days prior to each
Rate Change Date may notify the Bank of its election to have a portion of
the outstanding principal amount under the Term Loan (which must be at least
$1,000,000 and must be an increment of $100,000) bear interest for a one-
month, three-month, or six month period commencing on such Rate Change Date
at the LIBOR Rate plus the Applicable LIBOR Margin.
Interest shall be calculated based on actual days elapsed
divided by a year of 360 days.
Detection will make arrangements satisfactory to the Bank, such
as the purchase of interest rate caps, providing for protection of at least
an aggregate of $11,537,500 of Obligations under the Mortgage Loan and the
Term Loan from interest rate increases.
3A.4 PAYMENTS. Commencing on June 1, 1996, payments of all
accrued interest under the Term Loan Note shall be due and payable on the
first day of each month. In addition, commencing on December 1, 1997,
principal payments of $217,424.24 each shall be due and payable on the first
day of each month.
The Term Loan Note shall be due and payable in full on the earlier of
(i) a Revolving Line Termination Date, and (ii) May 31, 2003.
3A.5 BREAK COSTS. Any payment of any principal outstanding
under the Term Loan Note, which principal amount is then bearing interest at
a rate based upon the LIBOR Rate, shall be accompanied by a payment of all
Break Costs unless such payment is on the Rate Change Date applicable to
that particular principal amount outstanding.
ARTICLE 4 - EXPENSES/DEFAULT RATE INCREASES
4.1 ADMINISTRATIVE EXPENSES. The Borrower shall pay any fees,
expenses and disbursements, including reasonable legal fees, of the Bank
related to this Agreement, the Obligations, the perfection of any collateral
security required hereunder, and the transactions contemplated by this
Agreement. Such payments shall be due from time to time upon the Bank
giving the Borrower notice of the amount of such expenses.
4.2 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 administration of the Obligations or
collection of any of the Obligations or enforcement of any of the Bank's
rights hereunder or under any note, security agreement, reimbursement
agreement, guarantee, or other agreement related hereto. This obligation
shall survive the payment of any notes executed hereunder. The Bank may
apply any payments of any nature received by it first to the payment of
Obligations under this Section 4.2, notwithstanding any conflicting
provision contained in this Agreement or any other agreement with the
Borrower.
4.3 DEFAULT INTEREST RATE. Upon the failure of the Borrower
to comply with any covenant contained in Section 8.1 or Article 10 of this
Agreement, the rate of interest on each of the Obligations shall be
increased to a rate at all times equal to two percent (2%) above the rate of
interest which would be in effect absent such failure of compliance, such
increased rate to remain in effect through and including the end of the
fiscal quarter in which such failure of compliance is remedied. Upon the
occurrence of an Event of Default, the provisions of this paragraph shall be
superseded by the provisions of the second paragraph of this Section 4.3
which relates to increases in the rate of interest in case of the occurrence
of an Event of Default.
Upon the occurrence of an Event of Default, the rate of interest
on each of the Obligations shall be increased to a rate at all times equal
to two percent (2%) above the rate of interest which would be in effect
absent such failure of compliance, such increased rate to remain in effect
through and including payment in full of all of the Obligations and
cancellation of further commitments to lend under this Agreement, or written
waiver of such Event of Default by the Bank.
4.4 LATE PAYMENT FEES. Payments of principal and/or interest
not made in full before the date ten (10) days after the date due shall be
subject to a processing charge of two percent (2%) of the payment due.
4.5 PREPAYMENTS UPON DEFAULT. In by reason of an Event of
Default the Bank elects to declare the Obligations to be immediately due and
payable, then any Break Cost or prepayment charge with respect to the
Obligations shall become due and payable in the same manner as though the
Borrower had exercised a right of prepayment.
ARTICLE 5 - COLLATERAL AND GUARANTEES
5.1 SECURITY INTERESTS. As collateral for all Obligations,
the Borrower shall provide to the Bank, and shall cause each Guarantor to
provide to the Bank, a security interest and lien in all assets of the
Borrower, including without limitation machinery, equipment, furniture,
fixtures, vehicles, accounts, inventory, chattel paper, interests in leases
and property under lease, intellectual property and proprietary interests,
documents, instruments, and general intangibles. Such security interests
shall be first liens on such assets, which shall not be otherwise encumbered
except as specified on Schedule 5.1 attached hereto and made a part hereof.
The security interest of the Bank in Detection s assets,
Radionics assets, and Guarantor s assets located in Tennessee shall be
limited to the aggregate principal amount of One Hundred Fifty Thousand
Dollars ($150,000) each, and in each case together with all related
interest, costs, expenses, fees, and charges of any kind or nature.
5.2 GUARANTEES. Radionics shall provide its unconditional
guarantee of the Obligations of Detection related to the Mortgage Loan and
the Term Loan. The Borrower shall cause all Subsidiaries to become
Guarantors. The Guarantor guarantees shall contain an agreement that,
except for intercompany transactions with the Borrower or other Eligible
Subsidiaries, such Guarantor shall comply with the requirements of Articles
8, 9, 10, and 11 of this Agreement in the same manner as if such Guarantor
was a party to this Agreement.
5.3 STOCK PLEDGE. The Borrower shall pledge to the Bank all
of Borrower s shares of capital stock of Subsidiaries.
5.4 LANDLORD WAIVERS. The Borrower shall deliver to the Bank
a waiver from each landlord and mortgagee of premises on which the Bank's
collateral is located and that is not owned by the Borrower.
5.5 MORTGAGE. The Bank shall receive a Mortgage covering the
fee and leasehold interests of Detection and the Agency in the facility
located at 130 Perinton Parkway, Town of Perinton, New York owned in part by
Detection and owned in part by the Agency and leased by the Agency to
Detection. The Mortgage shall secure the Mortgage Loan. Unencumbered
(except as provided on Schedule 5.1) and marketable title to the Mortgaged
Property must be acceptable to the Bank's attorneys. The lien of the
Mortgage shall cover all improvements to the Mortgaged Property, ingress and
egress thereto, and all easements and licenses necessary or appropriate in
connection therewith. The lien of the Mortgage also shall cover all
fixtures, equipment, and other personal property installed upon or affixed
to the Mortgaged Property including without limitation mechanical equipment.
5.6 ASSIGNMENT OF LEASES. The Agency shall assign as
collateral for the Obligations the Lease Agreement made by the Agency to
Detection dated as of February 1, 1982 between the Agency and Detection;
provided, however, that such Assignment shall be subordinate to the Pledge
and Assignment made by the Agency to Chemical Back dated as of February 1,
1982 and recorded March 2, 1982 in the Monroe County Clerk's Office in Liber
6111 of Deeds at page 313.
ARTICLE 6 - REPRESENTATIONS OF BORROWER
The Borrower represents and warrants to the Bank as follows:
6.1 ORGANIZATION AND POWER. Detection is duly organized,
validly existing and in good standing under the laws of the State of New
York, and is duly qualified to transact business and in good standing in all
states in which it is required to qualify or in which failure to qualify
could have a material adverse impact on its business. Detection has full
power and authority to own its properties, to carry on its business as now
being conducted, to execute, deliver and perform this Agreement and all
related documents and instruments, and to consummate the transactions
contemplated hereby. Detection has no Subsidiaries or Affiliates except
Radionics and those listed on Schedule 6.1.
Radionics is duly organized, validly existing and in good
standing under the laws of the State of California, and is duly qualified to
transact business and in good standing in all states in which it is required
to qualify or in which failure to qualify could have a material adverse
impact on its business. Radionics has full power and authority to own its
properties, to carry on its business as now being conducted, to execute,
deliver and perform this Agreement and all related documents and
instruments, and to consummate the transactions contemplated hereby.
Radionics has no Subsidiaries or Affiliates except Detection and those
listed on SCHEDULE 6.1.
6.2 PROCEEDINGS OF BORROWER. All necessary action on the part
of the Borrower, including shareholder approval to the extent required,
relating to authorization of the execution and delivery of this Agreement
and all related documents and instruments, and the performance of the
Obligations of the Borrower hereunder and thereunder has been taken. This
Agreement and all related documents and instruments constitute legal, valid
and binding obligations of the Borrower, enforceable in accordance with
their respective terms, except as enforceability may be limited by
applicable bankruptcy, insolvency or similar law affecting the rights of
creditors generally, and equitable principles. The Borrower has no
defenses, offsets, claims, or counterclaims with respect to its obligations
arising under this Agreement and all related documents and instruments. The
execution and delivery by the Borrower of this Agreement and all related
documents and agreements, and the performance by the Borrower of its
obligations under this Agreement and all related documents and agreements
will not violate any provision of law or either of the Borrower s respective
Certificates of Incorporation or By-laws or organizational or other
documents or agreements. The execution, delivery and performance of this
Agreement and all related documents and agreements, and the consummation of
the transactions contemplated hereby 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 except in favor of
the Bank.
6.3 CAPITALIZATION. All of the outstanding shares and other
equity interests of both of the Borrowers are duly authorized, validly
issued, and fully paid. There is no existing contract, debenture, security,
right, option, warrant, call or similar commitment of any character calling
for or relating to the issuance, retirement, redemption, purchase, or
repurchase of shares or other equity interests of the Borrower.
6.4 LITIGATION. Except as shown on SCHEDULE 6.4, 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 the knowledge of
the Borrower, threatened against or affecting the Borrower (i) that brings
into question the legality, validity or enforceability of this Agreement or
the transactions contemplated hereby or (ii) that, if adversely determined,
would have a material adverse effect on the financial condition or the
business of the Borrower.
6.5 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
applied throughout the periods indicated, and fairly present the financial
condition of the Borrower, as of the respective dates thereof and the
results of their respective operations for the respective periods covered
thereby.
6.6 ADVERSE CHANGES. Since the most recent financial
statements described in Section 6.5 hereof there has been no material
adverse change in the condition, financial or otherwise, of the Borrower.
6.7 TAXES. The Borrower has filed or caused to be filed when
due all federal tax returns and all state and local tax returns that are
required to be filed, and has paid or caused to be paid all taxes as shown
on said returns or any assessment received. Detection s tax returns have
been audited and tax years closed through and including fiscal 1994.
Radionics tax returns have been audited and tax years closed through and
including fiscal 1989.
6.8 PROPERTIES. The Borrower has good and marketable title to
all of its properties and assets, including without limitation, the
properties and assets reflected in the most recent financial statements
referred to in Section 6.5 hereof. The Borrower has undisturbed peaceable
possession under all leases under which it is operating, none of which
contain unusual or burdensome provisions that may materially affect the
operations of the Borrower, and all such leases are in full force and
effect.
6.9 INDEBTEDNESS. Except as disclosed in the most recent
financial statements referred to in Section 6.5 hereof, the Borrower has no
outstanding Debt.
6.10 ERISA. No action, event, or transaction has occurred
that could give rise to a lien or encumbrance on the assets of the Borrower
as a result of the application of relevant provisions of ERISA, and the
Borrower is in material compliance with all requirements of ERISA.
6.11 MARGIN SECURITIES. No proceeds of the Obligations have
been or will be used for the purpose of purchasing or carrying Margin
Securities as defined in Regulation U of the Federal Reserve Board.
6.12 COMPLIANCE WITH LAW. The Borrower is not in violation of
any laws, ordinances, governmental rules, requirements, 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
governmental 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.
6.13 PATENTS, TRADEMARKS, AND AUTHORIZATIONS. The Borrower
owns or possesses all patents, trademarks, service marks, trade names,
copyrights, licenses, authorizations, other intellectual property rights,
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.
6.14 CONTRACTS AND AGREEMENTS. The Borrower is not a party to
any contract or agreement that materially adversely affects its business,
property, assets, or condition, financial or otherwise, and the Borrower is
in compliance in all material respects with all contracts and agreements to
which it is a party.
ARTICLE 7 - CONDITIONS OF LENDING
The following conditions must be satisfied before the Bank shall
have any obligation to make any advance under this Agreement:
7.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Borrower contained herein shall be true and correct as of
the date of making of each such advance, with the same effect as if made on
and as of such date.
7.2 NO DEFAULTS. There shall exist no condition or event that
constitutes (or that, with the giving of notice or the passage of time or
both, would constitute) an Event of Default under Article 12 hereof at the
time each advance is made.
7.3 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 the advance is made.
7.4 OPINION OF COUNSEL. The Borrower shall have delivered an
opinion of its counsel, dated the date of this Agreement, and upon request
supplemental opinions dated the date of the advance, in form and substance
reasonably satisfactory to the Bank.
7.5 Documents to be Delivered. The Borrower shall have
delivered to the Bank all security agreements, reimbursement agreements,
assignments, guarantees, and any related documents necessary or desirable in
connection with the requirements of Article 5 hereof. All notes evidencing
the Obligations shall have been delivered to the Bank at the time of the
making of the respective loans.
7.6 CERTIFIED RESOLUTIONS. Each of the Borrowers and the
Guarantors shall have delivered a certificate of its corporate secretary
certifying, as of the date of the first advance, resolutions duly adopted by
its respective Board of Directors authorizing the execution, delivery and
performance of this Agreement, or in the case of Guarantors, its respective
guarantee, and all related documents and agreements and the consummation of
the transactions contemplated hereby, which resolutions shall remain in full
force and effect so long as any of the Obligations are outstanding or any
commitment to lend exists under this Agreement.
7.7 FEES AND TAXES. The Borrower shall have paid all filing
fees, taxes, and assessments related to the borrowings and the perfection of
any interests in collateral security required hereunder.
7.8 INSURANCE. The Borrower shall have delivered evidence
satisfactory to the Bank of the existence of insurance required hereby.
7.9 ORGANIZATIONAL DOCUMENTS. The Borrower shall have
delivered to the Bank copies of its then-effective Certificate of
Incorporation, By-laws, d/b/a certificates, and other organizational
documents and instruments, and upon request of the Bank, a written
certificate that such documents and instruments have not been changed or
amended since the last advance to Borrower pursuant to the terms of this
Agreement.
7.10 OTHER DOCUMENTS AND AGREEMENTS. On or before the date of
this Agreement, the Borrower shall have delivered such other documents,
instruments, and agreements as the Bank and its legal counsel may require in
connection with the transactions contemplated hereby.
7.11 CERTIFICATES OF GOOD STANDING. On or before the date of
this Agreement the Borrower shall have delivered to the Bank certificates of
good standing from appropriate state officials to the effect that the each
of the Borrowers is in good standing in the state of its formation as well
as in all other states in which qualification is necessary for each of the
Borrowers to carry on its business in such states.
7.12 APPRAISAL. The Borrower shall have delivered to the Bank
prior to the making of the Mortgage Note an appraisal in form satisfactory
to the Bank, prepared by appraisers satisfactory to the Bank, showing that
the principal amount of the Mortgage Note will not exceed eighty percent
(80%) of the fair market value of the Mortgaged Property.
7.13 TITLE INSURANCE. Prior to the making of the Mortgage
Loan, the Borrower shall have delivered to the Bank's legal counsel an
updated Abstract of Title and shall have delivered title insurance in the
face amount of the Mortgage Loan, with all title exceptions being subject to
the approval of the Bank's attorneys.
7.14 SURVEY. Prior to the making of the Mortgage Loan, the
Borrower shall have delivered to the Bank a survey prepared by a registered
land surveyor, showing all encroachments or easements across property lines.
Those encumbrances not acceptable to the Bank and its counsel must be
removed. Said survey is to be approved by, satisfactory to, and certified
to the Bank, the Bank's attorneys, and the title insurance company.
7.15 REAL ESTATE TAXES. Prior to the making of the Mortgage
Loan, the Borrower must provide proof of payment of current real estate
taxes and assessments related to the Mortgaged Property, or payment of all
payments due under any payment-in-lieu-of-tax agreements, if any.
7.16 ENVIRONMENTAL REPORT. The Borrower shall have provided
to the Bank an environmental inspection report covering the Mortgaged
Property in form and substance satisfactory to the Bank prepared by
engineers satisfactory to the Bank.
ARTICLE 8 - AFFIRMATIVE COVENANTS OF BORROWER
So long as any Obligations to the Bank shall be outstanding or
this Agreement remains in effect, unless the Bank otherwise consents in
writing, the Borrower shall:
8.1 FINANCIAL STATEMENTS. Furnish to the Bank as soon as
available, but in no event later than one hundred twenty (120) days after
the end of each of its fiscal years, copies of its annual report containing
its annual financial statements audited by and with an unqualified opinion
from an independent certified public accountant satisfactory to the Bank.
Said financial statements shall be accompanied by (i) copies of its Form 10K
for the respective year, (ii) a schedule showing computation of financial
covenants, (iii) a copy of any management letter prepared by the Borrower s
accountants, and (iv) a certificate of the Chief Financial Officer of the
Borrower to the effect that no Event of Default has occurred and no
condition exists which with the passage of time or the giving of notice
would constitute an Event of Default.
The Borrower also shall furnish to the Bank copies of its Form
10Q not more than fifty (50) days after the close of each quarter of its
fiscal year. Said statements shall be accompanied by (i) a schedule showing
computation of financial covenants, and (ii) a certificate of the Chief
Financial Officer of the Borrower to the effect that no Event of Default has
occurred and no condition exists which with the passage of time or the
giving of notice would constitute an Event of Default.
The Borrower shall provide to the Bank interim financial
statements, if any, prepared by the Borrower's independent accountants.
8.2 OTHER REPORTS AND INSPECTIONS. Furnish to the Bank such
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, prior to an Event of Default, upon reasonable notice, 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.
8.3 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 in good faith contest any such taxes, assessments, levies,
or charges so long as such contest is diligently pursued and no lien or
execution exists or is levied against any of Borrower's assets related to
the contested items.
8.4 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, full-risk
extended coverage hazard insurance to the full insurable value of real
property (co-insurance not being permitted without the prior written consent
of the Bank), all-risk coverage for personal property, business interruption
or loss of rents coverage, worker's compensation insurance, and
comprehensive general liability and products liability insurance. The
Borrower also shall maintain flood insurance covering any of its real
properties located in flood zones. The Borrower shall provide to the Bank,
no less often than annually and upon its request, a detailed list and
evidence satisfactory to the Bank of its insurance carriers and coverage and
shall obtain such additional insurance as the Bank may reasonably request.
Hazard insurance policies for real property shall name the Bank as
mortgagee, and for personalty, additional insured and loss payee, as its
interests may appear. All policies shall provide for at least thirty (30)
day's prior notice of cancellation to the Bank.
8.5 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 in all material respects with all valid laws and
regulations now in effect or hereafter promulgated by any properly
constituted governmental authority having jurisdiction.
8.6 MAINTENANCE OF PROPERTIES. At all times maintain,
preserve, protect, and keep its property used or useful in conducting its
business, 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.
8.7 MATERIAL CHANGES, JUDGMENTS. Notify the Bank immediately
of any material adverse change in the financial condition of the Borrower
and of the filing of any suits, judgments, or liens which, if adversely
determined, could have a material adverse effect on the business or
financial condition of the Borrower. The Borrower also shall notify the
Bank immediately of any change in the name, identity, or organizational
structure of the Borrower, or any change in any equity or ownership interest
in Radionics or the Guarantors.
8.8 ERISA COMPLIANCE. Comply in all material respects with
the provisions of ERISA and regulations and interpretations related thereto.
8.9 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 in all material respects with all laws,
regulations, and requirements now in effect or hereafter promulgated by any
properly constituted governmental authority having jurisdiction over it.
8.10 PAYMENTS. Make all payments as and when required by this
Agreement and the notes and other agreements related hereto or to the
Obligations.
8.11 DEPOSITS/BANK SERVICES. Detection, and to the extent
practical, Radionics, shall maintain all of its main depository accounts at
the Bank and shall obtain its cash management services from the Bank.
8.12 AMENDMENTS. Give the Bank written notice of an amendment
or modification to the Certificate of Incorporation or other governing
documents or agreements of either Borrower.
ARTICLE 9 - NEGATIVE COVENANTS OF BORROWER
So long as any Obligations shall be outstanding, or this
Agreement shall remain in effect, unless the Bank otherwise consents in
writing, the Borrower shall not, directly or indirectly:
9.1 DEBT/LIENS. Create, incur, assume, or allow to exist,
voluntarily or involuntarily, any Debt, or any security interest,
assignment, pledge, lien or other encumbrance for the purpose of collateral
of any kind (including the charge upon property purchased under conditional
sales or other title retention agreements) upon any of its property or
assets, whether now owned or hereafter acquired, or become the general
partner in any partnership, excluding only (i) Obligations to and interests
held by the Bank, (ii) Debt described in SCHEDULE 9.1 attached hereto and
made a part hereof, (iii) encumbrances described in Schedule 5.1, and (iv)
obligations and interests to which the Bank consents in writing.
9.2 LOANS AND INVESTMENTS. Make any loan or advance to, or
any investment of any kind in, any person, firm, joint venture, corporation
or other entity whatsoever, (i) except short-term investments in
certificates of deposit of financial institutions and similar investments
made in the ordinary course of business, and (ii) except to or in any
Eligible Subsidiary.
9.3 MERGERS, SALES AND ACQUISITIONS/CHANGE IN OWNERSHIP
INTERESTS. Enter into any merger or consolidation, or acquire all or
substantially all the stock or other ownership interests or assets of any
person, firm, joint venture, corporation, or other entity, or sell, lease,
transfer, or otherwise dispose of any material portion of its assets except
in the ordinary course of business.
The Borrower will not allow any change in the ownership, legal
or equitable, of the shareholder or other equity interests in Radionics or
in the Subsidiaries except between or among the Borrower and the
Subsidiaries.
9.4 AMENDMENTS. Allow the amendment or modification of either
of their Certificates of Incorporation, By-laws, or other governing
documents and agreements in any material respect without the prior written
consent of the Bank.
9.5 COMPENSATION. Compensate any person or entity, including
without limitation salaries, bonuses, consulting fees, or otherwise, in
excess of amounts reasonably related to services rendered to the Borrower.
9.6 JUDGMENTS. Allow to exist any judgments against Borrower
in excess of $100,000 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.
9.7 MARGIN SECURITIES. Allow any proceeds of the Obligations
to be used for the purpose of carrying any Margin Securities as defined in
Regulation U of the Board of Governors of the Federal Reserve.
9.8 TENNESSEE ASSETS. Allow any of either of their respective
assets to be located in the State of Tennessee with a value in excess of the
dollar amount limitation of coverage by the respective Borrower s Security
Agreements related to Tennessee assets.
ARTICLE 10 - FINANCIAL COVENANTS
All of the following financial covenants shall be determined by
calculating such covenant for the Borrower and its Eligible Subsidiaries on
a consolidated basis and without duplication in accordance with GAAP.
So long as any Obligations to the Bank shall be outstanding or
this Agreement remains in effect, unless the Bank otherwise consents in
writing, the Borrower, shall:
10.1 MINIMUM CURRENT RATIO. Maintain a minimum Current Ratio
of at least 2.0 to 1.0, as shown on each quarterly financial statement
provided to the Bank.
10.2 MINIMUM INTEREST EXPENSE COVERAGE. Maintain a ratio of
EBITDA to Interest Expense, calculated for the quarter ending on the
measurement date plus the fewer of either (i) the last three preceding
quarters, or (ii) the number of quarters except the measurement date quarter
that have ended after March 31, 1996, as shown on the quarterly financial
statements provided to the Bank, of at least:
(a) 1.0 to 1.0 through and including the quarter ending June
30, 1996
(b) 2.0 to 1.0 for the quarter ending September 30, 1996
(c) 2.5 to 1.0 for the quarter ending December 31, 1996
(d) 3.0 to 1.0 for the quarter ending March 31, 1997
(e) 3.5 to 1.0 for the quarter ending June 30, 1997 and
thereafter.
10.3 MINIMUM FIXED CHARGE COVERAGE. Maintain a ratio of
EBITDA to Fixed Charges, calculated for the quarter ending on the
measurement date plus the fewer of either (i) the last three preceding
quarters, or (ii) the number of quarters except the measurement date quarter
that have ended after March 31, 1996, as shown on the quarterly financial
statements provided to the Bank, of at least:
(a) 1.2 to 1.0 through and including the quarter ending March
31, 1997
(b) 1.5 to 1.0 for the quarter ending June 30, 1997 and
thereafter.
10.4 MAXIMUM FUNDED DEBT RATIO. Maintain a ratio of Funded
Debt to EBITDA, calculated for the quarter ending on the measurement date
plus the three preceding quarters, not exceeding:
(a) 3.5 to 1.0 measured commencing March 31, 1997 and on June
30, 1997, September 30, 1997 and December 31, 1997
(b) 3.0 to 1.0 measured on March 31, 1998, June 30, 1998,
September 30, 1998, and December 31, 1998
(c) 2.0 measured on March 31, 1999 and at the end of each
quarter thereafter.
10.5 MINIMUM TANGIBLE NET WORTH. Maintain a minimum Tangible
Net Worth equal to at least ninety percent (90%) of the Tangible Net Worth
of the Borrower as of the date of this Agreement, as shown on each quarterly
financial statement provided to the Bank. Such minimum Tangible Net Worth
requirement shall be increased in each succeeding fiscal year by an amount
equal to seventy-five percent (75%) of net operating income for the prior
fiscal year plus one hundred percent (100%) of the net proceeds from any
sale of stock or other equity interests in the Borrower.
ARTICLE 11 - ENVIRONMENTAL MATTERS; INDEMNIFICATION
11.1 ENVIRONMENTAL REPRESENTATIONS. The Borrower represents
and warrants that, to the best of Borrowers's knowledge and except as shown
on SCHEDULE 11.1:
(a) Neither the Improvements nor any property adjacent to the
Improvements is being or has been used for the storage, treatment,
generation, transportation, processing, handling, production or disposal of
any Hazardous Substance or as a landfill or other waste disposal site or for
the storage of petroleum or petroleum based products except in compliance
with all Environmental Laws.
(b) Underground storage tanks are not and have not been located on
the Improvements except in compliance with all Environmental Laws.
(c) The soil, subsoil, bedrock, surface water and groundwater of the
Improvements are free of any Hazardous Substances.
(d) There has been no Release, nor is there the threat of a Release
of any Hazardous Substance on, at or from the Improvements or any property
adjacent to or within the immediate vicinity of the Improvements which
through soil, subsoil, bedrock, surface water or groundwater migration could
come to be located on the Improvements, and Borrower has not received any
form of notice or inquiry from any federal, state or local governmental
agency or authority, any operator, tenant, subtenant, licensee or occupant
of the Improvements or any property adjacent to or within the immediate
vicinity of the Improvements or any other person with regard to a Release or
the threat of a Release of any Hazardous Substance on, at or from the
Improvements or any property adjacent to the Improvements.
(e) All Environmental Permits relating to the Borrower and the
Improvements have been obtained and are in full force and effect.
(f) No event has occurred with respect to the Improvements which,
with the passage of time or the giving of notice, or both, would constitute
a violation of any applicable Environmental Law or non-compliance with any
Environmental Permit.
(g) There are no agreements, consent orders, decrees, judgments,
license or permit conditions or other orders or directives of any federal,
state or local court, governmental agency or authority relating to the past,
present or future ownership, use, operation, sale, transfer or conveyance of
the Improvements which require any change in the present condition of the
Improvements or any work, repairs, construction, containment, clean up,
investigations, studies, removal or other remedial action or capital
expenditures with respect to the Improvements.
(h) There are no actions, suits, claims or proceedings, pending or
threatened, which could cause the incurrence of expenses or costs of any
name or description or which seek money damages, injunctive relief, remedial
action or any other remedy that arise out of, relate to or result from (i) a
violation or alleged violation of any applicable Environmental Law or non-
compliance or alleged non-compliance with any Environmental Permit, (ii) the
presence of any Hazardous Substance or a Release or the threat of a Release
of any Hazardous Substance on, at or from the Improvements or any property
adjacent to or within the immediate vicinity of the Improvements or (iii)
human exposure to any Hazardous Substance, noises, vibrations or nuisances
of whatever kind to the extent the same arise from the condition of the
Improvements or the ownership, use, operation, sale, transfer or conveyance
thereof.
11.2 ENVIRONMENTAL COVENANTS. The Borrower covenants and
agrees with the Bank that, so long as this Agreement remains in effect, the
Borrower shall:
(a) Comply with, and shall cause all operators, tenants, subtenants,
licensees and occupants of the Improvements to comply with all applicable
Environmental Laws and shall obtain and comply with, and shall cause all
operators, tenants, subtenants, licensees and occupants of the Improvements
to obtain and comply with, all Environmental Permits.
(b) Not cause or permit any change to be made in the present or
intended use of the Improvements which would (i) violate any applicable
Environmental Law, (ii) constitute non-compliance with any Environmental
Permit or (iii) materially increase the risk of a Release of any Hazardous
Substance.
(c) Promptly provide Bank with a copy of all notifications which it
gives or receives with respect to any past or present Release or the threat
of a Release of any Hazardous Substance on, at or from the Improvements or
any property adjacent to the Improvements.
(d) Undertake and complete all investigations, studies, sampling and
testing and all removal and other remedial actions required by law to
contain, remove and clean up all Hazardous Substances that are determined to
be present at the Improvements in accordance with all applicable
Environmental Laws and all Environmental Permits.
(e) At all times allow the Bank and its officers, employees, agents,
representatives, contractors and subcontractors reasonable access after
reasonable prior notice to the Improvements for the purposes of ascertaining
site conditions, including, but not limited to, subsurface conditions.
(f) Deliver promptly to the Bank: (i) copies of any documents
received from the United States Environmental Protection Agency, or any
state, county or municipal environmental or health agency concerning the
Borrower's operations or the Improvements; and (ii) copies of any documents
submitted by the Borrower to the United States Environmental Protection
Agency or any state, county or municipal environmental or health agency
concerning its operations or the Improvements.
(g) If at any time the Bank obtains any reasonable evidence or
information which suggests that a material potential environmental problem
may exist at the Improvements, the Bank may require that a full or
supplemental environmental inspection and audit report with respect to the
Improvements of a scope and level of detail satisfactory to Bank be prepared
by an environmental engineer or other qualified person acceptable to the
Bank at Borrower's expense. Such audit may include a physical inspection of
the Improvements, a visual inspection of any property adjacent to or within
the immediate vicinity of the Improvements, personnel interviews and a
review of all Environmental Permits. If the Bank requires, such inspection
shall also include a records search and/or subsurface testing for the
presence of Hazardous Substances in the soil, subsoil, bedrock, surface
water and/or groundwater. If such audit report indicates the presence of
any Hazardous Substance or a Release or the threat of a Release of any
Hazardous Substance on, at or from the Improvements, Borrower shall promptly
undertake and diligently pursue to completion all necessary, appropriate and
legally authorized investigative, containment, removal, clean up and other
remedial actions, using methods recommended by the engineer or other person
who prepared said audit report and acceptable to the appropriate federal,
state and local agencies or authorities.
11.3 INDEMNITY. The Borrower agrees to indemnify, defend, and
hold harmless the Bank from and against any and all liabilities, claims,
damages, penalties, expenditures, losses, or charges, including, but not
limited to, all costs of investigation, monitoring, legal representation,
remedial response, removal, restoration or permit acquisition of any kind
whatsoever, which may now or in the future be undertaken, suffered, paid,
awarded, assessed, or otherwise incurred by the Bank (or any other person or
entity affiliated with the Bank or representing or acting for the Bank or at
the Bank's behest, or with a claim on the Bank or to whom the Bank has
liability or responsibility of any sort related to this Section 11.3)
relating to, resulting from or arising out of (a) the use of the
Improvements for the storage, treatment, generation, transportation,
processing, handling, production or disposal of any Hazardous Substance or
as a landfill or other waste disposal site, (b) the presence of any
Hazardous Substance or a Release or the threat of a Release of any Hazardous
Substance on, at or from the Improvements, (c) the failure to promptly
undertake and diligently pursue to completion all necessary, appropriate and
legally authorized investigative, containment, removal, clean up and other
remedial actions with respect to a Release or the threat of a Release of any
Hazardous Substance on, at or from the Improvements, (d) human exposure to
any Hazardous Substance, noises, vibrations or nuisances of whatever kind to
the extent the same arise from the condition of the Improvements or the
ownership, use, operation, sale, transfer or conveyance thereof, (e) a
violation of any applicable Environmental Law, (f) non-compliance with any
Environmental Permit or (g) a material misrepresentation or inaccuracy in
any representation or warranty or a material breach of or failure to perform
any covenant made by Borrower in this Agreement. Such costs or other
liabilities incurred by the Bank or other entity described in this Section
11.3 shall be deemed to include, without limitation, any sums which the Bank
deems it necessary or desirable to expend to protect its security interests
and liens.
11.4 NO LIMITATION. The liability of Borrower under this
Article 11 shall in no way be limited, abridged, impaired or otherwise
affected by (a) any amendment or modification of this Agreement or any other
document relating to the Obligations by or for the benefit of Borrower or
any subsequent owner of the Improvements except for an amendment or
modification which expressly refers to this Article 11, (b) any extensions
of time for payment or performance required by this Agreement or any other
document relating to the Obligations, (c) the release of Borrower, any
guarantor or any other person from the performance or observance of any of
the agreements, covenants, terms or conditions contained in this Agreement
or any other document relating to the Obligations by operation of law,
Bank's voluntary act or otherwise, (d) the invalidity or unenforceability of
any of the terms of provisions of this Agreement or any other document
relating to the Obligations, (e) any exculpatory provision contained in this
Agreement or any other document relating to the Obligations limiting Bank's
recourse to property encumbered by any mortgage or to any other security or
limiting Bank's rights to a deficiency judgment against Borrower, (f) any
applicable statute of limitations, (g) any investigation or inquiry
conducted by or on the behalf of Bank or any information which Bank may have
or obtain with respect to the environmental or ecological condition of the
Improvements, (h) the sale, assignment or foreclosure of any interest in
collateral for the Obligations, (i) the sale, transfer or conveyance of all
or part of the Improvements, (j) the dissolution and liquidation of
Borrower, (k) the death or legal incapacity of any individual, (l) the
release or discharge, in whole or in part, of Borrower in any bankruptcy,
insolvency, reorganization, arrangement, readjustment, composition,
liquidation or similar proceeding, or (m) any other circumstances which
might otherwise constitute a legal or equitable release or discharge of
Borrower, in whole or in part.
11.5 SURVIVAL. Notwithstanding anything to the contrary
contained herein, the Borrower's liability and obligations under Section
11.4 shall survive the discharge, satisfaction or assignment of this
Agreement by the Bank and the payment in full of all of the Obligations.
11.6 INVESTIGATIONS. If the Borrower defaults on any of its
Obligations pursuant to this Agreement or any other loan document, the Bank
or its designee shall have the right, upon reasonable notice to the
Borrower, to enter upon the Improvements and conduct such tests,
investigation and sampling, including but not limited to installation of
monitoring wells, as shall be reasonably necessary for the Bank to determine
whether any disposal of Hazardous Substances has occurred on, at or near the
Improvements. The costs of all such tests, investigations and samplings
shall be considered as additional indebtedness secured by all collateral for
the Obligations and shall become immediately due and payable without notice
and with interest thereon at highest rate then borne by any of the
Obligations.
11.7 NO WARRANTY REGARDING INFORMATION. The Borrower agrees
that the Bank shall not be liable in any way for the completeness or
accuracy of any Environmental Report or the information contained therein.
The Borrower further agrees that the Bank has no duty to warn the Borrower
or any other person or entity about any actual or potential environmental
contamination or other problem that may have become apparent or will become
apparent to the Bank.
ARTICLE 12 - DEFAULTS
12.1 DEFAULTS. The following events (hereinafter called
"Events of Default") shall constitute defaults under this Agreement. Such
Events of Default shall be without prejudice to the Bank's rights to demand
payment in full of Obligations payable on demand, as specified in this
Agreement or the notes relating to such Obligations, at any time.
a. NONPAYMENT. Failure of the Borrower to make any payment
of any type under the terms of this Agreement, any of the notes related
hereto, or of any of the agreements contemplated hereunder, within ten (10)
days after the same becomes due and payable.
b. PERFORMANCE. Failure of the Borrower or any Guarantor to
observe or perform any other condition, covenant or term of this Agreement
and all related agreements and documents; provided, however, except with
respect to Sections 8.1 and 8.4 and Article 10, if such failure is
susceptible to cure an Event of Default shall not occur unless such failure
is not cured within thirty (30) days after the Bank gives the Borrower or
the Guarantor respectively notice of same.
c. OTHER OBLIGATIONS. Failure of the Borrower or any
Guarantor to observe or perform any other condition, covenant, or term of
any other agreement with the Bank after any applicable cure or grace period
related thereto, or default by the Borrower or any Guarantor under any
agreement involving Debt or any other material agreement with any third
person or entity.
d. REPRESENTATIONS. (i) failure of any representation or
warranty made by the Borrower or any Guarantor in connection with the
execution of this Agreement, or any certificate of officers pursuant
thereto, to be truthful, accurate or correct in all material respects, or
(ii) after fifteen (15) days notice and failure to cure, failure of any
representation or warranty made by the Borrower or any Guarantor in
connection with the performance of this Agreement after the closing date, or
any certificate of officers pursuant thereto to be truthful, accurate or
correct in all material respects.
e. FINANCIAL DIFFICULTIES. Financial difficulties of the
Borrower or any Guarantor as evidenced by:
(i) any admission in writing of inability to pay debts
as they become due; or
(ii) the filing of a voluntary or involuntary 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
(iii) making an assignment for the benefit of creditors;
or
(iv) consenting to the appointment of a trustee or
receiver for all or a major part of any of its property; or
(v) the entry of a court order appointing a receiver or
a trustee for all or a major part of its property; or
(vi) the occurrence of any event, action, or transaction
that could give rise to a lien or encumbrance on the assets of the Borrower
as a result of application of relevant provisions of ERISA.
f. MATERIAL CHANGE. After ten (10) days notice to the
Borrower, any condition by reason of which the Bank reasonably believes the
Borrower's ability to timely repay any Obligations to the Bank is impaired,
including without limitation by reason of material or reasonably projected
material change in Borrower's business or operations, or in any factor
affecting Borrower's business or operations, or regarding any other
obligation or agreement of Borrower, or in the financial condition of
Borrower or in the collateral for the Borrower's Obligations.
12.2 REMEDIES. If any one or more Events of Default listed in
Section 12.1 (e)(i)-(v) occur, (a) any further commitments or obligations of
the Bank shall be deemed to be automatically and without need for further
action terminated, and (b) all Obligations of the Borrower to the Bank,
automatically and without need for further action, shall become forthwith
due and payable without presentment, demand, protest, or other notice of any
kind, all of which are hereby expressly waived. If any one or more Events
of Default other than those listed in Section 12.1 (e)(i)-(v) occur, the
Bank may, at its option, take either or both of the following actions at the
same or different times: (a) terminate any further commitments or
obligations of the Bank, and (b) declare all Obligations of the Borrower to
the Bank, automatically and without need for further action, to be 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 recover judgment against the Borrower for all Obligations of
the Borrower to the Bank either before, or after, or during the pendency of
any proceedings for the enforcement, of any security interests, mortgages,
pledges, 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 on such Obliga-
tions. The Bank shall be entitled to exercise any other legal or equitable
right which it may have, and 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 held by the Bank.
ARTICLE 13 - MISCELLANEOUS
13.1 WAIVER. No delay or failure of the Bank to exercise any
right, remedy, power or privilege hereunder shall impair the same or be
construed to be a waiver of the same or of any Event of Default or an
acquiescence therein. No single or partial exercise of any right, remedy,
power or privilege shall preclude other or further exercise thereof by the
Bank. All rights, remedies, powers, and privileges herein conferred upon
the Bank shall be deemed cumulative and not exclusive of any others
available.
13.2 SURVIVAL OF REPRESENTATIONS. All representations and
warranties contained herein shall survive the execution and delivery of this
Agreement and the execution and delivery of other agreements hereunder.
13.3 ADDITIONAL SECURITY/SETOFF. The Bank shall have a
security interest in and right of setoff with respect to all deposits or
other sums credited by or due from the Bank to the Borrower and any
Guarantor, and a security interest in all securities or other property of
the Borrower and any Guarantor in the Bank's possession for safekeeping or
otherwise with the exception of trust funds or trust accounts held for the
benefit of third parties. The Bank's security interest shall secure payment
of the Obligations. In the event of any Event of Default under this
Agreement, regardless of the adequacy of collateral, without any demand or
notice, except as required by applicable law, the Bank may apply or setoff
such deposits or other sums and may sell or dispose of any or all of such
securities or other property and may exercise any and all rights it may have
under the New York Uniform Commercial Code, as in effect from time to time.
The rights of the Bank under this Agreement are in addition to, and not
exclusive of, any other rights it may have with respect to such deposits,
sums, securities, or other property under other agreements or applicable
principles of law. The Bank shall have no duty to take steps to preserve
rights against prior parties as to such securities or other property.
13.4 NOTICES. Any notice or demand upon any party hereto
shall be deemed to have been sufficiently given or served for all purposes
hereof when delivered in person or by nationally recognized overnight
courier with receipt requested, or two business days after it is mailed
certified mail postage prepaid, return receipt requested, addressed as
follows:
If to Bank: Fleet Bank
One East Avenue
Rochester, New York 14638
Attention: Corporate Banking Department
Jeffery S. Holmes
If to Borrower: Detection Systems, Inc.
130 Perinton Parkway
Fairport, New York 14450
Attention: President
Any party may change, by notice in writing to the other parties, the address
to which notices to it shall be sent.
13.5 ENTIRE AGREEMENT. This Agreement and the documents
referred to herein embody the entire agreement and understanding among the
parties and supersede all prior agreements and understandings relating to
the subject matter hereof. This Agreement shall not be changed or amended
without the written agreement of all parties hereto. This Agreement embodies
all commitments to lend between the Bank and the Borrower and supersedes any
prior commitments.
13.6 PARTIES IN INTEREST. All the terms and provisions of
this Agreement shall inure to the benefit of and be binding upon and be
enforceable by the parties and their respective successors and assigns and
shall inure to the benefit of and be enforceable by any holder of notes
executed hereunder. Upon any transfer of any Obligation or any interest
therein the Bank may deliver or otherwise transfer or assign to the holder
any collateral or guarantees for the Obligation, which holder shall
thereupon have all the rights of the Bank.
13.7 BUSINESS DAYS. Whenever any payment is due, or
obligation is to be performed hereunder on a day not a Business Day, such
payment may be made or obligation performed on the next succeeding Business
Day. Such extension of time shall, in such case, be included in the
computation of any interest or fees.
13.8 ORAL AND TELECOPY REQUESTS. As a convenience to the
Borrower, Borrower hereby authorizes the Bank to rely upon requests made by
the Borrower or its employees in writing or by telecopy, and to treat such
requests as if they were made in a writing delivered to the Bank. Any
advance of funds made by the Bank pursuant to any such request shall be
deemed to be authorized by the Borrower unless immediately repaid in full.
13.9 SEVERABILITY. In the event that any one or more of the
provisions contained in 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 this Agreement or
such other agreement, document, or guarantee.
13.10 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.
13.11 PARTICIPATIONS. The Bank shall have the right to sell
or repurchase participations in the Obligations without giving prior notice
to the Borrower, so long as the Bank retains servicing responsibility with
respect to this Agreement and the transactions contemplated hereby.
13.12 REPLACEMENT OF PRIOR AGREEMENTS. This Agreement
supersedes and replaces the Credit Agreement dated December 31, 1991 between
the Bank and Detection, as the same was amended, and the credit facilities
related thereto.
13.13 JURISDICTION/TRIAL BY JURY. Borrower consents to
jurisdiction and service of process, which may be effected by certified
mail, in the courts of the State of New York and in the courts of the United
States having jurisdiction thereof.
Borrower waives trial by jury of any claims or proceedings with
respect to this Agreement, the Obligations, and all documents, agreements,
and matters related hereto to the fullest extent allowed by law.
IN WITNESS WHEREOF, the parties have executed this Agreement on
the date first above written.
FLEET BANK
By: /s/ Jeffrey S. Holmes
Title: Vice President
DETECTION SYSTEMS, INC.
By: /s/ Frank J. Ryan
Title: Vice President, Treasurer
RADIONICS, INC.
By: /s/ Frank J. Ryan
Title: Vice President, Treasurer
INDEX TO SCHEDULES
SCHEDULE 5.1 - Liens and Encumbrances
SCHEDULE 6.1 - Affiliates and Subsidiaries
SCHEDULE 6.4 - Litigation
SCHEDULE 9.1 - Obligations
SCHEDULE 11.1 - Environmental Matters
INDEX TO EXHIBITS
EXHIBIT A - Revolving Line Note
EXHIBIT B - Mortgage Loan Note
EXHIBIT C - Term Loan Note
SCHEDULE 5.1
Liens and Encumbrances
Capital Leases covering equipment subject to Leases intended as security
agreements and described in Schedule 9.1 hereto.
Liens on assets described in UCC Searches, as follows:
1. Search Report dated February 8, 1996 under Order Number 827407
by CSC Networks against the Debtor Name of "Detection Systems, Inc.", except
that the UCC Financing Statement Number 330505 in favor of Chemical Bank has
lapsed and is of no force and effect.
2. Search Report dated February 2, 1996 under Order Number 827407
by CSC Networks against the Debtor Name of "Radionics, Inc."
Miscellaneous liens referred to in Stock Purchase Agreement between Expamet
International Plc, Expamet, Inc. and Detection Systems, Inc. not exceeding
an aggregate principal amount of $250,000.
SCHEDULE 6.1
Affiliates and Subsidiaries
NAME JURISDICTION OF INCORPORATION
Emergency Communications, Inc. New York
TriSense Ltd New York
Detection Systems -- Foreign Sales Corporation Barbados
Detection Systems International, Inc. New York
Detection Systems (AUST) PTY LTD Australia
Detection Systems (HK) Limited Hong Kong
Emergency Communications, Inc. is owned by Detection Systems, Inc. and by
certain officers of Detection Systems, Inc. whose shareholdings in Emergency
Communications, Inc. are periodically increased pursuant to a stock vesting
plan.
TriSense Ltd, Detection Systems -- Foreign Sales Corporation, and Detection
Systems International, Inc. are wholly-owned by Detection Systems, Inc.
Detection Systems (AUST) PTY LTD, and Detection Systems (HK) Limited are
wholly-owned by Detection Systems International, Inc.
SCHEDULE 6.4
Litigation
Claim described in a letter dated November 6, 1995 to Detection Systems,
Inc. by Mickey R. Olmstead, a copy of which is delivered to Fleet Bank
herewith.
See Schedule 2.5 to the Stock Purchase Agreement between Expamet
International Plc, Expamet, Inc. and Detection Systems, Inc. for a
description of litigation pending or threatened against Radionics, Inc.
SCHEDULE 9.1
Obligation
Capital Leases, as follows:
Flexible Surface Equipment
last payment date 6/1/98
monthly payment $9,773.68
principal owing (2/12/96) $232,651.36
1994 Jaguar
last payment date 10/20/97
monthly payment &792.47
1992 BMW
last payment date 7/1/96
monthly payment $678.49
Industrial Revenue Bond on headquarters building
last payment date 10/1/97
quarterly payment $63,330.00
Obligations listed on Schedule 3.8 of the Stock Purchase Agreement between
Expamet International Plc, Expamet, Inc. and Detection Systems, Inc. (copy
attached)
SCHEDULE 11.1
Environmental Matters
See Fact Sheet by New York State Department of Environmental Conservation
pertaining to Rando Machine Corp., Site ID #8-59-014, Town of Macedon, Wayne
County, a copy of which has been delivered to Fleet Bank concurrently
herewith.
EXHIBIT A
AMENDED AND RESTATED REVOLVING LINE NOTE
$6,500,000 May 31, 1996
Unless otherwise expressly provided herein, all capitalized
terms in this Amended and Restated Revolving Line Note ("Revolving Line
Note") shall have the meanings given to them in the Amended and Restated
Credit Facility Agreement dated as of May 31, 1996, between the undersigned
("Borrower") and Fleet Bank ("Bank"), as the same may be amended, extended,
replaced, or modified from time to time (the "Credit Agreement").
This Revolving Line Note amends, replaces, and restates in its
entirety the Revolving Line Note dated as of February 12, 1996 given by the
Borrower in favor of the Bank.
FOR VALUE RECEIVED, the Borrower, jointly and severally, hereby
promises to pay to the order of the Bank, at any of its banking offices, or
at such other places as Bank may specify in writing to Borrower, the
principal sum of Six Million Five Hundred Thousand Dollars ($6,500,000), or
if less, the aggregate unpaid principal amount of all advances made by Bank
to Borrower. Bank shall maintain a record of amounts of principal and
interest payable by Borrower from time to time, and the records of 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, Bank may mail or deliver periodic statements to Borrower
indicating the date and amount of each advance hereunder (but any failure to
do so shall not relieve Borrower of the obligation to repay any advance).
Unless Borrower questions the accuracy of an entry on any periodic statement
within fifteen business days after such mailing or delivery by Bank,
Borrower shall be deemed to have accepted and be obligated by the terms of
each such periodic statement as accurately representing the advances
hereunder. In the event of transfer of this Revolving Line Note, or if the
Bank shall otherwise deem it appropriate, Borrower hereby authorizes Bank to
endorse on this Revolving Line Note the amount of advances and payments to
reflect the principal balance outstanding from time to time. Bank is hereby
authorized to honor borrowing and other requests received from purported
representatives of Borrower orally, by telecopy, in writing, or otherwise.
Oral requests shall be conclusively presumed to have been made by an
authorized person and Bank's crediting of Borrower's account with the amount
requested shall conclusively establish Borrower's obligation to repay the
amount advanced.
Interest. All outstanding amounts under this Revolving Line
Note shall bear interest until paid in full at the Base Rate plus the
Applicable Base Rate Margin. Changes in the rate of interest applicable to
this Revolving Line Note shall become effective automatically and without
notice at the time of changes in the Base Rate.
The Borrower, however, at least two business days prior to each
Rate Change Date may notify the Bank of its election to have a portion of
the outstanding principal amount under this Revolving Line Note (which must
be at least $1,000,000 and must be an increment of $100,000) bear interest
for a one-month, three-month, or six month period commencing on such Rate
Change Date at the LIBOR Rate plus the Applicable LIBOR Margin.
Interest shall be calculated based on actual days elapsed
divided by a year of 360 days. Interest shall continue to accrue after
maturity at the rate required by this Revolving Line Note until this
Revolving Line Note is paid in full. The rate of interest on this Revolving
Line Note may be increased under the circumstances provided in the Credit
Agreement. The right of Bank to receive such increased rate of interest
shall not constitute a waiver of any other right or remedy of Bank.
Payments. Payments of all accrued interest under this Revolving
Line Note shall be due and payable on the first day of each month.
Principal payments also shall be due and payable such that there
is no outstanding principal under the Revolving Line for one (1) day in each
of Borrower s fiscal years.
All remaining outstanding principal and accrued interest shall
be due and payable in full on the Revolving Line Termination Date.
All payments shall be in lawful money of the United States in
immediately available funds. Unless canceled in writing by Borrower,
Borrower authorizes Bank to debit its accounts at Bank to make payments due
hereunder, but such authority shall not relieve Borrower of the obligation
to assure that payments are made when due.
Late Charge. This Revolving Line Note is subject to the late
charges provided in the Credit Agreement.
Maximum Rate. At no time shall Borrower be obligated or
required to pay interest under this Revolving Line Note at a rate which
exceeds the maximum rate permitted by applicable law or regulation. If by
the terms of this Revolving Line Note 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 Revolving Line 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.
Prepayment. This Revolving Line Note is freely prepayable in
whole or in part at any time, subject to payment of Break Costs, if any, as
provided in the Credit Agreement.
Holidays. If this Revolving Line Note or any payment hereunder
becomes due on a day not a Business Day, the due date of this Revolving Line
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. At Bank's option, this Revolving Line Note
shall become immediately due and payable in full, without further
presentment, protest, notice, or demand, upon the happening of any Event of
Default.
Modification of Terms. The terms of this Revolving Line Note
cannot be changed, nor may this Revolving Line Note be discharged in whole
or in part, except by a writing executed by Bank. In the event that Bank
demands or accepts partial payments of this Revolving Line Note, such demand
or acceptance shall not be deemed to constitute a waiver of the right to
demand the entire unpaid balance of this Revolving Line 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. Borrower on demand shall pay all expenses of
Bank, including without limitation reasonable attorneys' fees, in connection
with enforcement and collection of this Revolving Line Note.
Miscellaneous. To the fullest extent permissible by law,
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 Revolving Line Note. 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 Borrower's obligations under this Revolving Line
Note which shall be unconditional.
Laws. Borrower agrees that this Revolving Line Note shall be
governed by the laws of the State of New York.
DETECTION SYSTEMS, INC.
By: _____________________________
Title: __________________________
RADIONICS, INC.
By: ____________________________
Title: __________________________
EXHIBIT B
MORTGAGE LOAN NOTE
$3,400,000 May 31, 1996
Unless otherwise expressly provided herein, all capitalized
terms in this Mortgage Loan Note shall have the meanings given to them in
the Amended and Restated Credit Facility Agreement dated as of May 31, 1996
between the undersigned ("Detection"), Radionics, Inc. and Fleet Bank
("Bank"), as the same may be amended, extended, replaced, or modified from
time to time (the "Credit Agreement").
FOR VALUE RECEIVED, Detection hereby promises to pay to the
order of the Bank, at any of its banking offices, or at such other places as
Bank may specify in writing to Borrower, the principal sum of Three Million
Four Hundred Thousand Dollars ($3,400,000).
Interest. Outstanding principal amounts under this Mortgage
Loan Note shall bear interest until paid in full at the Base Rate plus the
Applicable Base Rate Margin. Changes in the rate of interest applicable to
this Mortgage Loan Note shall become effective automatically and without
notice at the time of changes in the Base Rate.
Detection, however, at least two business days prior to each
Rate Change Date may notify the Bank of its election to have a portion of
the outstanding principal amount under this Mortgage Loan Note (which must
be at least $1,000,000 and must be an increment of $100,000) bear interest
for a one-month, three-month, or six month period commencing on such Rate
Change Date at the LIBOR Rate plus the Applicable LIBOR Margin.
Interest shall be calculated based on actual days elapsed
divided by a year of 360 days.
Interest shall continue to accrue after maturity at the rate
required by this Mortgage Loan Note until this Mortgage Loan Note is paid in
full. The rate of interest on this Mortgage Loan Note may be increased under
the circumstances provided in the Credit Agreement. The right of Bank to
receive such increased rate of interest shall not constitute a waiver of any
other right or remedy of Bank.
Payments. Payments of all accrued interest under this Mortgage
Loan Note shall be due and payable on the first day of each month. In
addition, commencing on December 1, 1997, principal payments of $20,987.65
each shall be due and payable on the first day of each month.
All Obligations under and related to this Mortgage Loan Note shall be
due and payable in full on the earlier of (i) a Revolving Line Termination
Date, and (ii) May 31, 2006.
All payments shall be in lawful money of the United States in
immediately available funds. Unless canceled in writing by Detection,
Detection authorizes Bank to debit its accounts at Bank to make payments due
hereunder, but such authority shall not relieve Detection of the obligation
to assure that payments are made when due.
Late Charge. This Mortgage Loan Note is subject to the late
charges provided in the Credit Agreement.
Maximum Rate. At no time shall Detection be obligated or
required to pay interest under this Mortgage Loan Note at a rate which
exceeds the maximum rate permitted by applicable law or regulation. If by
the terms of this Mortgage Loan Note Detection 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 Mortgage Loan 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.
Prepayment. This Mortgage Loan Note is freely prepayable in
whole or in part at any time, subject to payment of Break Costs, if any, as
provided in the Credit Agreement.
Holidays. If this Mortgage Loan 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 of this Mortgage Loan 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. At Bank's option, this Mortgage Loan Note
shall become immediately due and payable in full upon the happening of any
Event of Default.
Modification of Terms. The terms of this Mortgage Loan Note
cannot be changed, nor may this Mortgage Loan Note be discharged in whole or
in part, except by a writing executed by Bank. In the event that Bank
demands or accepts partial payments of this Mortgage Loan Note, such demand
or acceptance shall not be deemed to constitute a waiver of the right to
demand the entire unpaid balance of this Mortgage Loan 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. Detection on demand shall pay all expenses of
Bank, including without limitation reasonable attorneys' fees, in connection
with enforcement and collection of this Mortgage Loan Note.
Miscellaneous. To the fullest extent permissible by law,
Detection waives presentment, demand for payment, protest, notice of non-
payment, and all other demands or notices otherwise required by law in
connection with the delivery, acceptance, performance, default, or
enforcement of this Mortgage Loan Note. Detection 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 Detection's obligations under this Mortgage Loan
Note which shall be unconditional.
Laws. Detection agrees that this Mortgage Loan Note shall be
governed by the laws of the State of New York.
DETECTION SYSTEMS, INC.
By: ____________________________
Title: __________________________
EXHIBIT C
TERM LOAN NOTE
$14,350,000 May 31, 1996
Unless otherwise expressly provided herein, all capitalized
terms in this Term Loan Note shall have the meanings given to them in the
Amended and Restated Credit Facility Agreement dated as of May 31, 1996
between the undersigned ("Detection"), Radionics, Inc. and Fleet Bank
("Bank"), as the same may be amended, extended, replaced, or modified from
time to time (the "Credit Agreement").
FOR VALUE RECEIVED, Detection hereby promises to pay to the
order of the Bank, at any of its banking offices, or at such other places as
Bank may specify in writing to Borrower, the principal sum of Fourteen
Million Three Hundred Fifty Thousand Dollars ($14,350,000).
Interest. Outstanding principal amounts under this Term Loan
Note shall bear interest until paid in full at the Base Rate plus the
Applicable Base Rate Margin. Changes in the rate of interest applicable to
this Term Loan Note shall become effective automatically and without notice
at the time of changes in the Base Rate.
Detection, however, at least two business days prior to each
Rate Change Date may notify the Bank of its election to have a portion of
the outstanding principal amount under this Term Loan Note (which must be at
least $1,000,000 and must be an increment of $100,000) bear interest for a
one-month, three-month, or six month period commencing on such Rate Change
Date at the LIBOR Rate plus the Applicable LIBOR Margin.
Interest shall be calculated based on actual days elapsed
divided by a year of 360 days.
Interest shall continue to accrue after maturity at the rate
required by this Term Loan Note until this Term Loan Note is paid in full.
The rate of interest on this Term Loan Note may be increased under the
circumstances provided in the Credit Agreement. The right of Bank to receive
such increased rate of interest shall not constitute a waiver of any other
right or remedy of Bank.
Payments. Payments of all accrued interest under this Term Loan
Note shall be due and payable on the first day of each month. In
addition, commencing on December 1, 1997, principal payments of $217,424.24
each shall be due and payable on the first day of each month.
All Obligations under and related to this Term Loan Note shall be due
and payable in full on the earlier of (i) a Revolving Line Termination Date,
and (ii) May 31, 2003.
All payments shall be in lawful money of the United States in
immediately available funds. Unless canceled in writing by Detection,
Detection authorizes Bank to debit its accounts at Bank to make payments due
hereunder, but such authority shall not relieve Detection of the obligation
to assure that payments are made when due.
Late Charge. This Term Loan Note is subject to the late charges
provided in the Credit Agreement.
Maximum Rate. At no time shall Detection be obligated or
required to pay interest under this Term Loan Note at a rate which exceeds
the maximum rate permitted by applicable law or regulation. If by the terms
of this Term Loan Note Detection 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 Term Loan 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.
Prepayment. This Term Loan Note is freely prepayable in whole
or in part at any time, subject to payment of Break Costs, if any, as
provided in the Credit Agreement.
Holidays. If this Term Loan 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 of this Term Loan 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. At Bank's option, this Term Loan Note shall
become immediately due and payable in full upon the happening of any Event
of Default.
Modification of Terms. The terms of this Term Loan Note cannot
be changed, nor may this Term Loan Note be discharged in whole or in part,
except by a writing executed by Bank. In the event that Bank demands or
accepts partial payments of this Term Loan Note, such demand or acceptance
shall not be deemed to constitute a waiver of the right to demand the entire
unpaid balance of this Term Loan 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. Detection on demand shall pay all expenses of
Bank, including without limitation reasonable attorneys' fees, in connection
with enforcement and collection of this Term Loan Note.
Miscellaneous. To the fullest extent permissible by law,
Detection waives presentment, demand for payment, protest, notice of non-
payment, and all other demands or notices otherwise required by law in
connection with the delivery, acceptance, performance, default, or
enforcement of this Term Loan Note. Detection 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 Detection's obligations under this Term Loan Note
which shall be unconditional.
Laws. Detection agrees that this Term Loan Note shall be
governed by the laws of the State of New York.
DETECTION SYSTEMS, INC.
By: ____________________________
Title: __________________________
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 4th day of June, 1996 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 any Carryforward
Bonuses as provided in Section 3 and 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 except for any
Carryforward Bonuses as provided in Section 3.
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 $212,100 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 $500,000, and an
annual stock bonus to a maximum of 20,000 shares per year based
on a formula that, subject for both bonuses to the provisions
below concerning achievement of the EPS (Earnings Per Share)
Goal, 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. For these purposes,
"sales growth" shall mean the greater of: (a) the actual
percentage of sales growth compared to the immediately prior
year or (b) equivalent sales growth. "Equivalent sales growth"
shall mean an assumed 20% compounded annual sales growth beyond
the actual sales of the year prior to any year in which sales
growth was more than 20% provided that the resulting assumed
sales level for the year in question is not more than the actual
sales of the year in question. If a participant in a bonus
program is employed by the Company for only part of a year or
his or her employment is terminated before year end, the
participant's bonus for that year will be pro rated based on the
portion of the year the participant was employed by the Company.
Each cash bonus and each stock bonus provided for above shall
not be earned unless the Company achieves the EPS Goal, as
defined below, except that for any year in which the conditions
provided above have been satisfied for a bonus but the EPS Goal
is not achieved, the bonus will be earned, or partly earned, in
any of the next five fiscal years in which there is an Earnings
Surplus, as defined below, subject to the following:
(A) for any given fiscal year the "EPS Goal"
shall be a goal for after-tax earnings per share for the year
established by the Board of Directors within the first 120 days
of that year;
(B) for any given fiscal year there shall be an
"Earnings Surplus" to the extent that after-tax earnings per
share exceed the EPS Goal for that year;
(C) all calculations under this Section 3(ii)
shall be made in accordance with generally accepted accounting
principles applied consistently with the Company's practices;
(D) any bonuses otherwise earned in any fiscal
year except for the achievement of the EPS Goal for that year
are called "Carryforward Bonuses" herein;
(E) if in any fiscal year there is an Earnings
Surplus but it is not sufficient for the earning of all
Carryforward Bonuses, that amount of the Carryforward Bonuses
equal in the aggregate to the amount which, net of tax effect,
would eliminate the Earnings Surplus shall be earned in that
year, subject to the following:
(1) if there are Carryforward Bonuses from more
than one fiscal year, the Carryforward Bonuses from the earliest
year or years shall be earned prior to those of later years; and
(2) if only a portion of any fiscal year's
Carryforward Bonuses are thus earned, they shall be earned on a
pro rata basis among the officer or former officer participants
in these bonus programs for that year; and
(3) any remaining unearned amount of
Carryforward Bonuses shall be carried forward to any future year
in which there is an Earnings Surplus;
(4) all cash bonuses shall be fully paid before
any stock bonuses are paid; and
(5) a person who was a participant, or pursuant
to an employment agreement is treated as a participant, in a
bonus program for the year when a bonus becomes a Carryforward
Bonus shall be paid the Carryforward Bonus when it becomes
earned pursuant to the provisions of this Subsection (ii),
regardless whether the person continues as an officer,
participant or employee after it becomes a Carryforward Bonus.
(F) no Carryforward Bonus may be earned in any
fiscal year more than five fiscal years after the year in which
the other conditions for the bonus were satisfied.
(iii) Grants of options under any Company employee
stock option plan, where permitted by the 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 has 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 or
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. RETIREMENT. The Company hereby agrees that, after
Executive's retirement from full time employment with the
Company, as agreed between the Company and Executive, the
Company will pay Executive retirement benefits for his lifetime
and for his spouse's lifetime, if his spouse survives him, as
follows:
(a) a retirement wage benefit initially equal to
12% of Executive's base salary as set forth in Section 3(i)
above, increased each year thereafter by any increase, less
0.5%, in the CPI as defined below (except that the wage benefit
shall be 75% of that amount after Executive's death);
(b) continuation of Executive's full health
insurance or similar benefit for Executive and his spouse; and
(c) continuation of such other benefits as
provided such continuation pursuant to their terms.
For these purposes:
(i) unless otherwise agreed or directed by
law or a court, "spouse" shall mean the person to whom Executive
is married at the time any benefit is to be paid, or, after
Executive's death, the person to whom Executive was married at
the time of his death;
(ii) "CPI" shall mean the Consumer Price Index
as determined by the United States Department of Labor, Bureau
of Labor Statistics, or any successor governmental agency or,
lacking any such successor, any other authoritative source
designated in good faith by the Board of directors; and the wage
benefit shall be increased as of January 1 each year by
increasing the wage benefit paid during the previous year by any
positive percentage calculated by (A) dividing CPI most recently
computed and available at the end of that previous year by the
CPI most recently computed and available at the end of the year
previous to that (the quotient to be expressed as a percentage)
and (B) subtracting 100.5%.
The parties agree: (y) that payment of these
retirement benefits may be terminated if a court of law
determines that Executive has violated the provisions of Section
8 above, and (z) that the Company will purchase and maintain
life insurance sufficient to fund the estimated benefits for the
spouse (any excess policy proceeds to be available, if agreed,
to purchase shares of the Company's Common Stock held in
Executive's estate) and the policy or policies of such insurance
shall be held in a trust designed for this purpose.
10. 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.
11. 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.
12. AMENDMENT. It is agreed that no change or
modification of this Agreement shall be made except in a writing
signed by both parties.
13. 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.
14. LAW GOVERNING. The validity, interpretation and
effect of this Agreement shall be governed by the laws of the
State of New York.
15. 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.
6/27/96 /s/ Karl H. Kostusiak
________________
Date Karl H. Kostusiak, Executive
DETECTION SYSTEMS, INC.
6/27/96 /s/ Donald R. Adair
________________ by:
Date Donald R. Adair, Chairman of
the Compensation Committee of
the Board of Directors
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 4th day of June, 1996 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 any Carryforward
Bonuses as provided in Section 3 and 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 except for any
Carryforward Bonuses as provided in Section 3.
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 $169,700 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 $500,000, and an
annual stock bonus to a maximum of 16,000 shares per year based
on a formula that, subject for both bonuses to the provisions
below concerning achievement of the EPS (Earnings Per Share)
Goal, 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. For these purposes,
"sales growth" shall mean the greater of: (a) the actual
percentage of sales growth compared to the immediately prior
year or (b) equivalent sales growth. "Equivalent sales growth"
shall mean an assumed 20% compounded annual sales growth beyond
the actual sales of the year prior to any year in which sales
growth was more than 20% provided that the resulting assumed
sales level for the year in question is not more than the actual
sales of the year in question. If a participant in a bonus
program is employed by the Company for only part of a year or
his or her employment is terminated before year end, the
participant's bonus for that year will be pro rated based on the
portion of the year the participant was employed by the Company.
Each cash bonus and each stock bonus provided for above shall
not be earned unless the Company achieves the EPS Goal, as
defined below, except that for any year in which the conditions
provided above have been satisfied for a bonus but the EPS Goal
is not achieved, the bonus will be earned, or partly earned, in
any of the next five fiscal years in which there is an Earnings
Surplus, as defined below, subject to the following:
(A) for any given fiscal year the "EPS Goal"
shall be a goal for after-tax earnings per share for the year
established by the Board of Directors within the first 120 days
of that year;
(B) for any given fiscal year there shall be an
"Earnings Surplus" to the extent that after-tax earnings per
share exceed the EPS Goal for that year;
(C) all calculations under this Section 3(ii)
shall be made in accordance with generally accepted accounting
principles applied consistently with the Company's practices;
(D) any bonuses otherwise earned in any fiscal
year except for the achievement of the EPS Goal for that year
are called "Carryforward Bonuses" herein;
(E) if in any fiscal year there is an Earnings
Surplus but it is not sufficient for the earning of all
Carryforward Bonuses, that amount of the Carryforward Bonuses
equal in the aggregate to the amount which, net of tax effect,
would eliminate the Earnings Surplus shall be earned in that
year, subject to the following:
(1) if there are Carryforward Bonuses from more
than one fiscal year, the Carryforward Bonuses from the earliest
year or years shall be earned prior to those of later years; and
(2) if only a portion of any fiscal year's
Carryforward Bonuses are thus earned, they shall be earned on a
pro rata basis among the officer or former officer participants
in these bonus programs for that year; and
(3) any remaining unearned amount of
Carryforward Bonuses shall be carried forward to any future year
in which there is an Earnings Surplus;
(4) all cash bonuses shall be fully paid before
any stock bonuses are paid; and
(5) a person who was a participant, or pursuant
to an employment agreement is treated as a participant, in a
bonus program for the year when a bonus becomes a Carryforward
Bonus shall be paid the Carryforward Bonus when it becomes
earned pursuant to the provisions of this Subsection (ii),
regardless whether the person continues as an officer,
participant or employee after it becomes a Carryforward Bonus.
(F) no Carryforward Bonus may be earned in any
fiscal year more than five fiscal years after the year in which
the other conditions for the bonus were satisfied.
(iii) Grants of options under any Company employee
stock option plan, where permitted by the 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 has 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 or
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. RETIREMENT. The Company hereby agrees that, after
Executive's retirement from full time employment with the
Company, as agreed between the Company and Executive, the
Company will pay Executive retirement benefits for his lifetime
and for his spouse's lifetime, if his spouse survives him, as
follows:
(a) a retirement wage benefit initially equal to
12% of Executive's base salary as set forth in Section 3(i)
above, increased each year thereafter by any increase, less
0.5%, in the CPI as defined below (except that the wage benefit
shall be 75% of that amount after Executive's death);
(b) continuation of Executive's full health
insurance or similar benefit for Executive and his spouse; and
(c) continuation of such other benefits as
provided such continuation pursuant to their terms.
For these purposes:
(i) unless otherwise agreed or directed by
law or a court, "spouse" shall mean the person to whom Executive
is married at the time any benefit is to be paid, or, after
Executive's death, the person to whom Executive was married at
the time of his death;
(ii) "CPI" shall mean the Consumer Price Index
as determined by the United States Department of Labor, Bureau
of Labor Statistics, or any successor governmental agency or,
lacking any such successor, any other authoritative source
designated in good faith by the Board of directors; and the wage
benefit shall be increased as of January 1 each year by
increasing the wage benefit paid during the previous year by any
positive percentage calculated by (A) dividing CPI most recently
computed and available at the end of that previous year by the
CPI most recently computed and available at the end of the year
previous to that (the quotient to be expressed as a percentage)
and (B) subtracting 100.5%.
The parties agree: (y) that payment of these
retirement benefits may be terminated if a court of law
determines that Executive has violated the provisions of Section
8 above, and (z) that the Company will purchase and maintain
life insurance sufficient to fund the estimated benefits for the
spouse (any excess policy proceeds to be available, if agreed,
to purchase shares of the Company's Common Stock held in
Executive's estate) and the policy or policies of such insurance
shall be held in a trust designed for this purpose.
10. 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.
11. 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.
12. AMENDMENT. It is agreed that no change or
modification of this Agreement shall be made except in a writing
signed by both parties.
13. 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.
14. LAW GOVERNING. The validity, interpretation and
effect of this Agreement shall be governed by the laws of the
State of New York.
15. 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.
6/27/96 /s/ David B. Lederer
________________
Date David B. Lederer, Executive
DETECTION SYSTEMS, INC.
6/27/96
________________ by: /s/ Donald R. Adair
Date Donald R. Adair, Chairman of
the Compensation Committee of
the Board of Directors
AMENDED LICENSE AND MANUFACTURING AGREEMENT
As of January 26, 1993, Detection Systems, Inc. ("DSI") and
Emergency Communications Inc. ("ECI") entered a License and
Manufacturing Agreement (the "Agreement"), concerning the
"Security Escort System." Additionally, on January 25, 1995,
DSI and ECI agreed to Agreement No. 1 to the License and
Manufacturing Agreement.
Intending to amend the Agreement and for good and valuable
consideration, the receipt of which is hereby acknowledged, DSI
and ECI hereby agree that this Amended License and Manufacturing
Agreement shall replace the previous Agreements and will read in
its entirety as follows:
WHEREAS, DSI has developed and is the owner of certain
radio technology and know-how which is used, among other
applications, in a system known as the "Security Escort System";
and
WHEREAS, ECI desires to obtain the rights to further
develop, and to market and sell the Security Escort System and
similar products, and other "emergency call market" products
based upon that technology and know-how; and
WHEREAS, DSI has engineering and manufacturing capabilities
and ECI desires that DSI manufacture all of the products based
upon that technology and know-how;
NOW, THEREFORE, in consideration of the foregoing and the
mutual promises hereinafter set forth, the parties hereby agree
as follows:
Section 1. Definitions.
1.1 An "affiliate" of, or party "affiliated" with, a
specified party is a party that directly, or indirectly through
one or more intermediaries, controls or is controlled by, or is
under common control with, the specified party, "control" being
the actual ability to cause another to take relevant actions,
regardless of whether that ability arises from legal ownership
or other rights, from contract or from other relationships.
1.2 "DSI" shall include all subsidiaries and affiliates of
DSI other than ECI.
1.3 "Emergency Call Market" shall mean the set of all
groups of potential buyers of Systems (defined below) for use as
described and limited in this paragraph 1.3. Systems may have,
or may be capable of adaptation for, other uses such as access
control. A System will be considered as sold in the Emergency
Call Market only if the System is offered and sold for the
primary use of allowing individuals to signal personal duress
using a device carried on the person. Without limiting the
foregoing, the Emergency Call Market does not include Systems
which are offered and sold primarily for use in the following
applications: (a) "house arrest" systems; (b) conventional
fixed location alarm devices (both residential and commercial);
(c) small premises medical alert services; (d) access control;
and (e) vehicle theft alarms. For these purposes, "buyers" of
Systems shall include purchasers and lessees of Systems, as well
as other persons and entities that expressly authorize the
installation and operation of Systems at premises or facilities
owned, leased, or otherwise lawfully possessed by them.
1.4 "Manufacturing" means any manufacture of Products or
components thereof for sale, lease, license, or other transfer
to or use by third parties. "Manufacturing" does not include
the assembly of experimental or developmental Products,
components or systems strictly for use by ECI personnel in ECI
facilities for developmental or experimental purposes.
1.5 "Net Receipts" shall mean (a) gross receipts from
sales, leases, licenses, or other transfers or authorized uses
of Products and Systems, and parts, equipment, materials and
components thereof (or receipts from the use thereof), plus (b)
gross receipts from installation services, service contracts and
the performance of servicing on any Product or System, plus (c)
the sum of all purchase prices paid by ECI customers to third
parties for any parts of Systems, equipment, materials, and/or
components which are required as part of the Product or System
(excluding utility hook-ups), less (d) in all cases, sales or
use taxes, and shipping, packing and transportation insurance
expenses which were added to the face of the invoice.
1.6 "ECI" shall include all subsidiaries and other
affiliates of ECI, but not DSI or any other affiliate which is
such only because of its relationship with DSI.
1.7 "Products" shall mean any and all equipment and
systems that are manufactured or supplied by DSI and use the
Technology, and each component and part thereof, including but
not limited to the Security Escort System and other emergency
response system components and equipment (but excluding
standard, off-the-shelf materials, supplies, and components of
the type described in paragraph 7.1(b) below).
1.8 "Product Specifications" shall mean the specifications
and tolerances for each Product as proposed by ECI and consented
to by DSI as provided in paragraph 7.8, below.
1.9 "Rights" include all legal rights and claims to the
proprietary knowledge developed, compiled or acquired by DSI
relating directly or indirectly to the Technology or the
Products, including but not limited to trade secrets, processes,
trademarks, copyrights, patents and manufacturing know-how.
1.10 "Security Escort System" means the technology and
system design described as the Security Escort System on Exhibit
A.
1.11 "System" means a group of products, equipment,
materials and/or supplies which satisfy the following criteria:
(a) the System is offered and sold for the primary use of
allowing individuals to signal personal duress using a device
carried on the person;
(b) the System covers an area of land and/or one or more
buildings or structures (but no System shall cover single and/or
duplex family residences unless the primary purpose of the
System is to cover other buildings or structures);
(c) the System is capable of handling at least 20 users at
one time and the users will include unrelated persons; and
(d) the signal from a user's device is sent, directly or
indirectly, to one or more central locations and includes
information that identifies the user.
A System shall consist exclusively of (i) Products and (ii)
standard, off-the-shelf materials and/or components as described
in paragraph 7.1(b).
1.12 "Technology" includes all technical information,
design drawings, engineering data and all other unique and
special knowledge relating to the component, equipment, and
system design, manufacture, installation, and operation of the
Security Escort System and all related radio technology, which
exist as of the date of this Agreement or at any time subsequent
to the date of this Agreement, whether developed by DSI or ECI
or by any other party under contract or affiliated with DSI or
ECI, including the information described at Exhibit A.
SECTION 2. LICENSE.
2.1. GRANT OF LICENSE. DSI hereby grants and agrees to
grant to ECI for the term of this Agreement a nontransferable,
nonassignable, indivisible license, right and privilege to all
of DSI's Rights to the Technology, including all such Rights
which DSI may acquire during the term of this Agreement, for use
in developing, marketing, selling, installing and servicing
Products in the Emergency Call Market.
2.2 EXTENT OF LICENSE.
(a) The license granted in this Section 2 shall be for the
development, marketing, selling, installing and servicing of
Products solely in the Emergency Call Market.
(b) Nothing in this Agreement shall limit DSI's ability in
any way to develop or use the Technology, or to license others
to develop or use the Technology, and DSI reserves the right,
free of restriction, to make independent arrangements with any
third party with respect to the license, development or use of
the Technology for any such other purpose, including for the
development, manufacture, marketing, selling, installing and
servicing of products substantially similar to the Products that
ECI may sell under this Agreement.
(c) This license, insofar as it applies to any Technology
hereinafter developed at the expense of any third party, shall
not extend to any part of that Technology whose license by DSI
would violate the terms of any agreements which DSI has entered
into with that third party.
2.3 Territory. ECI shall have the right to market and
sell the Products in the Emergency Call Market anywhere in North
America.
2.4 Express Rights. Nothing herein shall be construed as
a grant by DSI of a license or other right to use any other
technology or know-how or rights other than as specifically
provided in this Agreement.
2.5 New Developments. ECI shall promptly advise DSI of
any engineering developments or improvements originated by ECI
with respect to the Technology of the Products and shall
promptly deliver to DSI copies of all relevant documentation and
samples of such developments or improvements. Any such
developments or improvements made by either party during the
term of this Agreement or within one year thereafter shall be
the property of DSI and shall be included in the Technology that
is licensed under this Agreement. DSI reserves the sole right
to protect such developments or improvements by registering
trademark or copyright claims, patents or by other means as
deemed appropriate by DSI, and ECI agrees to execute all such
instruments and take all such other actions as may be reasonably
required in order to record, substantiate and protect DSI's
ownership thereof. Both ECI and DSI shall have the right to use
the inventions developed by either party as it relates to this
technology as long as this Agreement remains in force.
2.6 Further Research and Development. DSI agrees to
provide, at its cost and expense, ongoing research and
development services for the initial System, until it is
commercially viable on a preliminary basis (or until DSI
determines that the development of the System should be
abandoned). Thereafter, at its option DSI may provide, at its
cost and expense, normal engineering services comparable to
those supplied to other DSI customers. DSI agrees that, at
ECI's request, DSI will provide additional research and
development services for ECI for finishing the initial Product
development and for later improvements of Products or
development of new Products, subject to DSI's reasonable time
and availability requirements. ECI agrees to pay DSI for such
extraordinary services on a fully loaded cost plus 20 percent,
payment to be made within 30 days from invoice date, with
amounts unpaid thereafter to accrue interest on a daily basis at
a rate equal to 15 percent per year. For purposes of this
paragraph 2.6, "fully loaded cost" includes DSI's pro rata
general and administrative expenses allocable to the research
and development services. All technology developed under this
paragraph 2.6 shall be the property of DSI and shall be included
in the Technology that is licensed under this Agreement.
2.7 Trademarks. DSI acknowledges that the Rights covered
under this license include a grant to ECI to use the registered
trademark "Security Escort", for the duration of this Agreement.
ECI shall use said trademark in the form approved by DSI. ECI
recognizes the title and ownership of DSI in said trademark and
agrees to do nothing to impair that title or ownership. ECI
agrees that it will not, either directly or indirectly, apply
for registration of said trademark or trade name in any
jurisdiction. ECI shall adhere to the established prestige and
goodwill of DSI in any of its advertising and business materials
with respect to the aforementioned trademark. ECI shall use its
best efforts to safeguard the established prestige and goodwill
of the trademark and, accordingly, ECI shall maintain the
highest quality and standards of business conduct relating to
products and services bearing such trademark. The foregoing
provisions shall also apply to any and all other marks that may
become included in the Rights that are licensed to ECI under
this Agreement.
2.8 Technical Support. DSI agrees to provide technical
training for ECI's personnel, upon reasonable request by ECI and
subject to DSI's reasonable time and availability requirements.
ECI shall compensate DSI for such services on a fully loaded
cost plus 20 percent basis. For purposes of this paragraph 2.9,
"fully loaded cost" includes DSI's pro rata general and
administrative expenses allocable to the training.
Section 3. Confidentiality and Noncompetition.
3.1 Confidentiality. ECI acknowledges DSI's ownership of
the Technology and the Rights and the confidential nature
thereof and shall not directly or indirectly contest or impair
the same either during the life of this Agreement or at any time
after termination hereof. Nothing in this paragraph 3.1 shall
bind ECI with respect to any aspect of the Technology that
becomes publicly available through lawful means and other than
through a breach of this Agreement or breach of an agreement
entered into as provided in paragraph 3.2.
3.2 Obligation to Protect. ECI agrees that it shall use
the Technology only for the purposes stated herein and shall
take all reasonable and proper precautions against the
disclosure of the same to any person (including any of its
directors, officers and employees), except to the extent persons
need to know information included in the Technology for purposes
of assisting ECI in exercising its rights under this Agreement.
Prior to disclosure of any information regarding the Technology
to any such person, ECI shall enter into a confidentiality
agreement with that person consistent with ECI's obligations and
agreements hereunder, and DSI shall be named a beneficiary of
such confidentiality agreements with full authority and right to
enforce ECI's rights thereunder.
3.3 Noncompetition. ECI shall not manufacture or enter
into any arrangement with any other person, firm or company for
the assembly or manufacture of components, equipment or systems
using the Technology, except as provided in paragraphs 7.1(b)
and 7.7, below.
3.4 Litigation; Duty to Assist. Should litigation or
other legal action be brought by DSI against any third party
relating to the Technology, DSI will pay for the cost of such
action, but ECI shall assist DSI in such action as requested by
DSI. ECI shall not, directly or indirectly, indemnify, agree to
indemnify, or otherwise encourage or assist any person in any
way acting in opposition to any such action brought by DSI.
Section 4. Term and Termination.
4.1. Initial Term. This Agreement shall commence on the
date hereof and shall continue until the end of the five year
period after the commencement date. In no event, even after the
term of this Agreement, shall DSI refuse to supply ECI component
parts to existing systems, providing its factory is still
capable of manufacturing these component parts.
4.2 Continuing Terms. As of the end of the initial term
of this Agreement, it shall automatically continue and be
extended for one year and on a year to year basis thereafter
unless either party gives notice to the other not less than six
months prior to the expiration of the then current term that the
Agreement shall not be renewed when the current term expires;
provided, however, that DSI shall not have the right to
terminate this Agreement unless ECI is in material violation of
this Agreement or ECI has paid royalties and/or purchased
equipment under this Agreement during the twelve months
immediately preceding the month in which notice of termination
is given aggregating less than $500,000 multiplied by a
fraction, the numerator of which is the Consumer Price Index,
All Urban Consumers ("CPI"), as most recently announced by the
U.S. Department of Labor and the denominator of which is the CPI
most recently announced prior to the date of this Agreement. If
the CPI is materially changed or eliminated as a measure of
consumer price adjustment, then for purposes of this Agreement
there shall be substituted for that CPI such index (including
any revised CPI) as is most commonly accepted as a replacement
therefor.
4.3. Effect of Termination. Upon the termination of this
Agreement for any reason whatsoever:
(a) ECI's license and right to use the Technology and to
market and sell the Products shall immediately terminate and
cease to exist, except that ECI shall have the right to use the
Technology (i) in the sale and installation of inventory on hand
and of Products for which purchase orders have already been
accepted and (ii) to the extent required, in connection with
ongoing servicing of Systems then in place;
(b) ECI shall immediately deliver to DSI all originals and
copies of books, notes, drawings, writings and other documents
in which any confidential information relating to the Technology
has been recorded, and all samples and models relating to the
Technology and the Products;
(c) Said termination shall not affect the right of DSI to
any sums due to it immediately prior to the date of termination,
as well as the right to receive payments and royalties in
connection with (i) the sale or installation by ECI of inventory
on hand or on purchase orders already accepted, and (ii) ongoing
servicing by ECI of Systems in place; and
(d) Said termination shall not relieve ECI or any other
person of its obligation to preserve the confidentiality of the
Technology.
Section 5. Reporting Requirements.
5.1 Periodic Reports. ECI agrees to furnish DSI on or
before the 30th day following each calendar quarter a complete
quarterly report of all product development and business
activity relating to the Technology and the Products, and of all
sales orders and receipts relating to the Products made during
that quarter. DSI agrees to maintain the confidential status of
any confidential information obtained pursuant to this
paragraph.
5.2 Inspection of Books and Records. All books and
records of ECI shall be open for inspection by representatives
of DSI, at reasonable times and intervals, for the purpose of
verifying the reports and payments provided for herein. If any
such inspection results in a written determination by an
independent accounting firm, selected by agreement between DSI
and ECI, that ECI has underpaid royalties due to DSI during any
three month period, ECI shall immediately pay not only an amount
equal to the underpayment but also an additional amount, equal
to the underpayment, as a compensation and penalty for the
underreporting and underpayment. All books and records of DSI
pertaining to costs allocable to Products shall be open for
inspection by representatives of ECI, at reasonable times and
intervals, for the purpose of verifying those costs.
Section 6. Royalties.
6.1 Royalties. In consideration of the rights and
privileges described herein, ECI agrees to pay royalties to DSI
equal to the following percentages of ECI's Net Receipts:
0 percent on the first $1 million of aggregate Net Receipts covered
by this Agreement, regardless of when received;
5 percent on the next $10 million of such aggregate Net Receipts;
4 percent on the next $10 million of such aggregate Net Receipts;
3 percent on the next $10 million of such aggregate Net Receipts; and
2 percent on all Net Receipts thereafter.
Royalties shall be paid on a calendar quarter basis, payment for
all royalties accruing during any quarter to be made within 30
days after the end of that quarter.
Section 7. Manufacturing and Supply.
7.1 Generally.
(a) To insure ECI has an assured source for the Systems,
DSI and ECI agree that, except as provided in paragraph 7.6
below, DSI shall serve as the exclusive manufacturer and
supplier of the Systems for ECI during the term of this
Agreement. DSI will manufacture the Systems and the Products
included therein on a "cost plus" basis as described in
paragraph 7.4 below. DSI agrees to manufacture and sell the
Systems and the Products included therein to ECI, and ECI agrees
to purchase them, on the terms and conditions of this Section 7.
DSI shall have the right to subcontract any or all of the
manufacturing and supplying of Products or Systems hereunder,
and if DSI is unable to manufacture and/or supply Products or
Systems or any components thereof, DSI shall for that period
subcontract with others to manufacture and supply whatever
Products, Systems or components DSI cannot.
(b) Notwithstanding the provisions of paragraph 7.1(a),
above, ECI may purchase standard, off-the-shelf materials,
supplies, and/or components for the Systems directly from third
party suppliers, or may authorize its customers to do so,
provided that those materials, supplies, and/or components may
be included in the System without any manufacturing operations
and only with minor on-site installation efforts and expense.
7.2 Control. DSI retains sole discretion and complete
control of the manufacturing process and is required only to
produce or secure the production of the Products in conformity
with the Product Specifications. DSI shall manufacture or
purchase, at its sole cost and expense, any and all materials,
parts and components to be included in the Products and Systems
and any and all tooling and equipment necessary for the
manufacture of the Products or Systems.
7.3 Ordering. Each month ECI shall notify DSI of its
latest forecast for all purchase orders and the requested
shipment dates for Products and Systems it expects to purchase
during the next six (6) months, as well as its firm orders for
all Products and Systems that it will purchase during the next
three (3) months.
7.4 Price and Credit Terms. The price for any Product or
System shall be DSI's fully loaded cost (regardless of whether
DSI builds or buys) plus 100 percent, except that DSI shall be
paid $2,000 for downloading standard software required for the
operation of the System. For purposes of this paragraph 7.4,
"fully loaded cost" includes DSI's pro rata general and
administrative expenses allocable to each Product or System.
All prices are F.O.B. DSI's plant, Fairport, New York, and, if
not paid within 30 days from date of invoice, shall thereafter
accrue an interest charge on a daily basis at a rate equal to 15
percent per year. DSI agrees to fully disclose its costs to ECI,
but such disclosures shall be treated as Technology for purposes
of the confidentiality provisions of Section 3 hereof. DSI
reserves the right to redetermine costs on a quarterly basis
based upon recent actual costs. DSI further agrees to use its
reasonable efforts and to work with ECI to seek the lowest
available costs while maintaining ECI's desired levels of
quality assurance.
7.5 Installation of Products and Systems. All orders
shall be delivered to ECI's truck or common carrier at DSI's
plant in Fairport, New York or at such other shipping point as
the parties may agree. All installation and servicing of
Products, components and Systems shall be the sole
responsibility of ECI.
7.6 Warranty.
(a) DSI warrants that Products sold to ECI under this
Agreement shall meet all Product Specifications and shall have
the benefit of the same standard warranty terms (subject to the
same conditions and limitations) as DSI from time to time gives
on the majority of other products that it manufactures and sells
to others. DSI makes no warranty whatsoever with respect to
goods, materials, or component parts that are not of its own
manufacture and which are purchased by ECI and not from DSI, or
are purchased by any third party, for use in a System.
(b) DSI's total liability to ECI for any Product sold
under this Agreement shall be limited to the same extent as set
forth in DSI's standard warranty terms, conditions, and
limitations as from time to time it gives on the majority of
other products that it manufactures and sells to others. DSI
MAKES NO WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE,
MERCHANTABILITY, OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED IN
FACT OR BY LAW, EXCEPT AS SPECIFICALLY SET FORTH IN THIS
PARAGRAPH 7.6.
(c) ECI agrees that it will expressly warrant Products to
its customers in accordance with its own terms, conditions and
limitations, and ECI will not offer or purport to pass the
benefit of DSI's warranties to ECI's customers, DSI's warranties
being solely for the benefit of ECI.
7.7 Exclusivity. ECI agrees that, until the end of the
five year term set forth in paragraph 4.1(a) of this Agreement,
DSI shall be its sole manufacturing source for the Products,
except for standard, off-the-shelf materials, supplies and
components as described in paragraph 7.1(b), above. Thereafter,
ECI may contract with third parties for the manufacture of the
Products at a lower price than offered by DSI, provided that ECI
must first disclose to DSI the proposed third party contract
specifications and price, after which DSI shall have 60 days to
match the third party offer, which matching offer, if made,
shall be accepted by ECI.
7.8 Product Specifications. ECI shall be responsible for
developing Product Specifications, subject to DSI's consent as
to items covered by DSI's warranty under paragraph 7.6, which
consent shall not be unreasonably withheld or delayed. DSI
agrees to assist ECI in the development of the Product
Specifications. ECI shall have the right from time to time to
request changes in the Product Specifications subject to DSI's
approval, which shall not be unreasonably withheld or delayed.
7.9 System Financing. If ECI offers financing to a third
party relating to Products or Systems or any servicing thereof,
DSI shall be offered the right to provide that financing or to
participate on an equal basis with ECI or any third party in
such financing arrangements.
Section 8. Indemnification and Insurance.
8.1 Indemnification.
(a) DSI shall be exempt from any and all liability for any
damage, injury or loss to person or property arising from any
cause or happening involving the Technology of any Products or
Systems, and ECI agrees to and hereby does indemnify and save
harmless DSI and its shareholders, directors, officers and
employees and their respective heirs, successors, assigns and
agents against and from any and all claims by or on behalf of
any person or persons or other parties arising from use or
application of the Technology or any Product or System sold,
licensed, leased, or otherwise transferred by ECI or used by ECI
or used by others under arrangement with ECI. ECI assumes all
responsibility and liability including all claims made by third
parties of any nature for any incident of personal injury,
property loss or damages of any other nature that may result
from the Technology and any such Products or Systems.
(b) ECI agrees promptly upon written request to reimburse
DSI for any costs DSI incurs, including but not limited to,
legal fees and related costs, arising from its investigation or
defense of any claims or threatened claims described in
paragraph 8.1(a), above.
8.2 Insurance. ECI shall, at its own cost and expense,
throughout the term of this Agreement, maintain adequate
insurance, including product liability insurance, covering (i)
all of its own activities which involve or use the Technology,
including all research and development activity relating to the
Technology or the Products and Systems; and (ii) the marketing,
sale, installation, servicing and use of the Products and
Systems by or for the benefit of any third party, which
insurance shall name DSI as an additional insured, providing
coverage in an amount at least equal to $10,000,000 per
occurrence. The insurance required by this paragraph shall be
primary insurance and the insurer shall be liable for the full
amount of the loss up to and including the total limit of
liability set forth in the declarations without the right of
contribution from any other insurance coverage held by DSI.
Section 9. Force Majeure.
9.1 Neither party shall be responsible for any failure to
comply with the terms of this Agreement where such failure is
due to force majeure. "Force Majeure" shall mean fire, flood,
explosions, acts of God, civil riot, insurrection or revolution,
labor strikes, acts of any government or agency thereof,
embargoes or judicial action, unavailability of materials, parts
or components, and any other cause beyond the party's control.
Upon the cessation of any such cause operating to excuse
performance by either party, this Agreement shall continue in
full force and effect until otherwise terminated. If one or
more causes of force majeure are asserted in good faith by
either party as a basis for non-performance of this Agreement
for a consecutive period of six months, either party shall have
the right and option to terminate this Agreement forthwith by
giving written notice to the other party to that effect.
Notwithstanding anything to the contrary contained herein, force
majeure shall not excuse the obligations of ECI to make payment
to DSI in accordance with the terms of Sections 6 and 7 hereof.
Section 10. Waiver.
10.1 No waiver by either party of a provision hereof or
default hereunder shall be deemed a waiver of any other
provision or default of like or similar nature, and no waiver
shall be enforceable unless in writing and signed by the party
against whom enforcement is sought.
Section 11. Assignment.
11.1 This Agreement may not be assigned by ECI without
DSI's express consent in writing. This Agreement shall inure to
the benefit of and be binding upon the successors and assigns of
DSI and the permitted successors and assigns of ECI.
Section 12. Governing Laws.
12.1 This Agreement shall be subject to the laws and
courts of the State of New York, without regard to its
principles of conflict of laws. In the event of a civil action
commenced by either party hereto, the parties agree to venue in
the County of Monroe, New York.
Section 13. Dispute Resolution.
13.1 Any controversy, dispute or claim arising out of or
relating to this Agreement or alleged breach thereof shall be
submitted for resolution in the City of Rochester, New York,
before a panel of three arbitrators (one chosen by each party
and the third chosen by the first two arbitrators), the
arbitration to be conducted in accordance with the rules for
resolution of commercial disputes of the American Arbitration
Association. Nevertheless, actions to enforce collection of
royalties or payment of the purchase price for Products may, at
DSI's option, be instituted and processed in any court of
competent jurisdiction and without arbitration.
Section 14. Severability.
14.1 Should any term, clause, or provision of this
Agreement be adjudged to be invalid for any reason whatsoever or
be deleted by agreement of the parties hereto, such invalidity
or deletion shall not affect the validity or operation of any
other term, clause, or provision of this Agreement which shall
remain binding on the parties as to all such other terms,
clauses and provisions.
Section 15. Entire Agreement.
15.1 This Agreement supersedes any prior agreement(s)
between the parties as to the subject matter hereof and sets
forth the entire agreement and understanding between the parties
as to said subject matter. Any amendments or alterations hereof
shall be valid only when made in writing and executed by both
parties.
Section 16. Counterparts.
16.1 This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
Section 17. Notices.
17.1 Any notices given by a party under this Agreement
shall be deemed given when delivered personally or when
deposited in the mail by certified mail, return receipt
requested, or when sent by telecopy, or by a recognized
overnight courier, addressed to the other party as follows:
IF TO DSI: Mr. Frank J. Ryan, Vice President
Detection Systems, Inc.
130 Perinton Parkway
Fairport, NY 14450
Fax: 716-223-9180
IF TO ECI: Mr. Karl H. Kostusiak, President
Emergency Communications, Inc.
190 Linden Oaks Drive, Suite B
Rochester, NY 14625
Fax: 716-223-5784
Either party may change the address for notice or the person to
whose attention notice should be sent by giving notice thereof
to the other party.
Section 18. Further Assurances.
18.1 Each of the parties agrees to execute and deliver all
such agreements and instruments and to take all such other
actions as may be necessary or appropriate in order to
effectuate the purposes of the Agreement or to establish or
confirm proprietary rights in patents, trademarks, copyrights,
and trade secrets and confidential information as contemplated
by this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date stated above.
DETECTION SYSTEMS, INC. EMERGENCY COMMUNICATIONS INC.
By: /S/ Frank J. Ryan By: /s/ Karl H. Kostusiak
Frank J. Ryan Karl H. Kostusiak
Vice President President
Date: October 10, 1995 Date: October 10, 1995
AMENDMENT NO. 1
to
LICENSE AND MANUFACTURING AGREEMENT
As of January 26, 1993, Detection Systems, Inc. ("DSI") and
Emergency Communications Inc. ("ECI") entered a License and
Manufacturing Agreement (the "Agreement") concerning the
"Security Escort System" (the "System").
Intending to amend the Agreement and for good and valuable
consideration, the receipt of which is hereby acknowledged, DSI
and ECI hereby agree as follows:
1. Addition of Section 7A. The Agreement is amended by the
addition of a new Section 7A, which shall read in its entirety
as follows:
7A. SALES REPRESENTATION:
7A.1 APPOINTMENT OF SALES REPRESENTATIVE. ECI hereby
appoints DSI as a sales representative to solicit orders for
the System from any and all prospective customers within the
Emergency Call Market as defined in this Agreement; provided,
however, that DSI shall not serve as ECI's sales representative
for any customer, or prospective customer, as to whom, prior to
DSI's solicitation of an order, ECI has already designated
another organization or person or itself as the exclusive sales
representative (except to the extent that any such other
representative may otherwise agree with DSI).
7A.2 COMMISSION. In addition to royalties, DSI shall
receive a commission equal to the percentage of gross revenue
generated from the sale or lease of a System to any customer for
whom DSI serves as the sales representative as provided in this
Agreement, as shown in Table 1:
Table 1
Paid Users* as a Percentage
OF FULL TIME STUDENT ENROLLMENT COMMISSION PERCENTAGE**
<10% 0%
10%-20% 1%
20-30% 2%
30-40% 3%
40-50% 4%
50-60% 5%
60-70% 6%
70-80% 7%
80-90% 8%
90-100% 9%
100% or Greater 10%
* Includes faculty, staff and part-time students.
** For customers other than colleges and universities, the "enrollment"
concept and percentages shown on Table 1 will be agreed in advance.
Commissions are payable to DSI within 30 days of receipt of
funds by ECI, as a percentage of each payment actually received
from a customer. All sales will be on terms and conditions to
be set forth in a written contract negotiated and executed
between ECI and each customer.
7A.3 EXPENSES. ECI will provide reasonable quantities of
sales brochures and other promotional materials for the System
to DSI at no charge to DSI. Each party shall be responsible for
its own expenses incurred in connection with the initial sale of
Systems. All sales and marketing expenses incurred by ECI after
the initial sale of a particular System directed at maintaining
or improving the number of users of this particular System shall
be shared equally between ECI and DSI (provided that DSI's share
shall in no event exceed 50% of the total commissions payable to
DSI with respect to such customer), and DSI's share shall be
subtracted from DSI's commissions for that System.
7A.4 EFFECT OF TERMINATION. Upon termination of this
Agreement for any reason by either party, DSI shall continue to
receive commissions for a period of 12 months thereafter with
respect to any DSI customer who placed an order for a System
prior to the effective date of termination; provided, however,
that if DSI customers have placed orders for at least 50
Systems, DSI shall continue to receive commissions for a period
of 24 months thereafter.
7A.5 INSTALLATION SCHEDULE. All sales commitments will be
honored by ECI on a best efforts basis consistent with ECI's
establishment of national installation and service capability.
7A.6 TRAINING. All DSI representatives will receive ECI
sponsored training prior to commencing sales activities.
2. Part of Agreement. The provisions of Section 7A being
added to the Agreement by this Amendment No. 1 shall be and
become a part of the Agreement as if the Agreement, as amended
by this Amendment No. 1, were written as one agreement at and as
of the date of this Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment No. 1 as of the date set forth below.
DETECTION SYSTEMS, INC. EMERGENCY COMMUNICATIONS INC.
By: /s/ Frank J. Ryan By: /s/ James T. Reed
Frank J. Ryan James T. Reed
Vice President President
JOINT VENTURE AGREEMENT FOR ESTABLISHMENT OF
D.S. FIRST SYSTEMS (BEIJING) LIMITED
CHAPTER 1 GENERAL PROVISIONS
In accordance with the "Law of the People's Republic of China on Chinese
Foreign Joint Ventures" and the "Regulations for the Implementation of the
law on Chinese-foreign Equity Joint Ventures of the People's Republic of
China" and other relevant Chinese laws and regulations, The Ministry of
Public Security of People's Republic of China, The First Research Institute,
Beijing Zhougdun Security Technology Development Company (Chinese-Party A),
Qing Dao Waldorf Real Estate Company (Chinese-Party B), Detection Systems
International, Inc. (Foreign-Party A) and Hunt Electronic Co., Ltd.
(Foreign-Party B), adhering to the principles of equality and mutual benefit
and through friendly consultations, agree to jointly invest to set up a
joint venture enterprise in Beijing, the People's Republic of China and this
Agreement is made for this purpose.
CHAPTER 2 PARTIES TO THE JOINT VENTURE
ARTICLE 1
The names of the parties and their respective registered addresses and legal
representatives are as follows:
CHINESE-PARTY A
Name: The Ministry of Public Security of People's Republic of China
The First Research Institute, Beijing
Zhougdun Security
Technology Development Company
Registered Address: No. 1, Capital Gymnasium South Road, Beijing,
People's Republic of China
Legal Representative: Mr. Fu, Sen
Position: Director
Nationality: Chinese
CHINESE-PARTY B
Name: Qing Dao Waldorf Real Estate Company
Registered Address: No. 9, Yue Yang Road, Qing Dao City, People's
Republic of China
Legal Representative: Mr. Li, Wei-Yuan
Position: Managing Director
Nationality: Chinese
FOREIGN-PARTY A
Name: Detection Systems International, Inc.
Registered Address: 1800 Abbott Street, P.O. Box 80012, Salinas, CA
93912-0012, U.S.A.
Legal Representative: Mr. Lawrence R. Tracy
Position: President
Nationality: United States of America
FOREIGN-PARTY B
Name: Hunt Electronic Co., Ltd.
Registered Address: 6th Floor, No. 57-59, Jiun Hsien Road, Chi Tu
District, Keelung, Taiwan R.O.C.
Legal Representative: Mr. Cheng, Tzu Chao
Position: Managing Director
Nationality: Taiwan
CHAPTER 3 ESTABLISHMENT OF THE JOINT VENTURE COMPANY
ARTICLE 2
In accordance with the "Law of the People's Republic of China on Chinese-
foreign Joint Ventures" and other relevant Chinese laws and regulations, the
parties to the joint venture agree to set up a joint venture company with
limited liability known as D.S. First Systems (Beijing) Limited (hereinafter
referred to as "the Company"). The Company is a legal person under the laws
of the People's Republic of China.
ARTICLE 3
The Chinese name of the Company is (-----). The English name of the Company
is D.S. First Systems (Beijing) Limited. The registered address of the
Company is No. 1, Capital Gymnasium South Road, Beijing, People's Republic
of China.
ARTICLE 4
All activities of the Company shall be conducted in accordance with the laws
and pertinent rules and regulations of the People's Republic of China.
ARTICLE 5
The organization form of the Company is a limited liability company. The
profits, risks and losses of the Company shall be shared by the parties in
proportion to their contributions of the registered capital.
CHAPTER 4 THE OBJECTIVES, SCOPE AND SCALE OF PRODUCTION AND BUSINESS
ARTICLE 6
The objects of the Company are: to exploit the economic technical advantages
enjoyed by each joint venture party, to develop and produce through and/or
in China security safety products such as security alarm equipment, closed-
circuit monitoring facilities, integrated control systems, to strengthen the
business cooperation and the exchange of technology, to engage advanced and
suitable technology and scientific management method for the purposes of
improving the quality of such products, developing new products in order to
enable them to compete both in China and in other foreign markets in terms
of quality and price, so as to increase economic benefits and ensure
satisfactory economic returns for the joint venture parties.
ARTICLE 7
The scope of the business of the Company is: to develop, produce, undertake
installation contracts, sell advanced Artificial Intelligence security
protection systems and products, security intrusion detectors and control
panels, CCTV systems, integrated control system and to establish
supermarkets for public security equipment and leasing business.
ARTICLE 8
The production capacity of the Company: The Company shall expand its
production capacity on a gradual basis in accordance with the market demand
in China and overseas, and in accordance with such market demand, the
Company plans to construct production line in 1998 for the purpose of
producing security system equipment including a variety of alarms and CCTV
products.
CHAPTER 5 SELLING OF PRODUCTS
ARTICLE 9
The products of the Company shall be sold both in China and overseas, in the
proportions of 70% and 30% respectively.
ARTICLE 10
Foreign-Party A and Foreign-Party B shall use their best endeavours to sell
that portion of the products of the joint venture company intended for
export. In addition, each of Foreign-Party A and Foreign-Party B undertakes
to sell 30% of the products manufactured with or by means of the technology
transferred by it to the Company where such products form a part of the
products of the Company intended for export.
ARTICLE 11
In order to provide maintenance services for products sold both in China and
overseas, the Company may set up branches for the purposes of sales and
maintenance services both in China and overseas subject to the decision made
by the Board of Directors of the Company and to the approval of the relevant
Chinese authorities.
ARTICLE 12
The trademark for the joint venture's products shall be "D.S. 1" or D.S.
One", subject to the approval of the trademark registration when the Company
is founded.
ARTICLE 13
Both Foreign-Party A and Foreign-Party B are entitled to purchase products
of the Company for re-sale overseas and the sale prices of such products
shall be mutually agreed upon between the Company and Foreign-Party A or
Foreign-Party B.
ARTICLE 14
All products supplied by the Company to Foreign-Party A or Foreign-Party B
shall conform to all international approved standards such as UL, CE or
others previously approved in respect of the same models.
CHAPTER 6 TOTAL AMOUNT OF INVESTMENT AND THE REGISTERED CAPITAL
ARTICLE 15
The total amount of investment of the Company shall be US $500,000.00. The
registered capital of the Company shall be US $500,000.00
ARTICLE 16
All the parties contributing to the capital of the Company shall make their
respective contributions in cash as follows:
Percentage of
PARTY REGISTERED CAPITAL US$
Chinese-Party A 30% $150,000.00
Chinese-Party B 20% $100,000.00
Foreign-Party A 30% $150,000.00
Foreign-Party B 20% $100,000.00
ARTICLE 17
The registered capital of the Company shall be paid by the respective
parties in one lump sum within one month after the date of issuance of the
business license relating to the Company. The parties can make their
respective payments in RMB or foreign currency. The exchange rate between
RMB and foreign currency shall be the rate pronounced by the Foreign
Exchange Bureau of the People's Republic of China on the date when the
capital contribution is made.
ARTICLE 18
Any party to the joint venture wishing to transfer all or any part of its
share of the Company to a third party other than the parties hereto, prior
written consent shall be obtained from the other parties to the joint
venture, and shall report to the examination and approval authority for
approval. The Company shall not reduce its registered capital during the
subsistence of the joint venture. Any party to the joint venture which is
desirous of transferring all or part of its investment shall do so subject
to the pre-emptive right of the other joint venture parties.
CHAPTER 7 RESPONSIBILITY OF EACH PARTY TO THE JOINT VENTURE
ARTICLE 19
The Company shall initially produce the following products including
Security Intrusion Detectors TR540, TR540Q, TR560, TR560Q; Control Panel
DS7080i; 1/3" CCD Black and White Camera and 1/3" CCD Colour Camera; and
Mini-Matrix Video Control system, and in the meantime also research and
develop safety security system, burglary alarm and integrated control
systems. The parties shall be respectively responsible for the following
matters:
Chinese-Party A:
1. Attending to matters such as the application for approval for the
establishment of the Company from the relevant Chinese authorities,
registration and obtaining the business license;
2. Providing cash capital contribution in accordance with Article 17;
3. Provide existing facilities to enable the Company to produce pilot run
of new designs at a cost that is mutually agreed upon.
4. Organizing the development, production and sale of the products, and to
use its best endeavours to sell and promote the sale of the products
intended for the domestic market;
5. Making full use of Chinese-Party A's influence in the public security
equipment market in the People's Republic of China to establish sales and
installation market therein;
6. Assisting the Company in purchasing or leasing equipment, materials, raw
materials, articles for office use, transportation and communication
facilities etc. in the People's Republic of China;
7. Assisting the Company in the People's Republic of China recruiting
management and operations personnel, technical personnel, workers and other
personnel which may be required;
8. Assisting foreign workers and staff in their applications for entry
visa, work licenses and other travel requirements;
9. Responsible for providing technology and related training for the
production of the Mini-Matrix Video Control System of the Company;
10. Responsible for obtaining the necessary licenses for transferring the
technology required for the production of the products stated in Sub-clause
9 and obtaining all other technological matters stated in the Technology
Transfer Agreement;
11. Providing the Company with all necessary materials to produce the
products stated in Sub-clause 9 above at a price to be mutually agreed upon.
12. Responsible for handling other matters entrusted to it by the Company.
Chinese-Party B:
1. Assisting Chinese-Party A by providing necessary documentation for
completing the required registration matters of the Company;
2. Providing cash capital contribution in accordance with Article 17;
3. Assisting the Company to obtain loan from banks to facilitate the
setting up and expansion of the rental business and for all other necessary
use of the business when the Company is founded and further to be qualified
to apply for the loan;
4. Responsible for all other matters entrusted to it by the Company.
Foreign-Party A:
1. Assisting Chinese-Party A by providing necessary documentation for
completing the required registration matters of the Company;
2. Providing cash contribution in accordance with Article 17;
3. Organizing the development, production and sale of the products
including the import of the complete equipment units, parts of the equipment
and finishing products;
4. Gradually introducing the foreign advanced business management method
such as security product supermarket and leasing business;
5. Responsible for providing technology and related training for the
production of Security Intrusion Detectors TR540, TR540Q, TR560, TR560Q and
Control Panel DS7080i;
6. Responsible for obtaining the necessary licenses for transferring the
technology required for the production of the products stated in Sub-clause
5 and obtaining all other technological matters stated in the Technology
Transfer Agreement, the Custom I.C. technology is not fully owned by
Foreign-Party A thus cannot be transferred under this Agreement;
7. Providing the Company with all necessary materials including the Custom
I.C.s to produce the products stated in Sub-clause 5 above at a price to be
mutually agreed upon;
8. Undertaking to use their best efforts to sell 30% of the products stated
in Sub-clause 5 within the export portion and also to use its best
endeavours to export the remaining export portion of the said products;
9. Responsible for other matters entrusted to it by the Company.
Foreign-Party B:
1. Assisting Chinese-Party A by providing necessary documentation for
completing the required registration matters of the Company;
2. Providing cash capital contribution in accordance with Article 17;
3. Attending to the development and the production technology of the
closed circuit monitoring equipment including the import of the complete
equipment units, parts of the equipment and finishing products;
4. Responsible for providing technology and related training for the
production of 1/3" CCD Black and White Camera and 1/3" CCD Colour Camera;
5. Responsible for obtaining the necessary licenses for transferring the
technology required for the production of the products stated in Sub-clause
4 and obtaining all other technological matters stated in the Technology
Transfer Agreement, the Custom I.C. technology is not fully owned by
Foreign-Party B thus cannot be transferred under this Agreement;
6. Providing the Company with the necessary materials including the
Custom I.C.s. to produce the products stated in Sub-clause 4 above at a
price to be mutually agreed upon;
7. Undertaking to use their best efforts to sell 30% of the products
stated in Sub-clause 4 within the export portion and also to use its best
endeavours to export the remaining export portion of the said products;
8. Responsible for other matters entrusted to it by the Company.
CHAPTER 8 TRANSFER OF TECHNOLOGY
ARTICLE 20
All the parties hereto agree that a technology transfer agreement shall be
signed between the Company, Foreign-Party A, Foreign-Party B and Chinese-
Party A within 12 months of the date hereof or after the establishment of a
production line but before production takes place under which agreement the
respective manufacturing licenses of Foreign-Party A, Foreign-Party B and
Chinese-Party A will be obtained to enable the Company to realize its
business production objective as well as to obtain advanced technology
required for its production scale including product design, manufacturing
skills, methods of testing, prescribed materials, standard of quality and
personnel training.
ARTICLE 21
In respect of the technology agreed to be transferred by it, Foreign-Party A
hereby warrants as follows:
1. Foreign-Party A warrants that the technology transferred by it in
general, including the designs, manufacturing technology, technological
process, testing and inspection relating to the products licensed by it for
production, namely Security Intrusion Detectors TR540, TR540Q, TR560, TR560Q
and Control Panel - DS7080i will be complete, precise and reliable and will
realize the business objective of the Company and will also attain the
quality and production capacity contemplated by the Joint Venture Agreement.
2. Foreign-Party A undertakes to procure that the Company shall have a
full license to manufacture the products as stipulated in this Agreement and
the technology transfer agreement.
3. The drawings, technological requirements and other detailed
information which form part of the technology transfer shall be transferred
to the Company on time.
4. During the subsistence of the technology transfer agreement, Foreign-
Party A shall supply to the Company forthwith any improvements on the
technology transferred by it thereunder including any information relating
to such improvements and technological materials;
5. Foreign-Party A warrants that it has the exclusive right to transfer
the technology stipulated in the technology transfer agreement.
ARTICLE 22
In respect of the technology agreed to be transferred by it, Foreign-Party B
hereby warrants as follows:
1. Foreign-Party B warrants that the technology transferred by it in
general, including the designs, manufacturing technology, technological
process, testing and inspection relating to the products licensed by it for
production, namely 1/3" CDD Black White Camera and 1/3" CDD Colour Camera
will be complete, precise and reliable and will realize the business
objective of the Company, and will also attain the quality and production
capacity contemplated by the Joint Venture Agreement.
2. Foreign-Party B undertakes to procure that the Company shall have a
full license to manufacture the products as stipulated in this Agreement and
the technology transfer agreement.
3. The drawings, technological requirements and other detailed
information which form part of the technology transfer shall be transferred
to the Company on time.
4. During the subsistence of the technology transfer agreement, Foreign-
Party B shall supply the Company forthwith any improvements on the
technology transferred by it thereunder including any information relating
to such improvements and technological materials.
5. Foreign-Party B warrants that it has the exclusive right to transfer
the technology stipulated in the technology transfer agreement.
ARTICLE 23
In respect of the technology agreed to be transferred by it, Chinese-Party A
hereby warrants as follows:
1. Chinese-Party A warrants that the technology transferred by it in
general, including the designs, manufacturing technology, technological
process, testing and inspection relating to the products licensed by it for
production, namely Mini-Matrix Video Control System, will be complete,
precise and reliable and will realize the business objective of the Company,
and will also attain the quality and production capacity contemplated by the
Joint Venture Agreement;
2. Chinese-Party A undertakes to procure that the Company shall have a
full license to manufacture the products as stipulated in this Agreement and
the technology transfer agreement;
3. The drawings, technological requirements and other detailed
information which form part of the technology transfer shall be transferred
to the Company on time;
4. During the subsistence of the technology transfer agreement, Chinese-
Party A shall supply the Company forthwith any improvements of the
technology transferred by it thereunder including any information relating
to such improvements and technological materials;
5. Chinese-Party A warrants that it has the exclusive right to transfer
the technology stipulated in the technology transfer agreement.
ARTICLE 24
In the event that the Company shall be legally dissolved or cease to trade
for any reason, the technology transferred to the Company by Foreign-Party
A, Foreign-Party B and Chinese-Party A under the technology transfer
agreement and any products manufactured pursuant thereto shall immediately
be transferred to Foreign-Party A, Foreign-Party B and Chinese-Party A
respectively.
ARTICLE 25
The products and technology licensed by Foreign-Party A, Foreign-Party B and
Chinese-Party A under the technology transfer agreement shall be for the use
by the Company. None of the parties, except the transferor of its own
products and technology to the joint venture, shall be entitled to use the
technology and/or products transferred by other parties to the Company for
its own use. Further, the parties hereto agree not to disclose any other
parties' information relating to such products and technology to any third
parties.
ARTICLE 26
The technology transfer license fee payable by the Company to Foreign-Party
A, Foreign-Party B and Chinese-Party A respectively shall be paid by way of
royalty. The rate of such royalty shall be 5% of the total amount of sales
of the respective products licensed by Foreign-Party A, Foreign-Party B and
Chinese-Party A to and manufactured by the Company. For the purpose of
calculating the amount of royalty payable, the quantity of the products
shall be calculated every six months and the amount of royalty payable shall
be paid within 30 days thereafter.
ARTICLE 27
The duration of the technology transfer agreement to be signed by Foreign-
Party A, Foreign-Party B, Chinese-Party A and the Company shall be 12 years,
subject to any of the earlier termination clauses contained therein.
ARTICLE 28
Foreign-Party A, Foreign-Party B and Chinese-Party A shall each supply the
necessary raw materials to the Company for the production of the products
respectively transferred by them under the technology transfer agreement at
prices to be agreed between the Company and Foreign-Party A, Foreign-Party B
and Chinese-Party A respectively.
CHAPTER 9 DURATION OF THE JOINT VENTURE
ARTICLE 29
The duration of the Company shall be 12 years commencing from the date of
issuance of the business license of the Company. In the event of any party
proposing to extend its duration and such proposal is unanimously approved
by the board of directors, an application for extension of the duration may
be submitted to the original examination and approval authority not less
than 6 months prior to the expiry of such duration.
CHAPTER 10 THE BOARD OF DIRECTORS
ARTICLE 30
The board of directors shall be constituted from the date the Company is
registered.
ARTICLE 31
The supreme authority of the Company shall be vested in its board of
directors which shall decide on all major issues concerning the Company.
The matters listed below shall require the unanimous approval of the board
of directors:
1. the amendment of the Articles of Association;
2. the termination and the dissolution of the Company;
3. the increase and the transfer of the registered capital of the Company;
4. the merger of the Company with other economic organization.
The following matters listed below shall also require the prior approval of
two-thirds of the board of directors:
1. any borrowing by the Company from any third party;
2. any lending by the Company to any third party.
As for other matters, approval by a majority shall be obtained.
ARTICLE 32
The board of directors shall be made up of five directors, of which two
shall be appointed by Foreign-Party A and one shall be appointed by each of
Chinese-Party A, Chinese-Party B and Foreign-Party B respectively. The
chairman of the board shall be appointed by Chinese-Party A and there shall
be two vice-chairmen, one each to be appointed by Foreign-Party A and
Chinese-Party B respectively. The term of office for the chairman and the
directors shall be one year.
ARTICLE 33
The chairman shall be the legal representative of the Company. Should the
chairman be unable to perform his duties for any reason, the board of
directors can temporarily authorize a vice-chairman or any other director to
perform the duties of the chairman.
ARTICLE 34
Board meetings shall be held at least once every year and shall be convened
and presided over by the chairman. Minutes of the board meetings shall be
filed and properly kept in Chinese and English languages. The chairman may,
in special circumstances and upon the proposal of more than one-third of the
directors, convene an emergency board meeting.
CHAPTER 11 BUSINESS MANAGEMENT OFFICE
ARTICLE 35
The Company shall establish a business management office which shall be
responsible for managing the daily operations of the Company. The business
management office shall have a general manager recommended by Foreign-Party
A, four deputy general managers of which to be recommended by each party.
The general manager, the deputy general managers and the senior consultant
shall be appointed by the board of directors. The Company shall recruit the
middle management staff, technicians and workers from the labour force
available in the market according to the Company's requirements.
ARTICLE 36
The general manager shall be responsible for the carrying out of the
decisions of the board of directors and organize and conduct the daily
management of the Company. The deputy general managers and the senior
consultant shall assist in the work of the general manager. Departments of
administration, personnel, finance and accounting, computers, technology
development, marketing and products, etc. shall be established under the
business management office. Each department shall have its own manager who
is responsible to attend to matters delegated by either or both the general
manager and deputy general managers. The departmental managers shall be
accountable to the general manager and the deputy general managers.
ARTICLE 37
In case of embezzlement or serious dereliction of duty on the part of the
general manager, the deputy general managers or the senior consultant, the
board of directors may dismiss him upon passing a resolution.
CHAPTER 12 LABOUR MANAGEMENT
ARTICLE 38
Matters in relation to the recruitment, employment, dismissal and
resignation, wages, labour insurance, welfare and rewards of employee's of
the Company shall be implemented in accordance with the "Regulations of the
People's Republic of China on Labour Management in Chinese-Foreign Equity
Joint Ventures" and its implementing rules after the board of directors
having discussed and decided on the matters.
ARTICLE 39
Matters such as the appointment, salary, insurance, welfare and standard of
traveling expenses of the senior management personnel recommended by the
parties shall be discussed and decided by the board of directors.
CHAPTER 13 TAXES, FINANCE AND AUDIT
ARTICLE 40
The Company shall pay taxes in accordance with the laws and other relevant
regulations of the People's Republic of China.
ARTICLE 41
Staff and workers of the Company shall pay individual income tax in
accordance with the "Individual Income Tax Law of the People's Republic of
China".
ARTICLE 42
The Company shall make payments to reserve fund, enterprise expansion fund
and welfare fund for staff and workers in accordance with the stipulations
of the "Law of the People's Republic of China on Chinese-foreign Equity
Joint Venture". The proportion and the amount of the annual payment shall
be decided by the board of directors in accordance with circumstances
relating to the business of the Company.
ARTICLE 43
The Company shall use RMB as its account keeping unit. The fiscal year of
the Company shall be from January 1 to December 31. All vouchers, receipts,
reports, account books shall be written in Chinese; further monthly
financial reports be written in Chinese and English according to
international accounting standards are provided to all parties.
ARTICLE 44
The Company shall employ a Chinese registered accountant to verify and audit
its accounts and reports shall be submitted to the board of directors and
the general manager.
ARTICLE 45
Any party to the joint venture shall have the right to appoint its own
accountant to audit the Company's accounts and the Company shall render
assistance thereto. The audit report shall be submitted to the board of
directors and the general manager, but such auditing shall not affect the
normal production operation of the Company and the expenses incurred thereby
shall be borne by the party who appoints the accountant.
ARTICLE 46
Within the first month of each fiscal year, the general manager shall
prepare the previous year's balance sheet, profit and loss account and
proposal regarding the distribution of profits and submit them to the board
of directors for examination and approval.
CHAPTER 14 INSURANCE
ARTICLE 47
All insurance policies of the Company shall be taken out with the People's
Insurance Company of China. The risks, premium and duration of each
insurance policy shall be decided by the board of directors in accordance
with the stipulations of the People's Insurance Company of China.
CHAPTER 15 DISPOSAL OF ASSETS AFTER THE EXPIRATION OF THE JOINT VENTURE
ARTICLE 48
Upon the expiry or earlier termination of the joint venture, the Company's
dissolution shall be carried out according to the relevant law. Assets
realized by the Company shall be distributed in accordance with the
proportions of investment contributed by the parties hereto. All products
and technology transferred or licensed under the technology transfer
agreement shall immediately be returned and reverted to the original
transferors concerned.
CHAPTER 16 AMENDMENT, ALTERATION AND DISCHARGE OF THIS AGREEMENT
ARTICLE 49
Any amendment to this Agreement shall be agreed in writing and signed by all
the parties and shall only come into force after reporting to and obtaining
the approval of the original examination and approval authority.
ARTICLE 50
In the event of force majeure that renders this Agreement incapable of being
performed or the Company sustaining heavy losses in successive years that
renders it incapable to continue operation, and after unanimously approved
by the board of directors, or under the circumstance that the Company at any
time incurs a loss which exceeds its assets, then the Company and this
Agreement shall be terminated after reporting to and obtaining approval from
the original examination and approval authority.
ARTICLE 51
In the event of any party to the joint venture failing to carry out its
duties under this Agreement of the Articles of Association or committing a
serious breach of any provision under this Agreement of the Articles of
Association rendering the Company incapable of operating its business, then
the party in default shall be deemed to have been unilaterally terminated
this Agreement and the other parties shall have the right to claim
compensation for economic losses and to terminate this Agreement in
accordance with this Agreement after reporting to and obtaining approval
from the original examination and approval authority.
CHAPTER 17 LIABILITIES FOR BREACH OF AGREEMENT
ARTICLE 52
In the event of any party failing to make its capital contribution in
accordance with the provisions under Chapter 6 hereto, the party in default
shall pay breach fees amounting to 3% of its capital contribution to the
other parties each month starting from the first month of the due date. In
the event the party in default failing to make its capital contribution
within three months from the due date, apart from the duty to pay an
accumulated breach fee of 9% of its capital contribution, the other parties
shall have the rights to terminate this Agreement and claim compensation
from the defaulting party.
CHAPTER 18 FORCE MAJEURE
ARTICLE 53
Should any party to this Agreement be prevented from performing this
Agreement directly due to force majeure event such as earthquake, typhoon,
flood, fire, war, that party shall immediately notify the other parties and
shall within 15 days after the stopping of the force majeure event provide
details of the event and valid documents evidencing the reason of its
delaying in performing or inability to perform wholly or partly of this
Agreement. The parties shall then, through consultations, decide whether to
terminate this Agreement or to postpone implementing this Agreement and at
the same time decide whether to exempt or lessen the obligations on the part
of the defaulting party.
CHAPTER 19 APPLICABLE LAW
ARTICLE 54
The formation of this Agreement, its validity, interpretation, execution and
dispute resolution shall be governed by the laws of the People's Republic of
China.
CHAPTER 20 SETTLEMENT OF DISPUTES
ARTICLE 55
Any dispute arising from the performance of this Agreement shall be resolved
through friendly consultations between the parties. In case that resolution
cannot be reached through consultations, the dispute shall be submitted to
the China International Economic and Trade Arbitration Commission in Beijing
for arbitration. In the event of the claim or amount of dispute exceeds
U.S. dollars one (1) million, then the dispute shall be submitted to the
International Economic and Trade Arbitration Commission or equivalent
arbitration body in the third country for arbitration. The arbitral award
shall be final and binding upon all the parties.
CHAPTER 21 LANGUAGE
ARTICLE 56
This Agreement shall be written in both Chinese and English. Both languages
shall have equal force. In the event of any discrepancy between the two,
the Chinese version shall prevail.
CHAPTER 22 EFFECTIVENESS OF THIS AGREEMENT AND OTHERS
ARTICLE 57
This Agreement is written in Chinese and English in four identical original
copies which is kept by every party each, any supplemental agreement made in
accordance with the principles stipulated in this Agreement shall have the
same legal binding force as this Agreement.
ARTICLE 58
Any party wishing to give notice by telephone, facsimile etc., shall also
give such notice in writing by post if such notice concerns the rights and
obligations of the parties. The registered addresses of the parties listed
in this Agreement shall be the postal addresses.
ARTICLE 59
This Agreement is made on the 11th day of April, 1996 and signed by the
legal representatives of the parties in Beijing, China. This Agreement
shall come into force on the date of obtaining the approval from the State
Administration of Industry and Commerce.
Chinese-Party A: The Ministry of Public Security legal representative of
People's Republic of China, The First Research Institute,
Beijing Zhougdun Security Technology Development Company
Chinese-Party B: Qing Dao Waldorf Real Estate Co. Ltd. legal representative
Foreign-Party A: Detection Systems International, Inc. legal
representative
Foreign-Party B: Hunt Electronics Co., Ltd. legal representative
EXHIBIT 13
(Excerpts from Annual Report to Security Holders)
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 of cash flows
present fairly, in all material respects, the financial position of
Detection Systems, Inc. and its subsidiaries at March 31, 1996, 1995 and
1994, and the results of their operations and their cash flows for each of
the three years in the period ended March 31, 1996 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
June 27, 1996
<PAGE>
DETECTION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
March 31, 1996 1995 1994
Assets ---- ---- ----
Current assets:
Cash and cash equivalents $913,716 $4,580,751 $3,907,111
Short term investments,
at cost which approximates
market value 16,296 2,437,842 0
Accounts receivable, less
allowance for doubtful accounts
($235,000 in 1996, $100,000 in
1995 and 1994) 10,482,660 4,916,052 5,396,835
Inventories 14,065,843 5,255,724 5,845,951
Income taxes receivable 532,895 94,121 139,468
Deferred income taxes 1,554,900 354,500 273,400
Prepaid expenses and other assets 860,018 314,285 272,881
---------- ---------- ----------
28,426,328 17,953,275 15,835,646
Fixed assets, net 7,085,357 3,920,571 3,820,085
Property under capital lease, net 2,491,475 2,725,513 2,969,051
Deferred income taxes 3,983,200 0 0
Goodwill and other intangibles 3,762,327 0 0
Other assets 148,891 145,934 155,076
---------- ---------- ----------
$48,897,578 $24,745,293 $22,779,858
========== ========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $1,183,750
Current portion of capital lease
obligation 559,860 434,934 437,189
Accounts payable 6,231,737 1,213,958 699,278
Accrued payroll and benefits 1,566,777 1,074,103 923,071
Other accrued liabilities 3,171,914 266,526 329,118
---------- ---------- ----------
12,714,038 2,989,521 2,388,656
---------- --------- ---------
Long term liabilities 1,931,900
Obligations under capital leases 186,471 745,733 1,145,293
Long term debt 17,750,000
Deferred compensation 1,745,886 1,527,638 1,423,705
Deferred income taxes 0 288,200 330,600
Shareholders' equity:
Common stock, par value $.05 per share
Authorized - 12,000,000 shares
Issued - 2,811,361 shares in 1996,
2,792,489 shares in 1995 and
2,771,489 in 1994 140,568 139,624 138,574
Capital in excess of par value 6,972,431 6,853,246 6,724,970
Retained earnings 4,869,022 12,724,265 11,209,776
---------- ---------- ----------
11,982,021 19,717,135 18,073,320
Less - Treasury stock, at cost (12,363) (36,326) (322,778)
Notes receivable for stock
purchases (392,514) (486,608) (258,938)
Cumulative translate adjustment (7,861) 0 0
11,569,283 19,194,201 17,491,604
---------- ---------- ----------
$45,897,578 $24,745,293 $22,779,858
========== ========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
DETECTION SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Year ended March 31, 1996 1995 1994
---- ---- ----
Revenues:
Net sales $41,857,809 $34,336,336 $31,354,835
Interest income 340,311 113,420 195,875
---------- ---------- ----------
42,198,120 34,449,756 31,550,710
Costs and expenses:
Production 27,978,460 20,829,843 19,541,360
Development 4,699,643 4,070,443 4,160,532
Purchased in-process research
and development 9,350,000
Marketing, administrative
and general 10,514,797 6,788,924 6,111,691
Interest expense 320,463 168,557 165,886
---------- ---------- ----------
52,863,363 31,857,767 29,979,469
========== ========== ==========
Income before taxes and cumulative
effect of a change in
accounting principle (10,665,243) 2,591,989 1,571,241
(Benefit) provision for
income taxes (2,810,000) 1,077,500 426,600
---------- ---------- ----------
(Loss) income before cumulative
effect of a change in accounting
principle (7,855,243) 1,514,489 1,144,641
Cumulative effect of a change in
accounting principle 130,800
---------- ---------- ----------
Net (loss) income (7,855,243) 1,514,489 1,275,441
Retained earnings at beginning
of year 12,724,265 11,209,776 9,934,335
---------- ---------- ----------
Retained earnings at
end of year $4,869,022 $12,724,265 $11,209,776
========= ========== ==========
Earnings per common and common
equivalent share:
(Loss) income before cumulative
effect of a change in
accounting principle ($2.74) $.52 $.40
Cumulative effect of a change in
accounting principle .04
------ ---- ----
Net (loss) Income ($2.74) $.52 $.44
====== ==== ====
See accompanying notes to consolidated financial statements.
<PAGE>
DETECTION SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended March 31, 1996 1995 1994
---- ---- ----
Cash Flows from Operating Activities:
Net (loss) income ($7,855,243) $1,514,489 $1,275,441
---------- --------- ---------
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization 2,043,373 1,502,516 1,513,105
Purchased in process research
and development 9,350,000
Change in obsolescence reserve 25,000 140,000 (30,000)
Loss (gain) on disposition
of fixed assets 275,349 8,561 (11,991)
Deferred compensation 218,248 103,933 194,324
Deferred income taxes (3,536,000) (123,500) 26,800
Stock bonuses 34,763 48,800 152,100
Changes in operating assets and
liabilities:
Accounts receivable (1,156,325) 480,783 (286,696)
Inventories (4,289,805) 450,227 (908,323)
Prepaid expenses and other assets (195,749) (42,278) (52,895)
Accounts payable 2,354,624 514,680 (524,070)
Accrued payroll and benefits 190,159 102,232 (419,113)
Other accrued liabilities (460,930) (62,592) (19,233)
Income taxes receivable/payable (438,774) 45,347 (423,462)
---------- ---------- ---------
Total adjustments 4,413,933 3,168,709 (789,454)
Net cash (used in) provided by
operating activities (3,441,310) 4,683,198 485,987
---------- ---------- ---------
Cash flows from investing
activities:
Purchase of Radionics
net of cash acquired (17,965,381)
Capital expenditures (3,376,867) (1,358,009) (1,162,917)
Short term investments 2,421,546 (2,437,842) 3,242,049
---------- ---------- ---------
Net cash (used in) provided by
investing activities (18,920,702) (3,795,851) 2,079,132
---------- ---------- ---------
Cash flows from financing activities:
Notes payable 1,183,750
Proceeds from long term debt 17,750,000
Principal payments on long term
debt and capital lease
obligations (434,336) (401,815) (576,936)
Issuance of common stock 94,295 140,375 0
Stock options exercised 109,129 47,733 157,337
---------- ---------- ---------
Net cash provided by (used in)
financing activities 18,702,838 (213,707) (419,599)
---------- ---------- ---------
Effect of exchange rate changes (7,861)
Net (decrease) increase in cash
and cash equivalents (3,667,035) 673,640 2,145,520
Cash and cash equivalents
at beginning of year 4,580,751 3,907,111 1,761,591
---------- ---------- ---------
Cash and cash equivalents
at end of year $913,716 $4,580,751 $3,907,111
---------- ---------- ---------
Cash paid during the year for:
Interest $226,929 $173,709 $117,869
Income taxes $1,041,284 $1,141,276 $698,205
========= ========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996, 1995 AND 1994
NOTE 1 - DESCRIPTION OF OPERATIONS AND ACCOUNTING POLICIES:
Description of operations -
Detection Systems, Inc. is a leader in the design, development,
manufacturing and marketing of high performance electronic instrumentation
devices for the security and fire protection industries. Such devices
primarily include intrusion and fire detectors, and, to a lesser extent,
alarm control equipment. On February 12, 1996, Detection Systems, Inc.
consummated the purchase of Radionics, Inc. a leader in the design,
development, manufacturing and marketing of alarm control devices (Note 2).
PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements of Detection Systems, Inc.
(collectively, the Company) include all majority-owned U.S. and non-U.S.
subsidiaries. Intercompany accounts, transactions and profits are
eliminated. Certain amounts in the prior years financial statements have
been reclassified to conform with the current year s presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
year-end as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS -
Cash equivalents include time deposits and highly liquid investments with
original maturities of three months or less.
INVESTMENTS -
The Company accounts for its investment securities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. All of the Company s
reported investments are classified as available for sale. Accordingly,
unrealized holding gains and losses, net of applicable taxes, are excluded
from income and recognized as a separate component of shareholders equity
until realized. The fair value of securities is based upon quoted market
prices. Sales of securities and the related gains or losses are determined
using the specific identification method.
INVENTORIES -
Inventories, which include materials, labor and overhead, are recorded at
the lower of cost, determined by the first-in, first-out method, or market
value.
FIXED ASSETS AND PROPERTY UNDER CAPITAL LEASE -
The building and related improvements are depreciated using the straight-
line method over an estimated useful life of forty years. Land
improvements, machinery and equipment, production tooling and furniture are
depreciated on the straight-line method over estimated useful lives ranging
from three to ten years. Expenditures for maintenance and repairs are
charged to expense as incurred. Major improvements are capitalized.
GOODWILL AND OTHER INTANGIBLES -
Goodwill and other intangibles represent the excess of the cost of net
tangible assets acquired in business combinations over their fair value.
Goodwill and other intangibles are amortized using the straight-line method
over periods ranging from three to twenty years. The Company evaluates
goodwill and other intangibles for impairment at least annually by comparing
its best estimate of undiscounted future cash flows to the carrying amount
of goodwill and other intangibles.
RETIREMENT PLANS -
The Company has two defined contribution pension plans which, in aggregate,
cover substantially all domestic employees. The first plan requires the
Company to match 100% of an employee's contribution up to one percent of the
employee's base salary and 25% of an employee's contribution between two and
four percent of the employee's base salary. The second plan permits
employees to contribute up to 20% of their eligible earnings. Annual
contributions by the Company, out of its net profits, are in amounts
approved by the Company s Board of Directors.
The Company's contributions to these plans were approximately $117,000,
$113,000 and $111,000 in 1996, 1995 and 1994, respectively.
REVENUE RECOGNITION -
Revenues are recognized when product is shipped.
DEVELOPMENT COSTS -
All product development costs are charged to operations during the period
incurred.
FOREIGN CURRENCY TRANSLATION -
Assets and liabilities of non-U.S. subsidiaries are translated at current
exchange rates, and related revenues and expenses are translated at average
exchange rates in effect during the period. Resulting translation
adjustments are recorded as a separate component of shareholders equity.
INCOME TAXES -
The Company accounts for certain income and expense items differently for
financial reporting and income tax purposes in accordance with SFAS 109,
Accounting for Income Taxes. Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities applying enacted statutory rates in effect
for the year in which the differences are expected to reverse. The adoption
of SFAS 109 in 1994 resulted in a $130,800 favorable impact on 1994
earnings.
EARNINGS PER SHARE -
The computation of (loss) 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 2,856,826, 2,989,138, and
2,938,073 in 1996, 1995 and 1994, respectively. The adoption of SFAS 109 in
1994 resulted in a $130,800 favorable impact on 1994 earnings.
The earnings per share computations do not consider common equivalent shares
when the Company is in a loss position or when the effect of such inclusion
is anti-dilutive. There was no material difference between primary and
fully diluted earnings per share in 1996, 1995 and 1994, respectively.
CONCENTRATION OF CREDIT RISK -
Financial instruments which potentially expose the Company to concentration
of credit risk consist principally of bank deposits, temporary investments
and accounts receivable. The Company performs on-going credit evaluations
of its customers financial condition and the Company maintains an allowance
for uncollectible accounts receivable based upon the expected collectibility
of all accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS -
The carrying amount of the Company s financial instruments, including cash
and cash equivalents, short-term investments, accounts receivable and notes
payable, approximates their fair value at March 31, 1996 as the maturity of
these instruments is short term. The carrying amount of the Company s long
term debt obligations approximates their fair value as the interest rates on
such obligations approximate the market rate at March 31, 1996.
CASH FLOW STATEMENT -
The Company accepted notes receivable from employees for stock purchases in
the amount of $13,314, $258,071 and $6,993 in 1996, 1995 and 1994,
respectively. During 1995 and 1994, the Company acquired vehicles and
equipment under capital lease agreements of approximately $51,300 and
$497,000, respectively.
NEW ACCOUNTING STANDARDS -
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, must be adopted in 1997. This
standard requires that impairment losses be recognized when the carrying
value of a long-lived asset exceeds its fair value. The Company regularly
assesses all of its long-lived assets for impairment and, therefore, does
not believe the adoption of the standard will have a material effect on its
financial position or results of operations.
SFAS No. 123, Accounting for Stock-Based Compensation, must be adopted in
1997. This standard encourages but does not require, recognition of
compensation expense based on the fair value of equity instruments granted
to employees. The Company does not plan to record compensation for equity
instruments granted to employees. Therefore, the adoption of this standard
will have no impact on the Company s financial position or results of
operations.
NOTE 2 - ACQUISITION
In February 1996, the Company acquired all of the stock of Radionics, Inc.
(Radionics) for a total cash purchase price, including expenses, of
approximately $18 million. Funding for the acquisition was provided by
borrowings from a commercial bank pursuant to a bridge loan facility. This
loan was subsequently refinanced into a permanent facility (Note 6).
The acquisition has been accounted for under the purchase method, and
Radionics results of operations have been consolidated with the Company s
results of operations effective as of the acquisition date. The Company has
made a determination and allocation of the purchase price as of the
acquisition date, consisting of the following:
Accounts receivable $4,410,300
Inventories 4,545,300
Other current assets 2,477,400
Accounts payable and other current liabilities (6,332,000)
Net working capital acquired 5,101,000
Fixed assets 1,803,600
Purchased in-process research and development 9,350,000
Goodwill and other intangibles 3,844,500
Other non-current items, net (1,931,900)
-----------
Total purchase price, including expenses $18,167,200
==========
The financial position of Radionics has been included in the consolidated
balance sheet of the Company as of March 31, 1996 based upon the above
determination and allocation. Such amounts may be adjusted upon additional
analysis and asset valuation determinations to be made by the Company with
the assistance of outside firms. Any changes will be recorded in 1997, and
are not expected to have a significant impact on the Company s results of
operations as reported herein.
The valuation of technology, including other intangibles, was accomplished
through the application of an income approach. Projected debt-free income,
revenue net of provision for operating expenses, income taxes and returns on
requisite assets were discounted to a present value. This approach was used
for each of the Radionics product lines. Technology was divided into two
categories: current products and in-process research and development.
Current products included those products currently in the market place as of
the acquisition date and products which, while still in the development
stage at the acquisition date, were technologically feasible. The fair
market value of the purchased current products was determined to be
$890,000. This amount is recorded as an intangible asset and is being
amortized on a straight line basis over three years.
Purchased in-process research and development included the value of products
still in the development stage, but not considered to have reached
technological feasibility. As a result of the valuation, the fair market
value of the purchased in-process research and development was determined to
be $9,350,000. In accordance with generally accepted accounting practice,
this amount was expensed upon acquisition in the fourth quarter of fiscal
1996.
The following table summarizes, on an unaudited, pro forma basis, the
estimated combined results of operations of the Company, excluding the
write-off of in-process research and development, as though the acquisition
was made at the beginning of 1995 and 1996. For purposes of preparing the
unaudited pro forma information, the results from Detection Systems year
ended March 31 1996 and 1995 have been combined with the results of
Radionics' year ended December 31, 1995 and 1994, respectively. The pro
forma amounts do not necessarily reflect the results that actually would
have been obtained had the transaction taken place at the beginning of
periods indicated, nor are they intended to be a projection of future
results:
1996 1995
(Unaudited) ---- ----
Net revenues $81,285,000 $78,550,000
Costs and expenses 93,509,000 84,671,000
(Loss) before taxes (12,224,000) (6,121,000)
Net (loss) (7,706,000) (3,780,000)
Net (loss) per share ($2.70) ($1.32)
NOTE 3 - INVENTORIES:
Major classifications of inventory are as follows.
March 31, 1996 1995 1994
---- ---- ----
Component parts $6,924,870 $2,300,894 $2,120,052
Work in process 705,473 475,927 604,614
Finished products 7,414,700 2,853,903 3,356,285
---------- ---------- ---------
15,045,043 5,630,724 6,080,951
Less - Reserve for
obsolescence (979,200) (375,000) (235,000)
--------- ---------- ---------
$14,065,843 $5,255,724 $5,845,951
========== ========= =========
NOTE 4 - FIXED ASSETS:
Major classifications of fixed assets are as follows.
March 31, 1996 1995 1994
---- ---- ----
Land improvements $ 219,435 $ 211,735 $ 211,735
Building improvements 2,490,409 1,503,103 1,488,827
Machinery and equipment 9,802,633 7,099,144 6,284,455
Production tooling 3,134,229 3,140,152 2,707,804
Furniture 1,120,620 701,142 687,171
---------- ---------- ----------
16,767,326 12,655,276 11,379,992
Less - Accumulated
depreciation (9,681,969) (8,734,705) (7,559,907)
---------- ---------- ----------
$7,085,357 $3,920,571 $3,820,085
========== ========== ==========
Total depreciation expense on fixed assets was approximately $1,711,100,
$1,197,700 and $1,293,800 in 1996, 1995 and 1994, respectively.
NOTE 5 - CAPITAL LEASES:
During 1982, the Company entered into an agreement with a local government
agency under which the agency's bond proceeds of $3,800,000 were used to
purchase land and construct an operating facility for lease to the Company.
These expenditures 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, 1996 was 8.25%. 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, 1996, the Company was not in compliance with certain provisions
of this lease agreement. Consequently, the remaining principal balance of
$443,510 is presented as a current liability in the balance sheet. The
outstanding principal on this obligation was repaid in June, 1996.
The Company has various equipment under capital lease agreements which
require payments of principal and interest of $147,300 in 1997, $146,500 in
1998 and $29,300 in 1999.
<PAGE>
Property acquired under capital leases consists of the following.
March 31, 1996 1995 1994
---- ---- ----
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 1,327,591 1,322,445
--------- ---------- ---------
4,760,810 4,760,810 4,755,664
Less - Accumulated
depreciation (2,269,335) (2,035,297) (1,786,613)
--------- ---------- ---------
$2,491,475 $2,725,513 $2,969,051
========= ========== =========
Obligations under capital leases are summarized below.
March 31, 1996 1995 1994
---- ---- ----
Operating facility $ 443,510 $ 696,830 $ 950,150
Production and office
equipment 302,821 483,837 632,332
--------- ---------- ---------
746,331 1,180,667 1,582,482
Less - Current portion (559,860) (434,934) (437,189)
--------- ---------- ---------
$186,471 $745,733 $1,145,293
========= ========== =========
Total depreciation expense on assets under capital leases was approximately
$263,000, $294,800 and $209,300 in 1996, 1995 and 1994, respectively.
NOTE 6 - INDEBTEDNESS
The Company has a line of credit secured by general business assets of the
Company allowing borrowings of up to $6,500,000. Interest on the line
accrues at one-month LIBOR plus 200 basis points. At March 31, 1996,
borrowings on the line of credit aggregated $1,183,750 at approximately
7.4%. The maximum amount of borrowings on the line of credit outstanding
during the year was $1,183,800. There were no borrowings under line of
credit agreements during 1995 or 1994.
In connection with the acquisition of Radionics the Company borrowed
$17,750,000 at 7.375% pursuant to a bridge loan agreement. This obligation
matured on May 16, 1996 at which time it was refinanced into a permanent
loan facility, of which $3,400,000 is secured by certain real estate and
matures in April 2006. The remaining $14,350,000 is secured by general
business assets and matures in April 2003. Interest on the term loan
facility accrues interest based upon either the federal funds rate, the
prime rate or LIBOR, each adjusted by a factor which varies based upon the
rates of funded debt and to earnings before interest, tax depreciation and
amortization. At March 31, 1996 the interest rate on these borrowings was
approximately 7.4%.
The portion of long-term debt secured by real estate requires interest only
payments through November, 1997. Commencing in December, 1997 monthly
principal payments of $21,000 plus interest are required through May, 2006,
at which time the outstanding balance of principal is due.
The portion of long-term debt secured by general business assets requires
interest only payments through November, 1997. Commencing in December, 1997
monthly principal payments of $217,400 plus interest are required through
May, 2003 at which time the outstanding balance of principal is due.
As the principal amount of the bridge loan facility outstanding at March
31, 1996 was converted into a term facility, the borrowings are presented in
the consolidated balance sheet as long term debt.
Annual maturities of the Company s long term debt for the next five years
are approximately: 1997 - $0; 1998 - $953,600; 1999 - $2,860,800; 2000 -
$2,860,800; and 2001 - $2,860,880.
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, 1996, 1995 and 1994, unissued
common share equivalents of 61,271, 59,757 and 57,430 respectively, existed
under the plan.
The Company's stock bonus plan provides for bonuses payable in stock to
certain officers and key personnel if specified sales growth 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 existing under the plan were
168,260 in 1996, 151,740 in 1995 and in 1994.
NOTE 8 - SHAREHOLDERS' EQUITY:
The following table presents the changes in shareholders' equity balances
during the three years ended March 31, 1996.
Capital in
Common stock Treasury stock excess of
Shares Amount Shares Amount par value
------ ------ ------ ------ ---------
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
========= ======= ======= ======= =========
Distribution of stock bonus (2,500) (11,953) 6,010
Exercise of options and warrants (4,051) (20,313) (2,338)
Treasury stock purchases 1,290 8,303
Common stock issued 18,872 944 115,513
--------- ------- ------ ------- ---------
Balances,
March 31, 1996 2,811,361 $140,568 2,207 12,363 6,972,431
========= ======= ======= ======= =========
In May 1995, the Company s Board of Directors authorized the repurchase of
up to 100,000 shares of its outstanding common stock for issuance in
connection with incentive stock option and stock bonus plans. As of March
31, 1996, the Company had not repurchased any of its outstanding common
stock pursuant to this plan.
The Company has a stock option plan whereby options for a total of 250,000
shares of the Company s common stock may be granted to key employees or non-
employees of the Company by the Board of Directors. The exercise price of
the options must equal or exceed the market value of the Company s common
stock on the date of grant. Options are generally exercisable at a rate of
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
date of grant.
At March 31, 1996, there are 65,712 options currently exercisable and 16,150
options available for future grant. A summary of changes in outstanding
stock options is as follows:
Prices during Shares under option
fiscal years 1996 1995 1994
------------- ---- ---- ----
Outstanding at beginning
of year $3.056 - 9.875 151,793 96,473 103,885
Granted $5.625 - 9.875 114,550 123,000 7,500
Exercised $3.056 - 6.769 (10,000) (63,784) (13,912)
Cancelled $4,745 - 7.625 (14,680) (3,896) (1,000)
------ ------- -------
Outstanding at
end of year $3.056 - 9.875 241,663 151,793 96,473
======= ======= ======
A summary of changes in outstanding warrants is as follows.
Prices during Shares under option
fiscal years 1996 1995 1994
------------- ---- ---- ----
Outstanding at beginning
of year $3.519 - 6.597 5,400 10,800 13,500
Granted $5.75 10,000
Exercised $3.519 - 5.961 (5,400) (2,700)
------ ------ ------
Outstanding at
end of year $4.456 - 6.597 15,400 5,400 10,800
====== ===== ======
Warrants outstanding expire five years after they are issued.
NOTE 9 - INCOME TAXES:
The provision for income taxes consists of the following.
March 31, 1996 1995 1994
---- ---- ----
Federal
Current $594,400 $997,200 $204,300
Deferred (2,433,600) (98,800) 125,500
State
Current 131,600 203,800 64,700
Deferred (728,500) (24,700) 32,100
Foreign
Current
Deferred (373,900)
--------- --------- --------
($2,810,000) $1,077,500 $426,600
========== ========= =======
A reconciliation of the statutory federal income tax rate to the effective
rate is as follows.
Year Ended March 31, 1996 1995 1994
---- ---- ----
Statutory federal rate (34.0%) 34.0% 34.0%
State taxes, net of federal benefit (3.6) 7.9 4.1
Write-off of intangibles 6.4
Foreign tax rate differences 2.1
Operating loss carryforwards not
recognized 2.0
Research and development credits (3.0) (11.3)
Recapture of subsidiary excess losses 6.5
Foreign sales corporation benefit (.5) (2.1) (1.9)
Other 1.2 (1.7) 2.3
------ ----- -----
Effective income tax rate (26.4%) 41.6% 27.2%
===== ==== ====
Deferred tax assets (liabilities) are comprised of the following.
Realization of the tax loss and credit carryforwards, which expire at
various times between 2002 and 2011, is contingent on future taxable
earnings. Valuation allowances have been recorded for these and other asset
items which may not be realized.
March 31, 1996 1995
---- ----
Allowance for doubtful accounts $79,900 $44,500
Book accruals not currently deductible for tax 1,593,500 42,200
Deferred compensation 706,500 618,200
Inventory obsolescence reserve 141,600 164,100
Employee costs 780,300 119,000
Valuation reserve - land held for sale 43,300 43,300
State investment tax credit carryforwards 303,600 310,900
Subsidiary net operating loss carryforwards 741,000 48,300
Tax basis of intangibles in excess of book 2,917,300
Other 221,800 46,200
--------- ---------
Total deferred tax assets 7,528,800 1,436,700
--------- ---------
Depreciation (1,016,200) (951,300)
Prepaid assets (100,000) (34,900)
Book basis of intangibles in excess of tax (229,000)
Other (66,000) (25,000)
--------- ---------
Total deferred tax liabilities (1,411,200) (1,011,200)
--------- ---------
Deferred tax asset valuation reserve (579,500) (359,200)
--------- ---------
Net deferred tax asset $5,538,100 $66,300
========= ======
NOTE 10 - GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
The Company currently operates in one industry segment. During 1996, the
Company established a manufacturing and marketing subsidiary in Hong Kong
and a marketing subsidiary in Australia. The Company also maintains a sales
presence in Canada and Europe. Sales by the Company s domestic operations
to customers outside the United States represent 12.3%, 11.3% and 11.4% of
the Company s consolidated net sales for the years ended March 31, 1996,
1995 and 1994, respectively.
During 1996, sales to the Company s largest customers accounted for 14% and
10%, respectively, of net sales. During 1995, sales to the Company s
largest customers accounted for 23% and 22%, respectively, of net sales.
During 1994, sales to the Company s largest customers accounted for 20% and
17%, respectively, of net sales.
Inter-area sales represent are presented on a basis intended to reflect the
market value of the products as nearly as possible. Identifiable assets are
those assets of the Company that are identified with the operations in each
geographic area.
The following table presents sales and other financial information by
geographic area.
March 31, 1996 1995 1994
Net sales
United States $38,234,057 $34,335,336 $31,354,835
Foreign 3,623,752
Inter-area 1,394,684
Eliminations (1,394,684)
---------- ---------- ----------
$41,857,809 $34,336,336 $31,354,835
========== ========== ==========
Operating (loss) income
United States $(8,917,291) $2,591,989 $1,571,241
Foreign (1,432,217)
Eliminations (315,735)
----------- ---------- ----------
($10,665,243) $2,591,989 $1,571,241
========== ========== ==========
Identifiable assets
United States $40,582,177 $24,745,923 $22,779,858
Foreign 5,067,001
----------- ---------- ----------
$45,649,178 $24,745,923 $22,779,858
========== ========== ==========
NOTE 11 - COMMITMENTS
The Company leases certain facilities pursuant to operating lease
agreements. Operating lease expense for offices and other equipment was
approximately $470,000 in 1996 and $16,000 in 1995 and 1994. Future minimum
rental payments under noncancellable operating lease agreements are as
follows: $1,645,000 - 1997; $1,525,000 - 1998; $1,425,000 - 1999; $510,000
- - 2000; $181,000 - 2001; $545,700 - 2001 and thereafter.
NOTE 12 - SUBSEQUENT EVENTS
During the first quarter of fiscal 1997 the Company established a defined
benefit pension plan for certain key executives. Expense associated with
this plan will be recorded in 1997 based upon the results of an actuarial
valuation currently being performed.
DETECTION SYSTEMS, INC.
130 Perinton Parkway
Fairport, New York 14450
(716) 223-4060
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 20, 1996
TO THE SHAREHOLDERS:
The Annual Meeting of Shareholders of Detection Systems, Inc. will be
held at the Company's corporate headquarters located at 130 Perinton
Parkway, Fairport, New York, on August 20, 1996, at 2:00 p.m. for the
following purposes:
(l) To elect five directors;
(2) To elect independent auditors for fiscal year 1997; and
(3) 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 July 5, 1996
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
July 17, 1996
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.
DETECTION SYSTEMS, INC.
130 Perinton Parkway
Fairport, New York 14450
PROXY STATEMENT
First sent to Shareholders on July 17, 1996
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 20, 1996, 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 on July 5, 1996, at which time the
Company had outstanding 2,834,159 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. Abstentions,
broker non-votes and withheld votes will be counted in determining the
number of shares represented at the meeting but 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 and for the election of
Price Waterhouse LLP as independent auditors.
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, American Stock
Transfer & Trust Co., 40 Wall Street, New York, NY 10005, 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 III, 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 the principal of Adair Law
Firm, in Rochester, New York. Mr. Fuller is President and Chief Executive
Officer 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, 1996, the Board of Directors
held seven meetings. 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. In addition, this
committee approves and oversees services performed by the Company's
independent auditors and enables the independent accountants to directly
access the non-employee members of the Board of Directors.
The Board of Directors also has 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 specific compensation arrangements for the Company's
executive officers, met four times during the last specific 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
granting options pursuant to the Company's 1992 Restated 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. There is no additional compensation for attendance
of committee meetings.
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 1997 fiscal year. Proxies received by the Board of Directors will
be so voted unless share owners specify in their proxies a contrary choice.
MANAGEMENT AND SECURITY OWNERSHIP
The following table lists the directors and executive officers of the
Company and reflects the number of shares of the Company's common stock that
were beneficially owned as of June 3, 1996 by each director, executive
officer and all directors and executive officers as a group.
Amount and
Nature of
NAME, AGE, PRINCIPAL Beneficial Percent
OCCUPATION AND POSITIONS OWNERSHIP(1) OF CLASS SINCE
Donald R. Adair (52) 1,034(2) 0.03% 1991
Director of the Company and
Principal of Adair Law Firm
George E. Behlke (38) 23,964(3)(4) 0.77% 1996
Vice President, Engineering, of the
Company; Prior -- Engineering Manager
R. Wayne Carlton (58) 55,131(3)(4) 1.78% 1994
Vice President, National Sales,
of the Company;
Prior -- National Accounts Manager
Mortimer B. Fuller, III (54) 3,780(3) 0.12% 1990
Director of the Company and President
of Genesee and Wyoming Industries, Inc.
Karl H. Kostusiak (57) 417,928(4) 13.51% 1968
Director, President and CEO
of the Company
David B. Lederer (56) 296,491(4) 9.58% 1968
Director and Executive Vice President
of the Company
Edward C. McIrvine (62) 19,550(3)(5) 0.63% 1981
Director of the Company and
self-employed Research and Development
Management Consultant
Frank J. Ryan (42) 52,300(3)(4)(6) 1.69% 1982
Vice President, Secretary Treasurer
of the Company
Lawrence R. Tracy (49) 50,267(3) 1.62% 1995
President of Detection Systems
International, Inc.and Radionics, Inc.,
subsidiaries of the Company
Prior -- President of a competitive
manufacturer of electronic security
equipment
All Directors and Executive 920,445(2)-(6) 29.74%
Officers as a Group (9 persons)
Footnotes to Beneficial Ownership Table:
(1) For all shares listed, each person possess both sole voting and
investment power, except for those shares indicated in notes (2) - (6)
below.
(2) Includes 783 shares held in custodianship for Mr. Adair's children under
the Uniform Gifts to Minors Act of New York for which Mr. Adair disclaims
beneficial ownership.
(3) Includes 3,000, 3,660, 2,700, 2,700, 900,14,000 and 26,900 shares which
may be acquired upon exercise of warrants and options held by Messrs.
Behlke, Carlton, Fuller, McIrvine, Ryan, Tracy and all directors and
executive officers as a group, respectively.
(4) Includes 4,920, 32,428, 113,714, 73,366, 4,920 and 229,348 hypothetical
shares credited to the accounts of Messrs. Behlke, Carlton, Kostusiak,
Lederer, Ryan and all directors and executive officers as a group,
respectively, pursuant to the Company's deferred compensation plans,
which shares may be acquired upon termination of employment.
(5) Includes 16,200 shares held by Dr. McIrvine's wife for which he
disclaims beneficial ownership.
(6) Includes 540 shares held in trust for Mr. Ryan's son under the Uniform
Gifts to Minors Act of New York for which Mr. Ryan disclaims beneficial
ownership.
(7) In 1993 certain officers were awarded shares of stock of Emergency
Communications, Inc., a subsidiary of Detection Systems. Twenty percent
of these shares vested immediately; and an additional twenty percent vest
annually thereafter. Subject to the completion of that vesting schedule,
Messrs. Kostusiak, Behlke, Carlton, Kostusiak, Lederer and Ryan will own
1,500, 40, 40, 1200 and 40 shares, respectively.
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 3, 1996:
BENEFICIAL OWNERSHIP TABLE
Name and Amount and
Address of Nature of
TITLE BENEFICIAL BENEFICIAL Percent
OF CLASS OWNER OWNERSHIP(1)(2) OF CLASS
Common Stock Karl H. Kostusiak 417,928 13.51%
130 Perinton Parkway
Fairport, NY 14450
Common Stock David B. Lederer 296,491 9.58%
130 Perinton Parkway
Fairport, NY 14450
Common Stock Dimensional Fund Advisors, Inc. 164,148 5.30%
1299 Ocean Ave., 11th Floor
Santa Monica, CA 90401
- -------------------------------------
Footnotes to Beneficial Ownership Table:
(1) Messrs. Kostusiak and Lederer currently possess both sole voting and
investment power except with respect to 113,714 and 73,366 shares
respectively, which may be acquired upon termination of employment
pursuant to the Company's deferred compensation plans.
(2) Reflects shares held by Dimensional Fund Advisors Inc., a registered
investment advisor, as of December 31, 1995. The shares 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,
for all of which Dimensional Fund Advisors Inc. serves as investment
manager. Dimensional Fund Advisors Inc. disclaims beneficial ownership
of all such shares.
ELECTION OF AUDITORS
The Board of Directors has recommended that Price Waterhouse LLP be
elected as the independent auditors of the Company for the fiscal year
ending March 31, 1997. 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 elect
Price Waterhouse LLP as the independent auditors of the Company for the 1997
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.
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, 1996, 1995 and 1994.
ANNUAL COMPENSATION
Other
Annual
Name and Compen-
Principal Fiscal Salary Bonus sation
Position Year ($) ($)(1) ($)(2)
- ----------------- ----- ------ ------- -------
Karl H. Kostusiak 1996 205,926 1,419 26,186
President & Chief 1995 196,110 184,746 --(4)
Executive Officer 1994 183,280 71,943 68,442
R. Wayne Carlton 1996 105,000 18,518 --(4)
Vice President, 1995 100,000 28,386 --(4)
National Sales 1994 94,320 19,299 --(4)
David B. Lederer 1996 164,741 1,135 27,956
Executive Vice 1995 156,897 147,794 --(4)
President 1994 146,633 57,554 59,880
Frank J. Ryan 1996 105,000 723 --(4)
Vice President, 1995 100,000 35,017 --(4)
Secretary/Treasurer 1994 93,890 10,774 --(4)
Lawrence R. Tracy 1996 144,148 31,648 --(4)
President of 1995 21,000 102,405 --(4)
Detection Systems 1994 N/A N/A N/A
International, Inc. &
Radionics, Inc.
LONG-TERM COMPENSATION
Securities
Underlying All Other
Name and Options/ Compen-
Principal Fiscal SAR's sation
Position Year (#) ($)(3)
- -------------- ------ ---------- ---------
Karl H. Kostusiak 1996 0 2,542
President & Chief 1995 0 2,625
Executive Officer 1994 0 33,491
R. Wayne Carlton 1996 0 2,222
Vice President, 1995 2,500 2,309
National Sales 1994 0 3,049
David B. Lederer 1996 0 2,534
Executive Vice 1995 0 2,625
President 1994 0 27,592
Frank J. Ryan 1996 0 2,298
Vice President, 1995 1,500 2,242
Secretary/Treasurer 1994 0 3,032
Lawrence R. Tracy 1996 0 0
President of 1995 40,000 0
Detection Systems 1994 N/A N/A
International, Inc. &
Radionics, Inc.
- --------------------------
Footnotes to Compensation Table:
(1) Messrs. Kostusiak's, Lederer's, Ryan's and Tracy's bonuses were
primarily based on profit performance and Mr. Carlton's on sales
performance.
(2) During fiscal 1996, a total of $17,286 and $15,041 were paid toward
life, disability and long term care insurance premiums for the benefit of
Messrs. Kostusiak and Lederer, respectively. A total of $2,702 and
$2,876 were paid to Messrs. Kostusiak and Lederer, respectively, for
reimbursement of medical expenses not covered under the Company's medical
plans. A total of $2,608 and $8,554 were paid to Messrs. Kostusiak and
Lederer for reimbursement of automobile expenses.
(3) Contributions by the Company to accounts of the named executive officers
under the Company's 401(k) retirement savings plan.
(4) Less than the minimum amount required to be reported.
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 year
1996 and unexercised options held as of March 31, 1996. Options are
exercisable 35-40% after one year, 60% after two years, 80% after three
years and 100% after four years. 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, 1996 was $9.75 per share.
<TABLE>
<S> <C> <C> <C> <C>
Underlying Value of
Shares # Number of Shares (#) Unexerciesd
Acquired ($) Unexercised Options In-The-Money Options
On Value At March 31, 1996 (#) At March 31, 1996
Name Exercise Realized Exer'able/Unexer'able Exer'able/Unexer'able
K. Kostusiak 0 $0 0 / 0 0 / 0
R. Carlton 3,240 7,711 3,160 / 1,500 $8,939 / $3,750
D. Lederer 0 0 0 / 0 0 / 0
F. Ryan 2,160 4,601 2,760 / 900 $7,939 / $2,250
L. Tracy 0 0 14,000 / 26,000 $45,500 / $84,500
</TABLE>
Recipients of options may elect to exercise their options through an
installment loan arrangement with the Company. During fiscal year 1996,
Messrs. Kostusiak, Lederer and Ryan had stock option loans outstanding that
totaled $195,027, $144,141 and $66,999, respectively. As of June 7, 1996,
the outstanding balances of these loans were $180,479, $132,107 and $66,228,
respectively. The loans were charged interest rates ranging from 5.54% to
8.42%.
No options or stock appreciation rights ("SAR's") were granted during
fiscal 1996 to the named executive officers.
PENSION PLANS:
Effective April 1996, the Company approved the addition of a pension
plan for Messrs. Kostusiak and Lederer (each, an "Executive") in their
Executive Agreements, described below. Under the terms of the Executive
Agreements, the Company will pay each Executive retirement benefits for his
lifetime and for his spouse's lifetime, if his spouse survives him, as
follows: (a) a retirement wage benefit initially equal to 12% of
Executive's base salary on the date of his retirement or death, increased
each year thereafter by any increase, less 0.5%, in the Consumer Price Index
(except that the wage benefit shall be 75% of that amount after Executive's
death); (b) continuation of Executive's full health insurance or similar
benefit for Executive and his spouse; and (c) continuation of any other
benefit programs that provide continuation pursuant to their terms.
Based on a 5% compounded annual increase in their base compensation,
and assuming that they each retire at age 65, the estimated initial annual
benefit that would be payable to Messrs. Kostusiak and Lederer under the
pension plan provision in their Executive Agreements would be $34,771 and
$27,817, respectively.
The Executive Agreements further provide that: (a) the payment of
retirement benefits may be terminated if a court of law determines that an
Executive has violated the non-competition provisions of his Executive
Agreement, and (b) that the Company will purchase and maintain life
insurance sufficient to fund the estimated benefits for the spouse (any
excess policy proceeds to be available, if agreed, to purchase shares of the
Company's Common Stock held in Executive's estate) and the policy or
policies of such insurance shall be held in a trust designed for this
purpose.
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 CONCERNING EXECUTIVE OFFICERS:
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
important.
During fiscal year 1996 and subsequently, three additional factors have
affected the Committee's determinations: (1) the hiring in February 1995 of
Mr. Tracy and the plan to have him spearhead offshore development of
manufacturing and markets, (2) the Company's acquisition of Radionics, Inc. in
February 1996, and (3) the long-term need to assure succession of management.
Various changes have been made in compensation arrangements during this period
to respond to these factors.
TYING COMPENSATION TO THE COMPANY'S FINANCIAL PERFORMANCE:
In 1988, the Company entered into five-year employment agreements with
Messrs. Kostusiak and Lederer. Each year thereafter, 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. Beginning with the fiscal year ending March 31, 1997, the $250,000
threshold has been increased to $500,000. 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. Beginning with the fiscal year
ending March 31, 1997, the cash bonus and the stock bonus will not be earned
unless the Company achieves an earnings-per-share goal established by the Board
of Directors. If the earnings-per-share goal is not achieved, but the other
requirements for a bonus are achieved, the opportunity to be paid that bonus
will be carried forward for up to five fiscal years and may become earned, or
partly earned, in any year in which the earnings-per-share goal for that year
is exceeded. The fiscal year 1997 earnings-per-share goal for purposes of
these bonus plans has been established by the Board at $1.00 per share. The
intention of these bonus programs is to provide strong incentives for managing
the Company's financial performance toward three goals: (1) having pre-tax
profits greater than 5 percent of sales, (2) having sales increase
significantly each year, and (3) the Company achieving an earnings-per-share
goal established early each year by the Board of Directors. (Other aspects of
these agreements are described below under "Executive Agreements.") Since cash
bonuses are directly dependent on pre-tax profits, stock bonuses are directly
dependent on growth in both sales and pre-tax profits, and both bonuses will
be dependent on after-tax earnings-per-share, 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.")
Upon the acquisition of Radionics, Inc., the concept of "sales growth"
was redefined for the bonus program so as to encourage acquisitions that serve
the Company's long-term strategic objectives while taking into account possible
start-up costs and variability of overall sales in the initial years after an
acquisition. Thus, "sales growth" is now defined as the greater of (a) growth
in actual sales or (b) "equivalent sales growth" (which is defined as an
assumed 20% compounded annual sales growth beyond the actual sales of the year
prior to any year in which sales growth was more than 20%, provided that the
resulting assumed sales level for the year in question is not more than the
actual sales of the year in question).
The Committee believes that these provisions of the employment agreements
functioned as intended during the past three years. In particular, Mr.
Kostusiak's bonus compensation was as follows:
Fiscal Year Cash Bonus Stock Bonus Sales Pre-Tax Profit
1996 $1,419 -- $41,858,000 (Loss)
1995 $116,734 $59,290 $34,336,000 $2,592,000
1994 $71,943 -- $31,355,000 $1,571,000
When the Company's employment agreement with Mr. Kostusiak was renewed
and extended at the beginning of fiscal year 1996, 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 Executive Compensation section of
this proxy 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.
During fiscal year 1996, the bonus programs were modified to increase the
pre-tax earnings threshold for the cash bonus to $500,000 (effective in fiscal
1997) and to refine the definition of "sales growth," as discussed above.
EQUITY OWNERSHIP BY MANAGEMENT:
Since the Company's founding in 1968, Messrs. Kostusiak and Lederer have
each owned a substantial number of shares of the Company's common stock.
During fiscal year 1996 and subsequently, at Mr. Tracy's request, the Company
sold to him a total of 30,000 shares of common stock for cash at prices
approximating the market price at the time of the sales.
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 stock 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 parent Company's
rights to manufacture products for those markets and to earn royalties on the
products sold through those subsidiaries.
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 a considerable incentive for executive
officers to pursue the Company's long-term strategic objectives. As noted
above with respect to the stock bonus program, the concept of "equivalent sales
growth" was added recently to increase the weight toward achieving long-term
objectives with that program.
Additionally, in order to serve long-term objectives, in particular to
help build a succession plan for senior management, during fiscal year 1996 the
Company added to the employment contracts of Messrs. Kostusiak and Lederer
commitments to pay retirement wage benefits as described previously under
Pension Plans. The commitment made so far is modest, balancing the need to
start such a plan now while not adding significant expenses in a year of
losses. The Committee anticipates eventually increasing the commitment so that
the retirement wage benefit would start at 60% of final base wages, but future
increases in the commitment moving toward that goal probably will be made only
if and when the financial circumstances of the Company seem appropriate.
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, III
Edward C. McIrvine
EXECUTIVE AGREEMENTS
The Company has employment agreements with three of its executive
officers, Messrs. Kostusiak, Lederer and Tracy ( the "Executive Agreements").
The Executive Agreements with Messrs. Kostusiak and Lederer are through May
2001 and the agreement with Mr. Tracy is through February 1999. The Executive
Agreements provide for severance benefits under certain circumstances. The
terms "change of control", "cause" and "disability" are used in the following
description as defined in the Executive Agreements. The Executive Agreements
terminate upon the executive's death or permanent disability except as
described under Pension Plans.
Under the agreements with Messrs. Kostusiak and Lederer, if the Company
terminates the executive's employment without cause, the Company will continue
compensation and benefits to the executive for the then remaining balance of
the term of employment or for a period of three years from the date of
termination, whichever is longer. Under such circumstances, Mr. Tracy's
agreement provides that his compensation will continue for the then remaining
balance of the term 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 base salary and 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.
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 will also request banks, brokers and others, who hold shares for
the benefit of other persons, to forward proxy materials to such beneficial
owners and will reimburse such record holders for their expenses in forwarding
this material to the beneficial owners of the shares held by them.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The members of the compensation committee of the Board of Directors are
Messrs. Adair, Fuller and McIrvine. In the last fiscal year, the Company and
its subsidiaries paid $13,200 to Adair Law Firm, of which Mr. Adair is the
principal, for legal services. Mr. Adair also served on the stock option
committee of the Board of Directors.
COMPARISON OF TOTAL SHAREHOLDER RETURN
The Company's common stock trades on The Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol: DETC. The following graph sets
forth the Company's 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 28,
1991, and that all dividends were reinvested.
(Picture of graph titled: Comparison of five year cumulative total return
among Detection Systems, Inc., The Nasdaq Index & the Nasdaq electronic
industry index.)
Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96
Detection Systems, Inc. 100 78 115 138 106 136
The Nasdaq Index 100 127 147 158 176 239
Electronic Industry Index 100 123 203 246 322 424
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, 1996.
The Company paid a premium of $115,324 in fiscal year 1996 for director
and officer liability insurance. This policy is renewed annually and provides
protection for the directors and officers of the Company 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
3/19/97. 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, Controller
130 Perinton Parkway
Fairport, New York 14450
Dated: July 17, 1996
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
1996 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 25th day of June, 1996.
/s/ David B. Lederer
----------------
(Signature)
David B. Lederer
----------------
(Print Name)
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
1996 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 4th day of June, 1996.
/s/ Mortimer B. Fuller III
-----------------------
(Signature)
Mortimer B. Fuller, III
-----------------------
(Print Name)
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
1996 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 4th day of June, 1996.
/s/ Donald R. Adair
------------------
(Signature)
Donald R. Adair
------------------
(Print Name)
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
1996 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 4th day of June, 1996.
/s/ Edward C. McIrvine
-----------------------------
(Signature)
Edward C. McIrvine
-------------------
(Print Name)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 913,716
<SECURITIES> 0
<RECEIVABLES> 10,482,660
<ALLOWANCES> (235,000)
<INVENTORY> 14,065,843
<CURRENT-ASSETS> 28,426,328
<PP&E> 21,528,136
<DEPRECIATION> 11,951,304
<TOTAL-ASSETS> 45,897,578
<CURRENT-LIABILITIES> 12,714,038
<BONDS> 0
<COMMON> 7,105,138
0
0
<OTHER-SE> 4,869,022
<TOTAL-LIABILITY-AND-EQUITY> 45,897,578
<SALES> 41,857,809
<TOTAL-REVENUES> 340,311
<CGS> 27,978,460
<TOTAL-COSTS> 52,542,900
<OTHER-EXPENSES> 24,564,440
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 320,463
<INCOME-PRETAX> (10,665,243)
<INCOME-TAX> (2,810,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,855,243)
<EPS-PRIMARY> (2.74)
<EPS-DILUTED> (2.74)
</TABLE>
