As Filed with the Securities and Exchange Commission on July 23, 1997
Registration No. 333-__________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DETECTION SYSTEMS, INC.
(Exact name of Registrant as Specified in its Charter)
New York 16-0958589
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
130 Perinton Parkway
Fairport, New York 14450
716-223-4060
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Office)
Frank J. Ryan, Vice President
130 Perinton Parkway, Fairport, New York 14450
716-223-4060
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies of all communications to:
Justin P. Doyle, Esq. R. Alan Higbee, Esq.
Roger W. Byrd, Esq. David M. Doney, Esq.
Nixon, Hargrave, Devans & Doyle LLP Fowler, White, Gillen, Boggs,
Clinton Square, Suite 1300 Villareal and Banker, P.A.
Rochester, New York 14604 501 East Kennedy Blvd.,
Suite 1700
Tampa, Florida 33602
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box./ /
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering./ / _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. <square>
CALCULATION OF REGISTRATION FEE:
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Title of Shares to Amount to Offering Price Offering Registration
be Registered be Registered Per Share Price Fee
Common Stock,
par value $.05 1,495,000(1) $18.875(2) $28,218,125(2) $8,551
(1) Includes 195,000 shares of Common Stock which may be sold by the Company to
cover over-allotments.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457 of the Securities Act of 1933.
--------------------------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act or until the Registration Statement shall become effective
on such date as the Commission, acting pursuant to said section 8(a), may
determine.
<PAGE>
SUBJECT TO COMPLETION DATED JULY 23, 1997
1,300,000 SHARES
[DSI LOGO] DETECTION SYSTEMS, INC. [RADIONICS LOGO]
COMMON STOCK
OF THE 1,300,000 SHARES OF COMMON STOCK OFFERED HEREBY, 1,072,000
SHARES ARE BEING ISSUED AND SOLD BY DETECTION SYSTEMS, INC. (THE "COMPANY") AND
228,000 SHARES ARE BEING SOLD BY CERTAIN SHAREHOLDERS OF THE COMPANY (THE
"SELLING SHAREHOLDERS"). THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM
THE SALE OF COMMON STOCK BY THE SELLING SHAREHOLDERS. SEE "PRINCIPAL AND
SELLING SHAREHOLDERS."
THE COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "DETC." ON JULY 21, 1997, THE LAST REPORTED SALE PRICE OF THE COMMON
STOCK WAS $18.875 PER SHARE.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price Underwriting Proceeds Proceeds to
to Discounts and to Selling
Public Commissions(1) Company(2) Shareholders
[S] [C] [C] [C] [C]
Per Share $_________ $_________ $_________ $_________
Total (3) $_____________ $_____________ $_____________ $_____________
(1)The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2)Before deducting expenses estimated to be $250,000, which are payable by the
Company.
(3)The Company has granted the Underwriters a 30-day option to purchase up to
195,000 additional shares of Common Stock on the same terms and conditions
as the securities offered hereby, solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $_____________,
$_____________ and $_____________, respectively. See "Underwriting."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS,
SUBJECT TO PRIOR SALE, WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THEM, AND
SUBJECT TO CERTAIN OTHER CONDITIONS INCLUDING THE RIGHT OF THE UNDERWRITERS TO
WITHDRAW, CANCEL, MODIFY OR REJECT ANY ORDER IN WHOLE OR IN PART. IT IS
EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT
, 1997, AT THE OFFICES OF RAYMOND JAMES & ASSOCIATES, INC., ST. PETERSBURG,
FLORIDA.
RAYMOND JAMES & ASSOCIATES, INC. NEEDHAM & COMPANY, INC.
The date of this Prospectus is , 1997
<PAGE>
******************************************************************************
*Information contained herein is subject to completion or amendment. A *
*registration statement relating to these securities has been filed with the *
*Securities and Exchange Commission. These securities may not be sold nor *
*may offers to buy be accepted prior to the time the Registration Statement *
*becomes effective. This Prospectus shall not constitute an offer to sell *
*or the solicitation of an offer to buy nor shall there be any sale of these *
*securities in any state in which such offer, solicitation or sale would be *
*unlawful prior to registration or qualification under the securities laws of*
*any such state. *
******************************************************************************
INSIDE FRONT COVER
[Photograph of Security System Components]
Samples of the Company's Security System Products
[Photograph of Fire System Components]
Samples of the Company's Fire System Products
[Photograph of Access Control System Components]
Samples of the Company's Access Control System Products
[Photograph of CCTV Components]
Samples of the Company's CCTV Products
DETECTION SYSTEMS, DA SYSTEMS, DS VISION, EASIKEY, RADIONICS, READYKEY,
SAFECOM, TRISENSE, TRITECH AND SECURITY ESCORT ARE TRADEMARKS OF THE COMPANY.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR
AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER
THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO (THE "CONSOLIDATED FINANCIAL STATEMENTS"), APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION SET FORTH HEREIN
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, REFLECTS A
THREE-FOR-TWO STOCK SPLIT IN THE FORM OF A STOCK DIVIDEND DISTRIBUTED ON
DECEMBER 17, 1996, AND ASSUMES THAT 221,738 SHARES OF COMMON STOCK OWNED BY
NUMEREX CORP. ARE REPURCHASED SIMULTANEOUSLY WITH THE CLOSING OF THE OFFERING.
AS USED HEREIN, THE "COMPANY" MEANS DETECTION SYSTEMS, INC. AND ITS
SUBSIDIARIES, EXCEPT WHERE THE CONTEXT INDICATES OTHERWISE, AND A "FISCAL YEAR"
MEANS THE TWELVE-MONTH PERIOD ENDING ON MARCH 31ST OF THE SPECIFIED YEAR.
THE COMPANY
The Company is a leading supplier of equipment to the electronic protection
industry. The Company designs, manufactures and markets electronic detection,
control and communication equipment for security, fire protection, access
control and closed circuit television ("CCTV") applications, offering products
primarily for the commercial and mid- to high-end residential portions of the
market. From its founding in 1968 until 1995, the Company was primarily a
niche provider of intrusion detection devices for the domestic market. In
1995, the Company adopted a strategy designed to substantially expand its
product offerings, establish an international sales presence, increase its
manufacturing capacity and improve its manufacturing cost structure. The
Company has since made five acquisitions, opened sales offices in six countries
and successfully established a manufacturing facility in China. These
initiatives have enabled the Company to significantly expand its product
catalog and market reach and to increase its net sales from $34.3 million in
fiscal 1995 to $101.3 million in fiscal 1997. Excluding amounts attributable
to acquisitions, the Company's net sales grew by approximately 22.5% in fiscal
1997.
The Company manufactures system components for sale to installation
companies, distributors and other equipment manufacturers either as individual
components or, increasingly, bundled with other compatible components to form
an integrated system for a specific customer's application. The Company is not
engaged in the installation or monitoring aspects of the industry. The
Company's primary customers are: (i) national and regional installation
companies such as ADT, Ameritech, Checkpoint, Holmes Protection, Honeywell,
Simplex, Wells Fargo and Westar; (ii) national distributors such as ADI in the
U.S., Efsec in Sweden, Glastrak in the Netherlands and Rimi in Russia; (iii)
original equipment manufacturers ("OEMs") such as Pittway and ITI Technologies
that integrate the Company's components into their finished products, and
(iv) certain large commercial customers such as Pepsico and agencies of the
federal government.
The Company presently offers products in all four of the principal
categories of the electronic protection equipment market: security, fire,
access control and CCTV. According to industry statistics, combined U.S.
wholesale equipment sales for these four categories were estimated at $5.3
billion in 1996. The Company believes international markets of significant
size also exist for each of these four categories. There are several factors
driving the growth of the private security industry. The perception by
Americans that crime is a significant problem has continued to grow as
evidenced by the focus on crime in political campaigns and in the media.
Insurance companies often provide incentives to businesses for installing
electronic security systems or require such systems as a condition of insurance
coverage. An electronic fire system is required in commercial facilities in
many localities in order to comply with municipal fire codes. There has been a
trend for large commercial customers to centralize their security function at
the corporate level instead of managing security on an ad hoc site-basis. This
has often resulted in greater attention and resources for security solutions.
The growth in telecommuting and in-home offices has created incremental demand
for residential security products by bringing expensive office equipment into
the home. Market penetration has also been driven by the increased
affordability of systems, as advances in technology and reduced manufacturing
costs have increasingly brought high quality systems into price ranges
attractive to residential and small commercial customers. In addition to new
systems, there is ongoing system replacement in the commercial and mid- to
high-end residential markets, creating significant retrofit opportunities. The
Company estimates that customers in these markets typically upgrade or replace
their systems every seven to ten years.
3
<PAGE>
The scale and product scope of the Company has increased significantly due
to recent acquisitions, particularly the February 1996 acquisition of
Radionics, Inc. ("Radionics"). Based in Salinas, California, Radionics had net
sales of $45.1 million for the year ended December 31, 1995 and was a leading
provider of control panels and related equipment to the Company's industry.
Subsequent to the Radionics acquisition, the Company has completed four
additional acquisitions: (i) the purchase in July 1996 of certain assets of
Senses International, Inc. ("Senses") which had annual net sales of
approximately $2.0 million, (ii) the purchase in May 1997 of Digital Audio
Limited ("DA Systems") which had annual net sales of approximately $10.8
million, (iii) the purchase in June 1997 of Seri<e'>e, S.A. ("Seri<e'>e") which
had annual net sales of approximately $6.3 million, and (iv) the purchase in
June 1997 of Radio-Active Systems N.V. ("RAS") which had annual net sales of
approximately $9.9 million. These acquisitions have served both to broaden the
Company's product lines and increase its international presence.
The Company's goal is to be an international leader in the design,
manufacture and marketing of equipment for the electronic protection industry,
satisfying all of its customers' protection needs with a complete line of high-
quality, technologically advanced products which are distributed by a worldwide
marketing organization and supported by a service-oriented product support
team. Among the principal elements of the Company's strategy are the
following:
* Catalog expansion - continuing to expand its product catalog through
internal development, acquisitions and partnering with companies that
have technological capabilities that complement the Company's internal
capabilities. The Company believes that the ability to provide a full
catalog of products will result in competitive advantages over firms
which only provide a small portion of the products regularly required
by the industry's customers. Part of the Company's motivation for its
recent acquisitions was to expand the Company's product catalog. The
Company is promoting the sale of its fire, access control and other
product lines by leveraging the superior market acceptance it enjoys in
the security equipment arena.
* INTERNATIONAL EXPANSION - continuing to expand its international
sales efforts. The Company's acquisitions of DA Systems, RAS and
Seri<e'>e have given the Company inroads into important European
markets. The Company plans to use the distribution networks of these
companies to distribute its full range of products, as appropriate. In
addition, the Company's sales offices in Asia and Australia have been
successful in developing a base of operations from which the Company
can further expand in those markets.
* TECHNOLOGICAL ADVANCEMENT - continuing to develop technologically
advanced products. The Company utilizes the power of microprocessors
and application specific integrated circuits to fully exploit presently
available technology. By using this technology, the Company has
developed: detection products which feature demonstrably superior
signal processing capacity which optimize the trade-off between false
alarms and catch performance; control products which generally provide
a superior level of programming flexibility and more sophisticated
firmware than competitive product offerings; and communication
equipment which provides access to a variety of commercially available
communication technologies.
* Market focus - continuing to focus on the installation and service
professionals that service the commercial and mid- to high-end
residential security and fire alarm system markets, who view the
features and quality of the Company's products as providing superior
value. The Company is also increasing its sales efforts directed to
the U.S. government.
* Production efficiencies - increasing utilization of its China
facility and continuing to consolidate its purchasing. The Company's
China facility became operational in October 1995. The Company has
been able to reduce its unit manufacturing costs by transitioning
production from its Fairport, New York and Salinas, California
locations to its China facility. The Company anticipates additional
cost savings from the continued transition of production to its China
facility. The Company has also realized cost savings by consolidating
purchasing of components for its worldwide operations.
The address of the Company's principal executive offices is 130 Perinton
Parkway, Fairport, New York 14450, and its telephone number is (716) 223-4060.
4
<PAGE>
THE OFFERING
Common Stock offered by the Company 1,072,000 shares
Common Stock offered by the Selling
Shareholders 228,000 shares
Common Stock to be outstanding after
the offering 5,599,032 shares(1)
Use of proceeds To repay indebtedness under the
Company's revolving credit
facility, which repayment will
provide availability under such
facility for working capital
and general corporate purposes,
including possible
acquisitions, and to repurchase
Common Stock issued in
connection with a recent
acquisition. See "Use of
Proceeds."
Nasdaq National Market symbol DETC
(1)Does not include shares issuable upon the exercise of outstanding options
and warrants or under deferred compensation plans which, as of March 31,
1997, were: (i) an aggregate of 355,020 shares issuable upon the exercise of
currently outstanding options and warrants, (ii) 98,019 shares issuable
under the Company's Deferred Compensation Plan, and (iii) 252,390 shares
issuable under the Company's Deferred Stock Compensation Plan.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands except per share amounts)
<TABLE>
FISCAL YEAR ENDED MARCH 31,
------------------------------------------------
<CAPTION>
1993 1994 1995 1996(1) 1997
------- ------ ------ -------- -----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales $29,432 $31,355 $34,336 $41,858 $101,251
Costs and expenses:
Production 18,036 19,541 20,830 27,978 64,916
Research and development 3,534 4,161 4,070 4,700 8,115
Purchased in-process research
and development 9,350
Marketing, administrative
and general 5,511 6,112 6,789 10,515 21,411
Operating income (loss) 2,351 1,541 2,647 (10,685) 6,809
Interest income 239 196 113 340 206
Interest expense 234 166 168 320 1,765
--- --- --- --- -----
Income (loss) before taxes and
cumulative effect of a change
in accounting principle 2,356 1,571 2,592 (10,665) 5,250
Provision (benefit) for taxes 919 426 1,078 (2,810) 1,525
--- --- ----- ------- -----
Income (loss) before cumulative
effect of a change in
accounting principle 1,437 1,145 1,514 (7,855) 3,725
Cumulative effect of a change in
accounting principle 130
----- ------ ------ ------ -----
Net income (loss) $1,437 $1,275 $1,514 $(7,855) $3,725
====== ====== ====== ======= ======
Earnings (loss) per common
and common equivalent share $.34 $.30 $.35 ($1.83) $.76
======= ======= ======= ======== =====
Weighted average number of
shares 4,376 4,407 4,484 4,285 4,934
</TABLE>
At Year End
March 31, 1997
-------------------------
As
Actual Adjusted(2)
-------- ----------
Balance Sheet Data:
Cash and cash equivalents $ 2,244 $ 2,244
Working capital 31,067 32,020
Total assets 68,276 68,276
Total debt, including current portion(3) 29,187 14,379
Shareholders' equity 17,831 36,500
_____________________
(1) In February 1996, the Company acquired Radionics. Purchased in-process
research and development of Radionics, which consisted of products still
in the development stage but not considered to have reached technological
feasibility, was valued at $9.4 million. In accordance with generally
accepted accounting principles, this amount was expensed upon acquisition
in the fourth quarter of fiscal 1996. The Company's fiscal 1996 results
were also adversely affected by $3.9 million in costs associated with the
start-up of the Company's China facility and other international
operations.
(2) Adjusted to reflect the sale of 1,072,000 shares of Common Stock offered
by the Company hereby at an assumed public offering price of $18.875 per
share and the application of the net proceeds therefrom in the manner
described under "Use of Proceeds."
(3) Reflects repayment of $3.9 million associated with the repurchase of
221,738 shares of Common Stock issued to Numerex Corp. in connection with
the Company's May 1997 purchase of its DA Systems subsidiary.
6
<PAGE>
RISK FACTORS
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK, INCLUDING THE
RISKS DESCRIBED BELOW. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
SPECIFIC FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION CONTAINED IN
THIS PROSPECTUS, BEFORE DECIDING WHETHER TO INVEST IN THE COMMON STOCK OFFERED
HEREBY.
THIS PROSPECTUS CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), WHICH REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS,
INCLUDING, BUT NOT LIMITED TO, STATEMENTS CONCERNING INDUSTRY PERFORMANCE, THE
COMPANY'S OPERATIONS, PERFORMANCE, FINANCIAL CONDITION, GROWTH AND ACQUISITION
STRATEGIES, MARGINS AND GROWTH IN SALES OF THE COMPANY'S PRODUCTS. FOR THIS
PURPOSE, ANY STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT
LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS "MAY," "WILL,"
"EXPECT," "BELIEVE," "ANTICIPATE," "INTEND," "COULD," "ESTIMATE" OR "CONTINUE"
OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR
NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND
THE COMPANY'S CONTROL, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A
VARIETY OF IMPORTANT FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THIS "RISK
FACTORS" SECTION AND ELSEWHERE IN THIS PROSPECTUS.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
The success of the Company depends heavily on the business it conducts with
a limited number of significant customers. In fiscal 1997, 10.7%, 10.6% and
6.0% of the Company's net sales were attributable to Pittway Corporation
("Pittway"), Ameritech Corp. ("Ameritech") and Honeywell Inc., respectively.
Pittway is a competitor of the Company across many of its product lines and
purchases the Company's products to incorporate them into its products and
systems. During October 1996, Ameritech (an established customer of the
Company) began purchasing the Company's products through Pittway to utilize
Pittway's distribution facilities. The Company has had long-standing
relationships with most of its significant customers; however, it generally
does not have supply contracts with them and they may unilaterally reduce or
discontinue their purchases without penalty. The Company's loss of (or failure
to retain a significant amount of business with) any of these customers could
have a material adverse effect on the Company. See "Business-Marketing."
COMPETITION
The markets in which the Company operates are highly competitive. The
Company's competitors include manufacturers of security and fire alarm
equipment from all over the world. In addition, the Company may face
competition from new entrants into these markets and increased competition from
existing competitors. A number of the Company's competitors have substantially
greater financial and other resources than the Company. In many cases the
Company's competitors are concentrated in one market niche in the electronic
protection industry, allowing them to concentrate their resources in that
niche. The Company competes on the basis of providing superior value to
customers with respect to both products and services. There can be no
assurance that the Company's products and services will continue to be
competitive and accepted by the market in the future. See
"Business-Competition."
IMPACT AND RISKS OF ACQUISITIONS
Between February 1996 and July 1997 the Company made five acquisitions:
Radionics, DA Systems, Senses, Seri<e'>e and RAS. Part of the Company's growth
strategy is to expand its product catalog, technologies and markets through
additional acquisitions. There can be no assurance that the Company will be
able to successfully integrate the operations and management of its recent
acquisitions or that the Company will be able to consummate or, if consummated,
successfully integrate the operations and management of future acquisitions.
Acquisitions involve significant risks, including risks associated with: (i)
the diversion of management's attention to the assimilation of the acquired
businesses; (ii) the ability of the acquired businesses to maintain the quality
of products and services that the acquired business has historically provided;
(iii) the need to integrate financial and other systems with those of the
Company; (iv) the loss of key employees of the acquired business after the
acquisition; (v) unforseen liabilities of the acquired business; (vi) the
dilutive effect of the issuance of additional equity securities; (vii) the
incurrence of additional debt as part of such acquisition or to fund the
operations of the acquired business; and (viii) the amortization of goodwill
and other intangible assets involved in any acquisitions that are accounted for
using the purchase method of accounting. In addition, certain of the
businesses acquired by the Company have been unprofitable and there can be no
assurance that they can be made profitable. There can be no assurance that
future
7
<PAGE>
acquisition opportunities will become available, that future acquisitions can
be consummated on favorable terms or that such acquisitions will contribute to
the Company's profitability. Currently, the Company has no arrangements or
understandings with any party with respect to any future acquisition. The
Company, however, continues to investigate and consider acquisition
opportunities. See "Business-Strategy."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company is exposed to risks associated with international operations
because a significant portion of its products are manufactured at its China
facility and it has increasingly significant sales in a number of foreign
countries. Approximately 25% of the Company's manufacturing output during
fiscal 1997 was produced at its China facility. The Company leases its China
facility from the local Chinese government and is dependent on the local
Chinese government for personnel and utilities as well as all other municipal
services. See "Business-Manufacturing." The Company believes that its
relationship with the local Chinese government is good, however, any future
deterioration of such relationship could have a material adverse effect on the
Company's results of operations. Sales of the Company's products outside the
United States accounted for approximately 16% of its net sales during fiscal
1997. One aspect of the Company's business strategy is to increase the sale of
its products in international markets. The Company's international operations
give rise to political and economic uncertainties relating to, among other
things, U.S. and foreign trade restrictions; foreign government stability; risk
of renegotiation or modification of existing agreements or arrangements with
governmental authorities; foreign economic stability; shipping costs and
delays; tariffs; export controls; government regulation; patent and trademark
availability, protection and registration; foreign exchange restrictions which
limit the repatriation of investments and earnings therefrom; changes in
taxation or international tax treaties; military action and other hostilities
or confiscation of property. While the United States imposes quotas and duties
on selected imported products, there are currently no U.S. quotas or duties on
the Company's products.
The Company is subject to currency exchange risks to the extent that its
purchases and sales occur outside the United States and it is unable to
denominate its purchases or sales in dollars or otherwise shift to its
customers or suppliers the risks of currency exchange rate fluctuations.
Currently, the Company does not engage in currency hedging transactions for
normal operations, although it did engage in a hedging transaction in
connection with the purchase of RAS, and it may do so in the future.
Fluctuations in exchange rates may affect the results of the Company's
international operations reported in dollars and the value of such operations'
net assets reported in dollars. Additionally, the results of operations,
financial condition and competitive position of the Company may be affected by
the relative strength of the currencies in countries where its products are
sold.
INTELLECTUAL PROPERTY
The Company's ability to compete effectively will depend, in part, on its
ability to protect its intellectual property, including its patents,
trademarks, copyrights and trade secrets, and on its ability to develop and
protect future intellectual property. In addition to patents, the Company
relies on a combination of trademark registrations, copyrights and
confidentiality agreements to protect its proprietary rights in intellectual
property. The Company's ability to compete effectively also depends on its
ability to avoid infringing on the proprietary rights of others. New patent
applications are continually being filed and prosecuted, and pending U.S.
patent applications are confidential until patents are issued. As a result, it
is impossible to anticipate all potential patent infringement issues. There
can be no assurance that the steps taken by the Company to protect its
intellectual property will be adequate to prevent misappropriation or that
others will not independently develop technology or products that compete with
or are superior to the products of the Company. Likewise, there can be no
assurance that the Company will not inadvertently infringe on the intellectual
property rights of others.
RISKS OF TECHNOLOGICAL CHANGE
The electronic protection industry is characterized by continuous
technological advances, frequent new product introductions and enhancements,
declining market prices for similar products over time and changes in customer
requirements. The Company's future success will depend in large part on its
ability to develop new products and technology to meet customer needs as well
as to enhance its existing products and to continually reduce product costs.
Any failure by the Company to anticipate or respond rapidly to technological
advances, new products and enhancements by competitors, or changes in customer
requirements could have a material adverse effect on the Company. See
"Business-Industry Overview" and "Business-Intellectual Property."
8
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the efforts of certain key members of its
senior management team, including Karl H. Kostusiak, President and Chief
Executive Officer. The loss of a key member of the Company's senior management
team could have an adverse effect on the operations of the Company. The
Company carries no key man life insurance on any of its management, but has
non-competition agreements with certain key officers and technical personnel.
See "Management."
PRODUCT LIABILITY CLAIMS
If an intrusion, fire or other event that the Company's products are
designed to detect occurs in a setting where the Company's products have been
installed, the Company may be subject to a claim that an error or omission on
the part of the Company contributed to the damages resulting from such event,
which damages could be substantial. Such a claim could be made whether or not
the Company's product performed properly under the circumstances. From time to
time the Company is subject to product liability claims in the ordinary course
of its business. The Company carries product liability insurance which
management believes is adequate; however, a product liability judgment or
settlement in excess of available insurance proceeds could have a material
adverse effect on the financial condition and results of operations of the
Company and any adverse claim or settlement could have an adverse effect on the
availability and cost to the Company of product liability insurance. The
Company does not believe that any pending or threatened litigation will have a
material adverse effect on the financial condition or results of operation of
the Company. See "Business-Legal."
DEPENDENCE ON SUPPLIERS; CONCENTRATION OF MANUFACTURING
While the Company manufactures most of the products it sells, certain of
the components used in its products are purchased from third parties and are
available from a limited number of sources. The loss of any one supplier or an
inability of suppliers to provide the Company with the required quantity or
quality of these components could have an interruptive effect on the Company's
business until such time as an alternative source of supply is found. See
"Business-Manufacturing."
The Company manufactures approximately 85% of the products it markets,
and obtains the other 15% from external suppliers of finished goods.
Substantially all of the products manufactured by the Company are produced at
its facilities in Fairport, New York or Zhuhai, China. Accordingly, any event
resulting in the slowdown or stoppage of either of these manufacturing
operations could have a material adverse effect on the Company.
GOVERNMENT REGULATION AND PRODUCT LISTING
Many of the Company's products require approval by the Federal
Communications Commission ("FCC") before they can be marketed in the United
States. In addition, commercial acceptance of the Company's products is
typically dependent on the listing of such products by Underwriters
Laboratories ("UL"). The Company has successfully obtained FCC approval and UL
listing of its products in the past; however, it cannot predict whether it will
obtain approvals for future products or whether FCC regulations or UL listing
requirements relating to the Company's current or future products might change.
Failure to comply with FCC regulations or UL listing requirements, an inability
to receive approval for products under development or a change in existing
regulations or listing requirements that would make products non-compliant,
could have a material adverse effect on the financial condition and results of
operations of the Company. Most foreign countries also have similar regulatory
agencies and private certification or listing organizations, which could have
the same impact on sales of the Company's products within those countries. In
addition to the regulation of its products, the Company is subject to local,
state, federal and foreign laws regarding the discharge of materials into the
environment.
VOLATILITY OF STOCK PRICE
The Common Stock has experienced significant volatility, as well as a
significant increase in market price, since the Company's acquisition of
Radionics in February 1996. The market for securities of technology companies
historically has been more volatile than the market for stocks in general. The
trading price of the Common Stock may be subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, announcement of
future developments including possible acquisitions, new products by the
Company or its competitors and other events or factors. These fluctuations may
be compounded by the historically low trading volume in the Common Stock. In
addition, the stock market has from time
9
<PAGE>
to time experienced extreme price and volume fluctuations that have
particularly affected the market price for many technology companies and that
often have been unrelated to the operating performance of these companies.
These broad market fluctuations may adversely affect the market price of the
Common Stock. See "Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, the Company will have 5,599,032
shares of Common Stock outstanding (5,794,032 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, 4,665,660 shares
(4,860,660 shares if the Underwriters' over-allotment option is exercised in
full), including the shares sold in this offering, will be freely tradeable by
persons other than affiliates of the Company without restriction under the
Securities Act. Of the remaining 933,372 shares, 727,802 shares will be
beneficially owned by persons who are affiliates of the Company which are
eligible for public sale subject to the volume and other limitations of Rule
144, 171,429 shares will be "restricted" securities within the meaning of Rule
144 under the Securities Act which may be sold pursuant to a currently
effective registration statement under the Securities Act, and 34,141 shares
will be subject to the resale restrictions under Regulation S of the Securities
Act. The Company, certain shareholders of the Company selling shares of Common
Stock hereunder (the "Selling Shareholders"), and the Company's executive
officers and directors have agreed not to sell, contract to sell or otherwise
dispose of any of their shares for a period of 120 days after the closing of
this offering without the prior written consent of Raymond James & Associates,
Inc. Notwithstanding the foregoing, at any time on or after the date of this
Prospectus, the Company may issue shares pursuant to the exercise of warrants
or employee stock options outstanding on the date of this Prospectus, which
issuances or sales may be effected any time after the date of this Prospectus.
Sales of substantial amounts of shares of Common Stock in the public market
after this offering, including sales pursuant to Rule 144 or Regulation S, or
the perception that such sales could occur, may adversely affect the market
price of the Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company has entered into employment and consulting agreements with
certain officers which provide that upon the occurrence of certain events
following a change in control of the Company, such officers may be entitled to
receive the equivalent of three years' compensation. See
"Management-Employment Agreements." The shares beneficially owned by the
Company's executive officers and directors and the compensation payable to
certain officers following a change in control may have the effect of
discouraging persons from pursuing a non-negotiated takeover of the Company and
preventing certain changes of control. Also, Section 912 of the New York
Business Corporation Law, which is applicable to the Company, contains
provisions that restrict certain business combinations with interested
shareholders, which may have the effect of inhibiting a non-negotiated merger
or other business combination involving the Company.
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,072,000 shares of
Common Stock offered by the Company, after deducting underwriting discounts and
commissions and estimated offering expenses and assuming a public offering
price of $18.875 per share, are estimated to be approximately $18.7 million
(approximately $22.1 million if the Underwriters' over-allotment option is
exercised in full). Approximately $3.9 million of the net proceeds from this
offering will be used to repurchase 221,738 shares of Common Stock issued to
Numerex Corp. in connection with the Company's May 1997 purchase of its DA
Systems subsidiary. The balance of the proceeds will be used to repay
indebtedness under the Company's revolving credit facility which, after such
payment, will have approximately $17.0 million of availability for working
capital and general corporate purposes, including possible acquisitions. The
revolving credit facility matures on July 31, 1998 and bears interest at a
floating rate which was 9.25% per year as of July 21, 1997. The Company will
not receive any of the proceeds from the sale of Common Stock by the Selling
Shareholders; however, certain of the Selling Shareholders have advised the
Company that they intend to use their proceeds from the sale of the Common
Stock to repay stock option loans from the Company.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 and as adjusted to reflect the sale of 1,072,000 shares of
Common Stock offered by the Company hereby at an assumed public offering price
of $18.875 per share and the application of the net proceeds therefrom in the
manner described under "Use of Proceeds." This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements.
MARCH 31, 1997
-------------------------
ACTUAL AS ADJUSTED
------ -----------
Current maturities of obligations under capital
leases and long-term debt $1,101 $148
Obligations under capital leases 54 54
Long-term debt(2) 28,032 14,177
Shareholders' equity:
Common stock, par value $.05 per share,
4,478,993 shares issued and outstanding,
5,500,993 shares issued and outstanding
as adjusted(1) 224 278
Capital in excess of par value 9,449 28,064
Retained earnings 8,594 8,594
Treasury stock, at cost (53) (53)
Notes receivable for stock purchases (378) (378)
Cumulative translation adjustment (5) (5)
------- -------
Total shareholders' equity 17,831 36,500
-------- --------
Total capitalization $45,917 $50,731
======== ========
_________________
(1) Does not include shares issuable upon the exercise of outstanding options
and warrants or under deferred compensation plans which, as of March 31,
1997, were: (i) an aggregate of 355,020 shares issuable upon the exercise
of currently outstanding options and warrants, (ii) 98,019 shares issuable
under the Company's Deferred Compensation Plan, and (iii) 252,390 shares
issuable under the Company's Deferred Stock Compensation Plan.
(2) Reflects repayment of $3.9 million associated with the repurchase of
221,738 shares of Common Stock issued to Numerex Corp. in connection with
the Company's May 1997 purchase of its DA Systems subsidiary.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"DETC." The following table sets forth the high and low closing prices of the
Common Stock for the periods indicated.
FISCAL YEAR ENDED MARCH 31, 1995 HIGH LOW
First Quarter $7.000 $4.000
Second Quarter 6.312 4.062
Third Quarter 6.250 3.687
Fourth Quarter 5.312 3.187
FISCAL YEAR ENDED MARCH 31, 1996
First Quarter 5.187 4.312
Second Quarter 5.187 5.375
Third Quarter 5.250 3.937
Fourth Quarter 6.500 3.687
FISCAL YEAR ENDED MARCH 31, 1997
First Quarter 12.312 6.312
Second Quarter 13.812 9.687
Third Quarter 20.875 10.750
Fourth Quarter 24.500 14.500
FISCAL YEAR COMMENCING APRIL 1, 1997
First Quarter 20.250 13.500
Second Quarter (through July 21, 1997) 18.875 17.500
On July 21, 1997, the last reported sale price for the Common Stock as reported
on the Nasdaq National Market was $18.875 per share and the number of
shareholders of record was approximately 1,150.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that all of its earnings will be
retained for development and expansion of the Company's business and does not
anticipate paying any cash dividends in the foreseeable future. Any future
determination as to the payment of cash dividends will depend on a number of
factors, including future earnings, capital requirements, the financial
condition and prospects of the Company and any restrictions under credit
agreements existing from time to time, as well as such other factors as the
Company's Board of Directors may deem relevant. Certain financial covenants in
the Company's current credit facility, including a covenant to maintain a
minimum tangible net worth, limit the Company's ability to pay dividends.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
The selected consolidated financial data presented below has been derived
from the Consolidated Financial Statements. The Consolidated Financial
Statements as of and for the years ended March 31, 1993, 1994, 1995, 1996 and
1997 have been audited by Price Waterhouse LLP, independent accountants. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements and other consolidated financial information
included elsewhere in this Prospectus.
FISCAL YEAR ENDED MARCH 31,
<TABLE>
<CAPTION>
1993 1994 1995 1996(1) 1997
----- ----- ----- ------- -----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales $29,432 $31,355 $34,336 $41,858 $101,251
Costs and expenses:
Production 18,036 19,541 20,830 27,978 64,916
Research and development 3,534 4,161 4,070 4,700 8,115
Purchased in-process research
and development 9,350
Marketing, administrative and
general 5,511 6,112 6,789 10,515 21,411
------ ------ ----- ------ ------
Operating income (loss) 2,351 1,541 2,647 (10,685) 6,809
Interest income 239 196 113 340 206
Interest expense 234 166 168 320 1,765
---- ---- --- --- -----
Income (loss) before income taxes
and cumulative effect of a
change in accounting principle 2,356 1,571 2,592 (10,665) 5,250
Provision (benefit) for income
taxes 919 426 1,078 (2,810) 1,525
Income (loss) before cumulative
effect of a change in accounting
principle 1,437 1,145 1,514 (7,855) 3,725
Cumulative effect of a change in
accounting principle 130
------ ------ ----- ------ -----
Net income (loss) $1,437 $1,275 $1,514 $(7,855) $3,725
======= ======= ====== ======= ======
Earnings (loss) per common
and common equivalent share $.34 $.30 $.35 ($1.83) $.76
Weighted average number of
shares 4,376 4,407 4,484 4,285 4,934
</TABLE>
<TABLE>
<CAPTION>
AT YEAR END MARCH 31,
------------------------------------------------
1993 1994 1995 1996 1997
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,762 $ 3,907 $ 4,597 $ 930 $ 2,244
Working capital 12,205 13,447 14,963 15,712 31,067
Total assets 22,543 22,780 24,745 45,898 68,276
Total debt, including
current portion 1,662 1,582 1,181 19,680 29,187
Shareholders' equity 16,059 17,492 19,194 11,569 17,831
</TABLE>
_____________________
(1) In February 1996, the Company acquired Radionics. Purchased in-process
research and development of Radionics, which consisted of products still
in the development stage but not considered to have reached technological
feasibility, was valued at $9.4 million. In accordance with generally
accepted accounting principles, this amount was expensed upon acquisition
in the fourth quarter of fiscal 1996. The Company's fiscal 1996 results
were also adversely affected by $3.9 million in costs associated with the
start-up of the Company's China facility and other international
operations.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading supplier of equipment to the electronic protection
industry. The Company designs, manufactures and markets electronic detection,
control and communication equipment for security, fire protection, access
control and CCTV applications, offering products primarily for the commercial
and mid- to high-end residential portions of the market. From its founding in
1968 until 1995, the Company was primarily a niche provider of intrusion
detection devices for the domestic market. In 1995, the Company adopted a
strategy designed to substantially expand its product offerings, establish an
international sales presence, increase its manufacturing capacity and improve
its manufacturing cost structure. The Company has since made five
acquisitions, opened sales offices in six countries and successfully
established a manufacturing facility in China. These initiatives have enabled
the Company to significantly expand its product catalog and market reach and to
increase its net sales from $34.3 million in fiscal 1995 to $101.3 million in
fiscal 1997.
The Company more than doubled its annualized net sales with its purchase of
Radionics in February 1996. The Radionics acquisition had a significant impact
on the comparative information for fiscal 1996 and 1997 with respect to both
the results of operations as well as asset and liability balances. Radionics
had net sales of $45.1 million for the year ended December 31, 1995. The
Radionics acquisition was funded by borrowings under a commercial credit
facility which caused a significant increase in interest expense for the
periods following the acquisition.
In April 1995, the Company commenced development of a manufacturing
facility in China which became operational in October 1995. This facility has
significantly increased the manufacturing capacity of the Company. The Company
has realized manufacturing efficiencies by transitioning to its China facility
a portion of its domestic manufacturing operations, including substantially all
of the manufacturing operations previously conducted by Radionics. The Company
believes that these efficiencies, coupled with the volume generated by its
expanded product catalog and sales network, may further enable it to reduce its
unit manufacturing costs.
The Company has recently completed four additional acquisitions: (i) the
purchase in July 1996 of certain assets of Senses which had annual net sales of
approximately $2.0 million, (ii) the purchase in May 1997 of DA Systems which
had annual net sales of approximately $10.8 million, (iii) the purchase in June
1997 of Seri<e'>e which had annual net sales of approximately $6.3 million, and
(iv) the purchase in June 1997 of RAS which had annual net sales of
approximately $9.9 million. These acquisitions have served both to broaden the
Company's product lines and increase its international presence.
The Company recognizes net sales upon shipment of products to customers.
Production expenses include materials, direct labor and manufacturing overhead
as well as an allocated portion of indirect overhead. Outgoing freight,
customs and other costs associated with delivery of products to customers are
classified under marketing, administrative and general expenses. Research and
development expenses include costs associated with salaries and benefits for
certain engineering employees, supplies, agency approvals, depreciation and
occupancy, as well as charges for independent testing and independent
contractors engaged for specific projects. Marketing, administrative and
general expenses include costs related to the Company's sales efforts and
corporate and general administrative functions, including costs of executive,
administrative and sales personnel, marketing/selling supplies, advertising,
depreciation and professional fees.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
which certain items of income and expense bear to net sales:
FISCAL YEAR ENDED MARCH 31,
-----------------------------------
1995 1996 1997
-------- --------- --------
[S] [C] [C] [C]
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Production 60.7 66.9 64.2
Research and development 11.9 11.2 8.0
Purchased in-process research and
development 22.3
Marketing, administrative and general 19.7 25.1 21.1
------ ------ ----
Operating income (loss) 7.7 (25.5) 6.7
Interest income 0.3 0.8 0.2
Interest expense 0.5 0.8 1.7
------ ------ ----
Income (loss) before income taxes 7.5 (25.5) 5.2
Provision (benefit) for income taxes 3.1 (6.7) 1.5
------ ------ ----
Net income (loss) 4.4% (18.8)% 3.7%
======= ====== ====
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
The Company's net sales increased 141.9% to $101.3 million in fiscal 1997
from $41.9 million in fiscal 1996. The acquisition of Radionics in February
1996 accounted for $45.6 million of this increase, while international and
domestic sales growth accounted for $7.2 million and $6.5 million,
respectively. See Note 10 of the Notes to the Consolidated Financial
Statements for information regarding the Company's sales information by
geographic area.
Production expenses increased 132.0% to $64.9 million in fiscal 1997 from
$28.0 million in fiscal 1996. As a percentage of net sales, production
expenses decreased to 64.2% in fiscal 1997 from 66.9% in fiscal 1996. The
increase in production expenses was primarily due to a corresponding increase
in the Company's net sales. The decrease in production expenses as a
percentage of net sales was primarily due to manufacturing efficiencies
achieved by transitioning a portion of its domestic manufacturing to its China
facility during fiscal 1997. This decrease was achieved despite the lower
gross margins experienced by the Company from certain of its initial
international sales. The Company anticipates further cost savings from the
continued consolidation of its manufacturing operations during fiscal 1998 and
1999.
Research and development expenses increased 72.7% to $8.1 million in fiscal
1997 from $4.7 million in fiscal 1996. As a percentage of net sales, research
and development expenses decreased to 8.0% in fiscal 1997 from 11.2% in fiscal
1996. The increase in research and development expenses was primarily due to
the addition of Radionics' research and development expenses. The decrease in
research and development expenses as a percentage of net sales was primarily
due to savings achieved from the consolidation of certain research and
development efforts of Radionics and the Company.
Marketing, administrative and general expenses increased 103.6% to $21.4
million in fiscal 1997 from $10.5 million in fiscal 1996. As a percentage of
net sales, marketing, administrative and general expenses decreased to 21.1% in
fiscal 1997 from 25.1% in fiscal 1996. The increase in marketing,
administrative and general expenses was primarily due to the addition of
Radionics' operations. The decrease in marketing, administrative and general
expenses as a percentage of net sales was primarily due to savings derived from
the consolidation of Radionics into the Company's organization.
Interest expense increased to $1.8 million in fiscal 1997 from $320,000 in
fiscal 1996. This increase was primarily due to the debt financing associated
with the Radionics acquisition. Interest income decreased to $206,000 in
fiscal 1997 from $340,000 in fiscal 1996.
Income before income taxes was $5.3 million in fiscal 1997 compared to a
loss of $10.7 million for fiscal 1996. The fiscal 1996 results included a $9.4
million non-recurring charge related to in-process research and development
associated with the Radionics acquisition and the expensing of $3.9 million in
costs associated with the start-up of the Company's China facility and other
international operations. The remainder of the improvement was due to the
other factors described above.
15
<PAGE>
The Company's effective income tax rate for fiscal 1997 was 29.0% compared
to a benefit rate of 26.4% in fiscal 1996. The fiscal 1997 effective rate
reflects the benefits of certain lower foreign income tax rates used to promote
economic growth and the utilization of loss carryforwards from fiscal 1996.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
The Company's net sales increased 21.9% to $41.9 million in fiscal 1996
from $34.3 million in fiscal 1995. The acquisition of Radionics in February
1996 accounted for $6.0 million of this increase. In addition, international
sales grew by $4.9 million in fiscal 1996 as a result of the Company's
international sales initiative. This increase was partially offset by a $3.4
million decline in domestic sales primarily attributable to reduced sales to a
single domestic customer. See Note 10 of the Notes to the Consolidated
Financial Statements for information regarding the Company's sales by
geographic area and significant customers.
Production expenses increased 34.3% to $28.0 million in fiscal 1996 from
$20.8 million in fiscal 1995. As a percentage of net sales, production
expenses increased to 66.9% in fiscal 1996 from 60.7% in fiscal 1995. The
increase in production expenses was primarily due to a corresponding increase
in the Company's net sales. The increase in production expenses as a
percentage of net sales was primarily due to the expensing of costs associated
with the start-up of the Company's China facility.
Research and development expenses increased 15.5% to $4.7 million in fiscal
1996 from $4.1 million in fiscal 1995. As a percentage of net sales, research
and development expenses decreased to 11.2% in fiscal 1996 from 11.9% in fiscal
1995. The increase in research and development expenses was primarily due to
the addition of Radionics' research and development expenses.
Marketing, administrative and general expenses increased 54.9% to $10.5
million in fiscal 1996 from $6.8 million in fiscal 1995. As a percentage of
net sales, marketing, administrative and general expenses increased to 25.1% in
fiscal 1996 from 19.7% in fiscal 1995. The increase in marketing,
administrative and general expenses, both in dollars and as a percentage of net
sales, was primarily due to costs associated with the start-up of foreign
operations and the addition of Radionics' operations.
Interest expense increased to $320,000 in fiscal 1996 from $169,000 in
fiscal 1995, and interest income increased to $340,000 in fiscal 1996 from
$113,000 in fiscal 1995.
The Company incurred a loss before income taxes of $10.7 million in fiscal
1996 compared to income of $2.6 million for fiscal 1995. The fiscal 1996
results included a $9.4 million non-recurring charge related to in-process
research and development associated with the Radionics acquisition and the
expensing of $3.9 million of costs associated with the start-up of foreign
operations. The remainder of the decline was due to the other factors described
above.
The Company's effective income tax rate for fiscal 1996 was a benefit of
26.4% compared to a tax rate of 41.6% in fiscal 1995. The benefit rate for
fiscal 1996 resulted from the Company's inability to fully recognize tax
benefits associated with certain subsidiary losses and certain other items not
deductible for tax purposes. The fiscal 1995 corporate tax rate was consistent
with federal and state income tax rates in effect at that time.
LIQUIDITY AND CAPITAL RESOURCES
The Company considers liquidity to be its ability to meet its long- and
short-term cash requirements. Prior to 1996, those requirements were primarily
met by cash generated by the Company's operating activities and cash reserves.
Since the 1995 implementation of the Company's strategy designed to enhance its
product offerings, manufacturing capacity and international operations,
particularly the acquisition of Radionics and the development of the China
facility, the Company has required external sources of financing to satisfy its
liquidity needs.
YEAR ENDED MARCH 31, 1997. During fiscal 1997, the Company's operating
activities used $6.6 million. The primary factor contributing to this use of
cash was a $15.9 million increase in inventories, which resulted from the
transition of the manufacturing of the Company's products to the China facility
as well as a strategic decision by the Company to increase inventories to
enable it to improve its delivery and order turnaround performance. Net
income, depreciation and amortization provided $6.5 million of net operating
cash and other account changes contributed $2.9 million to operating cash flow.
The
16
<PAGE>
Company believes that the consolidation of its manufacturing operations will
enable the Company to reduce future inventory levels.
During fiscal 1997, cash used for investing activities was $4.0 million and
was utilized for capital expenditures, primarily for the expansion of the
Company's international operations and production tooling relating to the
Radionics product lines.
During fiscal 1997, cash flows provided by financing activities were $11.9
million. The two primary sources of this cash were: (i) $10.0 million of
borrowings under the Company's revolving credit facility and (ii) receipt of
$2.0 million from a private placement of Common Stock which the Company
completed with five institutional investors in October 1996.
YEAR ENDED MARCH 31, 1996. During fiscal 1996, the Company's operating
activities used $3.4 million. The primary factors contributing to this use of
cash were losses from operations and an increase in inventories of $4.3 million
during the year. Sources of operating cash included depreciation and
amortization of $2.0 million and a $9.4 million non-cash charge related to the
write-off of in-process research and development associated with the Radionics
acquisition. Other account changes used $2.7 million of cash.
During fiscal 1996, cash used for investing activities was $18.9 million,
consisting of the purchase of Radionics for $18.0 million (including expenses
and net of cash acquired) and capital expenditures of $3.4 million, offset by
liquidation of short-term investments of $2.4 million.
During fiscal 1996, cash flows provided by financing activities were $18.7
million. The source of this cash was $18.9 million of borrowings under the
Company's commercial credit facilities, offset by principal payments on capital
lease obligations.
CAPITAL RESOURCES. On March 31, 1997, the Company had cash balances of
$2.2 million. On that date, the Company had an $11.5 million revolving credit
facility that was fully drawn. Subsequently, this was increased to $17.0
million, a portion of which was used for recent acquisitions. This credit
facility bears interest based on the prime rate or the London Interbank Offered
Rate, plus applicable points based on the Company's degree of financial
leverage, and matures on July 31, 1998.
The Company expects to continue its pursuit of acquisitions and the
development of new products and markets. The Company has budgeted $3.0
million for capital expenditures during fiscal 1998, excluding any amounts
required for acquisitions. These expenditures will include continued research
and development investment in security detection, fire detection, security,
fire and access control products as well as several wireless projects. The
Company also plans to continue its efforts to market its products
internationally.
The Company believes that the combination of its current cash balances,
cash flows from operations and existing credit facilities will be sufficient to
fund its planned operations during fiscal 1998.
DIVIDEND POLICY. The Company is dedicated to promoting shareholder value
through long term profitability and growth and believes that continued
investments in future product development are essential to this goal. For this
reason, it has been the Company's policy to not pay cash dividends.
INFLATION. During fiscal 1995, 1996 and 1997, inflation did not have a
significant impact on the Company's business.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis contain certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act, which
represent the Company's expectations or beliefs, including, but not limited to,
statements concerning the Company's operations, performance, financial
condition, growth and acquisition strategies, margins and growth in sales of
the Company's products. For this purpose, any statements contained therein
that are not statements of historical fact may be deemed to be forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, certain of which are beyond the Company's control, and actual
results may differ materially depending on a variety of important factors
including those described under the caption "Risk Factors" and elsewhere in
this Prospectus.
17
<PAGE>
BUSINESS
THE COMPANY
The Company is a leading supplier of equipment to the electronic protection
industry. The Company designs, manufactures and markets electronic detection,
control and communication equipment for security, fire protection, access
control and CCTV applications, offering products primarily for the commercial
and mid- to high-end residential portions of the market. From its founding in
1968 until 1995, the Company was primarily a niche provider of intrusion
detection devices for the domestic market. In 1995, the Company adopted a
strategy designed to substantially expand its product catalog, establish an
international sales presence, increase its manufacturing capacity and improve
its manufacturing cost structure. The Company has since made five
acquisitions, opened sales offices in six countries and successfully
established a manufacturing facility in China. These initiatives have enabled
the Company to significantly expand its product catalog and market reach and to
increase its net sales from $34.3 million in fiscal 1995 to $101.3 million in
fiscal 1997. Excluding amounts attributable to acquisitions, the Company's net
sales grew by approximately 22.5% in fiscal 1997.
INDUSTRY OVERVIEW
The electronic protection industry consists of companies that design,
manufacture, distribute, sell, install, monitor and maintain intrusion, fire
alarm and other electronic protection systems. The Company manufactures system
components for sale to installation companies, distributors, other equipment
manufacturers and, in limited cases, significant commercial or governmental
end-users. The Company is not engaged in the installation or monitoring
aspects of the industry. For many years, the electronic protection industry
was oriented towards the protection of physical assets with simple burglary
detection and alarm equipment. In line with its customers' requirements, the
industry has since broadened in scope to one which not only provides
sophisticated equipment for intrusion detection but additionally provides
important "premises control" functions, such as fire detection, personnel
access control and CCTV monitoring of interior and exterior areas. Equipment
required for these functions is sold as individual components or, increasingly,
bundled with other compatible components to form an integrated system for a
specific customer's application.
The Company presently offers products in all four of the principal
categories of the electronic protection equipment market: security, fire,
access control and CCTV. According to statistics compiled by the Security
Industry Association (the "SIA") in its 1997 SECURITY INDUSTRY MARKET OVERVIEW,
combined U.S. wholesale equipment sales for these four categories were
estimated at $5.3 billion in 1996. The Company believes international markets
of significant size also exist for each of the four categories. The SIA report
contains various U.S. statistics for each of the four categories, including the
following:
* SECURITY PRODUCTS. This category had an estimated U.S. market size
of $1.8 billion in 1996, with a 7.1% annual growth rate forecasted for
the five year period ending 2001. This market data includes sales for
commercial and residential alarm systems of all price points. The
Company presently addresses the commercial market and mid- to high-end
residential applications.
* FIRE PRODUCTS. This category had an estimated U.S. market size of
$1.1 billion in 1996, when considering only equipment sales for
commercial applications. The Company competes primarily in the
commercial fire equipment market and, to a lesser extent, offers
products for residential applications.
* ACCESS CONTROL PRODUCTS. This category had an estimated U.S.
market size of $1.6 billion in 1996. The U.S. market for access
control equipment is forecasted to grow at 9.0% each year through the
four year period ending 2000. The most rapidly growing part of the
access control market has been high-technology, PC-based systems for
large commercial applications with multiple entrance and exit points.
* CCTV PRODUCTS. This category had an estimated U.S. market size of
$758.0 million in 1996. The U.S. CCTV market is forecasted to grow at
a rate of 10.2% each year through the four year period ending 2000.
According to the SIA study, the overall U.S. market for all private
security products and services is forecasted to grow at approximately 8% per
year through 2000. There are several factors driving the growth of the private
security industry. The perception by Americans that crime is a significant
problem has continued to grow as evidenced by the focus on crime in political
campaigns and in the media. Insurance companies often provide incentives to
businesses for installing electronic security systems or require such systems
as a condition of insurance coverage. An electronic fire system is required in
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commercial facilities in many localities in order to comply with municipal fire
codes. There has been a trend for large commercial customers to centralize
their security function at the corporate level instead of managing security on
an ad hoc site-basis. This has often resulted in greater attention and
resources for security solutions. The growth in telecommuting and in-home
offices has created incremental demand for residential security products by
bringing expensive office equipment into the home. Market penetration has also
been driven by the increased affordability of systems, as advances in
technology and reduced manufacturing costs have increasingly brought high
quality systems into price ranges attractive to residential and small
commercial customers. In addition to new systems, there is ongoing system
replacement in the commercial and mid- to high-end residential markets,
creating significant retrofit opportunities. The Company estimates that
customers in these markets typically upgrade or replace their systems every
seven to ten years.
The Company believes that product manufacturing in the electronic
protection industry is characterized by the following attributes:
* HIGH DEGREE OF FRAGMENTATION. Manufacturing for the electronic
protection industry is highly fragmented and consists of a broad array
of equipment manufacturers, each of which typically provides only a
portion of the products required to deliver a comprehensive security
solution. The Company believes that there are more than 200 companies
engaged in manufacturing system components in the United States.
* TRENDS TOWARD CONSOLIDATION. There have recently been a number of
mergers and acquisitions among manufacturers of products for the
electronic protection industry, including the five acquisitions made by
the Company since 1996. The Company believes that this acceleration in
manufacturer consolidation is based in part on a competitive model that
has emerged in the industry which rewards companies that can offer a
full product catalog across all four of the principal categories of its
industry: security products, fire products, access control products
and CCTV products. The Company's customers are seeking vendors which
not only provide a full catalog of products, but can also supply
products for the many electric and electronic standards which exist
throughout the world. The installation and monitoring segment of the
industry has also been consolidating rapidly, with national and
regional firms such as ADT, Ameritech and Entergy regularly acquiring
local competitors. The national and regional consolidators often seek
to reduce the number of vendors required to meet their product needs.
The Company believes international full-catalog equipment suppliers
will have advantages over small niche product suppliers in capturing
business from these large installation and monitoring companies.
* CONTINUING TECHNOLOGICAL CHANGE. Detection, control and
communication equipment are being continuously improved, taking
advantage of increasing capabilities of microprocessors and application
specific integrated circuits. The improvements are primarily software-
based and are generally directed at increasing system sophistication,
reducing false alarms, reducing installation and service costs and
enhancing end-user convenience. A recent trend has been increased
integration of different types of security and alarm systems. Whereas
basic security and fire alarm systems were once adequate for many
customers, many customers now prefer access control and CCTV systems
integrated into a single system with traditional security and fire
capabilities. Despite the technological advances that occur in the
industry, there remains a certain inertia or loyalty to products that
have already been widely accepted by installation and monitoring
companies. It can be expensive for installation and monitoring
companies to adopt new products because product changes may create new
inventory requirements, necessitate re-training of installation and
service personnel and make inventories of displaced products obsolete.
It is often difficult for new products to gain rapid commercial
penetration. For this reason, acquisitions are often attractive, and
sometimes preferred to new product development, as a means of growth in
the Company's industry. This is particularly true when a niche
manufacturer can be purchased that has a significant existing customer
base.
* DIGITAL COMMUNICATIONS TECHNOLOGY. Digital technology has
permitted the consolidation of local stations into large, remote
monitoring stations, often hundreds of miles from the end-user's
business or residence. This has driven demand for a whole new
generation of products which take advantage of digital technology and
which utilize non-traditional communication channels such as two-way
radio, derived channel, cellular and satellite communications. Many
times, these communications channels are more reliable, secure and
often lower in cost than traditional communication methods such as
telephone lines.
* FALSE ALARMS. The electronic protection industry is increasingly
focusing on false alarms because of the significant burden they impose
on the support infrastructure of police and fire departments and
because, over the long-term, they undermine the protection afforded by
electronic protection systems. Industry associations and manufacturing
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and installation companies have been working together in recent years
to develop products and procedures to reduce false alarms.
STRATEGY
The Company's goal is to be an international leader in the design,
manufacture and marketing of equipment for the electronic protection industry,
satisfying all of its customers' protection needs with a complete line of high-
quality, technologically advanced products which are distributed by a worldwide
marketing organization and supported by a service-oriented product support
team. Principal elements of the Company's strategy include:
* Catalog expansion - continuing to expand its product catalog
through internal development, acquisitions and partnering with
companies that have technological capabilities that complement the
Company's internal capabilities. The Company believes that the ability
to provide a full catalog of products will result in competitive
advantages over firms which only provide a small portion of the
products regularly required by the industry's customers. Part of the
Company's motivation for its recent acquisitions was to expand the
Company's product catalog. The Company is promoting the sale of its
fire, access control and other product lines by leveraging the superior
market acceptance it enjoys in the security equipment arena.
* INTERNATIONAL EXPANSION - continuing to expand its international
sales efforts. The Company's acquisitions of DA Systems, RAS and
Seri<e'>e have given the Company inroads into important European
markets. The Company plans to use the distribution networks of these
companies to distribute its full range of products, as appropriate. In
addition, the Company's sales offices in Asia and Australia have been
successful in developing a base of operations from which the Company
can further expand in those markets.
* TECHNOLOGICAL ADVANCEMENT - continuing to develop technologically
advanced products. The Company utilizes the power of microprocessors
and application specific integrated circuits to fully exploit presently
available technology. By using this technology, the Company has
developed: detection products which feature demonstrably superior
signal processing capacity which optimize the trade-off between false
alarms and catch performance; control products which generally provide
a superior level of programming flexibility and more sophisticated
firmware than competitive product offerings; and communication
equipment which provides access to a variety of commercially available
communication technologies.
* Market focus - continuing to focus on the installation and service
professionals that service the commercial and mid- to high-end
residential security and fire alarm system markets, who view the
features and quality of the Company's products as providing superior
value. The Company is also increasing its sales efforts directed to
the U.S. government.
* Production efficiency - increasing utilization of its China
facility and continuing to consolidate its purchasing. The Company's
state-of-the-art China facility became operational in October 1995.
The Company has been able to reduce its unit manufacturing costs by
transitioning production from its Fairport, New York and Salinas,
California locations to its China facility. The Company anticipates
additional cost savings from the continued transition of production to
its China facility. The Company has also realized cost savings by
consolidating purchasing of components for its worldwide operations.
* Customer development - continuing to partner with significant
customers to develop new or enhanced products to meet specific end-user
needs. Products that the Company has jointly developed in the past
include a line of intrusion detectors with self-diagnostics for ADT to
work with its proprietary communication protocol, an integrated control
panel for Honeywell and a long-range photoelectric smoke detector for
Simplex.
* Related applications - exploiting opportunities to apply its
technologies in related applications for markets from which it does not
currently generate significant revenues. For example, the Company's
Security Escort product leverages its technological capabilities and
has provided it with an application that is useful in markets such as
colleges and prisons, which are different than those which it has
served historically.
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ACQUISITIONS
The Company's recent acquisitions demonstrate the implementation of its
primary strategies of catalog and international expansion. These acquisitions
significantly expanded the Company's product catalog while simultaneously
expanding its domestic and international distribution network.
RADIONICS. In February 1996 the Company acquired all of the outstanding
stock of Radionics, which has generally been regarded as a premier U.S.
manufacturer of security, fire and access control equipment and central station
receivers. Radionics had annual net sales of $45.1 million for calendar year
1995, and this acquisition more than doubled the Company's net sales rate.
This acquisition gave the Company access to Radionics' network of over 1,000
dealers. Radionics had a number of advanced products and models under
development which have subsequently been completed by the Company, such as a
246-zone fully-integrated control panel and a control communicator which can
function as a wired, wireless or hybrid system and can communicate using
BellSouth's Cellemetry<reg-trade-mark> technology.
SENSES. In July 1996 the Company acquired certain assets of Senses, a
manufacturer of long-range wireless alarm transmission equipment marketed under
the name "Safecom," with annual net sales of approximately $2.0 million. This
acquisition provided the Company with an important new technology, a patent on
the transmission of alarm signals from a digital communicator through a radio
network, and access to dealers who have installed approximately 150 Safecom
radio networks. Safecom networks are operating in 19 countries around the
world, with the greatest penetration in South America. The Safecom products
are particularly attractive in markets where the infrastructure for more
traditional forms of signal communication do not exist or are unreliable.
DA SYSTEMS. In May 1997 the Company acquired all of the outstanding stock
of DA Systems, a leading British manufacturer of security control equipment
with annual net sales of approximately $10.8 million. This acquisition
provided the Company with a line of controls and communication devices approved
for sale in the U.K., which has unique requirements for the design of security
control and communication equipment. Approval of future products should be
expedited by having U.K.-based engineers working on such products. DA Systems
also provided the Company with an important new in-building wireless radio
technology believed by the Company to be superior in performance to competitive
offerings.
SERIEE. On June 24, 1997 the Company acquired 99.5% of the outstanding
stock of Seriee. Seri<e'>e is a leading French manufacturer of electronic
control and communications equipment with net sales of approximately
$6.3 million per year and has the largest security equipment distribution
network in France. Like the U.K., France has unique design requirements and
this acquisition provides the Company with a line of French-approved control
panels which, coupled with Seriee's 10 agency offices located throughout
France, give the Company a significant entrance into the French market. Prior
to its acquisition, Seriee was a distributor for certain Company products.
RAS. On June 25, 1997 the Company acquired 98.7% of the outstanding stock
of RAS. RAS, with net sales of approximately $9.9 million per year, has the
largest security equipment distribution network in Belgium, with five regional
sales offices located throughout that country. The Company believes that RAS
has significant technical expertise in CCTV and access control systems and is
strategically located to service northern European customers by providing
convenient technical support and inventory. RAS had been a distributor for the
Company for over 15 years and, immediately prior to its acquisition, was the
Company's second largest distributor.
PRODUCTS
The Company produces and distributes a wide variety of electronic
protection equipment, offering a single source of products to the professional
installers who provide custom systems for different types of buildings and
protection requirements. The Company's products include security, fire and
access control systems and components, CCTV system components and the Security
Escort multiple user help call system. The Company seeks to be a value leader
by offering high quality and technologically advanced products at competitive
prices. The Company believes that the commercial and mid- to high-end
residential portions of the electronic protection industry recognize the
quality of the Company's products and consider them to offer attractive value.
The following table sets forth the Company's net sales for fiscal 1997 in
each of the primary categories of products offered by the Company:
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Fiscal 1997
Net Sales Percent
Product Type (in thousands) of Total
------------- -------------- --------
Security products $77,298 76.3%
Fire products 13,029 12.9%
Access control products 9,067 9.0%
CCTV products 1,857 1.8%
---------- -------
Total $101,251 100.0%
=========== =======
From its inception until 1995, the Company was primarily a niche provider
of intrusion detection devices. Following the shift in the Company's strategy
in 1995 to expand the products it offers by acquisition and internal
development, the Company has significantly expanded its product catalog by
adding: (i) control and communication equipment with its purchase of Radionics
in February 1996, (ii) wireless radio network products with its purchase of
certain assets of Senses in July 1996, (iii) in-building wireless radio
technology with its purchase of DA Systems in May 1997, and (iv) an additional
line of security control panels with its acquisition of Seri<e'>e in June 1997.
Since early 1995, the Company has introduced several internally developed
products including, among others, its TriTech pet avoidance detectors, a
control panel that offers both wired and wireless on-premise communication
capability, an enhanced and broadened line of smoke detectors, a new line of
passive infrared intrusion detectors, and a fire system control and
communication product. In addition, the Company completed Radionics' second
generation of integrated panels which are capable of simultaneously controlling
a full-featured alarm system, fire system and access control system. The
Company has also expanded its product catalog by entering into a number of
alliances with partners that have technological capabilities that complement
the Company's internal capabilities. One recent example of such an alliance
brought about the Company's first entry into the CCTV market in fiscal 1997.
SECURITY PRODUCTS
Security systems consist of intrusion detectors coupled with control and
communications equipment and, in many cases, notification devices. When a
triggering event occurs, a detector senses the event and notifies the control
equipment, which in turn causes the communications equipment to transmit an
alarm signal to a remote central alarm monitoring service or directly to the
police. The control equipment also activates notification devices such as
strobes, horns and sirens if these options are features of the system.
DETECTORS. Security detectors are the components of a security system
which sense intrusion into protected areas. The Company markets security
detectors under the brand names Detection Systems, Radionics, TriSense, DA
Systems and Seriee. Security detectors differ in three primary respects:
the way they sense intrusion or another alarm condition, the way they
communicate with control equipment and the type of information they transmit to
the control equipment.
The Company offers detectors which use six basic technological approaches
for sensing the existence of an intrusion or other alarm condition:
Type of Detector Operation
----------------------------------- -----------------------------------
Passive infrared body heat detection Passive infrared detectors operate
by detecting the change in energy
that occurs when a body of one
temperature passes by a background
of another temperature within the
detector's field of view.
Special processing techniques
enable the detector to determine
whether a change in energy is
caused by a person or by some other
false alarm source.
Combination passive infrared and Dual detectors combine passive
microwave detection infared detectors with microwave
("dual detectors") detectors. Microwave detectors
generate microwave signals and detect
either a reduction or distortion of
received energy caused by an intruder.
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Photoelectric beam interruption Photoelectric beam detectors consist of
a light transmitter and a separate
receiver. The transmitter emits an
invisible infrared beam to the receiver.
If the beam is broken, the receiver
signals an alarm.
Acoustic glass break detection Glass breakage detectors use
microprocessor-based sound analysis
technology to listen for the specific
frequencies associated with breaking
glass. They can be used to detect
breakage of plate, tempered, laminated
and wired glass.
Vibration detection Vibration or seismic detectors use three
distinct detection systems to protect
against attack from heavy objects,
drilling or explosion. They are designed
specifically for protection of vaults,
safes and ATMs, but also can be used to
protect other reinforced areas such as
night deposit boxes, data storage
cabinets and filing cabinets.
Magnetic contacts Magnetic contacts are used primarily on
doors and windows and signal the control
equipment when an electrical connection
is broken due to a protected door or
window being opened.
These different types of detectors are needed for different types of
applications in commercial and mid- to high-end residential security systems
and complement each other in their system applications and the types of
environments in which they function best. Many alarm systems incorporate
several different types of detectors in a single alarm system to maximize the
effectiveness of the system.
Detectors can communicate with an alarm system's control equipment directly
(wired), indirectly (wireless) or on a combined or "hybrid" basis (where the
detector communicates via wireless transmission to a peripheral device which is
wired to the control equipment). The Company offers detectors which are used
in each of these types of systems. The information that detectors communicate
to the control equipment ranges from a simple communication that an alarm event
has occurred to, in a multiplex system, the identity of the detector sensing
the alarm condition, the nature of the alarm condition and diagnostic
information about the detector.
The Company believes that for the markets it serves it offers the widest
variety of detectors available from any single supplier and that its detectors
are among the most advanced detectors available from any source. The Company
believes that its detectors generally provide greater features, performance and
reliability than its competitors' products. These characteristics are
attractive to professional installers because they make installation easier,
reduce service calls and expense, minimize false alarms and increase end-user
satisfaction. Specific attributes of the Company's detectors include:
* FEATURES. The Company offers a wide variety of detector types
which incorporate certain special features such as field-
interchangeable optic systems which permit installers to use the same
detector for different coverage patterns by simply adjusting the mirror
configuration; sensitivity controls which allow the installer to adjust
the sensitivity of the detector as appropriate for the application to
minimize false alarms; multiple mounting options to provide more
installation flexibility; pointable optics that permit the coverage
pattern to be directed thereby providing more mounting alternatives and
allowing adjustment for changes in use without re-mounting; and a broad
range of operating voltages for many detectors permitting them to be
used in older or specialized security systems.
* PERFORMANCE. Some examples of how the Company's products maximize
performance are its patented signalling processing techniques ("motion
analyzer processing") incorporated into its passive infrared and
TriTech detectors which enables them to distinguish between the
electronic signatures of valid and false alarm conditions. The
Company's newest dual detectors can be used in residential or
commercial environments to prevent up to 100-pound animals from causing
the detector to detect an alarm condition but still be tripped by a
human weighing less than 100 pounds. The Company's newest passive
infrared models can distinguish and ignore smaller animals, such as
rodents. Another example of the Company's detectors' performance
capability is their ability to perform under a broad range of
temperatures from -40<circle> fahrenheit through 120<circle>
fahrenheit.
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* RELIABILITY. Each of the Company's detectors undergoes computer-
based functional testing and in-circuit electrical testing to insure
that it functions as designed. The Company further enhances the
reliability of its more sophisticated detectors by incorporating
patented software-based diagnostic systems in them that confirm the
detectors are functioning in a number of respects and have not been
blocked or "masked-off."
CONTROL EQUIPMENT. The control components of a security system manage
all the functions of the system and provide the link between the system's
detectors and communications equipment. The Company markets control products
under the brand names Radionics, Detection Systems, DA Systems and Seri<e'>e.
The Company's control products include control panels which collect, interpret
and transmit the signals from the detectors and arming stations which are used
to program certain features of the system and to arm and disarm it. The
Company's control and communication product offering was greatly expanded in
1996 by its acquisition of the Radionics control product line, which had a
favorable industry reputation for alarm control and communication equipment.
The Company's security control product line includes products that are used
in all three types of systems installed by security professionals.
Conventional security systems include wired, wireless and hybrid (combination
wired and wireless) systems and simply communicate that an alarm condition
exists. In the next level, multiplex systems, each sensor is addressable,
which means that the specific location of the alarm condition is reported. At
the highest level, the Company's advanced multiplex systems feature the
capacity to report back addressable test and alarm condition information,
assuring that the system is working properly, and to report whether a detector
has been tampered with.
The Company has a wide range of control panels, ranging from its Detection
Systems' low-cost six-zone panel which can operate six detection device
circuits, to Radionics' recently introduced 246-zone fully integrated security,
fire and access control panel which can operate a combination of up to 246
intrusion detection, smoke detection and access control circuits and devices.
Features of the Company's control panels that enhance its ability to market its
control panels include: (i) the ability to quickly communicate data about
events occurring in the control system; (ii) the flexibility to select which
information is reported locally and which is transmitted to a central
monitoring station; (iii) the ability to specify how the keypad works for each
user at each location; (iv) "robust" power supplies which ensure adequate power
supply to the detectors, notification devices and other system components and
(v) enhanced transient immunity which protects the system from power surges and
lightning.
COMMUNICATIONS EQUIPMENT. The Company offers a broad line of
communications equipment, ranging from Radionics' central station receiving
equipment, which performs the function of receiving alarm signals from multiple
sources, to transmission equipment capable of accessing telephone lines, as
well as most of the alternative communication technologies which are
commercially available. One of these technologies is BellSouth's new
Cellemetry<reg-trade-mark> data service, which permits wireless transmission of
alarm signals to a central station using existing cellular networks. Another
is the ARDIS radio network, which offers a more secure alternative to telephone
lines as the means for contacting a central monitoring station, and ultimately
the police or fire department. In addition, the Company offers its Safecom
long-range wireless alarm transmission system which allows a monitoring company
to establish and maintain a proprietary two-way radio network to transmit and
receive alarm signals. The Company also offers its Fastlink system which
provides one-way radio communication of alarm signals to a remote monitoring
station. The Company, through its Radionics and DA Systems subsidiaries, is
licensed to manufacture and sell in the U.K. and U.S. derived channel
communication devices that transmit alarm signals over the unused bands of
standard telephone lines. This allows alarm signals to be transmitted at the
same time a telephone line is being used for voice communications.
SECURITY ESCORT. The Company's Security Escort product is a multiple
user help call system which allows a user to alert appropriate security
personnel as to their location, name, address and any handicap or other special
data by using a palm-size transmitter. Security Escort systems may be enabled
to permit a user to trigger a strobe and sound a siren as well. The primary
components of a Security Escort system are a central command station which is
monitored by security personnel, a Microsoft Windows<reg-trade-mark>-based
system software package, transceivers, receivers and individual transmitters.
This system uses a digital micro-cellular architecture which accommodates up to
16 million individual user ID codes. The system is now available through
several regional and national installation companies. It has been successfully
installed in college, prison, nursing home, psychiatric hospital, parking lot
complex and museum environments.
The Security Escort's advanced design features include: self-supervision
of the system's operational integrity by internally generating and monitoring
test transmissions; testing of transmitters by users; and system-generated
notices regarding system maintenance requirements. Security Escort allows a
user to test the system and his or her transmitter at any time and
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receive visual confirmation that both are functioning properly. In addition,
the system software provides for full archiving of all system activity
including victim tracking and alarm map recall.
FIRE PRODUCTS
Fire detection systems work in the same manner as security systems. In
fact, many fire detection systems are operated in tandem with a security system
by the same control equipment. Fire alarm systems range from conventional
systems, which can sense and signal a fire condition or non-condition, to
addressable systems, which permit identification of the triggered detector
within the system, and analog systems, which permit communication of
information regarding the condition of the environment at the detector
location. The Company offers fire detection products under the brand names
Detection Systems and Radionics. The Company's fire detection product line,
which includes products for both residential and commercial applications,
features detection components, dedicated control panels, communication
equipment and notification devices.
DETECTORS. The Company's fire detection components sense the presence
of smoke and heat by employing a variety of technologies, including beam smoke
detectors, photoelectric spot smoke detectors, ionization spot smoke detectors
and heat probes. The Company's smoke detectors are differentiated by a
patented chamber which provides increased immunity to dust, which is the
leading cause of false fire alarms. The Company also has a patented automatic
test and calibration feature which continuously senses and signals if dust or
other conditions cause the detector's sensitivity to deviate from its
acceptable range. The Company's fire detectors offer many of the same features
as its security detectors and undergo the same stringent testing requirements.
CONTROL EQUIPMENT. As described above, many of the Company's control
panels operate both security and fire alarm systems; however, some of the
Company's control panels are designed exclusively for operating fire alarm
systems. The Company originally entered the fire detection business as an
extension of the security products line by providing fire detection features
and accessories through the security control panel. The Company is in the
process of introducing two new control product lines for the dedicated fire
market, a market which the Company has not historically addressed. One of
these products utilizes state-of-the-art analog fire monitoring technology.
COMMUNICATION EQUIPMENT. The technologies the Company's products
provide for communicating fire alarm signals are the same as those provided by
its security alarm communications equipment. In the fire systems market, the
Company's capabilities in communications take on added importance because of
National Fire Protection Association ("NFPA") guidelines requiring all local
fire systems to have communications capability permitting alarm and trouble
conditions to be monitored remotely. The Company was the first to develop a
supplementary communications product specifically designed to permit existing
systems to be updated to comply with NFPA guidelines. The Company's Safecom
long-range wireless system provides fully-supervised two-way fire reporting by
radio which provides enhanced security.
NOTIFICATION DEVICES. The Company distributes a full range of
notification devices such as strobes, horns and sirens varying in color and
intensity which fully comply with the Americans with Disabilities Act. These
products are distributed under the Company's name and are supplied by a leading
specialty manufacturer of such products.
ACCESS CONTROL PRODUCTS
Electronic access control systems consist of equipment that can identify an
authorized individual and permit that person to enter a restricted area. While
intrusion control products protect the property when no one is on-site, access
control products protect the property while it is occupied. The market for
access control systems is divided into three major end-user categories:
industrial, commercial, and governmental. Fear of crime, potential liability
and convenience have created a significant retrofit market for access control
products in addition to the new construction market.
Access control systems can include card-based systems, CCTV-based systems,
audio systems and bar code systems. The Company distributes access control
products on an OEM basis under the brand names Readykey, Easikey and Radionics.
Access control products sold by the Company include control systems, card
readers, cards and detector accessories. Card-based technology is currently
the most attractive option both in terms of price and reliability, and
card-based systems currently dominate the access control market. Card-based
systems are currently in place in a number of non-residential operations,
including office buildings and hotels, and are becoming more prevalent in
residential settings such as college campuses.
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CCTV PRODUCTS
CCTV is a system of relaying video and audio signals from a camera to a
monitor or a recording device. The term CCTV refers to a closed-circuit system
sending signals to select receivers as opposed to a system broadcasting signals
to the general public. The Company distributes CCTV products under the brand
name DS Vision. These products consist of cameras, monitors, recorders,
control units and other accessories. The Company distributes color and black-
and-white as well as both high and low resolution cameras and monitors.
Professional CCTV security and surveillance systems can be simple or
complex. While a convenience store might employ a system consisting of a
single camera and monitor, an airport system would likely include hundreds of
cameras, monitors and video recorders along with computer-based control
equipment and video multiplexers. Professionally installed CCTV systems are
used in retail stores, banks, warehouses, office buildings, industrial sites,
government facilities, casinos, mines, airports, prisons and, increasingly, in
private homes. The Company is promoting a state-of-the-art system to enable
authorized personal computer users to remotely "look in" on the CCTV system
installed at their facility.
MARKETING
The Company's primary customers are: (i) national and regional installation
companies such as ADT, Ameritech, Checkpoint, Holmes Protection, Honeywell,
Simplex, Wells Fargo and Westar; (ii) national distributors such as ADI in the
U.S., Efsec in Sweden, Glastrak in the Netherlands and Rimi in Russia; and
(iii) original equipment manufacturers such as Pittway and ITI Technologies
that integrate the Company's components into their finished products.
End-users of the Company's products include federal and state governments,
Autozone, Boeing, J.C. Penney, Kmart, Northrop Grumman, Pepsico, Tandy and
Wal-Mart. The Company has a sales force of approximately 105 representatives
of which 50 are domestic and 55 are international. The Company presently has
approximately 137 distributors that accounted for 13.4% of the Company's net
sales during fiscal 1997.
The Company's products are installed in industrial, commercial,
institutional and residential buildings, in both new and upgraded system
installations. Radionics and DA Systems sell their products to national
dealer/installer networks which combine their products with those of other
suppliers to form complete systems. Historically, Radionics has sold its
products to installation companies in the high-end commercial, retail and
governmental markets. More recently, Radionics has broadened its product
offering by supplying products suitable for the residential market.
Conversely, DA Systems has historically sold its products to installation
companies and distributors for the small commercial and residential markets.
In connection with the Company's international marketing initiative, it has
opened six international sales offices. The Company's distributors and sales
representatives cover an additional 50 countries. Foreign sales (including
sales to Canada) accounted for approximately 16% of the Company's net sales in
fiscal 1997.
Domestically, large regional and national accounts are supported directly
by regional sales and service managers. The Company's sales managers provide
technical support to customers regarding system design, installation and
service. The Company also conducts regular training programs for its customers
as well as technical seminars at national and regional trade shows. A call to
the Company's 800 sales number typically results in same-day shipment of most
standard products from one of two warehouses. To support the on-site installer
or service person, toll-free 800 lines connect directly to the Technical
Service Department. Detection Systems and Radionics maintain regional
sales/training personnel in 14 states.
The Company markets the Security Escort multiple user help call system in
North America and in Australia. While the system was initially designed for
the protection of individuals on college and university campuses, it is
suitable for many other applications. The Company is seeking additional
distribution relationships to expand the market coverage for the system to
other environments, such as apartment complexes, condominiums, retirement
communities, hospitals, correctional facilities, governmental facilities and
manufacturing facilities.
The success of the Company depends heavily on the business it conducts
with a limited number of significant customers. In fiscal 1997, 10.7%, 10.6%
and 6.0% of the Company's net sales were attributable to Pittway, Ameritech and
Honeywell, respectively. Pittway is a competitor of the Company across many of
its product lines and purchases the Company's products to incorporate them into
its products and systems. During October 1996, Ameritech (an established
customer of the Company) began purchasing the Company's products through
Pittway to utilize Pittway's distribution facilities. The Company has had
long-standing relationships with most of its significant customers; however, it
generally does
26
<PAGE>
not have supply contracts with them and they may unilaterally reduce or
discontinue their purchases without penalty. The Company's loss of (or failure
to retain a significant amount of business with) any of these customers could
have a material adverse effect on the Company. The Company's acquisitions, its
international marketing initiatives and its increased use of distributors have
reduced the potential for sales fluctuations associated with the Company's
largest customers.
COMPETITION
The markets in which the Company operates are highly competitive. The
Company's competitors include manufacturers of security and fire alarm
equipment from all over the world. The Company believes its three major
competitors are Pittway, the Berwind Group and C&K Systems. In addition, the
Company may face competition from new entrants into these markets and increased
competition from existing competitors. A number of the Company's competitors
have substantially greater financial and other resources than the Company. In
many cases the Company's competitors are concentrated in one market niche in
the electronic protection industry, allowing them to concentrate their
resources in that niche. The Company competes on the basis of providing
superior value to customers with respect to both products and services. When
selecting intrusion and fire detection equipment, professional installation and
service companies consider the breadth of products offered by manufacturers and
distributors, product performance and reliability, as well as the incorporation
of advanced technological features such as automatic testing, efficiency of
delivery, ease of installation and service, sales and technical support
services and price. There can be no assurance that the Company's products and
services will continue to be competitive and accepted by the market in the
future.
MANUFACTURING
The Company has manufacturing facilities in Fairport, New York; Zhuhai,
China; Salinas, California; and Southall, England; although it has ceased using
the Salinas and Southall plants for regular product manufacturing. The Company
is ISO 9002 certified at all four of its manufacturing facilities.
The Company designs its products and prepares specifications for the
component parts used in its products. The Company purchases certain
components from outside sources and then assembles them into finished products.
Before product assembly, components are sample tested for compliance with
quality control standards and critical components are individually tested. The
Company assembles circuit boards using both automatic and semi-automatic
assembly equipment utilizing both pin-through-hole and surface-mount
technologies. Intermediate quality control processes are used to evaluate
components and products being transferred between assembly departments.
Completed circuit boards are tested and calibrated against Company-defined
performance standards.
The Company's China manufacturing operations, which commenced during fiscal
1996, are conducted in a 70,000 square foot manufacturing facility in Zhuhai,
People's Republic of China. Manufacturing operations and the first product
shipments from the Company's China facility commenced in October 1995.
Initially, the Company duplicated in this facility the proven manufacturing
procedures historically used in its Fairport facility. Subsequently, the
Company's management at the China facility has fine-tuned the manufacturing
process to take advantage of local conditions. The Company has transitioned
the manufacturing of many Detection Systems' motion sensors and most of
Radionics' controls to the China manufacturing facility to take advantage of
its lower production costs. The Company has ceased using the Radionics plant
in Salinas, California for regular product manufacturing and is currently using
the production area there primarily for product configuration. During fiscal
1997, approximately 25% of the Company's manufacturing output was produced at
its China facility. The Company is in the process of consolidating its
purchasing for all its manufacturing materials, which it expects will result in
additional cost savings.
INTELLECTUAL PROPERTY
The Company has obtained over 40 patents related to its products. While
the Company obtains patents as appropriate and considers certain of its patents
valuable, it does not believe any one of them by itself is crucial to the
successful conduct of its business. The Company relies on a combination of
patents, trademark registrations, copyrights and confidentiality agreements to
protect its intellectual property.
During the fiscal 1995, 1996 and 1997, the Company expended approximately
$4.1 million, $4.7 million and $8.1 million, respectively, on research and
development activities relating to the development of new products and the
improvement of existing products.
27
<PAGE>
SUPPLIERS
The Company purchases raw materials and components worldwide from numerous
suppliers. The vast majority of these materials are generally available from
more than one supplier and the Company has not encountered any serious
shortages or delays. Certain raw materials used in producing some of the
Company's products can be obtained only from one or two suppliers, the shortage
of which could adversely impact production of certain security equipment by the
Company. The Company believes that the loss of any other single source of
supply would not have a material adverse effect on its overall business.
REGULATION
Many of the Company's products require approval by the FCC before they can
be marketed in the United States. In addition, commercial acceptance of the
Company's products is typically dependent on UL listing. The Company has
successfully obtained FCC approval and UL listing of its products in the past;
however, it cannot predict whether it will obtain approvals for future products
or whether FCC regulations or UL listing requirements relating to the Company's
current or future products might change. Failure to comply with FCC
regulations or UL listing requirements, an inability to receive approval for
products under development or a change in existing regulations or listing
requirements that would make products non-compliant, could have a material
adverse effect on the financial condition and results of operations of the
Company. Most foreign countries have similar agencies and regulations, which
could have the same impact on sales of the Company's products within those
countries. In addition to the regulation of its products, the Company is
subject to local, state, federal and foreign laws regarding the discharge of
materials into the environment.
A number of municipalities have enacted or are considering enacting
legislation which penalizes false alarms which trigger responses by police or
fire departments. The Company is unable to quantify the effects such
legislation may have on the security and fire protection markets as a whole,
but believes that false alarm legislation is causing installation companies and
system buyers to be more inclined toward the use of higher quality equipment,
such as that manufactured and sold by the Company.
Compliance with federal, state and local laws and regulations regulating
the discharge of materials into the environment, or otherwise relating to the
protection of the environment have not had, and are not expected to have, a
material effect upon the capital expenditures, earnings or competitive position
of the Company.
EMPLOYEES
As of July 21, 1997, the Company directly employed 723 persons worldwide,
including 340 in manufacturing, 86 in engineering and product development, 68
in customer service, 104 in sales, 93 in management and administration and 32
in marketing. In addition, the Company's China facility employs 387 persons
who are under the supervision of the Company, including approximately 342 in
manufacturing, eight in engineering and product development, two in customer
service, two in sales and 33 in management and administration. None of the
Company's employees is represented by a collective bargaining organization, and
the Company's management believes employee relations are good.
PROPERTIES
The Company conducts manufacturing, research and general office operations
at its 92,000 square foot facility at 130 Perinton Parkway, Fairport, New York.
Radionics' research, product configuration and general office operations
are conducted at its 156,000 square foot facility located in Salinas,
California, the lease on which expires in July 1999. The manufacturing of
Radionics' products has been transitioned to the Company's China and Fairport
facilities.
The Company's China manufacturing operations are conducted in a 70,000
square foot manufacturing facility in Zhuhai, People's Republic of China.
Detection Systems (HK) Ltd., a subsidiary of the Company ("DS Hong Kong"),
leases the facility from the local Chinese government under a ten-year lease
which expires May 31, 2005. DS Hong Kong has also entered into a sub-
contracting agreement which runs through June 2000 and provides for the local
Chinese government to arrange for personnel and utilities and for DS Hong Kong
to furnish manufacturing equipment, raw materials and management
28
<PAGE>
services. Pursuant to this agreement DS Hong Kong pays a fee and production
expenses to the local Chinese government and makes payments to the workers at
the facility.
LEGAL
The Company experiences routine litigation in the normal course of its
business. The Company occasionally receives, and may receive in the future,
communications from third parties claiming that the Company's products or
technologies infringe on such parties' intellectual property rights. The
Company does not believe that any pending or threatened litigation or
intellectual property claims will have a material adverse effect on the
financial condition or results of operation of the Company.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers and directors of the Company:
NAME AGE POSITION
- -------------------- ------------ ----------------------------------------
Karl H. Kostusiak 58 Chairman of the Board, Chief Executive
Officer and President
David B. Lederer 57 Executive Vice President and Director
Lawrence R. Tracy 50 President of Detection Systems
International, Inc. and Radionics, Inc.,
subsidiaries of the Company
Frank J. Ryan 43 Vice President, Secretary and Treasurer
George E. Behlke 39 Vice President, Engineering
Gary Holroyd 38 Vice President, Operations
Donald R. Adair 53 Director
Mortimer B. Fuller, III 55 Director
Edward C. McIrvine 63 Director
KARL H. KOSTUSIAK has been President and Chief Executive Officer of the
Company since its founding in 1968. He has been a director of the Company
since 1968 and also serves as Chairman of the Board. He is a graduate of the
State University of New York at Buffalo with a Bachelor of Science in
Electrical Engineering and of the University of Rochester with a Master of
Science in Electrical Engineering. Mr. Kostusiak is a member of and actively
participates in the American Society for Industrial Security, the Central
Station Alarm Association, the National Burglar and Fire Alarm Association, the
National Fire Protection Association and the Security Industry Association.
DAVID B. LEDERER, one of the founders of the Company, has been Executive
Vice President of the Company since 1981 and a director since 1968. He is a
graduate of the State University of Nebraska with a Bachelor of Science and
Master of Science in Electrical Engineering. Mr. Lederer is a member of the
American Society for Industrial Security, the Central Station Alarm
Association, the National Burglar and Fire Alarm Association, the National
Electrical Manufacturers Association and the Security Industry Association.
LAWRENCE R. TRACY has been President of Detection Systems International,
President of Radionics since March 1996. Both DSII and Radionics are
subsidiaries of the
29
<PAGE>
Company. Prior to joining the Company, Mr. Tracy was President and Chief
Executive Officer of C&K Systems, Inc., a position he held for 13 years. Mr.
Tracy is a member of the American Society for Industrial Security, the Central
Station Alarm Association, the National Burglar and Fire Alarm Association, the
National Fire Protection Association and the Security Industry Association.
FRANK J. RYAN has been Vice President of the Company since 1988 and has
served as the Company's Chief Financial Officer since 1982. He is also the
Company's Secretary and Treasurer. He is a graduate of the State University of
New York at Fredonia. Mr. Ryan is a member of the Institute of Management
Accountants, the Central Station Alarm Association and the National Association
of Manufacturing.
GEORGE E. BEHLKE has served as the Company's Vice President, Engineering
since May 1995. Mr. Behlke has been with the Company since 1977 and served as
its Engineering Manager from 1984 until May 1995. His efforts in the
development of intrusion and smoke sensors have resulted in numerous patents
held by the Company. Mr. Behlke is a graduate of Alfred State Agriculture and
Technical College.
GARY HOLROYD has served as the Company's Vice President of Operations since
November 1996, having held similar positions for Radionics and Expamet
International PLC, Radionics' previous parent company, since 1975. He is a
graduate of the University of Newcastle, United Kingdom.
DONALD R. ADAIR has been a director of the Company since 1991 and also
serves on the Board's Compensation, Stock Option and Audit Committees. He is
the principal of Adair Law Firm, which was established in 1988 and focuses on
serving businesses in Rochester, New York. He is a graduate of Harvard College
and Cornell Law School. Mr. Adair is also a director of Stone Construction
Equipment, Inc. in Honeoye, New York, and Victor Insulators, Inc. in Victor,
New York.
MORTIMER B. FULLER, III has been a director of the Company since 1990 and
also serves on the Board's Compensation, Stock Option and Audit Committees.
Since 1977, he has been President and Chief Executive Officer of Genesee and
Wyoming Industries, Inc., a holding company in Greenwich, Connecticut which
owns and operates regional and short line freight railroads and provides rail
related services to railroads and shippers. He is a graduate of Princeton
University, Boston University School of Law and Harvard Business School. Mr.
Fuller is also a director of Genesee and Wyoming Industries and the American
Short Line Railroad Association. He is a founding member of the Regional
Railroads of America, and serves on that Association's executive committee. He
is also a trustee of the Lawrenceville School.
EDWARD C. MCIRVINE has been a director of the Company since 1981 and also
serves on the Board's Compensation, Stock Option and Audit Committees. Since
1987, he has been a self-employed research and development management
consultant and, from 1987 through 1991, he served as Dean of the College of
Graphic Arts and Photography at the Rochester Institute of Technology in
Rochester, New York. He is a graduate of the University of Minnesota and
earned his Ph.D. in Theoretical Physics from Cornell University. He is an
elected Fellow of the American Physical Society and served on the Board of the
American Institute of Physics.
30
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the compensation
of the Company's Chief Executive Officer and certain other executive officers
of the Company (collectively, the "Named Executive Officers") for fiscal years
ended March 31, 1997, 1996 and 1995. The Company did not grant any restricted
stock awards or stock appreciation rights or make any long-term incentive plan
payouts during the years indicated.
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------- -----------
Other Securities
Name and Annual Underlying All Other
Principal Fiscal Compen- Options/ Compen-
Position Year Salary($) Bonus($) sation($) SARS(#) sation($)(2)
- ----------- ------- --------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Karl H. Kostusiak 1997 212,100 403,333 --(3) 0 3,266
Chairman, President 1996 205,926 1,419 26,186 0 2,542
and CEO 1995 196,110 184,746 --(3) 0 2,625
David B. Lederer 1997 169,700 322,670 --(3) 0 3,364
Executive Vice 1996 164,741 1,135 27,956 0 2,534
President 1995 156,897 147,794 --(3) 0 2,625
Lawrence R. Tracy 1997 148,470 282,377 --(3) 18,775 3,301
President of 1996 144,148 31,648 --(3) 0 0
Detection Systems 1995 21,000 102,405 --(3) 60,000 0
International, Inc.
and
Radionics, Inc.
George E. Behlke 1997 108,150 81,790 24,761(4) 9,650 1,964
Vice President, 1996 89,363 723 --(3) 0 2,272
Engineering 1995 N/A N/A N/A N/A N/A
Gary Holroyd(1) 1997 117,636 74,587 --(3) 1,460 238
Vice President, 1996 N/A N/A N/A N/A N/A
Operations 1995 N/A N/A N/A N/A N/A
Frank J. Ryan 1997 108,150 59,308 --(3) 2,190 1,973
Vice President, 1996 105,000 723 --(3) 0 2,298
Secretary and 1995 100,000 35,017 --(3) 2,250 2,242
Treasurer
</TABLE>
_________________________
(1) Mr. Holroyd became an officer of the Company on November 7, 1996.
(2) Represents contributions by the Company to accounts of the named
executive officers under the Company's 401(k) retirement savings plan.
(3) Values are less than the minimum amount required to be reported.
(4) Includes $21,000 which represents the difference between the market value
and the exercise price for a nonqualified stock option awarded during the
fiscal year.
31
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth
information with respect to stock options granted to the Named Executive
Officers during fiscal 1997. Each grant was for incentive or nonqualified
stock options to purchase Common Stock under the Company's 1992 Restated Stock
Option Plan. All options are exercisable 40% after one year, 60% after two
years, 80% after three years and 100% after four years. Options awarded prior
to December 17, 1996 were adjusted to reflect the three-for-two stock split
effected on that date. The Company has not granted any stock appreciation
rights.
<TABLE>
<CAPTION>
Potential Realizable
Percent of Value at Assumed
Number of Total Annual Rates of Stock
Securities Options/SARs Exercise or Price
Underlying Granted to Base Price Market Price Appreciation for
Option/SARs Employee in Expiration Option Term
------------------------
Name Granted (#) Fiscal Year ($/Sh) ($/Sh) Date 5% ($) 10% ($)
---- ---------- ------------- ---------- ------------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
K. Kostusiak 0 -- -- -- -- -- --
D. Lederer 0 -- -- -- -- -- --
L. Tracy 6,000 37.5% 10.00 13.50 11/6/06 37,740 95,640
12,775 19.25 19.25 1/21/02 67,963 150,106
G. Behlke 6,000 19.2% 10.00 13.50 11/6/06 37,740 95,640
3,650 19.25 19.25 1/21/02 19,418 42,888
G. Holroyd 1,460 2.9% 19.25 19.25 1/21/02 7,767 17,155
F. Ryan 2,190 4.4% 19.25 19.25 1/21/02 11,651 25,733
</TABLE>
OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES. The
following table sets forth information with respect to the Named Executive
Officers concerning the exercise of options during fiscal 1997 and unexercised
options held as of March 31, 1997. The value of the underlying securities was
determined by taking the market value at year-end minus the exercise price.
The market price of the Company's stock on March 31, 1997 was $17.50 per share.
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised In-the-Money Options at
on Value Options at March 31, 1997 (#) March 31, 1997 ($)
Name Exercise (#) Realized($) Exercisable / Unexercisable Exercisable/Unexercissable
---- ------------ ----------- ----------------------------- --------------------------
<S> <C> <C> <C> <C>
K. Kostusiak 0 0 0 / 0 0 / 0
D. Lederer 0 0 0 / 0 0 / 0
L. Tracy 0 0 36,000 / 42,775 474,000 / 338,644
G. Behlke 6,444 101,465 1,500 / 11,150 19,000 / 127,875
G. Holroyd 0 0 3,000 / 5,960 41,000 / 58,945
F. Ryan 3,240 19,408 1,800 / 2,640 22,800 / 1,868
</TABLE>
At March 31, 1997, Messrs. Kostusiak, Lederer and Ryan had stock option
loans outstanding that totaled $182,910, $134,117 and $66,999, respectively.
As of June 6, 1996, the outstanding balances were $167,285, $121,210 and
$59,091, respectively. The loans carry interest rates ranging from 5.54% to
8.42%.
EMPLOYMENT AGREEMENTS
EXECUTIVE AGREEMENTS. The Company has employment agreements with three of
its executive officers, Messrs. Kostusiak, Lederer and Tracy (the "Executive
Agreements"). The Executive Agreements with Messrs. Kostusiak and Lederer are
through May 2002 and the agreement with Mr. Tracy is through February 1999.
The Executive Agreements provide for severance benefits under certain
circumstances. The terms "change of control," "cause" and "disability" are
used in the following description as defined in the Executive Agreements. The
Executive Agreements terminate upon the executive's death or permanent
disability except as described below.
Under the agreements with Messrs. Kostusiak and Lederer, if the Company
terminates the executive's employment without cause, the Company will continue
compensation and benefits to the executive for the then remaining balance of
the term of employment or for a period of three years from the date of
termination, whichever is longer. Under such circumstances, Mr. Tracy's
agreement provides that his compensation will continue for the then remaining
balance of the term
32
<PAGE>
of employment or for a period of one year from the date of termination,
whichever is longer. The continuation of compensation and benefits includes
the executive's base salary plus participation in all applicable executive
incentive compensation plans and fringe benefit packages. Further, if Mr.
Kostusiak's or Mr. Lederer's employment is terminated by the Company without
cause after expiration of the agreement but prior to the Company and the
executive reaching agreement with respect to the executive's retirement
benefits, the Company will also continue the executive's compensation and
benefits for a period of two years from the date of termination.
If the Company terminates Mr. Kostusiak's or Mr. Lederer's employment for
cause, each will receive compensation and benefits for the remaining balance of
the term of employment or for a period of three years from the date of
termination, whichever is longer, provided that this compensation is reduced by
any monetary damage suffered by the Company due to the cause. The same applies
for Mr. Tracy, except that compensation and benefits will continue for the
remaining balance of the term of employment or for a period of one year from
the date of termination, whichever is longer.
If, within four months after a "change in control," as defined in the
Executive Agreements, Mr. Kostusiak's or Mr. Lederer's employment is terminated
by the Company or the executive, each would be entitled to receive: (a) the
base salary through the termination date, as in effect at the time of
termination or at the time the change in control occurs, whichever is higher,
plus any bonus which has been earned but not yet paid; (b) an amount equal to
three times the highest total base salary and bonus compensation paid to him in
any of the Company's preceding three fiscal years; and (c) the continuation of
fringe benefits for three years after termination. No provision relating to a
change of control is included in Mr. Tracy's agreement.
All three agreements restrict the executives from competing with the
Company for various periods subsequent to termination of employment, depending
on the circumstances of the termination.
PENSION PROVISIONS. Effective April 1996, the Company approved the
addition of a pension plan for Messrs. Kostusiak and Lederer in their Executive
Agreements. Under the terms of the Executive Agreements, the Company will pay
each of them retirement benefits for his lifetime and for his spouse's
lifetime, if his spouse survives him, as follows: (i) a retirement wage
benefit initially equal to 12% of his base salary on the date of his retirement
or death, increased each year thereafter by any increase, less 0.5%, in the
Consumer Price Index (except that the wage benefit shall be 75% of that amount
after executive's death); (ii) continuation of his full health insurance or
similar benefit for him and his spouse; and (iii) continuation of any other
benefit programs that provide continuation pursuant to their terms.
Based on a 5% compounded annual increase in their base compensation, and
assuming that they each retire at age 65, the estimated initial annual benefit
that would be payable to Messrs. Kostusiak and Lederer under the pension plan
provision in their Executive Agreements would be $34,108 and $27,290,
respectively.
The Executive Agreements further provide that: (i) the payment of
retirement benefits may be terminated if an executive has violated the non-
competition provisions of his Executive Agreement, and (ii) the Company will
purchase and maintain life insurance sufficient to fund the estimated benefits
for the spouse (any excess policy proceeds to be available, if agreed, to
purchase shares of the Company's Common Stock held in the executive's estate)
and the policy or policies of such insurance shall be held in a trust designed
for this purpose.
CHANGES IN MR. LEDERER'S EMPLOYMENT. Mr. Lederer has advised the Company
that, subject to the successful completion of this offering, he intends to
reduce the scope of his employment to part-time. The Company is willing to
employ Mr. Lederer on a part-time basis and is presently negotiating the terms
of such employment with Mr. Lederer.
33
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of the Common Stock as of July 21, 1997 and as adjusted to
reflect the sale of 1,072,000 shares of Common Stock by the Company and the
sale of 228,000 shares of Common Stock by the Selling Shareholders, by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each of the Selling Shareholders, (iii) each
director of the Company, (iv) each of the Named Executive Officers and (v) all
executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior Shares to be Owned After
To Offering(1) Sold in Offering(1)
Name of Beneficial Owner Number Percent Offering Number Percent
_______________________ ----- ------ --------- ------ -------
<S> <C> <C> <C> <C> <C>
Donald R. Adair 1,549(2) * 0 1,549 *
George E. Behlke 38,393(3)(4) * 0 38,393 *
Mortimer B. Fuller, III 5,670(5) * 0 5,670 *
Gary Holroyd 4,725(3) * 0 4,725 *
Karl H. Kostusiak 636,161(4) 12.9% 60,000 576,161 9.6%
David B. Lederer 451,276(4) 9.3% 150,000 301,276 5.1%
Edward C. McIrvine 25,325(6) * 0 25,325 *
Frank J. Ryan 78,212(3)(4)(7) 1.6% 8,000 70,212 1.2%
Lawrence R. Tracy 100,008(3)(4) 2.1% 10,000 90,008 1.5%
All Directors and Executive
Officers
as a Group (9 persons) 1,341,319(2)-(7) 26.2% 228,000 1,113,319 18.0%
Dimensional Fund Advisors, Inc. 253,572 5.3% 0 253,572 4.4%
</TABLE>
_________________________
* Percentage of Common Stock owned is less than 1%.
(1) For all shares listed, each person possesses both sole voting and
investment power, except for those shares indicated in notes (2) - (7)
below. The share amounts include the shares of Common Stock actually
owned as of July 21, 1997 and the shares of Common Stock which the person
or group had the right to acquire within 60 days of such date. In
calculating the percentage of ownership, all shares of Common Stock which
the identified person or group had the right to acquire within 60 days of
July 21, 1997 upon the exercise of options or retirement are deemed to be
outstanding for the purpose of computing the percentage of shares of
Common Stock owned by such person or group, but are not deemed to be
outstanding for the purpose of computing the percentage of the shares of
Common Stock owned by any other person.
(2) Includes 1,173 shares held in custodianship for Mr. Adair's children under
the Uniform Gifts to Minors Act of New York for which shares Mr. Adair
disclaims beneficial ownership.
(3) Includes 1,500, 3,000, 1,800, 36,000 and 42,300 shares which may be
acquired upon exercise of warrants and options held by Messrs. Behlke,
Holroyd, Ryan, Tracy and all directors and executive officers as a group,
respectively.
(4) Includes 9,234, 179,840, 117,465, 8,492, 6,488 and 321,519 hypothetical
shares credited to the accounts of Messrs. Behlke, Kostusiak, Lederer,
Ryan, Tracy and all directors and executive officers as a group,
respectively, pursuant to the Company's deferred compensation plans, which
shares may be acquired upon retirement.
(5) Includes 2,025 shares held by Mr. Fuller's wife for which shares he
disclaims beneficial ownership.
(6) Includes 20,300 shares held by Dr. McIrvine's wife for which shares he
disclaims beneficial ownership.
(7) Includes 810 shares held in trust for Mr. Ryan's son under the Uniform
Gifts to Minors Act of New York for which shares Mr. Ryan disclaims
beneficial ownership.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company consists of 12,000,000 shares
of common stock, par value $0.05 per share (the "Common Stock"). As of the
date of this Prospectus, there are 4,743,894 issued and outstanding shares of
Common Stock. As of such date, there are outstanding options to purchase
319,120 shares of Common Stock pursuant to the Company's 1992 Restated Stock
Option Plan at exercise prices ranging from $3.75 per share to $22.75 per share
with a weighted average exercise price of $6.10 per share. In addition, the
Company has outstanding warrants to purchase 15,000 shares of Common Stock for
$3.83 per share and 1,500 shares of Common Stock for $13.50 per share. There
are also 98,019 shares of Common Stock issuable under the Company's Deferred
Compensation Plan and 278,528 shares of Common Stock issuable under the
Company's Deferred Stock Bonus Plan. The following description of the Common
Stock is qualified in
34
<PAGE>
its entirety by reference to the Company's Certificate of Incorporation and By-
laws, which are exhibits to the Registration Statement of which this Prospectus
is a part.
COMMON STOCK
The Common Stock possesses ordinary voting rights, and the holders thereof
vote together as a single class for the election of directors and in respect of
other corporate matters. Holders of shares of Common Stock are entitled to one
vote per share, and cumulative voting of shares is not permitted. In the event
of the voluntary or involuntary liquidation, distribution or sale of assets,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive and share ratably in all net assets available for
distribution to shareholders after satisfaction of the Company's liabilities.
The Common Stock carries no preemptive rights and is not convertible,
redeemable or assessable. The holders of Common Stock are entitled to such
dividends as may be declared by the Company's Board of Directors and paid out
of funds legally available therefor. See "Dividend Policy."
CERTAIN PROVISIONS OF LAW
The Company is subject to anti-takeover provisions under New York law that
apply to a public corporation organized under New York law unless the
corporation has elected to opt out of such provisions in its Certificate of
Incorporation or, depending on the provision in question, its By-Laws. The
Company has not elected to opt out of these provisions. The Common Stock is
subject to the "affiliated transaction" provisions of Section 912 the New York
Business Corporation Law. These provisions, subject to certain exceptions,
restrict business combinations between the Company and interested shareholders
unless either the business combination or the acquisition of shares making a
person an interested shareholder (the "Triggering Acquisition") is approved by
the Board of Directors prior to the date of the Triggering Acquisition. Once
the provisions are triggered, a business combination must either (i) meet
stringent fairness requirements, or (ii) after five years from the Triggering
Acquisition have elapsed, be approved by the holders of a majority of the
outstanding voting shares of the Company excluding the interested shareholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
35
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through their
representatives, Raymond James & Associates, Inc. and Needham & Company, Inc.
(the "Representatives"), have severally agreed, subject to the terms and
conditions of the underwriting agreement (the "Underwriting Agreement") by and
among the Company, the Selling Shareholders and the Underwriters, to purchase
from the Company and the Selling Shareholders the number of shares of Common
Stock set forth below opposite their respective names, at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
Number of
Name Shares
--------------------------------- ---------
Raymond James & Associates, Inc.
Needham & Company, Inc.
-----------
Total
===========
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
purchased.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock directly to the public at the public offering price set forth on the
cover page of this Prospectus and to certain dealers, including the
Underwriters, at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the public offering,
the public offering price and other selling terms may be changed by the
Underwriters. The Representatives have informed the Company and the Selling
Shareholders that the Underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
Certain of the Underwriters and the selling group members that currently
act as market makers for the Common Stock may engage in "passive market making"
in the Common Stock on the Nasdaq National Market in accordance with Rule 103
of Regulation M under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Rule 103 permits, upon satisfaction of certain conditions,
underwriters and selling group members participating in a distribution that are
also Nasdaq market makers in the security being distributed to engage in
limited market making activity when Rule 101 would otherwise prohibit such
activity. Rule 103 prohibits underwriters and selling group members engaged in
passive market making generally from entering a bid or effecting a purchase at
a price that exceeds the highest bid for those securities displayed on the
Nasdaq National Market by a market maker that is not participating in the
distribution of the Common Stock. Each underwriter or selling group member
engaged in passive market making is subject to a daily net purchase limitation
equal to 30% of such entity's average daily trading volume during the two full
consecutive calendar months immediately preceding the date of the filing of the
Registration Statement of which this Prospectus forms a part.
36
<PAGE>
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
aggregate of 195,000 additional shares of Common Stock, at the public offering
price, less the underwriting discounts and commissions, set forth on the cover
page of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the above table bears to the total shown,
and the Company will be obligated, pursuant to the option, to sell such shares
to the Underwriters. The Underwriters may exercise this option only to cover
over-allotments, if any, made in connection with the sale of the shares of
Common Stock offered hereby. If purchased, the Underwriters will sell such
additional shares on the same terms as those on which the shares are being
offered.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against, and to contribute to losses arising out of, certain civil
liabilities in connection with this offering, including liabilities under the
Securities Act.
The Company, its officers and directors and the Selling Shareholders have
agreed that for a period of 120 days following the date of this Prospectus,
they will not, except with the prior written consent of Raymond James &
Associates, Inc., acting for the Underwriters, sell, contract to sell or
otherwise dispose of any shares of Common Stock. This restriction does not
apply to shares sold by Selling Shareholders hereunder or certain issuances of
Common Stock by the Company pursuant to its stock option plans. See "Risk
Factors-Shares Eligible for Future Sale."
The foregoing includes a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy
of the Underwriting Agreement that is on file as an exhibit to the Registration
Statement of which this Prospectus forms a part.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company and for the Selling Shareholders by Nixon,
Hargrave, Devans & Doyle LLP, Rochester, New York, and for the Underwriters by
Fowler, White, Gillen, Boggs, Villareal and Banker, P.A., Tampa, Florida.
EXPERTS
The consolidated financial statements and financial statement schedule of
the Company as of March 31, 1995, 1996 and 1997, and for each of the three
fiscal years in the period ended March 31, 1997, included herein and/or
incorporated by reference from the Company's Annual Report on Form 10-K for the
year ended March 31, 1997, have been so included herein and/or incorporated by
reference in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information filed by the Company may
be inspected and copied (at prescribed rates) at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and at the following regional offices of the
Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. In addition, such reports, proxy statements and other
information can be obtained from the Commission's web site at
http://www.sec.gov. Quotations relating to the Common Stock appear on the
Nasdaq National Market. Such reports, proxy statements and other information
concerning the Company can also be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
The Company has filed with the Commission a Registration Statement on Form
S-2 (the "Registration Statement") under the Securities Act, with respect to
the shares of Common Stock offered hereby. This Prospectus, which is a part of
the Registration Statement, does not contain all the information set forth in,
or annexed as exhibits to, such Registration
37
<PAGE>
Statement, certain portions of which have been omitted pursuant to rules and
regulations of the Commission. For further information with respect to the
Company and the shares of Common Stock offered hereby, reference is hereby made
to such Registration Statement, including the exhibits thereto. Copies of such
Registration Statement, including exhibits, may be obtained from the
aforementioned public reference facilities of the Commission upon payment of
the prescribed fees, or may be examined without charge at such facilities.
Statements contained herein concerning any document filed as an exhibit are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement. Each such
statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission under the
Exchange Act are incorporated by reference in and made a part of this
Prospectus:
(a) the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997;
(b) the Company's Proxy Statement relating to its 1997 Annual Meeting of
Shareholders; and
(c) the Company's Current Report on Form 8-K dated May 7, 1997 and filed
with the Commission on May 21, 1997.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein, or in any other subsequently filed documents, which also are
incorporated or deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. The Company hereby undertakes to provide,
without charge, to each person, including any beneficial owner, to whom a copy
of this Prospectus is delivered, on the written or oral request of such person,
a copy of any or all of the information incorporated herein by reference.
Exhibits to any of such documents, however, will not be provided unless such
exhibits are specifically incorporated by reference into such documents. The
requests should be addressed to the Company's principal executive offices:
Attn: Secretary, 130 Perinton Parkway, Fairport, New York 14450, telephone
number (716) 223-4060.
38
<PAGE>
DETECTION SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants F-2
Consolidated Balance Sheets at March 31, 1995, 1996 and 1997 F-3
Consolidated Statement of Operations and Retained Earnings for the
years ended March 31, 1995, 1996 and 1997 F-4
Consolidated Statement of Cash Flows for the years ended March 31,
1995, 1996 and 1997 F-5
Notes to Consolidated Financial Statements F-6
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of Detection Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and
the related consolidated statements of operations and retained
earnings and of cash flows present fairly, in all material
respects, the financial position of Detection Systems, Inc. and
its subsidiaries at March 31, 1995, 1996 and 1997 and the results
of their operations and their cash flows for each of the three
years in the period ended March 31, 1997 in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
Rochester, New York
June 2, 1997
F-2
DETECTION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
At Year Ended March 31, 1995 1996 1997
--------- --------- ---------
Assets
Current assets:
Cash and cash equivalents $4,597,047 $ 930,012 $2,244,265
4,597,047
Short term investments 2,421,546
Accounts receivable, less allowance
for doubtful accounts ($100,000 in
1995, $235,000 in 1996 and
$313,800 in 1997) 4,916,052 10,482,660 15,246,309
Inventories 5,255,724 14,065,843 29,995,215
Deferred income taxes 354,500 1,554,900 2,132,156
Prepaid expenses and other assets 408,406 1,392,913 883,137
---------- ---------- ----------
17,953,275 28,426,328 50,501,082
---------- ---------- ----------
Fixed assets, net 3,920,571 7,085,357 11,057,256
Property under capital lease, net 2,725,513 2,491,475 190,915
Deferred income taxes 3,983,200 3,046,200
Goodwill and other intangibles, net 3,762,327 2,942,626
Other assets 145,934 148,891 537,772
---------- ---------- ----------
$24,745,294 $45,897,578 $68,275,852
========== ========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $1,183,750
Current portion of long term debt $953,648
Current portion of capital
lease obligation $434,934 559,860 147,574
Accounts payable 1,213,958 6,231,737 12,259,380
Accrued payroll and benefits 1,074,103 1,566,777 2,818,487
Other accrued liabilities 266,526 3,171,914 3,254,593
---------- ---------- ----------
2,989,521 12,714,038 19,433,682
---------- ---------- ----------
Long term liabilities 288,200 1,931,900 1,173,694
Obligations under capital leases 745,733 186,471 54,125
Long term debt 17,750,000 28,031,802
Deferred compensation 1,527,638 1,745,886 1,751,281
Shareholders' equity:
Common stock, par value $.05 per
share
Authorized - 12,000,000 shares
Issued - 2,792,489 shares in 1995,
2,811,361 shares in 1996 and
4,478,993 shares in 1997 139,624 140,568 223,950
Capital in excess of par value 6,853,246 6,972,431 9,448,917
Retained earnings 12,724,265 4,869,022 8,594,306
---------- ---------- ----------
19,717,135 11,982,021 18,267,173
Less - Treasury stock, at cost (36,326) (12,363) (52,553)
Notes receivable for stock purchases (486,608) (392,514) (378,373)
Cumulative translation adjustment (7,861) (4,980)
---------- ---------- ----------
19,194,201 11,569,283 17,831,267
---------- ---------- ----------
$24,745,293 $45,897,578 $68,275,851
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-3
DETECTION SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Year ended March 31, 1995 1996 1997
Net sales $34,336,336 $41,857,809 $101,251,380
Costs and expenses:
Production 20,829,843 27,978,460 64,916,410
Research and development 4,070,443 4,699,643 8,114,671
Purchased in-process research
and development 9,350,000
Marketing, administrative and
general 6,788,924 10,514,797 21,411,444
--------- ---------- ----------
31,689,210 52,542,900 94,442,525
---------- ---------- ----------
Operating income (loss) 2,647,126 (10,685,091) 6,808,855
Interest income 113,420 340,311 206,049
Interest expense (168,557) (320,463) (1,764,620)
---------- ---------- ----------
Income (loss) before income taxes 2,591,989 (10,665,243) 5,250,284
Provision (benefit) for income
taxes 1,077,500 (2,810,000) 1,525,000
---------- ---------- ----------
Net income (loss) 1,514,489 (7,855,243) 3,725,284
Retained earnings at beginning
of year 11,209,776 12,724,265 4,869,022
---------- ---------- ----------
Retained earnings at end of year $12,724,265 $ 4,869,022 $8,594,306
4,869,022 8,594,306
========== ========== ==========
Earnings (loss) per common and
common equivalent share $.35 ($1.83) $.76
=== ===== ===
See accompanying notes to consolidated financial statements.
F-4
DETECTION SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended March 31, 1995 1996 1997
--------- --------- ---------
Cash flows from operating
activities:
Net income (loss) $1,514,489 ($7,855,243) $3,725,284
--------- ---------- ----------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,502,516 2,043,373 2,737,438
Purchased in-process research
and development 9,350,000
Loss (Gain) on disposition of
fixed assets 8,561 275,349 (14,670)
Deferred compensation 103,933 218,248 5,395
Deferred income taxes (123,500) (3,536,000) 177,800
Stock based compensation 48,800 34,763 146,950
Changes in operating assets and
liabilities:
Accounts receivable 480,783 (1,156,325) (4,763,649)
Inventories 590,227 (4,264,805)(15,929,372)
Prepaid expenses and other assets 3,069 (634,523) 120,895
Accounts payable 514,680 2,354,624 6,027,687
Accrued payroll and benefits 102,232 190,159 1,251,710
Other accrued liabilities (62,592) (460,930) (99,684)
--------- ---------- ----------
Total adjustments 3,168,709 4,413,933 (10,339,500)
Net cash provided by (used in)
operating activities 4,683,198 (3,441,310) (6,614,216)
--------- ---------- ----------
Cash flows from investing
activities:
Purchase of Radionics net of cash
acquired (17,965,381)
Capital expenditures (1,358,009) (3,376,867) (3,968,349)
Short term investments (2,437,842) 2,421,546
--------- ---------- ----------
Net cash (used in) investing
activities (3,795,851) (18,920,702) (3,968,349)
--------- ---------- ----------
Cash flows from financing
activities:
Notes payable 1,183,750
Proceeds from long term debt 17,750,000 10,047,007
Principal payments on long term
debt and capital lease obligations (401,815) (434,336) (539,939)
Issuance of common stock 140,375 94,295 2,238,805
Stock options exercised 47,733 109,129 148,064
--------- ---------- ----------
Net cash (used in) provided by
financing activities (213,707) 18,702,838 11,893,937
--------- ---------- ----------
Effect of exchange rate changes (7,861) 2,881
Net increase (decrease) in cash
and cash equivalents 673,640 (3,667,035) 1,314,253
Cash and cash equivalents at
beginning of year 3,923,407 4,597,047 930,012
--------- ---------- ----------
Cash and cash equivalents at
end of year $4,597,047 $ 930,012 $2,244,265
========= ========= =========
Cash paid during the year for:
Interest $ 173,709 $ 226,929 $1,574,812
========= ========= =========
Income taxes $1,141,276 $1,041,284 $1,095,754
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
DETECTION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995, 1996 AND 1997
NOTE 1 - DESCRIPTION OF OPERATIONS AND ACCOUNTING POLICIES:
DESCRIPTION OF OPERATIONS -
Detection Systems, Inc. ("the Company") designs, manufactures
and markets electronic detection, control and communication
equipment for the security, fire protection, access control and
CCTV industries. From its inception in 1968 until 1995,
the Company was primarily a niche provider of intrusion
detection devices for the domestic market. In 1995, the Company
adopted a strategy designed to substantially expand its product
offerings, establish an international sales presence,
increase its manufacturing capacity and improve its
manufacturing cost structure. The Company has since made five
acquisitions, opened sales offices in six countries and successfully
established a manufacturing facility in China. These initiatives have
enabled the Company to significantly expand its product catalog and
market scope.
PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements of the Company include all
majority-owned U.S. and non-U.S. subsidiaries. Intercompany
accounts, transactions and profits are eliminated. Certain
amounts in the prior years' financial statements have been
reclassified to conform with the current year's presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at year-end as well as the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS -
Cash equivalents include time deposits and highly liquid
investments with original maturities of three months or less.
INVESTMENTS -
The Company accounts for its investment securities in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." All of the Company's reported investments are
classified as available for sale. Accordingly, unrealized
holding gains and losses, net of applicable taxes, are excluded
from income and recognized as a separate component of
shareholders' equity until realized.
INVENTORIES -
Inventories, which include materials, labor and overhead, are
recorded at the lower of cost, determined by the first-in, first-
out method, or market value.
FIXED ASSETS AND PROPERTY UNDER CAPITAL LEASE -
The building and related improvements are depreciated using the
straight-line method over an estimated useful life ranging from
26 to 40 years. Land improvements, machinery and equipment,
production tooling and furniture are depreciated on the
straight-line method over estimated useful lives ranging from
three to ten years. Expenditures for maintenance and repairs are
charged to expense as incurred. Major improvements are capitalized.
F-6
GOODWILL AND OTHER INTANGIBLES-
Goodwill and other intangibles represents the excess of the cost
of net tangible assets acquired in business combinations over
their fair value. Goodwill and other intangibles are amortized
using the straight-line method over periods ranging from three to
twenty years. The Company evaluates goodwill and intangibles for
impairment at least annually by comparing its best estimate of
undiscounted future cash flows to the respective carrying amount.
Accumulated amortization at March 31, 1996 and 1997 was
approximately $69,000 and $494,000, respectively.
RETIREMENT PLANS -
The Company has two defined contribution pension plans which, in
aggregate, cover substantially all domestic employees. The first
plan requires the Company to match 100% of an employee's
contribution up to one percent of the employee's base salary and
25% of an employee's contribution between two and four percent of
the employee's base salary. The second plan permits employees to
contribute up to 20% of their eligible earnings. Annual
contributions by the Company, out of its net profits, are in
amounts approved by the Company's Board of Directors.
The Company's contributions to these plans were approximately
$113,000, $117,000 and $155,000 in 1995, 1996 and 1997,
respectively.
During the first quarter of fiscal 1997 the Company established a
defined benefit pension plan for certain key executives. The
plan provides for an annual benefit of 12% of their ending annual
compensation and medical expense coverage for life after
retirement. The liability is being recognized over their
remaining service periods.
REVENUE RECOGNITION -
Revenues are recognized when product is shipped.
RESEARCH AND DEVELOPMENT COSTS -
All product development costs are charged to operations during
the period incurred.
FOREIGN CURRENCY TRANSLATION -
Assets and liabilities of non-U.S. subsidiaries are translated at
current exchange rates, and related revenues and expenses are
translated at average exchange rates in effect during the period.
Resulting translation adjustments are recorded as a separate
component of shareholders' equity.
STOCK BASED COMPENSATION -
The Company applies Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," which requires
compensation cost to be recognized based on the difference, if
any, between the quoted market price of the stock on the grant
date and the amount an employee must pay to acquire the stock.
INCOME TAXES -
The Company accounts for certain income and expense items
differently for financial reporting and income tax purposes in
accordance with SFAS No. 109, "Accounting for Income Taxes."
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of
assets and liabilities applying enacted statutory rates in effect
for the year in which the differences are expected to reverse.
STOCK SPLIT -
On November 7, 1996, a meeting of the Board of Directors was held
authorizing a three-for-two stock split effective December 17,
1996 for shareholders of record at the close of business on
November 27, 1996. All references in the consolidated financial
statements referring to share prices, per share amounts and stock
plans have been adjusted retroactively for the three-for-two
stock split.
F-7
EARNINGS PER SHARE -
The computation of earnings (loss) per common and common
equivalent share is based upon the weighted average number of
common and common equivalent shares outstanding during the
period. The weighted average common and common equivalent shares
used in this calculation, as adjusted to reflect the three-for-
two stock split, were 4,483,706, 4,285,238 and 4,933,541 in 1995,
1996 and 1997, respectively.
The earnings per share computations do not consider common
equivalent shares when the Company is in a loss position or when
the effect of such inclusion is anti-dilutive. There was no
material difference between primary and fully diluted earnings
per share in 1995, 1996 and 1997, respectively.
CONCENTRATION OF CREDIT RISK -
Financial instruments which potentially expose the Company to
concentration of credit risk consist principally of bank
deposits, temporary investments and accounts receivable. The
Company performs ongoing credit evaluations of its customers'
financial condition and the Company maintains an allowance for
uncollectible accounts receivable based upon the expected
collectibility of all accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS -
The carrying amount of the Company's financial instruments,
including cash and cash equivalents, short-term investments,
accounts receivable and notes payable, approximates their fair
value at March 31, 1996 and 1997 as the maturity of these
instruments is short term. The carrying amount of the Company's
long term debt obligations approximates their fair value as the
interest rates on such obligations approximate the market rate at
March 31, 1996 and 1997.
CASH FLOW STATEMENT -
The Company accepted notes receivable from employees for stock
purchases in the amount of $258,071, $13,314 and $22,758 in 1995,
1996 and 1997, respectively.
NEW ACCOUNTING STANDARDS -
In February 1997, SFAS No. 128, "Earnings Per Share," was issued
by the Financial Accounting Standards Board. SFAS No. 128
specified modifications to the calculation of earnings per share
from that currently used by the Company. Under SFAS No. 128,
"basic earnings per share" is calculated based upon the weighted
average number of common shares actually outstanding, and
"diluted earnings per share" is calculated based upon the
weighted average number of common shares outstanding and other
potential common shares (e.g. stock options and warrants) if they
are dilutive. SFAS No. 128 is effective for periods ending after
December 15, 1997 and will be adopted at that time. Had the
Company determined earnings per share in accordance with SFAS No.
128, for the years ended March 31, 1995, 1996 and 1997, basic pro
forma earnings (loss) per share would have been $.37, ($1.87) and
$.85, respectively, and pro forma diluted earnings (loss) per
share would have been $.34, ($1.87) and $.75, respectively.
NOTE 2 - ACQUISITION
In July 1996, the Company acquired certain assets and patent
rights of Senses International, Inc., a manufacturer of long
range wireless alarm transmission equipment. The Company paid
approximately $600,000 for these assets.
In February 1996, the Company acquired all of the stock of
Radionics, Inc. (Radionics) for a total cash purchase price,
including expenses, of approximately $18.2 million. Funding for
the acquisition was provided by borrowings from a commercial bank
pursuant to a term loan facility (Note 6).
F-8
The acquisition was accounted for under the purchase method, and
Radionics' results of operations have been consolidated with the
Company's results of operations effective as of the acquisition
date. The Company made a determination and allocation of the
purchase price as of the acquisition date and finalized this
allocation during fiscal 1997. The allocation of purchase price
consisted of the following:
Accounts receivable $ 4,410,300
Inventories 4,545,300
Other current assets 1,638,100
Accounts payable and other current liabilities (6,032,000)
-----------
Net working capital acquired 4,561,700
Fixed assets 1,803,600
Purchased in-process research and development 9,350,000
Goodwill and other intangibles 3,351,400
Other non-current items, net (899,500)
-----------
Total purchase price, including expenses $18,167,200
===========
The valuation of technology, including other intangibles, was
accomplished through the application of an income approach.
Projected debt-free income, revenue net of provision for
operating expenses, income taxes and returns on requisite assets
were discounted to a present value. This approach was used for
each of the Radionics product lines. Technology was divided into
two categories: current products and in-process research and
development.
Current products included those products currently in the market
place as of the acquisition date and products which, while still
in the development stage at the acquisition date, were
technologically feasible. The fair market value of the purchased
current products was determined to be $890,000. This amount is
recorded as an intangible asset and is being amortized on a
straight line basis over three years.
Purchased in-process research and development included the value
of products still in the development stage, but not considered to
have reached technological feasibility. As a result of the
valuation, the fair market value of the purchased in-process
research and development was determined to be $9,350,000. In
accordance with generally accepted accounting practice, this
amount was expensed upon acquisition in the fourth quarter of
fiscal 1996.
The following table summarizes, on an unaudited, pro forma basis,
the estimated combined results of operations of the Company as
though the acquisition was made at the beginning of 1995 and
1996. For purposes of preparing the unaudited pro forma
information, the results from Detection Systems' years ended
March 31, 1995 and 1996 have been combined with the results of
Radionics' years ended December 31, 1994 and 1995, respectively.
The pro forma amounts do not necessarily reflect the results that
actually would have been obtained had the transaction taken place
at the beginning of periods indicated, nor are they intended to
be a projection of future results:
1995 1996
------ ------
(Unaudited)
Net revenues $78,550,000 $81,285,000
Costs and expenses 84,671,000 93,509,000
Loss before taxes (6,121,000)
(12,224,000)
Net loss (3,780,000)
(7,706,000)
Net loss per share ($.88) ($1.80)
The charge for in process research and development of $9,350,000
is reflected in the fiscal year 1996 amounts above.
F-9
NOTE 3 - INVENTORIES:
Major classifications of inventory are as follows.
Year Ended March 31, 1995 1996 1997
---- ---- ----
Component parts $2,300,894 $ 6,924,870 $20,636,368
Work in process 475,927 705,473 2,697,459
Finished products 2,853,903 7,414,700 8,276,688
--------- ---------- ----------
5,630,724 15,045,043 31,610,515
Less-Reserve for obsolescence (375,000) (979,200) (1,615,300)
--------- ---------- ----------
$5,255,724 $14,065,843 $29,995,215
========= ========== ==========
NOTE 4 - FIXED ASSETS:
Major classifications of fixed assets are as follows.
Year Ended March 31, 1995 1996 1997
---- ---- ----
Land and improvements $ 211,735 $ 219,435 $ 714,582
Building and improvements 1,503,103 2,490,409 4,001,527
Machinery and equipment 7,099,144 9,802,633 14,080,783
Production tooling 3,140,152 3,134,229 3,865,900
Furniture 701,142 1,120,620 1,268,455
---------- ---------- ----------
12,655,276 16,767,326 23,931,247
Less - Accumulated depreciation (8,734,705) (9,681,969) (12,873,991)
---------- ---------- ----------
$3,920,571 $7,085,357 $11,057,256
========= ========= ==========
Total depreciation expense on fixed assets was approximately
$1,197,700, $1,711,100 and $2,126,700 in 1995, 1996 and 1997,
respectively.
NOTE 5 - CAPITAL LEASES:
During 1982, the Company entered into an agreement with a local
government agency under which the agency's bond proceeds of
$3,800,000 were used to purchase land and construct an operating
facility for lease to the Company. These expenditures had been
recorded as property under capital lease.
The lease, which required quarterly principal payments of $63,330
plus interest at two-thirds of a designated bank's prime lending
rate, extended to October 1997. However, all outstanding
principal on this obligation was repaid in June 1996, at which
time title to the property passed to the Company.
The Company has various equipment under capital lease agreements
which require payments of principal and interest of $156,117 in
1998; $38,934 in 1999 and $28,682 in 2000.
F-10
Property under capital leases consist of the following.
Year Ended March 31, 1995 1996 1997
---- ---- ----
Land and improvements $ 495,147 $ 495,147
Building 2,938,072 2,938,072
Machinery and equipment 1,327,591 1,327,591 $1,316,044
--------- --------- ---------
4,760,810 4,760,810 1,316,044
Less-Accumulated depreciation (2,035,297) (2,269,335) (1,125,129)
--------- --------- ---------
$2,725,513 $2,491,475 $ 190,915
========= ========= =========
Obligations under capital leases are summarized below.
Year Ended March 31, 1995 1996 1997
---- ---- ----
Operating facility $ 696,830 $443,510
Production and office equipment 483,837 302,821 $201,699
--------- ------- -------
1,180,667 746,331 201,699
Less - Current portion (434,934) (559,860) (147,574)
--------- ------- -------
$ 745,733 $186,471 $ 54,125
========= ======= =======
Total depreciation expense on property under capital leases was
approximately $294,800, $263,000 and $185,000 in 1995, 1996 and
1997, respectively.
NOTE 6 - INDEBTEDNESS
During 1996, the Company had a line of credit secured by general
business assets of the Company allowing borrowings of up to
$6,500,000. At March 31, 1996, borrowings on the line of credit
aggregated $1,183,750 at approximately 7.4%. The maximum amount
of borrowings on the line of credit outstanding during 1996 was
$1,183,750.
During 1997, the Company increased this line of credit to
$11,500,000. At March 31, 1997, borrowings on the line of credit
aggregated $11,230,757 at approximately 9.25%. This line
requires interest only payments through July 1998, at which time
all outstanding principal is due. Consequently, borrowings on
this line of credit outstanding as of March 31, 1997 are
classified as long term. The maximum amount of borrowings on the
line of credit outstanding during 1997 was $11,230,757.
In connection with the acquisition of Radionics, the Company
borrowed $17,750,000, of which $3,400,000 is secured by certain
real estate and matures in April 2006. The remaining $14,350,000
is secured by general business assets and matures in April 2003.
At March 31, 1997 and 1996, the interest rate on these borrowings
was approximately 7.4%.
Interest on the outstanding debt accrues based upon either the
federal funds rate, the prime rate or LIBOR, each adjusted by a
factor which varies based upon the rates of funded debt to
earnings before interest, tax, depreciation and amortization.
F-11
Pursuant to the terms of the debt agreements for the obligations
listed above, the Company has certain levels and covenants to
maintain with respect to such items as working capital, funded
debt and fixed charges. Failure to comply with these guidelines
constitutes default and obligations become currently due. The
Company is in compliance with all covenants and requirements under
the terms of the borrowing agreements.
Annual maturities of the Company's long term debt for the next
five years are approximately: 1998 - $953,600; 1999 -
$14,091,700; 2000 - $2,860,900; 2001 - $2,860,900; and 2002 -
$2,860,900.
NOTE 7 - DEFERRED COMPENSATION PLANS:
The Company's deferred compensation plan allows certain employees
to defer the receipt of salary or bonuses which they may be
entitled to receive. The compensation is normally payable at
retirement, and is fully vested when deferred. For salaries or
bonuses deferred, the employee elects, at the time of deferral,
to be paid in either stock or cash plus interest which has
accrued from the date of deferral.
Unissued common share equivalents are limited to 145,800 shares
under provisions of the plan. As of March 31, 1995, 1996 and
1997, unissued common share equivalents of 89,636, 97,537 and
98,019 respectively, existed under the plan.
The Company's stock bonus plan provides for bonuses payable in
stock to certain officers and key personnel if specified sales
growth, pretax profit growth and earning per share goals are
attained. The plan also provides that recipients may defer
receipt of stock bonuses until retirement. The bonus is fully
vested when deferred. Unissued common share equivalents existing
under the plan were 227,610 in 1995, 252,390 in 1996 and 252,390
in 1997.
NOTE 8 - SHAREHOLDERS' EQUITY:
The following table presents the changes in shareholders' equity
balances during the three years ended March 31, 1997.
Common stock Treasury Stock Capital in
--------------- ---------------- excess of
Shares Amount Shares Amount par value
Balances, March 31,
1994 2,771,489 $138,574 80,727 $322,778 $6,724,970
======== ======= ====== ======= =========
Distribution
of stock bonuses (6,550) (32,157) 16,643
Exercise of options and
warrants (69,184) (276,570) (27,692)
Treasury stock purchases 2,475 22,275
Common stock issued 21,000 1,050 139,325
-------- ------- ------ ------- ---------
Balances, March 31,
1995 2,792,489 $139,624 7,468 $ 36,326 $6,853,246
========= ======= ====== ======= =========
Distribution of stock
bonuses 2,400 120 (2,500) (11,953) 22,690
Exercise of options
and warrants 2,972 149 (7,029) (20,313) 2,875
Treasury stock
purchases 4,268 8,303
Common stock issued 13,500 675 93,620
-------- ------- ------ ------- ---------
Balances, March 31,
1996 2,811,361 $140,568 2,207 $ 12,363 $6,972,431
======== ======= ====== ======= =========
F-12
Common stock Treasury Stock Capital in
--------------- -------------- excess of
Shares Amount Shares Amount par value
Distribution of stock
bonuses 11,200 560 84,140
Exercise of options
and warrants 39,697 1,986 (7,679) (12,355) 172,127
Treasury stock 9,609 52,545
purchases
Three-for-two stock
split 1,482,449 74,122 1,786 (74,122)
Common stock issued 134,286 6,714 2,232,091
Other 62,250
--------- ------- ------ ------- ---------
Balances, March 31,
1997 4,478,993 $223,950 5,923 $ 52,553 $9,448,917
======== ======= ====== ======= =========
On December 17, 1996, the Company distributed a three-for-two
stock split effected in the form of a stock dividend to
shareholders of record on November 27, 1996. This distribution
increased the number of shares outstanding by 1,482,449. The
amount of $74,122 was transferred from capital in excess of par
to common stock. All per share amounts in this report have been
restated to reflect this stock split.
In October 1996, the Company authorized a private placement
offering for the sale of 114,286 shares from its authorized but
unissued shares of common stock at a pre-split price of $17.50
per share. The Company received approximately $2,000,000 in cash
from this transaction.
In May 1995, the Company's Board of Directors authorized the
repurchase of up to 100,000 shares of its outstanding common
stock for issuance in connection with incentive stock option and
stock bonus plans. As of March 31, 1997, the Company had not
repurchased any of its outstanding common stock pursuant to this
plan.
The Company has a fixed stock option plan whereby options for a
total of 250,000 shares of the Company's common stock may be
granted to key employees or non-employees of the Company by the
Board of Directors. The exercise price of the options must equal
or exceed the market value of the Company's common stock on the
date of grant. Options are generally exercisable at a rate of
40% in the second year after grant, 60% in the third year after
grant, 80% in the fourth year after grant and in full thereafter.
Options expire up to ten years after the date of grant.
Pro forma net earnings and earnings per share information, as
required by SFAS No. 123, "Accounting for Stock-Based
Compensation," has been determined as if the Company had
accounted for employee stock options under SFAS No. 123's fair
value method. The fair value of these options was estimated at
the grant date using a Black-Scholes option pricing model with
the following weighted-average assumptions: a risk-free interest
rate based on the anticipated length of time until exercise
ranging from 5.06% to 7.66%; expected life of 4 to 5 years;
and an expected volatility of 80%. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized
to expense over the options' vesting period (generally 4 years).
The Company's pro forma information follows:
Year ended March 31, 1995 1996 1997
------ ------ ------
Net earnings (loss)
As reported $1,514,000 ($7,855,000) $3,725,000
Pro forma $1,263,000 ($8,072,000) $3,439,000
Net earnings (loss) per
common and common equivalent share
As reported $.35 ($1.83) $.76
Pro forma $.28 ($1.88) $.70
F-13
This disclosure is not likely to be representative of the effects
on reported net earning for future years, because options vest
over four years and additional awards generally are made each
year.
A summary of the status of the Company's stock option plan as of
March 31, 1995, 1996 and 1997, and changes during the years
ending on those dates, is presented below:
1995* 1996* 1997
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning
of year 144,710 $2.92 227,690 $4.57 362,493 $ 4.45
Granted 184,500 4.64 171,825 4.17 50,100 14.54
Exercised (95,676) 2.31 (15,002) 3.19 (48,198) 4.65
Forfeited (5,844) 4.34 (22,020) 4.75 (25,875) 3.97
------- ------- -------
Outstanding at
end of year 227,690 4.57 362,493 4.45 338,520 5.95
======= ==== ======= ==== ======= ====
Options exercis-
able at year-
end 33,921 3.91 98,568 4.68 140,820 4.51
Weighted-
average
fair value of
options granted
during the year $2.11 $1.75 $8.18
*Amounts have been adjusted to reflect the three-for-two stock
split during fiscal 1997.
Options Outstanding Options Exercisable
------------------------------------------- --------------------
Weighted Weighted
Range of Number average Weighted Number average
Exercise Outstand Remaining average Outstand- Exercise
Prices ing at Contrac- Exercise ing at Price
Per March 31, tual Life Price Per March 31, Per
Share 1997 Years Share 1997 Share
-------- ------- ---- ------ ------- -----
$3 - $5 283,420 3.1 $ 4.43 139,270 $4.49
$5 - $7 5,000 2.2 $ 5.52 1,550 $6.06
$10 - $14 29,625 4.5 $11.24
$19 - $23 20,475 4.8 $19.32
-------- ------- ---- ------ ------- -----
$3 - $23 338,520 3.3 $5.95 140,820 $4.51
-------- ------- ---- ------ ------- -----
A summary of changes in outstanding warrants as of March 31,
1995, 1996 and 1997, and changes during the years ending on those
dates is presented below:
1995* 1996* 1997
----------------- --------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------- ------ ------- ------ -------
Outstanding at
beginning
of year 16,200 $4.40 8,100 $4.40 23,100 $ 4.03
Granted 15,000 3.83 1,500 13.50
Exercised (8,100) $4.40 (8,100) 4.40
------- ----- ------ ------ ------- ------
Outstanding at
end of year 8,100 $4.40 23,100 $4.03 16,500 $ 4.71
===== ==== ====== ==== ===== ====
* Amounts have been adjusted to reflect the three-for-two stock
split during fiscal 1997.
F-14
NOTE 9 - INCOME TAXES:
The provision (benefit) for income taxes consists of the
following.
Year Ended March 31, 1995 1996 1997
-------- ------- ---------
Federal
Current $997,200 $594,400 $1,184,000
Deferred (98,800) (2,433,600) (314,300)
State
Current 203,800 131,600 415,500
Deferred (24,700) (728,500) (73,100)
Foreign
Current 103,300
Deferred (373,900) 209,600
--------- --------- ---------
$1,077,500 ($2,810,000) $1,525,000
========= ========== =========
A reconciliation of the statutory federal income tax rate to the
effective rate is as follows.
Year Ended March 31, 1995 1996 1997
---- ---- ----
Statutory federal rate 34.0% (34.0%) 34.0%
State taxes, net of federal
benefit 7.9 (3.6) 4.5
Write-off of intangibles 6.4
Foreign tax rate differences 2.1 (8.1)
Change in valuation allowances 2.0 .8
Research and development
credits (3.0) (4.5)
Recapture of subsidiary excess
losses 6.5
Foreign sales corporation
benefit (2.1) (.5) (.6)
benefit
Other (1.7) 1.2 2.9
---- ---- ----
Effective income tax rate 41.6% (26.4%) 29.0%
==== ==== ====
F-15
Deferred tax assets (liabilities) are comprised of the following:
Year Ended March 31, 1995 1996 1997
Book accruals not currently
deductible for tax 42,200 1,593,500 1,200,900
Deferred compensation 618,200 706,500 733,200
Inventory obsolescence reserve 164,100 141,600 467,500
Accrued payroll and related costs 119,000 780,300 965,200
State investment tax credit
carryforwards 310,900 303,600 303,600
Subsidiary net operating loss
carryforwards 48,300 741,000 399,800
Tax basis of intangibles in
excess of book 2,688,300 2,796,400
Other 134,000 345,000 161,100
--------- --------- ---------
Total deferred tax assets 1,436,700 7,299,800 7,027,700
--------- --------- ---------
Depreciation (951,300) (1,016,200) (962,700)
Prepaid assets (34,900) (100,000) (61,500)
Other (25,000) (66,000) (121,700)
--------- --------- ---------
Total deferred tax liabilities (1,011,200) (1,182,200) (1,145,900)
--------- --------- ---------
Deferred tax asset valuation
reserve (359,200) (579,500) (703,400)
--------- --------- ---------
Net deferred tax asset $ 66,300 $5,538,100 $5,178,400
========= ========= =========
Realization of the tax loss and credit carryforwards, which
expire at various times between 2002 and 2011, is contingent on
future taxable earnings. Valuation allowances have been recorded
for these and other asset items which may not be realized.
Deferred income taxes have not been provided on the undistributed
earnings of foreign subsidiaries. The amount of such earnings
included in consolidated retained earnings at March 31, 1997 was
approximately $1.8 million. These earnings have been
substantially reinvested and the Company does not plan to
initiate any action that would precipitate the payment of income
taxes thereon.
NOTE 10 - GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
The Company currently operates in one industry segment. During
1995, the Company established a manufacturing and marketing
subsidiary in Hong Kong and a marketing subsidiary in Australia.
The Company also maintains a sales presence in Canada and Europe.
Net sales by the Company to unaffiliated customers outside the
United States represents 11.3%, 21.0% and 15.7% of consolidated net
sales for the years ended March 31, 1995, 1996 and 1997. Net
Sales by the Company's domestic operations to unaffiliated
customers outside the United States represent 11.3%, 12.3% and 7.0%
of the Company's consolidated net sales for the years ended March
31, 1995, 1996 and 1997, respectively.
The following table presents net sales, income (loss) before
income taxes and identifiable assets of the Company's domestic
and foreign operations. Net sales and income (loss) before
income taxes of the Company's domestic operations include the
impact of export sales. Inter-area sales are presented on a
basis intended to reflect the market value of the products as
nearly as possible. Identifiable assets are those assets of the
Company that are identified with the operations in the respective
geographic area.
F-16
Year Ended March 31, 1995 1996 1997
---------- ---------- ----------
Net sales
United States operations $34,336,336 $38,234,057 $92,442,003
Foreign operations 3,623,752 8,809,377
Inter-area 1,394,684 33,956,925
Eliminations (1,394,684) (33,956,925)
---------- ---------- -----------
$34,336,336 $41,857,809 $101,251,380
========== ========== ===========
Income (loss) before income
taxes
United States operations $2,591,989 ($8,917,291) $3,631,097
Foreign operations (1,432,217) 2,191,278
Eliminations (315,735) (572,091)
---------- ---------- -----------
$ 2,591,989 ($10,665,243) $5,250,284
========== ========== ===========
Identifiable assets
United States operations $24,745,293 $40,830,577 $48,142,435
Foreign operations 5,067,001 20,133,416
---------- ---------- -----------
$24,745,293 $45,897,578 $68,275,851
========== ========== ===========
During 1997 sales to the Company's three largest customers accounted
for 10.7%, 10.6% and 6.0% of the Company's net sales, respectively.
Accounts receivable from the Company's three largest customers represented
20.0%, 0.9% and 6.6% of the accounts receivable balances at March 31, 1997,
respectively. During 1996, sales to the Company's two largest customers
accounted for 13.8% and 9.7% of net sales, respectively. During 1995,
sales to the Company's two largest customers accounted for 19.3% and 18.7%
of net sales, respectively.
NOTE 11 - COMMITMENTS
The Company leases certain facilities pursuant to operating lease
agreements. Operating lease expense for offices and other
equipment was approximately $16,000 in 1995, $470,000 in 1996 and
$1,208,000 in 1997. Future minimum rental payments under
noncancelable operating lease agreements are as follows: 1998 -
$1,498,000; 1999 - $1,335,000 and 2000 - $379,000.
NOTE 12 - SUBSEQUENT EVENTS
On May 8, 1997, the Company announced its purchase of Digital
Audio Limited, (DA Systems), from Numerex Corporation in exchange
for 226,168 shares of the Company's common stock valued at $3.9
million. The shares are callable, at the Company's option, at
$17 per share plus interest at 8.25% until June 30, 1998, and may
be put by Numerex to the Company at that price after that date.
F-17
No dealer, salesperson or any other 1,300,000 SHARES
person has been authorized to give any
information or to make any
representation not contained in this
Prospectus in connection with this
offering, and, if given or made, such [DSI LOGO]
information or representation must not
be relied upon as having been
authorized by the Company, the Selling
Shareholders or the Underwriters. This
Prospectus does not constitute an offer DETECTION
to sell or a solicitation of an offer SYSTEMS, INC.
to buy any securities other than the
registered securities to which it
relates, or an offer to sell or
solicitation of an offer to buy such RADIONICS LOGO]
securities in any jurisdiction where,
or to any person to whom, it is
unlawful to make such an offer or
solicitation. Neither the delivery of
this Prospectus nor any sale made
hereunder shall, under any COMMON STOCK
circumstances, create any implication
that there has been no change in the
affairs of the Company since the date
hereof or that the information
contained herein is correct as of any
time subsequent to the date hereof.
PROSPECTUS
TABLE OF CONTENTS
PAGE
Prospectus Summary 3
Risk Factors 7 RAYMOND JAMES & ASSOCIATES, INC.
Use of Proceeds 11
Capitalization 11 NEEDHAM & COMPANY, INC.
Price Range of Common Stock 12
Dividend Policy 12
Selected Consolidated Financial Data 13 , 1997
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14
Business 18
Management 29
Principal and Selling Shareholders 34
Description of Capital Stock 34
Underwriting 36
Legal Matters 37
Experts 37
Available Information 37
Incorporation of Certain Documents
by Reference 38
Index to Consolidated Financial
Statements F-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company will pay all of the expenses incurred in connection with the
offering described in this registration statement. Such expenses are estimated
to be as follows:
Securities and Exchange Commission registration fee $8,551
Nasdaq National Market listing fee 17,500
NASD fee 3,322
Legal fees and expenses 80,000
Printing expenses 100,000
Accounting fees and expenses 25,000
Miscellaneous 15,627
--------
Total $250,000
=========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The New York Business Corporation Law (the "BCL") provides that if a
derivative action is brought against a director or officer of a corporation,
the corporation may indemnify him or her against amounts paid in settlement and
reasonable expenses, including attorneys' fees incurred by him or her, in
connection with the defense or settlement of such action, if such director or
officer acted in good faith for a purpose which he or she reasonably believed
to be in the best interests of the corporation, except that no indemnification
shall be made without court approval in respect of a threatened action, or a
pending action settled or otherwise disposed of, or in respect of any matter as
to which such director or officer has been found liable to the corporation. In
a nonderivative action or threatened action, the BCL provides that a
corporation may indemnify a director or officer against judgments, fines,
amounts paid in settlement and reasonable expenses, including attorneys' fees
incurred by him or her in defending such action, if such director or officer
acted in good faith for a purpose which he or she reasonably believed to be in
the best interests of the corporation.
Under the BCL, a director or officer who is successful, either in a
derivative or nonderivative action, is entitled to indemnification as outlined
above. Under any other circumstances, such director or officer may be
indemnified only if certain conditions specified in the BCL are met. The
indemnification provisions of the BCL are not exclusive of any other rights to
which a director or officer seeking indemnification may be entitled pursuant to
the provisions of the certificate of incorporation or the bylaws of a
corporation or, when authorized by such certificate of incorporation or bylaws,
pursuant to a shareholders' resolution, a directors' resolution or an agreement
providing for such indemnification.
The above is a general summary of certain provisions of the BCL and is
subject, in all cases, to the specific and detailed provisions of
Sections 721-725 of the BCL.
Article V, Section 2 of the Company's By-Laws contains provisions requiring
indemnification by the Company of its directors and officers against certain
liabilities and expenses which they may incur as directors and officers of the
Company or of certain other entities in accordance with Sections 722-723 of the
BCL.
Section 726 of the BCL also contains provisions authorizing a corporation
to obtain insurance on behalf of any director and officer against liabilities,
whether or not the corporation would have the power to indemnify against such
liabilities. The Company maintains insurance coverage under which the
directors and officers of the Company are insured, subject to the limits of the
policy, against certain losses, as defined in the policy, arising from claims
made against such directors and officers by reason of any wrongful acts as
defined in the policy, in their respective capacities as directors or officers.
II-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Location
- -------- ---------------------------- ------------------------
<S> <C> <C>
1 Underwriting Agreement To be filed by amendment
2(a) Definitive Stock Purchase Incorporated by reference
Agreement, dated February 12, as Exhibit 2 to the
1996, for purchase of stock of Company's Form 8K/A filed
Radionics, Inc. April 29, 1996
2(b) Asset Purchase Agreement, dated Incorporated by reference
July 22, 1996, for the purchase to Exhibit 2(b) of the
of the assets of Senses Company's 1997 Annual
International Report on Form 10-K
2(c) Stock Purchase Agreement, dated Incorporated by reference
May 7, 1997, for the purchase to Exhibit 2-1 of the
of the stock of Digital Audio Company's Form-8K filed
Limited May 21, 1997
2(d) Stock Purchase Agreement, dated Filed herewith
June 24, 1997, for the purchase
of shares of Seriee SA
2(e) Share Purchase Agreement, dated Filed herewith
June 25, 1997, for the purchase
of a portion of the stock of
Radio-Active Systems.
2(f) Share Purchase Agreement, Filed herewith
dated June 25, 1997, for the
purchase of a portion of the
stock of Radio-Active Systems.
4 Rights of Holders of common Incorporated by reference
stock - 1981 plan to Exhibit 4 of the
Company's 1993 Annual
Report on Form 10-K
5 Opinion of Nixon, Hargrave, To be filed by amendment
Devans & Doyle LLP
10(a) Non-employee director stock Incorporated by reference
option plan (warrant plan) to Exhibit 10(a) of the
Company's 1994 Annual
Report on Form 10-K
II-2
<PAGE>
10(b) Medical reimbursement plan Incorporated by reference
to Exhibit 10(b) of the
Company's 1997 Annual
Report on Form 10-K
10(c) Employee stock purchase plan Incorporated by reference
to Exhibit 10 of the
Company's 1994 Annual
Report on Form 10-K
10(d) Amended & Restated Credit Filed herewith
Facility Agreement dated June
24, 1997 among Detection
Systems, Inc., Radionics, Inc.
and Fleet Bank, together with
Amended and Restated Term Loan
Note, Revolving Line Note and
Mortgage Loan Note, each dated
June 24, 1997
10(e) Deferred Compensation Plan and Incorporated by reference
Deferred Bonus Plan, both to Exhibit 10(e) of the
amended January 1997 Company's 1997 Annual
Report on Form 10-K
10(f) 1992 Restated Stock Option Plan Incorporated by reference
to Exhibit 22 of the
Company's 1995 Annual
Report on Form 10-K
10(g) Detection Systems, Inc. Incorporated by reference
Executive Bonus Plan to Exhibit 10(g) of the
Company's 1997 Annual
Report on Form 10-K
10(h) Executive employment contract Incorporated by reference
with Karl H. Kostusiak to Exhibit 10(h) of the
Company's 1996 Annual
Report on Form 10-K
10(i) Executive employment contract Incorporated by reference
with David B. Lederer to Exhibit 10(i) of the
Company's 1996 Annual
Report on Form 10-K
10(j) Executive employment contract Incorporated by reference
with Lawrence R. Tracy to Exhibit 10 of the
Company's 1995 Annual
Report on Form 10-K.
10(k) ECI Amended License and Mfg. Incorporated by reference
Agreement & Amendment No. 1 to Exhibit 10(k) of the
Company's 1996 Annual
Report on Form 10-K
II-3
<PAGE>
10(l) Shareholders Agreements w/ ECI Incorporated by reference
to Exhibit 10 of the
Company's 1994 Annual
Report on Form 10-K
10(m) Stock Purchase Agreements with Incorporated by reference
Karl H. Kostusiak and David B. to Exhibit 10(n) of the
Lederer Company's 1997 Annual
Report on Form 10-K
10(n) Joint Venture Agreement for Incorporated by reference
Establishment of D.S. First to Exhibit 10(o) of the
Systems (Beijing) Limited Company's 1996 Annual
Report on Form 10-K
10(o) 1997 Stock Option Plan Filed herewith
10(p) Lease for China Facility dated To be filed by amendment
_______, 1995
11 Statement re: Computation of To be filed by amendment
Per Share Earnings
23(a) Consent of Nixon, Hargrave, Included in Exhibit 5
Devans & Doyle LLP
23(b) Consent of Independent Filed herewith
Accountants
24 Power of Attorney Reference is made to page
II-6 hereof
</TABLE>
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Rochester, State of New York, on this 22nd day of
July, 1997.
DETECTION SYSTEMS, INC.
By: /s/ Karl H. Kostusiak
Karl H. Kostusiak, Chairman,
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
Name Title Date
/s/ Karl H. Kostusiak Chairman, President, Chief July 22, 1997
Karl H. Kostusiak Executive Officer and Director
Officer and Director
/s/Frank J. Ryan Vice President (Principal July 23, 1997
Frank J. Ryan Financial Officer and
Principal Accounting Officer)
/s/Donald R. Adair Director July 23, 1997
Donald R. Adair
/s/Mortimer B. Fuller, III Director July 23, 1997
Mortimer B. Fuller, III
/s/David B. Lederer Director July 23, 1997
David B. Lederer
/s/Edward C. McIrvine Director July 23, 1997
Edward C. McIrvine
II-5
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below, hereby constitutes and appoints Karl H. Kostusiak and Frank J. Ryan, or
either of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution for him or her in any and all capacities, to
sign any or all amendments or post-effective amendments to this Registration
Statement, and any registration statement filed pursuant to Rule 462(b) of the
Securities Act prepared in connection therewith, and to file the same, with
exhibits thereto and other documents in connection therewith or in connection
with the registration of the Common Stock under the Exchange Act, with the
Securities and Exchange Commission, granting unto each of such attorneys-in-
fact and agents full power and authority to do and perform each and every act
and thing requisite and necessary in connection with such matters as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his or her substitute or substitutes may do or cause to be done by virtue
hereof.
Name Title Date
/s/ Karl H. Kostusiak Chairman, President, Chief July 22, 1997
Karl H. Kostusiak Executive Officer and Director
Officer and Director
/s/Frank J. Ryan Vice President (Principal July 23, 1997
Frank J. Ryan Financial Officer and
Principal Accounting Officer)
/s/Donald R. Adair Director July 23, 1997
Donald R. Adair
/s/Mortimer B. Fuller, III Director July 23, 1997
Mortimer B. Fuller, III
/s/David B. Lederer Director July 23, 1997
David B. Lederer
/s/Edward C. McIrvine Director July 23, 1997
Edward C. McIrvine
II-6
<PAGE>
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made and entered into this June 24, 1997,
By and between:
Detection Systems, Inc., a company registered under the laws of New York,
United States of America, having its headquarters at 130, Perinton Parkway,
Fairport, N.Y 14450 United States of America, represented by its Officer,
Mr. Lawrence R. Tracy (hereinafter "the Buyer"),
on the one hand,
And:
Essonne Electronique, a French SOCIETE ANONYME, having its registered
address at Zone Industrielle Ferrieres - 45210 Ferri*res, with registered
capital of 1,000,000 French francs, and registered at the Register of
Commerce and Companies of Montargis under the number B 969 203 462,
represented by its President Directeur General, Mr. Claude Dauphin,
(hereinafter the "Seller"),
on the other hand.
WHEREAS, the Seller is the owner of fourteen thousand nine hundred and
twenty eight (14,928) shares out of fifteen thousand (15,000) shares of
SERIEE SA, a French SOCIETE ANONYME having its registered office at 9, rue
Marceau, 93310 Le Pre Saint Gervais, with registered capital of 1,500,000
French francs, and registered at the Register of Commerce and Companies of
Bobigny under the number B 400 608 717 (hereinafter the "Compnay"). As of
the date of this Agreement, the Company has issued fifteen thousand
(15,000) shares, of which seventy two shares are not the subject of this
Agreement.
As of the date of this Agreement, the owners of the shares of the Company
are:
ESSONNE ELECTRONIQUE : 14,928 shares
MR. DANIEL SOUILLARD: 30 shares
MR. JACK MAGORD: 42 shares
TOTAL: 15,000 shares
The Seller' shares are hereinafter referred to as the "Shares". The Seller
wishes to sell and the Buyer agrees to buy all of the Shares subject to the
terms of this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants, agreements and conditions
hereinafter set forth, and intending to be legally bound hereby, THE
PARTIES HERETO AGREE AS FOLLOWS:
<PAGE>
ARTICLE 1
PURCHASE AND SALE OF SHARES
1.1. SHARES TO BE SOLD. At the Closing (as hereinafter defined)
the Seller shall sell and transfer all the Shares to Buyer, and Buyer shall
purchase and accept them from Seller.
1.2 PURCHASE PRICE - PAYMENT. Subject to adjustment as provided
below, the aggregate purchase price for the Shares is three million four
hundred ninety two thousand and eight hundred francs (FF 3,492,800). The
purchase price shall be payable in thirty four thousand one hundred and
forty one (34,141) shares of common stock of Detection Systems, Inc. ("DSI
Stock"), valued for purposes of this transaction, at the average of the
last five trading days prior to Closing Date, to be converted into French
francs, using the currency exchange rate published in The Wall Street
Journal of the day before Closing Date.
The certificates of the DSI Stock shall be sent by the Buyer to
the Seller by air courier within eight days from the Closing Date.
Sales and other dispositions of, and encumbrances upon, the DSI
Stock shall be restricted for at least sixty days after Closing or longer
if required by applicable U.S. securities laws and regulations. The Seller
expressly declares and warrants that he will not sell more than three
thousand (3,000) shares of DSI Stock during any given trading day.
The Seller has provided the Buyer with an unaudited balance sheet
of the Company as of May 31, 1997, a copy of which is attached in Schedule
1, (the "May Balance Sheet"), which according to Seller was prepared in
accordance with generally accepted accounting principles and in a manner
consistent with the Company's consolidated balance sheet for the twelve
months period ending on December 31, 1996 (also provided by Seller and a
copy of which is attached in Schedule 1).
To the extent that the total current assets (as stated on line DL
of the French accounting form 2051) of the May Balance sheet is less than
one million five hundred thousand francs (FF. 1,500,000), the purchase
price shall be decreased accordingly one franc of reduction per franc of
such difference.
This adjustment will be finalized as soon as practicable after
Closing based upon the May Balance Sheet audited by the Buyer's appointed
auditors and in no case later than September 30, 1997.
From the date of remittance of the certificates of the DSI Stock
until October 31, 1997, the Seller expressly undertakes not to sell any DSI
Stock in a total amount exceeding FF. 1,500,000, so as to enable the
parties hereto to settle any claim in the event the total current assets
less the total current liabilities of the then audited
2
<PAGE>
May Balance Sheet would be inferior to FF. 1,500,000, by means of a
restitution by the Seller to the Buyer of the relevant number of DSI
Stock corresponding to the reduction amount of the total current assets.
The currency exchange rate used by the parties hereto shall be the rate
published in The Wall Street Journal on the day before restitution of
the portion of the DSI Stock.
1.3. CLOSING. The Closing (the "Closing") shall take place on the
date hereof at the offices of Kahn & Associes, 9 rue Anatole de la Forge,
75017 Paris, France.
1.4. DELIVERIES BY SELLER. At the Closing, Seller shall deliver the
following to the Buyer:
(a) Transfer deed of Shares (the "Ordre de mouvement") signed
by the Seller;
(b) The minutes of the meeting of the Board of Directors of the
Company approving this Agreement and other actions the Buyer may
reasonably request,
(c) The Manufacturing Agreement between the Company and Esselec,
under which Esselec commits to continue to subcontract the Seriee
line of owned products during a minimum twenty four month period from
Closing Date, extendible at Seriee<O~>s request, to the life of the
products, at terms which shall in no case be inferior for Seriee than
those practised today. Such agreement must provide that Esselec is
to be considered by Seriee as a preferrential sub-contractor for new
products developed by Seriee, if such products are not subcontracted
to a factory of the Buyer's group. However, such preferrential
treatment for new products shall not be exclusive, which means that
Seriee may subcontract part of such activity to one or several other
subcontractors. Also, Seriee may decide to exclude Esselec from such
subcontracting if the price, quality or delivery terms offered by
other subcontractors are better for Seriee. Esselec commits to
continue to hold the AFNOR certification applicable to Esselec
manufacturing process, and to maintain such certification during the
duration of the subcontracting agreement.
(d) The resignation, effective as of the Closing Date of Mr
Claude Dauphin from his positions with the Company (including as a
consultant, if applicable), with the only payment done to him being
his remuneration (according to previous practice) to be paid up to
Closing Date.
(e) The resignation, effective as of June 28, 1997 of all
directors of the Company, without any payment nor indemnity.
(f) The letter of termination of the Service Agreement, the
Technical Agreement as well as any agreement entered into between the
Company and Essonne Electronique prior to the Date of Closing; such
letter of termination
3
<PAGE>
shall be duly accepted and signed by the
Company and Essonne Electronique. The termination of all such
agreements shall be effective on the Closing Date.
1.5. DELIVERIES BY THE BUYER. (a) Within 48 hours from the
Closing Date, the Buyer shall deliver to Seller copy of the certificates
for the 34,141 DSI Stock (b) within 3 business days from the Closing Date,
the Buyer shall deliver to Seller a check of FF. 200,000 to enable the
Company to reimburse the amount owed by the Company to Essonne Electronique
("compte courant"), which is of a total amount of FF 635,200. The balance,
I.E; FF 435,200 shall be paid by the Company to Essonne Electronique within
sixty days from Closing.
The certificates of the DSI Stock shall be sent by the Buyer to
the Seller by air courier within eight days from the Closing Date.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF SELLER
The Seller hereby makes the representations and warranties set
forth in this Article 2. For the purposes hereof, "knowledge of Seller"
shall includes matters known to the Seller or the Company. When reference
is made to any event, change or effect having a Material Adverse Effect,
this reference shall mean that this event, change or effect materially
harms the business, operations, prospects, assets (including intangible
assets), liability (including contingent liabilities), financial situation
or operation profits of the Company.
2.1. CORPORATE ORGANIZATION. The Company is a SOCIETE ANONYME
duly organized and validly existing under French law. It has the corporate
power and authority to own or lease its properties and to carry on its
business in the manner in which it is currently conducted. The Company
does not, directly or indirectly, have any equity interest or other
property interest in any company, joint venture, partnership, association
or other entity. Complete and correct copies of the certificate of
incorporation and by-laws (the "Constitutive Documents") are attached as
Schedule 2. The Company has not stopped making payments, declared a
moratorium on payments of its debts, is not in bankruptcy or reorganization
or liquidation, has not entered into an assignment for the benefit of its
creditors and has not become subject to any reorganization procedure.
2.2. AUTHORIZATION. The Seller has the requisite capacity to
enter into this Agreement and the other agreements to be executed and
delivered by the Seller pursuant hereto (the "Additional Seller's
Documents") and to carry out the transactions contemplated hereby and
thereby. When fully executed and delivered, this Agreement and each of the
Additional Seller's Documents will constitute the valid and binding
agreements of the Seller, enforceable against the Seller in accordance with
their respective terms.
4
<PAGE>
2.3. CAPITALIZATION. As of the date of this Agreement, the
capital of the Company is as set forth in the preamble to this Agreement.
All the shares have been validly issued and are fully paid, nonassessable
and free of any lien, preemptive rights or other restrictions with respect
thereto. The Shares are held by the Seller as set out in the table in the
preamble to this Agreement. There is no agreement or commitment which
could result in the Company having to purchase, amortize, issue or transfer
the Shares of the Company in any manner whatsoever.
2.4. OWNERSHIP OF SHARES. On the date of Closing, the Buyer will
acquire all rights to the shares free of all Liens.
2.5. CONSENTS AND APPROVALS; NON-CONTRAVENTION. Neither the
execution, delivery or performance of this Agreement or of any related
documents, nor the consummation by Seller of the transactions contemplated
hereby or thereby, nor compliance by Seller with any of the provisions
hereof or thereof:
(a) violates any provision of the Constitutive Documents,
(b) requires on the part of the Seller any filing with, or
permit, authorization, consent or approval of, any court, trustee in
bankruptcy ("administrateur judiciaire"), administrative or other authority
(a "Governmental Entity"),
(c) require, in accordance with the terms of any contract, lease
or other agreement to which the Seller or the Company is a party, any
consent, approval or authorization,
(d) violate any judicial or arbitral decision, or any legal
regulatory or contractual provision applicable to the Seller or the
Company, or
(e) result in a material violation or material breach of any
agreement or result in the termination, modification, cancellation, loss of
a material benefit, or result in the creation or imposition of any lien
upon any of the respective properties or assets of the Seller or the
Company.
2.6. FINANCIAL STATEMENTS. The balance sheet of the Company as
at December 31, 1996, and the interim unaudited balance sheet prepared by
the Company as of May 31, 1997 which have been delivered to Buyer and
attached as Schedule 1 (together, the "Financial Statements") are complete,
sincere and true and prepared in accordance with generally applicable
accounting principles in France and accurately reflect the asset and
liability situation of the Company at each of the dates and for each period
indicated.
2.7. INTERIM CHANGE. Since January 1st, 1997, the Company has
not engaged in any business or transaction other than in the ordinary
course of business. In particular (but without this list being exclusive):
5
<PAGE>
(a) the Company has not suffered any change, nor has there
arisen any event, having or which could reasonably be expected to have a
Material Adverse Effect;
(b) the Company has not forgiven or canceled any debts or claims
or waived, released or relinquished any contract right or any other rights
of its business;
(c) the Company has not consented to, or has not had imposed on
it, any liens;
(d) the Company has not suffered any damage, destruction or loss
of property, whether or not covered by insurance, which could reasonably be
expected to have a Material Adverse Effect;
(e) the Company has not accelerated the collection of, granted
any discounts with respect to or sold or assigned to third parties any
accounts receivable or delayed the payment of any payables or, other than
in the ordinary course of business and consistent with past practice, had
any reason to write off as uncollectable any accounts receivable or any
portion thereof;
(f) the Company has not assumed any loan, directly or
indirectly, or incurred or guaranteed any obligation with regards to a
loan, or made any loans, advances or capital contributions to, or
investment in, any other individual, corporation, partnership, joint
venture, association, organization or other entity (a "Person"),
(g) pledged or subjected to any lien, sold, assigned or
transferred any asset except for sales of inventory in the ordinary course
of business and consistent with past practice;
(h) the Company has not increased in any manner the wages,
salaries, bonuses, pension plans, retirement allocations or other
allocations of any officer, employee or other person,
(i) the Company has not entered into any additional pension,
profit-sharing, bonus, severance pay, or other plan, agreement or
arrangement relating to retirement of other benefits,
(j) the Company has not entered into any employment or
consulting agreement with any person,
(k) the Company has not amended any plan, agreement or
arrangement in effect as of the date hereof;
(l) with the exception of the economic dismissal of seven
employees which procedure of termination is currently underway and which
names are listed in
6
<PAGE>
Schedule 3 the Company has not been the target of any
work stoppage or other labor difficulty;
(m) the Company has not made any investment in any business,
company, partnership, association or other entity.
(n) with the exception of the sub-contracting agreement for the
Company's line of products between Esselec and the Company, the Company has
not entered into any agreement, contract or commitment, with respect to the
manufacture of any product of the Company or any update or derivative
thereof (collectively, the "Products");
(o) the Company has not declared, paid or set aside for payment
any dividend or other distribution;
(p) the Company has not made any change in its accounting
principles or methods, except as may have been required by a change in
generally accepted accounting principles in France;
2.8. NO UNDISCLOSED LIABILITIES. Except as and to the extent of
the amounts specifically reflected or reserved against in the Financial
Statements, and obligations under agreements, commitments or contracts
entered into, in the ordinary course of business, the Company has not
incurred any liabilities or obligations of any nature (whether or not
accrued). As of the Closing date, and save for the shareholder's advance
("compte courant") in the amount of FF. 635,200 owed by the Company to
Essonne Electronique, there exists no shareholder advances owed by the
Company.
2.9. LITIGATION. There is no claim, action, suit, inquiry or
investigation by or before any judicial entity pending or, to the knowledge
of the Seller, threatened against or involving the Company or affecting any
of its assets. There is no basis known to the Seller for any such claim,
action, suit, inquiry, or investigation.
2.10. NO VIOLATION.
(a) The Seller and the Company have always been in full
compliance with the by-laws of the Company.
(b) The Seller and the Company have always been in full
compliance with (i) all legal regulations applicable to the Company and
(ii) all judicial decisions related thereto,
(c) The Seller and the Company have not breached any obligations
with regard to any contract or agreement irrespective of its purpose.
7
<PAGE>
(d) The Company has all authorizations (from Governmental Entity
or other authority) necessary to : (i) enable it conduct its business as
currently conducted and, if necessary (ii) to enter into all transactions
contemplated by this Agreement.
2.11. TITLE TO ASSETS. With the exception of a real property
located 14, rue des Tro*nes - 41260 La Chauss*e Saint Victor, duly owned
and paid by the Company, the Company does not own any real property assets.
With the exception of the liens listed in the Certificate of recordation of
liens delivered by the Commercial Court of Bobigny, attached as Schedule 4,
the Company has good and marketable title, free and clear of all liens, of
all assets, rights, trademarks, trade names, licenses and properties, which
are used in the conduct of the business conducted by the Company (the
"Assets"). The Company has valid and enforceable leases or licenses, as the
case may be, with respect to the Assets consisting of property that is
leased or licensed to the Company, under which there does not exist any
default, on the part of the Company. Since inception, the Company has
validly entered into and, as the case may be, has validily and legally
terminated any lease agreement used for carrying on its business activites.
2.12. INTELLECTUAL PROPERTY.
(a) A true and complete list, of all the Company's industrial and
intellectual property rights (collectively, "Intellectual Property") owned
by, or licensed to the Company is contained in Schedule 5. The
Intellectual Property described in Schedule 5 constitutes all Intellectual
Property necessary to operate the Company's business. The Intellectual
Property is duly and validly registered under the Company's name and all
fees for recordation or renewal have been timely paid by the Company.
(b) The Company does not own any patent nor has it filed an
application for any patent.
(c) The Company has the sole and exclusive right to use, sell,
license, dispose of or bring actions for the infringement of its rights to
the Intellectual Property as utilized in its business; there are no
royalties, honoraria, fees or other payments payable by the Company to any
Person by reason of ownership, use, licensure, sale or disposition of any
Intellectual Property.
(d) There are no license agreements, commitments or guaranteed
royalty or fee payments with respect to Intellectual Property. The Closing
of the transaction contemplated hereby will not in any way impair the right
of the Company to use, sell, license or dispose of, or any portion thereof,
or to bring any action for the infringement of any of such rights to the
Intellectual Property.
(e) None of the former or present employees or officers of the
Company hold any right, title or interest, directly or indirectly, in whole
or in part, in or to any Intellectual Property which the Company currently
owns or which is necessary for the business of the Company; no former or
present employees, officers or directors of
8
<PAGE>
the Company or any other third
party has asserted any moral rights claim with respect to the Intellectual
Property.
(f) There is no pending or threatened claim or litigation
challenging or questioning the validity, ownership or right to use, sell,
license or dispose of any Intellectual Property nor, to the knowledge of
the Seller, is there a valid basis for any such claim, nor has the Company
received any notice asserting that the proposed use, sale, license or
disposition by the Company of any Intellectual Property conflicts or will
conflict with the rights of any other party, nor is there, to the knowledge
of the Seller, a valid basis for any such claim or assertion.
(g) There are no allegations by any third party that the Company
has infringed any copyright, patent, trademark or trade name or
misappropriated or misused any invention, trade secret or other proprietary
information entitled to legal protection, and the Company has not asserted
any claim of infringement, misappropriation or misuse in the last three
years.
2.13. CONTRACTS AND COMMITMENTS.
(a) All commercial contracts and agreements intered into by the
Company (whether written or oral), have been entered into under normal and
ordinary business conditions. There exists no fixed term commercial
contract entered into for a duration superior to one year. Save for a debt
collection agreement entered into by the Company with CAREDIF, any
commercial contract entered into by the Company is terminable by the
Company without penalty upon notice of thirty (30) days or less.
(b) The Company has duly and timely satified all the conditions
provided in the agreement entered into with Ma"tre Jeanne on June 1st, 1995
for the acquisition of the "fonds de Commerce" of SOCI<florin>T<florin>
D'ETUDES ET DE REALISATIONS INDUSTRIELLES ELECTRIQUES - SERIEE.
(c) The Company has not entered into any credit agreement, loan
agreement with any financial institution or third party.
(d) The Company has not received any financial benefit,
investment or subsidy granted by any public agency;
(e) The Company does not have outstanding contracts with respect
to the employment of any officer, individual, employee, agent, consultant,
adviser, salesperson, representative or other person on a full-time, part-
time, contract or consulting basis which differs in any material respect
from the requirements of applicable law including provisions with respect
to termination indemnification.
(f) Except as required by law, the Company does not have any
pension, profit-sharing, bonus, severance pay, retirement, hospitalization,
insurance,
9
<PAGE>
stock purchase, stock option or other benefit with or for the
benefit of any Person (a "Benefit Plan").
(g) The Company does not have any employee on a fixed-term
employment agreement.
(h) Save for two loans made to Mr. Roger and Mrs. Dechamp (in the
respective amount of FF. 38,000 and FF. 18,000), the Company does not have
any outstanding loan to the Seller or employee.
(i) The Company has not guaranteed any obligations of the Seller
or any other person. The Seller has not guaranteed any obligations of the
Company which would still be in effect after the Closing Date.
(j) There are no shareholders agreements, voting agreement,
pledge agreement, or sale-purchase agreements relating to the Shares.
(k) The Company does not have any contract which is material to
its business, operations or prospects or any other contract, instrument,
commitment, plan or arrangement which has not been made in the ordinary
course of business.
(l) Each Material Contract: (i) is valid and binding on the other
party or parties thereto and is in full force and effect and (ii) after the
Closing of the transaction contemplated by this Agreement, shall continue
in full force and effect without penalty or other adverse consequence
arising solely from the consummation of the transactions contemplated by
this Agreement. Neither the Company nor, to the best knowledge of the
Seller, any other party to any Material Contract is in breach of, or
default under, any Material Contract.
2.14. CUSTOMERS AND SUPPLIERS. There has not been any adverse
change in the business relationship of the Company with any customer or
supplier since December 31, 1996.
2.15. INSURANCE. The Company has valid insurance policies which
adequately cover all the risks against which it is normal to insure
considering the activities of the Company. There has not been any failure
to give any notice or present any claim under any such policy in a timely
fashion or in the manner or detail required by the policy . There are no
outstanding past due premiums or claims, and there are no provisions for
retroactive or retrospective premium adjustments. No notice of
cancellation or non-renewal with respect to, or disallowance of any claim
under, any such policy has been received by the Company. Execution of this
Agreement shall not entitle any of the insurers covered by this Section
2.16 to modify the terms of the insurance policies taken out by or on
behalf of the Company, these policies shall remain in full force and effect
after the Closing.
10
<PAGE>
2.16. ENVIRONMENTAL MATTERS. The Company is not in breach of any
environmental regulations.
2.17. TAXES - SOCIAL SECURITY CONTRIBUTIONS.
(a) All tax and social security returns, declarations, reports,
estimates, information returns, and statements (collectively, "Tax and
Social Security Returns") required to be filed by THE COMPANY on or before
the date hereof for all periods ending on or before the Closing date have
been timely filed, and all such Tax and Social Security Returns are true,
correct and complete.
(b) THE COMPANY has timely paid (or accrued in its accounts) all
taxes and social security contributions due or claimed to be due by it by
any taxing or social security authority in respect to periods (or any
portion thereof) ending on or before the Closing date, and no failure in
this regard may be attributed to it.
(c) No audit or other proceeding by any national, local court,
governmental, regulatory, parafiscal, administrative or similar authority
are presently pending with respect to any taxes or social security
contributions of THE COMPANY.
(d) The Company is not a party to, or is bound by or has any
obligation under, any tax-consolidation agreement or similar contract or
arrangement.
2.18. TRANSACTIONS WITH AFFILIATES. The Seller does not have,
directly or indirectly, (i)<E^>an interest in any entity which furnished or
sold, or which furnishes or sells, services or products which the Company
furnishes or sells, or proposes to furnish or sell, or (ii)<E^>any interest
in any Person which purchases from or sells or furnishes to the Company any
goods or services.
2.19 ACCOUNTS RECEIVABLE. All receivables of the Company arose in
the ordinary course of business and the aggregate amounts thereof, are
collectible (except to the extent reserved against as reflected in the
Financial Statements) and are carried at values determined in accordance
with French generally accepted accounting principles. None of the
receivables is subject to any claim of offset, setoff or counterclaim and
there are no facts or circumstances that would give rise to any such claim.
No person has any lien, charge, pledge, security interest or other
encumbrance on any of such receivables and no agreement for deduction or
discount has been made with respect to any of such receivables.
2.20 MINUTE BOOKS. The minute books of the Company made
available to counsel for Buyer contain all minutes since the Company's
incorporation as normally kept in conformance with French law.
2.21 ENTIRETY OF REPRESENTATIONS. The statements related to the
above representations and warranties are complete and do not contain any
false representations nor omit any facts that are essential for the
purposes hereof.
11
<PAGE>
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF BUYER
Buyer hereby jointly and severally represent and warrant to
Seller as follows:
3.1. CORPORATE ORGANIZATION. Buyer is duly organized, validly
existing and in good standing under the laws of the State of New York.
3.2. AUTHORIZATION. Buyer has the requisite corporate power and
authority to enter into this Agreement and the other documents and
instruments to be executed and delivered by Buyer pursuant hereto (the
"Additional Buyer's Documents") and to carry out the transactions
contemplated hereby and thereby. When fully executed and delivered, this
Agreement and each of the Additional Buyer's Documents will constitute the
valid and binding agreements of Buyer, enforceable against it in accordance
with their respective terms.
3.3. CONSENTS AND APPROVALS; NON-CONTRAVENTION. Neither the
execution, delivery or performance of this Agreement or any of the
Additional Buyer's Documents by Buyer nor consummation of the transactions
contemplated hereby or thereby will (a) violate any provision of the
articles of incorporation of the Buyer, (b) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Buyer or any
of its properties or assets.
ARTICLE 4
ADDITIONAL AGREEMENTS
4.1. CONSENTS AND APPROVALS. The parties shall, and Seller shall
cause the Company to, take all reasonable actions necessary to comply
promptly with all legal requirements which may be imposed with respect to
the transactions contemplated hereby (which actions shall include, without
limitation, furnishing all information required in connection with
approvals of or filings with any Governmental Entity) and will promptly
cooperate with and furnish information to each other in connection with any
such requirements imposed on any of them in connection with the
transactions contemplated hereby.
4.2. FURTHER ASSURANCES. From time to time after the Closing,
the Seller will use all reasonable efforts to obtain any licenses, permits,
waivers, consents, authorizations, qualifications and orders of
Governmental Entities or other Persons or entities as Buyer shall
reasonably request as necessary to enable the Company to continue to enjoy
after the Closing the rights and benefits presently enjoyed by the Seller
in the operation of the business conducted by the Company.
12
<PAGE>
4.3. COMPETITION. The Seller, from the present date until the
end of a three year period, shall not, in the European Union, the United
States of America and Canada, directly or indirectly, own any capital stock
or other equity securities of, have any direct or indirect (unless the
participation is less than 1% of the capital of a publicly traded company)
equity or ownership interest in, or serve as a director, officer, employee,
consultant or agent of any individual, partnership, corporation, trust or
unincorporated association which competes with, or conducts a similar
business as that of the Company or the Buyer.
4.4. REIMBURSEMENT OF ESSONNE ELECTRONIQUE FORMER SHAREHOLDER'S
ACCOUNT ("COMPTE COURANT").
The Company will reimburse the amount it owes to Essonne
Electronique as recorded in the shareholder's account ("compte courant"),
which is of a total amount of FF 635,200, according to the following
payment schedule: FF 200,000 within three working days after Closing, and
the balance sixty days from Closing Date. As stated in Article 1.5, the
first payment installment of FF. 200,000 shall be tendered by the Buyer.
4.5. PAYMENT OF ESSELEC'S PAST DUE INVOICES AS OF THE CLOSING
DATE
The Company will remit to Esselec, within five business days from
Closing Date a note ("traite") in the amount of FF 1,012,520.78 (VAT
included), payable thirty days from issuance, to pay for the Esselec
subcontracting invoices due and payable before Closing Date (invoices
issued by Esselec in March and April 1997 in the amount of FF. 1,012,520.78
VAT included). All other invoices of Esselec shall be paid according to
regular payment terms. The Company shall pay in due course the invoices due
for July 10,1997, in the amount of FF. 801,784.66 (VAT included).
ARTICLE 5
SURVIVAL AND INDEMNIFICATION
5.1. SURVIVAL. All representations and warranties contained in
this Agreement shall survive for three (3) years after the Closing with the
exception of the representations and warranties of Section 2.18 (fiscal and
labor questions) which will survive for the applicable statutes of
limitations. All representations and warranties shall further survive
beyond such three-year period (or period of the applicable statutes of
limitation) for so long as any claim made during such three-year period (or
period of the applicable statutes of limitation) under this Article 5 are
not definitively settled. In addition, it is specified that the periods
thus defined apply to the notification of the event giving rise to
indemnification and not to its judicial or amicable settlement.
5.2. INDEMNIFICATION. The Seller agrees to indemnify and hold
harmless the Buyer and/or the Company for the period noted in Article 5.1
commencing on the date hereof (and for any further period during which a
claim for indemnification is
13
<PAGE>
pending hereunder) against and in respect of
any Damages (as hereinafter defined in Section 5.7) of which the cause
predates the Closing date and incurred as a result of any breach by the
Seller of this Agreement, including the representations, warranties and
covenants contained herein or in any agreement, document or other
instrument delivered pursuant hereto or in connection herewith. No
investigation made by or for the Buyer shall affect any representation or
warranty of the Seller contained in this Agreement or the indemnification
obligation of the Seller set forth herein.
5.3. THRESHOLD. As concerns all damages, the Seller will not be
held liable under this Article 5 for the indemnification of the Buyer,
unless the total Damages exceed the sum of fifty thousand (50,000) French
francs, in which case the Seller will be liable for any sums of Damages
exceeding FF. 50,000.
To determine whether this threshold is met, all sums for which
the Seller is liable pursuant to the provisions of this Agreement shall be
aggregated irrespective of when such sums are claimed from the Seller.
The threshold of FF. 50,000 shall be applied only to the first
claim of Damages made by the Buyer. Should a second or subsequent claims be
made by the Buyer, the Seller shall be liable for the payment of all
Damages as of the first French franc.
5.4. PROCEDURE FOR INDEMNIFICATION.
(a) The Buyer shall give prompt written notice (within 30 days)
to the Seller of any claim or event known to it which does or may give rise
to a claim for indemnification hereunder by the Buyer against the Seller;
provided that the failure of the Buyer to give notice as provided in this
Agreement shall not relieve the Seller of his obligations under this
Article 5 to the extent that such failure has not prejudiced the Seller.
(b) In the case of any claim for indemnification hereunder
arising out of a claim, action, suit or proceeding brought by any Person
who is not a party to this Agreement (a "Third Party Claim"), the Buyer
shall also give the Seller copies of any written claims, process or legal
pleadings with respect to such Third Party Claim promptly after such
documents are received by the Buyer, it being understood that any delay in
remitting such documentation by the Buyer shall not relieve the Seller of
his obligations under this Article 5 except to the extent that such failure
has prejudiced the Seller.
(c) The Seller may elect to compromise or defend the Company or
the Buyer, at his own expense and by his own counsel, any Third Party
Claim. If the Seller elects to compromise or defend a Third Party Claim,
it shall, within 30 days (or sooner, if the nature of such Third Party
Claim so requires), notify the Buyer of its intent to do so, and the Buyer
shall reasonably cooperate in the compromise of, or defense against, such
Third Party Claim. If the Seller elects not to compromise or defend
against a Third
14
<PAGE>
Party Claim, or fails to notify the Buyer of its election
as provided in this Section 5.3, the Buyer may pay, compromise or defend
such Third Party Claim at the expense of the Seller.
(d) If there is a reasonable likelihood that a Third Party Claim
may adversely affect the Buyer, other than as a result of money damages or
other money payments for which the Buyer is entitled to indemnification
hereunder, the Buyer will have the right, after consultation with the
Seller, to have sole control of the defense and settlement of such Third
Party Claim notwithstanding the provisions of Section 5.5.
5.6. PAYMENT OF AMOUNTS DUE. In case of a claim by the Buyer
under the provisions of this Article 5, the Seller shall pay the amounts
claimed as soon as there is an agreement between them with respect thereto.
The payment shall be settled by the Seller in French francs. However,
should the Seller still own DSI Stock, on the date of settlement, the Buyer
shall have the option to accept DSI Stock, corresponding to the amount due
by the Seller, as valid payment, using the currency exchange rate published
in The Wall Street Journal on the day before payment.
5.7. DEFINITION OF DAMAGES. For purposes of this Article 5,
"Damages" shall mean any loss, liability, damage, deficiency, cost and
expense including, in particular, reasonable attorneys' fees and expenses
incurred or actually disbursed in connection with any claim, suit or
proceeding brought against the Company and that had its origin prior to the
Closing.
However, Damages shall not include fees and expenses of attorneys
incurred or actually disbursed in the case of a claim not involving a Third
Party Claim except to the extent awarded or imposed by a judicial or
arbitral decision, which Buyer reserves the right to request.
Any amounts that may be due to the Buyer will be calculated after
having taken into account any tax savings benefiting the Company.
ARTICLE 6
GENERAL PROVISIONS
6.1. AMENDMENT AND WAIVER. No amendment of any provision of this
Agreement shall in any event be effective, unless the same shall be in
writing and signed by the parties hereto. Any failure of any party to
comply with any obligation, agreement or condition hereunder may only be
waived in writing by the other parties. No failure by any party to take
any action against any breach of this Agreement or default by the other
parties shall constitute a waiver of such party's right to enforce any
provision hereof or to take any such action.
6.2. DISPUTE RESOLUTION. Any dispute, controversy or claim
arising out of this Agreement or the breach thereof shall be resolved by
arbitration pursuant to the
15
<PAGE>
rules of the International Chamber of Commerce,
before a panel of three arbitrators, one of whom shall be selected by the
Buyer, one of whom shall be selected by the Seller and the third arbitrator
shall be selected by the other two arbitrators. The arbitration take place
in Paris and shall be conducted in the English language.
6.3. BROKER'S AND FINDER'S FEES. The Seller hereby represent and
warrant to Buyer with respect to the Seller, and Buyer hereby represents
and warrants to Seller, that no Person or entity is entitled to receive
any investment banking, brokerage or finder's fee or fees for financial
consulting or advisory services in connection with this Agreement or the
transactions contemplated hereby.
6.4 LEGAL FEES. Each party will bear its own legal fees and
expenses.
6.5. NOTICES. All notices, requests and other communications
hereunder shall be in writing and shall be deemed given if delivered
personally, facsimiled (which is confirmed) or mailed by registered or
certified mail (postage prepaid, return receipt requested) to the parties
at the following addresses (or at such other address for a party as shall
be specified by like notice):
- TO THE BUYER AT:
130, Perinton Parkway,
Fairport, N.Y 14450, USA
Facsimile: 00/1 716 421 42 88
Attention: Lawrence R.Tracy
David Lederer
- TO THE SELLER AT:
Zone Industrielle Ferrieres
45210 Ferrieres
Facsimile: 02 38 89 84 30
Attention: Claude Dauphin
6.6. ENTIRE AGREEMENT; BINDING EFFECT. This Agreement and the
documents referred to herein (a) constitute the entire agreement and
supersede all other agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof and (b) shall
not be assigned by either party (by operation of law or otherwise) without
the prior written consent of the other party, except that Buyer may assign,
in its sole discretion, any of its rights, interests and obligations
hereunder to any related company.
6.7. APPLICABLE LAW. This Agreement shall be governed by and be
construed in accordance with French law.
16
<PAGE>
6.8. SEVERABILITY. In case any term, provision, covenant or
restriction of this Agreement is held to be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and
enforceability of the remaining terms, provisions, covenants or
restrictions, or of such term, provision, covenant or restriction in any
other jurisdiction, shall not in any way be affected or impaired thereby.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement
as of the date first written above.
ESSONNE ELECTRONIQUE DETECTION SYSTEMS INC.
By: /s/ Claude Dauphin By: /s/ Lawrence R. Tracy
Name: Claude Dauphin Name: Lawrence R. Tracy
Title: President Directeur General Title: Officer
17
SHARE PURCHASE AGREEMENT
This Share Purchase Agreement (the "Agreement"), entered into as of
25 June 1997, by and among:
1. V.M.H. N.V., a company organized and existing under the laws of
Belgium, having its registered office at Weggevoerdenlaan 5, 8500
Kortrijk;
2. V.R.C. N.V., a company organized and existing under the laws of
Belgium, having its registered office at Paepsemlaan 28/30, 1070
Brussels;
3. Ets. Victor Dambois S.A., a company organized and existing under the
laws of Belgium, having its registered office at Quai de Coronmeuse
39, 4000 Li<e`>ge;
4. Transport International Nieuwenhuyse N.V., a company organized and
existing under the laws of Belgium, having its registered office at
Weggevoerdenlaan 5, 8500 Kortrijk;
5. Mrs. Raymond Van Marcke, Smokkelpotstraat 31, 8500 Kortrijk;
6. Mr. Carl Van Marcke, Kasteelstraat 6, 9770 Kruishoutem;
7. Mr. Bruno Van Marcke, Chemin des Ablens 2, 7900 Grandmetz;
hereinafter individually referred to as a "Seller" and collectively
as "Sellers", each acting in their capacity of shareholder of RADIO-
ACTIVE SYSTEMS, a corporation organized and existing under the laws of
Belgium, whose registered office is situated at Weggevoerdenlaan 5, 8500
Kortrijk, registered with the Registrar of Commerce of Kortrijk under n*
91241 (hereinafter the "Company"),
AND
Detection Systems, Inc., a corporation organized and existing under
the laws of the State of New York, having its registered office at 130
Perinton Parkway, Fairport, New York 14450, United States of America,
hereinafter referred to as "Buyer".
Sellers and Buyer are referred to herein from time to time
individually as a "Party" or collectively as the "Parties".
<PAGE>
-2-
WHEREAS, Sellers collectively own 2,557 or 78.7% of the 3,250 registered
shares issued by and representing the share capital of the Company;
WHEREAS, pursuant to that certain letter of intent dated May 20, 1997
(the "Letter of Intent"), Sellers desire to sell and Buyer desires to
purchase said 2,557 shares, upon the terms and subject to the conditions
hereinafter set forth;
WHEREAS, in connection with the Letter of Intent, Sellers and Buyer have
executed that certain escrow agreement dated May 21, 1997 (the "Escrow
Agreement"), pursuant to which Buyer has transferred an amount of USD
280,000 to an account opened by it with Generale Bank, branch office
Waterpoort 1, 8500 Kortrijk (the "Escrow Funds");
WHEREAS, Parties have agreed that they will not instruct the Generale
Bank, branch office Waterpoort 1, 8500 Kortrijk, to distribute the Escrow
Funds together with interest earned on the deposit to Sellers, as
provided in the Escrow Agreement, but they shall, on the contrary,
instruct the Generale Bank to refund the Escrow Funds to Buyer; Buyer
however shall pay Sellers, at the date of execution of this Agreement,
the full amount of the purchase price for the 2,557 shares of the Company
Sellers desire to sell and Buyer desires to purchase;
WHEREAS, the official receivers of Gemel Italy S.P.A, Via Campo di Maggio
40, 21022 Brunello, Varese, Italy, have confirmed the Company in writing
that the trade receivable that the Company has on Gemel Italy S.P.A. may
be set off against outstanding debt claims of Gemel Italy S.P.A. on the
Company and that the remaining balance due by the Company to Gemel Italy
S.P.A. shall be cancelled by Gemel Italy S.P.A. in their books; the
letter at issue of Gemel Italy S.P.A. is attached to this Agreement as
Schedule 1;
WHEREAS, the outstanding balance of said receivable on Gemel Italy S.P.A.
was discounted for BEF 1,555,386 in the Company's audited accounts
relating to the financial year ended December 31, 1996;
WHEREAS, Parties therefor have agreed to raise the price, mentioned in
article 5 of the Letter of Intent, for the 2,557 shares of the Company
Sellers desire to sell and Buyer desires to purchase, by the amount of
the trade receivable that the Company had on Gemel Italy S.P.A., being
BEF 1,555,386 and that, as such, the purchase price for the mentioned
2,557
<PAGE>
-3-
shares is BEF 99,897,819; it being expressly understood, however,
that in the event and at the time that it would appear that the above-
referenced set-off is legally unenforceable, Parties shall consult with
each other so as to reach an equitable solution for a downward adjustment
of said purchase price; provided, however, that said downward adjustment
shall in no event exceed BEF 1,555,386;
WHEREAS, Buyer has performed a due diligence of the business and the
assets of the Company, which included the examination of the consistent
application of the Company's valuation rules and the conformity of the
Belgian statements with the Belgian accounting law as reflected in the
audited accounts for 1996 which were prepared by Hermant Dod<e'>mont &
C* and are attached to this Agreement as Schedule 2, as well as all items
set forth in Schedule 3.
WHEREAS, Buyer has entertained a commercial relationship with the Company
over the past years as one of its main suppliers and, as such, has a
reasonable knowledge of the Company's business.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties and
covenants herein contained, the Parties agree as follows:
ARTICLE 1 - PURCHASE AND SALE OF SHARES
Upon the terms and subject to the conditions of this Agreement,
Sellers shall sell to Buyer, and Buyer shall purchase from Sellers, 2,557
registered shares representing 78.7% of the corporate capital of the
Company (the "Shares") for an aggregate purchase price (the "Purchase
Price") of BEF 99,897,819 and, at the date of execution of this
Agreement:
- Buyer shall pay to Sellers the full amount of the Purchase
Price by means of a certified check. This payment shall not entail any
costs or expenses for Sellers. The Purchase Price has been established as
set forth in article 5 of the Letter of Intent, but has been increased by
the amount of the trade receivable which the Company had on Gemel Italy
S.P.A., Via Campo di Maggio 40, 21022 Brunello, Varese, Italy, and which
was discounted in the Company's audited accounts relating to the
financial year ended December 31, 1996.
- Immediately after having received the full Purchase Price, each
Seller shall sell, assign, transfer and deliver to
<PAGE>
-4-
Buyer, the number of Shares set forth beside such Seller's name
on Schedule 4 hereto, and deliver all certificate(s),
instruments and documents required to be delivered by such
Seller to validly effectuate the transfer of such Shares;
specifically, each Seller shall at that moment cause the
Company's shares register to be duly amended so as to validly
reflect the transfer of such Shares to Buyer.
ARTICLE 2 - ADJUSTMENT OF THE PURCHASE PRICE
In the event and at the time that the Company would be obliged to
reinstate the discount recorded in the Company's annual accounts relating
to the financial year ended December 31, 1996 in respect of the trade
receivable which the Company had on Gemel Italy S.P.A., Via Campo di
Maggio 40, 21022 Brunello, Varese, Italy, the Parties shall consult with
each other so as to reach an equitable solution for a downward price
adjustment and a partial reimbursement by Sellers of the Purchase Price
set forth in Article 1 hereof; it being expressly understood, however,
that the amount of said downward adjustment and partial reimbursement by
Sellers of the Purchase Price shall in no event exceed BEF 1,555,386.
ARTICLE 3 - REIMBURSEMENT OF ESCROW FUNDS
At the date of execution of this Agreement, Sellers and Buyers shall
execute an amendment to the Escrow Agreement, approved and signed by the
Generale Bank, branch office Waterpoort 1, 8500 Kortrijk, instructing the
Generale Bank to distribute the Escrow Funds together with interest
earned on the deposit since May 21, 1997 to Buyer (the "Amendment"). The
Amendment is attached to this Agreement as Schedule 5.
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF SELLERS
Each Seller represents and warrants to Buyer that the following are
true, correct and complete as of the date of this Agreement:
4.1 ORGANIZATION. The Company is a corporation duly organized,
validly existing and in good standing under the laws of Belgium and has
the requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted.
4.2 AUTHORITY. Each Seller has all requisite authority to enter
into, execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement has been duly
<PAGE>
-5-
executed and delivered by each Seller and constitutes the valid
and binding obligation of each Seller enforceable against it in
accordance with its terms. Each Seller is entitled to sell and
procure the transfer of the full legal and beneficial ownership
in its/his Shares of the Company to Buyer, free and clear of
all encumbrances and third party's rights in accordance with
the terms of this Agreement.
4.3 NO VIOLATION OR CONFLICT. Neither the execution and delivery of
this Agreement by Sellers, nor the consummation by Sellers of the
transactions contemplated hereby or compliance by Sellers with the
provisions hereof will conflict with, or result in any violation of, or
default under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to the loss of a benefit under, or
result in the creation of any security interest upon any of the
properties or assets of the Company under, any provision of the articles
of incorporation or by-laws or the comparable charter or organization
documents of the Company.No filing or registration with, or
authorization, permit, waiver, consent or approval of, any governmental
entity or authority, including courts of competent jurisdiction, domestic
or foreign (a "Governmental Entity") is, under Belgian law, required to
be obtained or made for the execution, delivery and performance by
Sellers of this Agreement. The approval of the board of directors of the
Company, required pursuant to article 8 of the articles of incorporation
("statuten") of the Company, in case of transfer of shares of the
Company, has been obtained.
4.4 SHARES. The stated capital of the Company consists of 3,250
shares, issued in registered form, each with a nominal value of BEF
1,000, representing a total capital of BEF 3,250,000. All Shares are
validly authorized and issued, are fully paid-in and all such Shares are
free and clear of any encumbrances, liens, pledges, charges, rights of
first refusal, or security rights. However, pursuant to article 8 of the
articles of incorporation ("statuten") of the Company, the approval of
the board of directors of the Company is required in case of a transfer
of shares of the Company. Sellers have not approved any security, option,
warrant, right, call, subscription, agreement, commitment, fixed or
contingent, that directly or indirectly (i) calls for the issuance, sale,
pledge or other disposition of any shares of capital stock of the Company
or any securities convertible into, or other rights to acquire, any
shares of capital stock of the Company, (ii) obligates the Company to
grant, offer or enter into any of the foregoing or (iii) relates to the
voting or control of such capital stock, securities or rights.
<PAGE>
-6-
4.5 FINANCIAL SCHEDULES. Attached hereto as Schedule 2 are the
audited balance sheet (including the accompanying notes) and related
audited income statement as of and for the financial year ended December
31, 1996 for the Company (the "Financial Schedules"). The accounts
included in the Financial Schedules present fairly and in all material
respects the financial condition of the Company as of such date and the
results of operations of the Company for such period.
4.6 EVENTS SUBSEQUENT TO DECEMBER 31, 1996. (i) To the best
knowledge of Sellers, there has, since December 31, 1996, not been any
event, change or circumstance having, either individually or in the
aggregate, an effect which has, at the date of execution of this
Agreement, appeared to be materially adverse to the business, financial
condition, operation or results of operations of the Company ("Material
Adverse Effect"), or (ii) so far as Sellers know or may reasonably be
expected to know, there has not been, since December 31, 1996, any
material transaction except in the ordinary course of business relating
to the assets or the business of the Company.
4.7 TAX MATTERS. The Company has filed all tax returns and tax
reports that it was required to file. All such tax returns and tax
reports were correct and complete in all material respects. To the best
knowledge of Sellers, there are no unpaid corporate taxes of the Company,
except for corporate taxes the payment of which is not yet due, and there
are no security interests on any of the assets of the Company that arose
in connection with any failure (or alleged failure) to pay any corporate
taxes due by the Company.
4.8 LITIGATION. Except as set forth in Section A of the Disclosure
Letter attached to this Agreement as Schedule 6, there are no claims,
actions, suits, inquiries, investigations, or proceedings pending,
involving the Company.
4.9 EMPLOYEES. Except as set forth in Section B of the Disclosure
Letter attached to this Agreement as Schedule 6, the Company is not a
party or bound by any collective bargaining agreement, nor has it
experienced any strikes, grievances, claims of unfair labor practices
(i.e. practices not commonly imposed or applied by a reasonable
employer), or other collective bargaining disputes within the last five
(5) years and none is pending, or to the knowledge of Sellers,
threatened.
4.10 GENERAL. Each of the representations and warranties
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set forth in this Article 4 and the Disclosure Letter thereto
is true and accurate. Buyer has relied on the representations
and warranties of Sellers explicitly set forth in this Article
4 and on the Disclosure Letter thereto.
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to each Seller that the following are
true, correct and complete as of the date of this Agreement:
5.1 ORGANIZATION, STANDING AND POWER. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the
State of New York and has the requisite corporate power and authority to
carry on its business as now being conducted.
5.2 AUTHORIZATION. Buyer has all requisite power and authority to
enter into this Agreement and to perform its obligations hereunder. The
execution and delivery of this Agreement and the performance of its
obligations hereunder have been duly authorized by all necessary
corporate action on the part of Buyer. This Agreement has been duly
executed and delivered by Buyer and constitutes the valid and binding
obligation of Buyer, enforceable against it in accordance with its terms,
except as enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other similar laws affecting
the rights of creditors generally. However, as of the execution of this
Agreement, no bankruptcy, insolvency, reorganization or any other event
implying the applicability of a law affecting the rights of creditors of
Buyer is, as far as reasonably can be foreseen at this time, pending or
threatening.
5.3 NO VIOLATION - CONSENTS. Neither the execution and delivery by
Buyer of this Agreement, nor the consummation by Buyer of the
transactions contemplated hereby or compliance by Buyer with the
provisions hereof will conflict, or result in any violation of, or
default under, or give rise to a right of termination or cancellation of
this Agreement under, the articles of incorporation or by-laws or any
other charter or organization document of Buyer. No filing or
registration with, or authorization, permit, waiver, consent or approval
of, any Governmental Entity is required to be obtained or made by Buyer
in connection with the execution, delivery and performance by Buyer of
this Agreement.
5.4 DUE DILIGENCE. Buyer has performed a due diligence of the
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business and the assets of the Company. This due diligence included the
examination of the consistent application of the Company's valuation
rules and the accordance of the Belgian statements to the Belgian
accounting law as reflected in the audited accounts for 1996 which were
prepared by Hermant Dod<e'>mont & C* and are attached to this Agreement
as Schedule 2, as well as all items set forth in Schedule 3. During this
due diligence, Buyer has been assisted by the law firm Van Bael & Bellis
and the audit company Price Waterhouse.
5.5 KNOWLEDGE OF THE COMPANY'S BUSINESS. Buyer has entertained a
commercial relationship with the Company over the past years as one of
its main suppliers and, as such, has a reasonable knowledge of the
Company's business.
5.6 DAY-TO-DAY MANAGEMENT. Buyer acknowledges that the day-to-day
management of the Company has been performed by N.V. (formerly B.V.B.A.)
SDM, a company organized and existing under the laws of Belgium, having
its registered office at Sint-Annastraat 71, Kortrijk, registered with
the Registrar of Commerce of Kortrijk under n* 109020 and managed by Mr.
P. Sabbe ("SDM"), according to a co-operation agreement ("Samenwerkings-
overeenkomst") entered into between SDM and the Company on January 21,
1991. A copy of the Samenwerkingsovereenkomst is attached to this
Agreement as Schedule 7.
ARTICLE 6 - RESIGNATION OF MEMBERS OF BOARD OF DIRECTORS
Immediately following the execution of this Agreement, Sellers shall
cause their members of the Board of Directors of the Company to resign in
order to be replaced as of the date of execution of this Agreement by the
representatives of Buyer. Buyer procures that, at the first annual
general meeting of shareholders of the Company following the execution of
this Agreement, a valid discharge of liability ("kwijting") within the
meaning of article 79 of the Belgian Company Law will be granted, with
respect to the period from 1 January 1997 until the date of execution of
this Agreement, to all individuals who, at any time between 1 January
1997 and the date of execution of this Agreement, have been members of
the Board of Directors of the Company.
ARTICLE 7 - SURVIVAL AND INDEMNIFICATION
7.1 INDEMNITY PERIOD. The right on indemnification for
breach of a representation, warranty, covenant or agreement
contained in this Agreement, or in the Disclosure Letter or any
Schedule, shall only exist until 31 December 1999. After this
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date, no claim may be brought by a Party against another Party
with respect to this Agreement.
7.2 JOINT AND SEVERAL LIABILITY OF SELLERS WHICH ARE LEGAL
ENTITIES. Subject to the other provisions of this Article, the Sellers
which are legal entities are jointly and severally liable for any and all
breaches of the representations and warranties set forth in Article 4.
Each Seller which is a natural person, however, can only be held liable
for any and all breaches of the representations and warranties set forth
in Article 4, pro rata the number of shares set forth beside such
Seller's name on Schedule 4 hereto.
7.3 LIMITATION ON INDEMNIFICATION AMOUNTS. Subject to Article 7.2
hereof, the aggregate obligations and aggregate liabilities of all
Sellers for any and all breaches of:
(i) the representations and warranties set forth in Articles 4.1,
4.2 and 4.4 hereof shall in any case be limited to 35% of the Purchase
Price, as determined in Article 1 hereof, it being understood that the
obligations and liabilities of each individual Seller for such breaches
is in any event limited to 35% of the part of the Purchase Price
mentioned beside such Seller's name on Schedule 4;
(ii) the other representations and warranties, and any and all
failures to perform any covenant made by or on behalf of Sellers, under
this Agreement, the Disclosure Letter and any Schedules hereto, and any
and all other failures under this Agreement, the Disclosure Letter or any
Schedule hereto, shall in any case be limited to BEF 10,000,000.
7.4 INDEMNIFICATION. Subject to the other provisions of this
Article, and therefor without prejudice to the Articles 7.1, 7.2 and 7.3
of this Agreement, from the date of execution of this Agreement:
(i) Sellers shall only indemnify and hold harmless Buyer or its
successors (the "Representatives"), as the case may be, from and against
any losses, damages or expenses (with the exception of attorney's fees),
judgments, fines (collectively, "Damages") Buyer or its Representatives
have suffered, to the extent the Damages arise out any breach of any
representation or warranty or failure to perform any covenant
made by or on behalf of Sellers, under this Agreement or in the
Disclosure Letter or any Schedule hereto, and any and all failures
under this Agreement, the Disclosure Letter or any Schedule hereto.
<PAGE>
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However, Sellers shall only indemnify and hold harmless Buyer
or its Representatives from and against Damages which exceed
BEF 1,000,000 for each breach of representation or warranty or
failure to perform any covenant or any other failure under
this Agreement, the Disclosure Letter or any Schedule hereto. Buyer or
its Representatives, as the case may be, shall notify Sellers within a
period of one month from the earlier of (i) the occurrence or (ii)
discovery of such breach of representations and warranties or failure to
perform a covenant or failure under this Agreement, the Disclosure Letter
or any Schedule hereto or (iii) the moment such breach of representations
and warranties or failure to perform a covenant or failure under this
Agreement, the Disclosure Letter or any Schedule hereto should reasonably
have been discovered by Buyer. In absence of such a timely notification,
Buyer looses any right to indemnification of any Damage which arises out
the concerned breach of representations or warranty or failure to perform
a covenant or failure under this Agreement, the Disclosure Letter or any
Schedule hereto.
(ii) Buyer shall indemnify and hold harmless Sellers or their
Representatives (which definition includes heirs of such Seller), as the
case may be, from and against any Damages Sellers or their
Representatives have suffered, to the extent they arise out any breach of
any representation or warranty or failure to perform any covenant made by
or on behalf of Buyer under this Agreement or any Schedule hereto or any
other failure of Buyer under this Agreement or any Schedule hereto.
Sellers or their Representatives, as the case may be, or one of the
Sellers or its Representatives, shall notify Buyer within a period of one
month from the earlier of (i) the occurrence or (ii) discovery of such
breach of representations and warranties or failure to perform a covenant
or (iii) the moment that such breach of representations and warranties or
failure to perform a covenant should reasonably have been discovered by
the concerned Seller(s). In the absence of such a timely notification,
the concerned Seller(s) loose(s) any right to indemnification of any
Damage which arises out the concerned breach of representation or
warranty or failure to perform a covenant.
(iii) Neither Sellers nor Buyer are under an obligation to indemnify
the other Party, to the extent the breach of representations or
warranties or the failure to perform any covenant made in this Agreement
or in the Disclosure Letter or any Schedule hereto or any other failure
under this Agreement, the Disclosure Letter or any Schedule hereto is due
to the behaviour of such other Party. No indemnification may be
<PAGE>
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claimed by Buyer, based upon facts, acts, omissions or general
circumstances, the existence of which could not have been
reasonably ignored by Buyer at the date of execution of this
Agreement.
(iv) Sellers can in any event only be held liable for the breach of
representations and warranties set forth in Article 4.7 if the amount of
taxes which are due but unpaid at the date of the execution of this
Agreement exceed the amount of taxes for which provision is made in the
Financial Schedules. Buyer accepts to indemnify and hold harmless Sellers
from and against, any taxes due or payable by the Company as a result of,
or in connection with, all taxable events occurring after the date of
execution of this Agreement.
7.5 THIRD PARTY CLAIMS AND ACTIONS AGAINST THIRD PARTIES. Promptly
after receipt by any person entitled to indemnification under this
Article 7 (an "Indemnified Party") of notice of the commencement of any
action in respect of which the Indemnified Party will seek
indemnification hereunder or before the Indemnified Party brings a claim
against a third party in respect of which the Indemnified Party will
seek indemnification hereunder if the claim is rejected, the Indemnified
Party shall notify each person that is obligated to provide such
indemnification (an "Indemnifying Party") thereof in writing. Failure to
so notify the Indemnifying Party shall relieve the Indemnifying Party
from any liability that it may have to the Indemnified Party under this
Article 7 or any other Article of this Agreement, the Disclosure Letter
or any Schedule, but not from any liability that it may have to the
Indemnified Party other than under this Agreement, the Disclosure Letter
or any Schedule hereto. The Indemnifying Party shall be entitled to
participate in the defense of such action or bringing of such a claim
and, provided that within 15 days after receipt of such written notice
the Indemnifying Party confirms in writing its responsibility therefor
and reasonably demonstrates that it will be able to pay the full amount
of potential liability in connection with any such claim, to assume
control of such defense or of the bringing of such claim; PROVIDED,
HOWEVER, that:
(i) the Indemnified Party shall be entitled to participate in the
defence of such action or bringing of such claim and to employ counsel at
its own expense to assist in the handling of such claim;
(ii) the Indemnifying Party shall obtain the prior written approval
of the Indemnified Party before entering into any
<PAGE>
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settlement of such claim or ceasing to defend against such
claim, if pursuant to or as a result of such settlement or
cessation, an order, injunction or other equitable relief would
be imposed against the Indemnified Party which, if successful,
could materially interfere with the business, operations,
assets, conditions (financial or otherwise) or prospects of the
Indemnified Party.
The Indemnified Party shall give the Indemnifying Party sufficient
access to all relevant information and documents, related to such action
or claim, and necessary to enable the Indemnifying Party to participate
in, or assume control of, the defence of such action or bringing of such
claim.
7.6 MITIGATION OF DAMAGES. Without prejudice to the right of the
Indemnifying Party, as defined in article 7.5, pursuant to Article 7.5,
Buyer and its Representatives shall, and shall cause the Company, to
mitigate to any extent any Damages that may have arisen or may still
arise from any event in respect of which indemnification by Buyer or its
Representatives is, or will be, claimed. In particular, Buyer and its
Representatives shall, and shall cause the Company, to bring any action,
suit or proceeding against any other person or persons who may be liable
or jointly liable for such Damages or for the cause of such Damages.
7.7 DETERMINATION OF INDEMNIFICATION AMOUNTS. Subject to the other
provisions of this Article, the amounts for which Sellers shall be liable
under this Article 7 shall be determined taking into consideration (i)
any insurance proceeds received by Buyer, its Representatives or the
Company or to which Buyer, its Representatives or the Company are
entitled in connection with the facts giving rise to the right of
indemnification, (ii) any reimbursements, compensations or payments from
any other person or persons received by Buyer, its Representatives or the
Company or to which Buyer, its Representatives or the Company are
entitled in connection with the facts giving rise to the right of
indemnification, (iii) any savings of taxes realized or that may be
claimed by Buyer, its Representatives or the Company, in connection with
the facts giving rise to the right of indemnification.
7.8 SUBROGATION. In the event that the Indemnifying Party shall be
obligated to indemnify the Indemnified Party pursuant to this Article 7,
the Indemnifying Party shall, upon payment of such indemnity in full, be
subrogated to all the rights of the Indemnified Party with respect to the
claims to which such indemnification relates.
<PAGE>
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ARTICLE 8 - TERMINATION
8.1 TERMINATION. This Agreement may be terminated at any time by
mutual written consent of Buyer and Sellers.
8.2 EFFECT OF TERMINATION. Upon the termination of this Agreement
pursuant to Article 8.1 hereof, this Agreement shall forthwith become
null and void and none of the Parties hereto or any of their respective
officers, directors, employees, agents, consultants, shareholders or
principals shall have any liability or obligation hereunder or with
respect hereto.
ARTICLE 9 - MISCELLANEOUS
9.1 HEADINGS. The section headings herein are for convenience of
reference only, do not constitute part of this Agreement and shall not be
deemed to limit or otherwise affect any of the provisions hereof.
9.2 NOTICES. All notices or other communications required or
permitted hereunder shall be given in writing and shall be deemed duly
given or served when personally delivered against receipt, on the third
business day when sent by telex or telecopy (and confirmation received),
on the next business day when sent by Federal Express or other nationally
recognized overnight delivery service or on the fifth business day after
deposit with the post office for delivery by registered or certified
mail, postage prepaid (return receipt requested), as follows:
If to the Sellers:
Aforementioned address of Seller under no. 1.
If to Buyer
Aforementioned address of Buyer.
or such other address as shall be furnished in writing by such Party. Any
notice or communication changing any of the addresses set forth above
shall be effective and deemed given only upon its receipt.
9.3 ASSIGNMENT. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the
<PAGE>
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Parties hereto (and, with respect to each individual Seller,
the personal representatives and heirs of such Seller) and
their respective successors and permitted assigns; PROVIDED,
HOWEVER, that neither this Agreement nor any of the rights,
interests, or obligations hereunder may be assigned by any of
the Parties hereto without the prior written consent of the
other Party; PROVIDED, FURTHER, HOWEVER, that Buyer may assign
its interests or obligations hereunder to any of its
affiliates, as defined in the Belgian Royal Decree of October
14, 1991 defining the notions parent establishment and
affiliates for the application of the Company Law
("Affiliates"), other than the Company, without the Sellers'
prior written consent. However, such assignment to any of the
Affiliates of Buyer is only binding upon Sellers to the extent
notice of assignment has been given to Sellers.
9.4 ENTIRE AGREEMENT. This Agreement (including the Schedules
hereto) embodies the entire agreement and understanding of the Parties
with respect to the transactions contemplated hereby and supersedes all
prior written or oral commitments, arrangements or understandings with
respect thereto. There are no restrictions, agreements, promises,
warranties, covenants or undertakings with respect to the transactions
contemplated hereby other than those expressly set forth herein.
9.5 MODIFICATIONS, AMENDMENTS AND WAIVERS. At any time, to the
extent permitted by Law, Buyer and Sellers may, by written agreement,
modify, amend or supplement any term or provision of this Agreement and
any term or provision of this Agreement may be waived in writing by the
Party which is entitled to the benefits thereof.
9.6 GOVERNING LAW - COMPETENT JURISDICTION. This Agreement shall be
governed by the laws of Belgium as to all matters, including but not
limited to matters of validity, construction, effect and performance. The
Courts of Kortrijk shall have exclusive jurisdiction in this respect.
9.7 SEVERABILITY. In the event that any one or more provisions of
this Agreement shall be declared to be illegal or unenforceable under any
law, rule or regulation of any government (including any supranational
legal authority) having jurisdiction over either of the Parties hereto or
their successors or permitted assigns, such illegality or
unenforceability shall not affect the validity and
enforceability of the other provisions thereof, and the Parties
shall agree upon a modification of this Agreement
<PAGE>
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with respect to such illegal or unenforceable provision to eliminate
such invalidity.
9.8 FORCE MAJEURE. Neither Party hereunder shall be held liable or
deemed to be in default under this Agreement if prevented from
performance of its obligations by reason of force majeure or other
contingencies beyond its control, including, but not limited to, strikes,
fire, earthquakes, wars, restraints affecting transportation, natural
calamities or acts of any government or supranational legal authority.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
duly executed in eight (8) original copies as of the day and year first
above written, Buyer and each Seller acknowledging receipt of one
original copy. In addition, the Parties hereto have caused the Schedules
hereto to be duly executed in two (2) original copies as of the day and
year first above written, Buyer and Sellers acknowledging receipt of one
original copy, respectively.
[BUYER]
Detection Systems, Inc.
By /s/ Lawrence R. Tracy
Name: Lawrence R. Tracy
Title: Officer
[SELLERS]
1. V.M.H. N.V
By /s/ [Illegible]
2. V.R.C. N.V.
By /s/ [Illegible]
3. Ets. Victor Dambois S.A.
By /s/ [Illegible]
4. Transport International Nieuwenhuyze N.V.
By /s/ [Illegible]
<PAGE>
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5. /s/ Mrs. Raymond Van Marcke
Mrs. Raymond Van Marcke
6. /s/ Bruno Van Marcke
Mr. Bruno Van Marcke
7. /s/ Carl Van Marcke
Mr. Carl Van Marcke
LIST OF SCHEDULES*
Schedule 1: Letter of Gemel Italia - April 14, 1997.
Schedule 2: Audited accounts of the Company related to the financial
year ended December 31, 1996.
Schedule 3: Disclosure regarding the due diligence performed on June
10 and 11, 1997.
Schedule 4: List of the Sellers.
Schedule 5: Amendment of the Escrow Agreement.
Schedule 6: A. Pending litigations.
B. Collective bargaining agreements.
Schedule 7: Samenwerkingsovereenkomst SDM.
Schedule 8: Statutes of Radio Active Systems.
*copies of Schedules will be provided upon request.
SHARE PURCHASE AGREEMENT
This Share Purchase Agreement (the "Agreement"), entered into as of
25 June 1997, between Mr. Philippe Sabbe, residing at Wandelweg 11,
Kortrijk, hereinafter referred to as "Seller", acting in his capacity of
shareholder of RADIO-ACTIVE SYSTEMS, a corporation organized and existing
under the laws of Belgium, whose registered office is situated at
Weggevoerdenlaan 5, 8500 Kortrijk (hereinafter the "Company"), and
Detection Systems, Inc., a corporation organized and existing under the
laws of the State of New York, having its registered office at 130
Perinton Parkway, Fairport, New York 14450, United States of America,
hereinafter referred to as "Buyer".
Seller and Buyer are referred to herein from time to time
individually as a "Party" or collectively as the "Parties".
WHEREAS, Seller owns 650 or 20% of the 3,250 registered shares issued by
and representing the share capital of the Company;
WHEREAS, pursuant to that certain Memorandum of Understanding dated June
2, 1997 (the "MOU"), Buyer proposed to Seller to purchase said 650 shares
from Seller, contingent upon the prior successful acquisition by Buyer of
78.7% of the shares of the Company (the "78.7% Interest");
WHEREAS, Buyer has now successfully completed the acquisition of the
78.7% Interest;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties and
covenants herein contained, the Parties agree as follows:
ARTICLE 1 - PURCHASE AND SALE OF SHARES
Upon the terms and subject to the conditions of this Agreement,
Seller shall sell to Buyer, and Buyer shall purchase from Seller, 650
registered shares representing 20% of the corporate capital of the
Company (the "Shares") for a purchase price (the "Purchase Price") of
BEF 25,140,235 and, at the date of execution of this Agreement:
(a) Seller shall sell, assign, transfer and deliver to Buyer, the
Shares and deliver all certificate(s), instruments and documents required
to be delivered by Seller to validly effectuate the transfer of such
Shares; specifically, Seller shall cause the Company's share register to
be duly amended so as to validly reflect the transfer of the Shares to
Buyer.
(b) Buyer shall accept and purchase the Shares from the Seller and
in payment therefor shall deliver to Seller (by intrabank transfer or
certified or official bank check) immediately available funds in an
amount equal to the amount of the Purchase Price.
The Purchase Price has been established on the basis of the per
share price paid by Buyer in consideration of the 78.7% Interest.
ARTICLE 2 - REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer that the following are true,
correct and complete as of the date of this Agreement:
2.1 ORGANIZATION. The Company is a corporation duly organized,
validly existing and in good standing under the laws of Belgium and has
the requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted.
2.2 AUTHORITY. Seller has all requisite authority to enter into,
execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement has been duly executed and delivered by Seller
and constitutes the valid and binding obligation of Seller enforceable
against it in accordance with its terms. Seller is entitled to sell and
procure the transfer of the full legal and beneficial ownership in the
Shares of the Company to Buyer, free and clear of all encumbrances and
third party's rights in accordance with the terms of this Agreement.
2.3 NO VIOLATION OR CONFLICT. Neither the execution and delivery of
this Agreement by Seller, nor the consummation by Seller of the
transactions contemplated hereby or compliance by Seller with the
provisions hereof will conflict with, or result in any violation of, or
default under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to the loss of a benefit under, or
result in the creation of any security interest upon any of the
properties or assets of the Company under, any provision of (i) the
articles of incorporation or by-laws or the comparable charter or
organization documents of the Company, or (ii) any agreement, contract,
lease, permit, concession, franchise, license or other arrangement
applicable to the Company. No filing or registration with, or
authorization, permit, waiver, consent or approval of, any governmental
entity or authority, including courts of competent jurisdiction, domestic
or foreign (a "Governmental Entity") is required to be obtained or made
for the execution, delivery and performance by Seller of this Agreement.
2.4 SHARES. The stated capital of the Company consists of 3,250
shares, issued in registered form, each with a nominal value of BEF
1,000, representing a total capital of BEF 3,250,000. All Shares are
validly authorized and issued, are fully paid-in and all such Shares are
free and clear of any encumbrances, liens, pledges, charges, rights of
first refusal, or security rights. There is no security, option, warrant,
right, call, subscription, agreement, commitment or understanding of any
nature whatsoever, fixed or contingent, that directly or indirectly (i)
calls for the issuance, sale, pledge or other disposition of any shares
of capital stock of the Company or any securities convertible into, or
other rights to acquire, any shares of capital stock of the Company, (ii)
obligates the Company to grant, offer or enter into any of the foregoing
or (iii) relates to the voting or control of such capital stock,
securities or rights.
2.5 COMPLIANCE WITH APPLICABLE LAWS AND AGREEMENTS. The Company
holds all permits, licenses, concessions, franchises, consents and
approvals of all Governmental Entities which are necessary or material to
the operation of its business, and the Company is in compliance in all
material respects with the terms of such permits, licenses, concessions,
franchises, consents and approvals. The business of the Company is not
being conducted, in conflict with, violation of or default under (i) any
judgment, order, decree, statute, law, ordinance, rule or regulation of
any Governmental Entity applicable to the Company, which violation or
default would result in any change in, or effect on, the Company
(including the business thereof) which is, or with reasonable probability
might be, materially adverse to the business, operations, assets,
condition (financial or otherwise) or prospects of the Company ("Material
Adverse Effect"), or (ii) any agreement, contract, lease, permit,
concession, franchise, license or other arrangement applicable to the
Company, which violation or default would have a Material Adverse Effect
(as defined) on the business of the Company.
2.6 FINANCIAL SCHEDULES. Attached hereto as Schedule 1 are the
audited balance sheet (including the accompanying notes) and related
audited income statement as of and for the financial year ended December
31, 1996 for the Company (the "Financial Schedules"). The accounts
included in the Financial Schedules have been prepared in accordance with
generally accepted Belgian accounting principles and all other laws and
regulations applicable to the Company and present fairly the financial
condition of the Company as of such date and the results of operations of
the Company for such period.
2.7 EVENTS SUBSEQUENT TO DECEMBER 31, 1996. Since December 31,
1996, there has not been any (i) event, change or effect having,
individually or in the aggregate, a Material Adverse Effect (as defined)
on the business, financial condition, operation, results of operations,
or future prospects of the Company, (ii) contingency of any kind existing
or in prospect which, so far as reasonably can be foreseen at this time,
may result in any Material Adverse Effect (as defined), or (iii) material
transaction except in the ordinary course of business relating to the
assets or the business of the Company.
2.8 TAX MATTERS. The Company has filed all tax returns and tax
reports that it was required to file. All such tax returns and tax
reports were correct and complete in all material respects. There are no
unpaid Taxes (as defined below) of the Company, except for Taxes the
payment of which is not yet due. There are no security interests on any
of the assets of the Company that arose in connection with any failure
(or alleged failure) to pay any Taxes due by the Company. The Company has
withheld and paid all Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent
contractor, creditor, shareholder, or other third party. For purposes of
this Article, "Taxes" shall mean all direct and indirect taxes including,
without limitation, any income, gross receipts, license, payroll,
employment, excise, severance, stamp, occupation, environmental, customs
duties, capital, withholding, social security, real property, personal
property, sales, value added, registration, or other tax of any kind
whatsoever imposed or levied by any state, local or foreign government or
by any agencies or subdivisions thereof, including any interest,
penalty, or addition thereto, whether disputed or not.
2.9 LITIGATION. There are no claims, actions, suits, inquiries,
investigations, or proceedings pending, or to the knowledge of Sellers,
threatened, involving the Company. The Company has not received any
notice of legal proceedings or other legal notice from which it appears
that it may be or is alleged to be in violation of any laws of Belgium
relating to the environment or the health of persons. Seller is not aware
of any facts which would be likely to give rise to any such violation.
2.10 SHAREHOLDERS' LOANS. The Company is not a party to an agreement
or other instrument relating to the borrowing of money or the guaranty of
any obligation for the borrowing of money entered into or contemplated to
be entered into with any of its past or present shareholders.
2.11 CONTRACTS. The Company is not a party to (i) any agreement (or
group of related agreements), other than the agreements referred to in
Article 2.10 above, under which it has created, incurred, assumed, or
guaranteed any indebtedness for borrowed money; (ii) any agency,
distributorship, marketing, purchasing, sales, manufacturing or licensing
agreement; (iii) any agreement which is over one year in length or cannot
be terminated with a maximum one year notice period or involves the
receipt or payment of more than BEF 1,000,000; (iv) any agreement
limiting the freedom of the Company to compete in Belgium or abroad; (v)
any agreement for the employment of any individual on a full-time, part-
time, consulting, or other basis, or providing severance or termination
benefits, or any agreements pursuant to which services are provided on an
independent contractor basis or any employee leasing agreements; (vi) any
collective bargaining agreement (vii) any agreement under which the
consequences of a default or termination could have a Material Adverse
Effect on the business, financial condition, operations, results of
operations, or future prospects of the business of the Company; or (viii)
any agreement between the Company and the Sellers, whether acting
individually or collectively.
2.12 TITLE TO ASSETS. The Company has good and marketable title to
all of the assets used by it in the conduct of its business, free and
clear of any encumbrances, liens, pledges, charges, options, rights of
first refusal, mortgages or similar interests or other security rights.
2.13 LEASES. All real property leases currently used in the
Company's business are, in all material respects, valid and subsisting,
and there is not under any such lease any existing default known to the
Company or to Seller, that would be likely, either individually or in the
aggregate, to have a Material Adverse Effect (as defined), or any
condition, event or at which the passage of time or notice or both would
constitute such a default. With respect to personal property leases
currently used in the Company's business, the Company has valid and
enforceable written leases.
2.14 EMPLOYEES. The Company is not a party or bound by any
collective bargaining agreement, nor has it experienced any strikes,
grievances, claims of unfair labor practices, or other collective
bargaining disputes within the last five (5) years and none is pending,
or to the knowledge of the Company or Seller, threatened. There are no
pension, retirement or benefit plans, schemes or funds or any other
arrangement under which the Company is obliged to provide benefits of any
kinds to its employees, former employees, employees' spouse or any other
dependent.
2.15 INSURANCE. The Company has maintained insurance policies of
fire, liability, including product and environmental liability, use and
occupancy and other forms of insurance covering the business of the
Company, in amounts and against such losses and risks that are sufficient
for compliance with all requirements of law. Each such policy is in full
force and effect and all premiums are currently and fully paid up or
accruals provided for and no notice of cancellation or termination has
been received with respect to any such policy. The Company has complied
in all material respects with the provisions of such policies.
2.16 GENERAL. Each of the representations and warranties set forth
in this Article 3 and the Disclosure Letter thereto is true and accurate.
None of the representations and warranties set forth in this Article 2
shall be treated as qualified by any actual or constructive knowledge on
the part of Buyer or any of its representatives. Buyer has relied on the
representations and warranties of Seller explicitly set forth in this
Article 3 and on the Disclosure Letter thereto.
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller that the following are true,
correct and complete as of the date of this Agreement:
3.1 ORGANIZATION, STANDING AND POWER. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the
State of New York and has the requisite corporate power and authority to
carry on its business as now being conducted.
3.2 AUTHORIZATION. Buyer has all requisite power and authority to
enter into this Agreement and to perform its obligations hereunder. The
execution and delivery of this Agreement and the performance of its
obligations hereunder have been duly authorized by all necessary
corporate action on the part of Buyer. This Agreement has been duly
executed and delivered by Buyer and constitutes the valid and binding
obligation of Buyer, enforceable against it in accordance with its terms,
except as enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other similar laws affecting
the rights of creditors generally.
3.3 NO VIOLATION - CONSENTS. Neither the execution and delivery by
Buyer of this Agreement, nor the consummation by Buyer of the
transactions contemplated hereby or compliance by Buyer with the
provisions hereof will conflict, or result in any violation of, or
default under, the articles of incorporation or by-laws of Buyer. No
filing or registration with, or authorization, waiver, consent or
approval of, any Governmental Entity is required to be obtained or made
by Buyer in connection with the execution, delivery and performance by
Buyer of this Agreement.
ARTICLE 4 - COVENANT AS TO TAX MATTERS
Seller shall be liable for, and shall indemnify and hold Buyer and
the Company harmless against, all Taxes (as defined) due or payable by
the Company for any taxable year or taxable period ending on or before
the date of execution of this Agreement, but only to the extent that the
amount of such Taxes exceeds the amount of Taxes for which provision is
made in the Financial Schedules.
Without limiting the generality of the foregoing, Seller shall be
liable for, and shall indemnify and hold Buyer and the Company harmless
against, without limitation in time, any and all Taxes that may arise
out, as a result of, or in connection with, the existence and the
performance of that certain Co-operation Agreement
("Samenwerkingsovereenkomst") entered into between BVBA SDM and the
Company on January 25, 1991, a copy of which is attached hereto as
Schedule 2.
Subject and without prejudice to the foregoing, the Company shall be
liable for, and the Company and Buyer shall indemnify and hold Seller
harmless against, any and all Taxes due or payable by the Company as a
result of, or in connection with, all taxable events occurring after the
date of execution of this Agreement.
Buyer and Seller shall cooperate with each other in giving effect to
this Article 4 and shall use their reasonable best efforts to provide
each other with such information as may be required for each Party to
satisfy its tax and audit requirements.
ARTICLE 5 - CONDITIONS TO THE OBLIGATIONS OF BUYER
The obligations of Buyer required to be performed by it at the date
of execution of this Agreement shall be subject to the satisfaction, at
or prior said date, of each of the following conditions, each of which
may be waived by Buyer as provided herein except as otherwise required by
applicable law:
(i) Each of the representations and warranties of Seller contained
in this Agreement shall be true and correct in all respects as of the
date hereof.
(ii) All corporate action necessary to authorize the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby shall have been duly and validly taken
by Seller. All notices to, and declarations, filings and registrations
with, and consents, authorizations, approvals and waivers from,
governmental and regulatory bodies required to consummate the
transactions contemplated hereby and all other consents or waivers
required pursuant hereto shall have been made or obtained.
ARTICLE 6 - CONDITIONS TO OBLIGATIONS OF SELLER
The obligation of Seller required to be performed by it at the date
of execution of this Agreement shall be subject to the satisfaction, at
or prior to said date, of each of the following conditions, each of which
may be waived by Seller as provided herein except as otherwise required
by applicable law:
(i) Each of the representations and warranties of Buyer contained
in this Agreement shall be true and correct in all respects as of the
date hereof.
(ii) All corporate action necessary to authorize the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby shall have been duly and validly taken
by Buyer.
ARTICLE 7 - SURVIVAL AND INDEMNIFICATION
7.1 INDEMNITY PERIOD. Except if expressly otherwise provided
herein, all representations, warranties, covenants and agreements
contained in this Agreement, or in the Disclosure Letter or any Schedule,
certificate, document or other instrument delivered in connection
herewith shall survive until 31 December 2005.
7.2 INDEMNIFICATION AMOUNTS. In the absence of fraud or wilful
concealment, Seller's obligation and liability for any and all breaches
of:
(i) the representations and warranties set forth in Articles 2.1,
2.2 and 2.4 hereof shall be the Purchase Price, as determined in Article
1 hereof;
(ii) the other representations and warranties shall be limited to
BEF 10,000,000.
7.3 INDEMNIFICATION. Subject to the other provisions of this
Article, from and after the date of execution of this Agreement:
(i) Seller shall indemnify and hold harmless the Company and/or
Buyer and its successors, assigns and affiliates (collectively, the
"Representatives") from and against any losses, damages or expenses,
judgments, fines (collectively, "Damages") to the extent they arise out
any breach of any representation or warranty or failure to perform any
covenant made by or on behalf of Seller, under this Agreement or in the
Disclosure Letter or any Schedule, certificate, document or other
instrument contemplated hereby and delivered by Seller in connection
herewith. Buyer and/or the Company, as the case may be, shall notify
Seller promptly after the occurrence of such breach of representations
and warranties.
(ii) Buyer shall indemnify and hold harmless Seller and its
Representatives from and against any Damages to the extent they arise out
any breach of any representation or warranty or failure to perform any
covenant made by or on behalf of Buyer under this Agreement or in any
certificate, document or other instrument contemplated hereby or
delivered by Buyer in connection herewith. Seller shall notify Buyer
promptly after the occurrence of such breach of representations and
warranties.
(iii) Seller shall indemnify and hold harmless the Company and/or
Buyer and its Representatives from and against any Damages which arise
out of future claims against the Company and/or Buyer or its
Representatives in relation to any Environmental Liability (as defined
hereafter) and any product liability, it being understood that Seller
shall retain such liability to the extent that the event causing such
Damages occurred or existed prior to the Closing. For purposes of this
provision, "Environmental Liability" means any liability related to
damages caused to the natural environment or to the health of persons by
the activities or omissions of the Company or otherwise connected with
its business including damages caused to water, air, soil by disposal of
waste.
7.4 THIRD PARTY CLAIMS. Promptly after receipt by any person
entitled to indemnification under this Article 7 (an "Indemnified Party")
of notice of the commencement of any action in respect of which the
Indemnified Party will seek indemnification hereunder, the Indemnified
Party shall notify each person that is obligated to provide such
indemnification (an "Indemnifying Party") thereof in writing, but any
failure to so notify the Indemnifying Party shall not relieve it from any
liability that it may have to the Indemnified Party other than under this
Article 7. The Indemnifying Party shall be entitled to participate in the
defense of such action and, provided that within 15 days after receipt of
such written notice the Indemnifying Party confirms in writing its
responsibility therefor and reasonably demonstrates that it will be able
to pay the full amount of potential liability in connection with any such
claim, to assume control of such defense with counsel reasonably
satisfactory to such Indemnified Party; PROVIDED, HOWEVER, that:
(i) the Indemnified Party shall be entitled to participate in the
defence of such claim and to employ counsel at its own expense to assist
in the handling of such claim;
(ii) the Indemnifying Party shall obtain the prior written approval
of the Indemnified Party before entering into any settlement of such
claim or ceasing to defend against such claim, if pursuant to or as a
result of such settlement or cessation, order, injunction or other
equitable relief would be imposed against the Indemnified Party; and
(iii) the Indemnifying Party shall not be entitled to control (but
shall be entitled to participate at its own expense in the defense of),
and the Indemnified Party shall be entitled to have sole control over,
the defense or settlement of (a) any claim to the extent the claim seeks
an order, injunction or other equitable relief against the Indemnified
Party which, if successful, could materially interfere with the business,
operations, assets, condition (financial or otherwise), or prospects of
the Indemnified Party or (b) any claim relating to Taxes.
7.5 SUBROGATION. In the event that the Indemnifying Party shall be
obligated to indemnify the Indemnified Party pursuant to this Article 7,
the Indemnifying Party shall, upon payment of such indemnity in full, be
subrogated to all the rights of the Indemnified Party with respect to the
claims to which such indemnification relates.
ARTICLE 8 - TERMINATION
8.1 TERMINATION. This Agreement may be terminated at any time by
mutual written consent of Buyer and Seller.
If Buyer or Seller shall terminate this Agreement pursuant to the
provisions hereof, such termination shall be effected by notice to the
other Party specifying the provision hereof pursuant to which such
termination is made.
8.2 EFFECT OF TERMINATION. Upon the termination of this Agreement
pursuant to Section 8.1 hereof, this Agreement shall forthwith become
null and void and none of the Parties hereto or any of their respective
officers, directors, employees, agents, consultants, shareholders or
principals shall have any liability or obligation hereunder or with
respect hereto.
ARTICLE 9 - MISCELLANEOUS
9.1 HEADINGS. The section headings herein are for convenience of
reference only, do not constitute part of this Agreement and shall not be
deemed to limit or otherwise affect any of the provisions hereof.
9.2 NOTICES. All notices or other communications required or
permitted hereunder shall be given in writing and shall be deemed duly
given or served when personally delivered against receipt, when sent by
telex or telecopy (and confirmation received), on the next business day
when sent by Federal Express or other nationally recognized overnight
delivery service or on the fifth business day after deposit with the post
office for delivery by registered or certified mail, postage prepaid
(return receipt requested), as follows:
If to Seller: At aforementioned address
If to Buyer: At aforementioned address
or such other address as shall be furnished in writing by such Party. Any
notice or communication changing any of the addresses set forth above
shall be effective and deemed given only upon its receipt.
9.3 ASSIGNMENT. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the Parties hereto
(and, with respect to Seller, the personal representatives and heirs of
such Seller) and their respective successors and permitted assigns;
PROVIDED, HOWEVER, that neither this Agreement nor any of the rights,
interests, or obligations hereunder may be assigned by any of the Parties
hereto without the prior written consent of the other Party; PROVIDED,
FURTHER, HOWEVER, that Buyer may assign its interests or obligations
hereunder to any of its affiliates without Seller's prior written
consent.
9.4 ENTIRE AGREEMENT. This Agreement (including the Disclosure
Letter and Schedules hereto) embodies the entire agreement and
understanding of the parties with respect to the transactions
contemplated hereby and supersedes all prior written or oral commitments,
arrangements or understandings with respect thereto. There are no
restrictions, agreements, promises, warranties, covenants or undertakings
with respect to the transactions contemplated hereby other than those
expressly set forth herein.
9.5 MODIFICATIONS, AMENDMENTS AND WAIVERS. At any time, to the
extent permitted by Law, Buyer and Sellers may, by written agreement,
modify, amend or supplement any term or provision of this Agreement and
any term or provision of this Agreement may be waived in writing by the
Party which is entitled to the benefits thereof.
9.6 GOVERNING LAW - COMPETENT JURISDICTION. This Agreement shall be
governed by the laws of Belgium as to all matters, including but not
limited to matters of validity, construction, effect and performance. The
Courts of Kortrijk shall have exclusive jurisdiction in this respect.
9.7 SEVERABILITY. In the event that any one or more provisions of
this Agreement shall be declared to be illegal or unenforceable under any
law, rule or regulation of any government (including any supranational
legal authority) having jurisdiction over either of the Parties hereto or
their successors or permitted assigns, such illegality or
unenforceability shall not affect the validity and enforceability of the
other provisions thereof, and the Parties shall agree upon a modification
of this Agreement with respect to such illegal or unenforceable provision
to eliminate such invalidity.
9.8 FORCE MAJEURE. Neither Party hereunder shall be held liable or
deemed to be in default under this Agreement if prevented from
performance of its obligations by reason of force majeure or other
contingencies beyond its control, including, but not limited to, strikes,
fire, earthquakes, wars, restraints affecting transportation, natural
calamities or acts of any government or supranational legal authority.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement
(including the Schedules hereto) to be duly executed in two (2) original
copies as of the day and year first above written, Buyer and Seller each
acknowledging receipt of one original copy.
[BUYER]
Detection Systems, Inc.
By
Name: Lawrence R. Tracy
Title: Officer
Signature: /s/ Lawrence R. Tracy
[SELLER]
Mr. Philippe Sabbe
Signature: /s/ Philippe Sabbe
AMENDED AND RESTATED CREDIT FACILITY AGREEMENT
THIS AGREEMENT is made as of the 24th day of June, 1997, 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 as amended and restated by the Amended and Restated
Credit Facility Agreement dated May 31, 1996 as amended by Amended and
Restated Credit Facility Agreement Amendment Number 1 and Amended and
Restated Credit facility Agreement Amendment Number 2.
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
<PAGE>
The Applicable Base Rate Margin shall be adjusted at the beginning of each
three month period commencing either March 1, July 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, July 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, and any assignee or participant of 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 any prepayment
or failure to make a prepayment after notice of the same is given.
"Business Day" shall mean any day except for a Saturday, Sunday,
banking holiday in the State of New York, or banking holiday in London,
England.
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<PAGE>
"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 Liabilities shall not include obligations to repurchase Borrower
shares pursuant to the Stock Purchase Agreement dated May 7, 1997 between
Detection Systems, Inc. and Numerix Corp.
"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, or bills, notes, or similar instruments, 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. Debt
shall not include obligations to repurchase Borrower shares pursuant to
the Stock Purchase Agreement dated May 7, 1997 between Detection Systems,
Inc. and Numerix Corp.
"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,
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<PAGE>
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, themselves comply in all respects
with the same requirements as are imposed upon the Borrower in Articles 8,
9, 10, and 11 of this Agreement. The Bank hereby agrees that each Foreign
Subsidiary shall be an Eligible Subsidiary to the extent that it meets the
requirements of this definition with the exception of the requirement that
it provide the Bank a security interest in all of its assets; provided,
however, that the Bank in its discretion may require the delivery of such
security interests at any time. Schedule 6.1 to this Agreement (as updated
by the parties from time to time) shall contain a listing of those
Subsidiaries that are intended to qualify as Eligble Subsidiaries and those
that are not.
"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.
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<PAGE>
"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.
"Foreign Subsidiary" shall mean any Subsidiary formed under the laws
of a jurisdiction other than the United States of America or any state,
territory or instrumentality thereof.
"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,
bylaw, policy, guideline, procedure, interpretation, decision,
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<PAGE>
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 the Bank and any assignee or participant of the Bank for any
reduction in any amount receivable by such Bank or participant in respect
of the Obligations or any increased costs of funding or maintaining the
Obligations as a result of the adoption of, change of, or change in the
interpretation or administration of any law, regulation, guideline or
policy 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 (or any assignee or participant of
the Bank or any of their holding companies), with any request or directive
(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 of the Bank, the Bank's holding company, or any assignee
or participant of the Bank or any of their holding companies, as a
consequence of the transactions contemplated by this Agreement and all
related documents and agreements, the existence of the Bank's commitment,
or any note bearing interest at a rate based on the LIBOR Rate, to a level
below that which the Bank, the Bank's holding company, or any assignee or
participant of the Bank or their respective holding companies, could have
achieved but for such adoption, change or compliance (taking into
consideration such Bank's, assignee's, and participant's policies),
including without limitation including without limitation any law,
regulation, policy or guideline relating to (i) capital adequacy including
among others any 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", (ii) reserve requirements, (iii) taxation, (iv) asset
maintenance, (v) asset pledges, or (vi) otherwise. A certificate of a
claiming bank detailing such Increased Cost shall be deemed to be
conclusive as to the amount claimed absent manifest error.
"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.
6
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"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 one-month,
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.
If at any time the Bank (acting for itself or at the request
of any of its participants) notifies the Borrower that LIBOR plus
the applicable margin will not adequately reflect the cost to
any of them of making, funding, or maintaining Obligations for
which the interest rate is based upon LIBOR for any particular
interest rate period, the obligation of the Bank to make advances
available at a rate based upon LIBOR shall be suspended until the
Bank (acting for itself and its
7
<PAGE>
participants) notifies the Borrower that the circumstances
causing such suspension no longer exist.
"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 of this Agreement.
"Revolving Line Note" shall mean the note evidencing Obligations
related to the Revolving Line as described in Section of this Agreement.
"Revolving Line Termination Date" shall mean the date on which
the Revolving Line terminates as described in Section of this Agreement.
"Subsidiary" shall mean for any person or entity any corporation or
other business organization 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.
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<PAGE>
"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 Seventeen
Million Dollars ($17,000,000) 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 $17,000,000. Each borrowing request must be of at least $250,000.
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 three 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.
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<PAGE>
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.
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) July 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, July 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: $17,000,000, 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.
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<PAGE>
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.
2.9 LINE INCREASE FEE. The Borrower shall pay to the Bank a fee
equal to US$22,000 on the date hereof in connection with the increase in
availability 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 three 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.
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<PAGE>
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 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 three 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.
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<PAGE>
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 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.
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<PAGE>
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.
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<PAGE>
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.
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.
Each Eligible Subsidiary is duly organized, validly existing and in
good standing under the laws of the state or country of its organization,
and is duly qualified to transact business and in good standing in all
states and countries in which it is required to qualify or in which failure
to qualify could have a material adverse impact on its business. Each
Eligible Subsidiary has full power and authority to own its properties, to
carry on its business as now being conducted, to execute, deliver and
perform its obligations under this Agreement and all documents and
instruments related to this Agreement, and to consummate the transactions
contemplated hereby.
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<PAGE>
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.
All necessary action on the part of each Eligible Subsidiary,
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 each Eligible Subsidiary hereunder and thereunder has been taken. All
documents and instruments related to this Agreement executed by each
Eligible Subsidiary respectively constitute legal, valid and binding
obligations of such Eligible Subsidiary, 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. No Eligible Subsidiary has
defenses, offsets, claims, or counterclaims with respect to its obligations
arising under all documents and instruments related to this Agreement. The
execution and delivery by each Eligible Subsidiary or all documents and
agreements related to this Agreement, and the performance by each Eligible
Subsidiary of its obligations under this Agreement and all related
documents and agreements will not violate any provision of law or any
Eligible Subsidiary's Certificate of Incorporation or By-laws or
organizational or other documents or agreements. The execution, delivery
and performance of all documents and agreements related to this Agreement,
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 any Eligible Subsidiary 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,
16
<PAGE>
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.
All of the outstanding shares and other equity interests of each
Eligible Subsidiary 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 any Eligible Subsidiary except with respect to
Emergency Communications, Inc. pursuant to the Shareholders Agreement dated
January 26, 1993, a complete copy of which has been provided to the Bank
prior to the date hereof.
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.
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 any Eligible
Subsidiary (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 Eligible Subsidiary.
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 and its Eligible
Subsidiaries, 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 or
its Eligible Subsidiaries, taken as a whole.
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. Each Eligible Subsidiary 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.
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6.8 PROPERTIES. The Borrower and each of its Eligible
Subsidiaries have good and marketable title to all of their 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 and each of its Eligible Subsidiaries have undisturbed
peaceable possession under all leases under which they are operating, none
of which contain unusual or burdensome provisions that may materially
affect the operations of the Borrower and its Eligible Subsidiaries, 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 and
its Eligible Subsidiaries have 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 or
its Eligible Subsidiaries as a result of the application of relevant
provisions of ERISA, and the Borrower and its Eligible Subsidiaries are 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 and its Eligible
Subsidiaries are not in violation of any laws, ordinances, governmental
rules, requirements, or regulations to which they are subject which
violation might materially adversely affect the condition (financial or
otherwise) of the Borrower and its Eligible Subsidiaries. The Borrower and
its Eligible Subsidiaries have obtained and are in compliance with all
licenses, permits, franchises, and
governmental authorizations necessary for the ownership of their properties
and the conduct of their business, for which failure to comply could
materially adversely affect the condition (financial or otherwise) of
Borrower and its Eligible Subsidiaries.
6.13 PATENTS, TRADEMARKS, AND AUTHORIZATIONS. The Borrower and
its Eligible Subsidiaries own or possess 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 their business as now conducted without any
material conflict with the rights of others.
6.12 CONTRACTS AND AGREEMENTS. The Borrower and its Eligible
Subsidiaries are not parties to any contract or agreement that materially
adversely affects their business, property, assets, or condition, financial
or otherwise, and the Borrower and its Eligible Subsidiaries are in
compliance in all material respects with all contracts and agreements to
which they are a party.
ARTICLE 7 - CONDITIONS OF LENDING
- ---------------------------------
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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
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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:
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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 and so long as Borrower maintains all
reserves required by GAAP.
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
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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.
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8.13 ELIGIBLE SUBSIDIARIES. Cause each Eligible Subsidiary to
comply in all respects with the same requirements as are imposed upon the
Borrower in Sections 8.3, 8.4, 8.5, 8.6, 8.7, 8.8, and 8.9 of this Agreement.
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
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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.
9.9 ELIGIBLE SUBSIDIARIES. Cause each Eligible Subsidiary to comply
in all respects with the same requirements as are imposed upon the Borrower
in Sections 9.1, 9.2, 9.3, 9.5, 9.6, and 9.8 of this Agreement.
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
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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.
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(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
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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
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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
28
<PAGE>
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.
29
<PAGE>
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
30
<PAGE>
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 its Eligible Subsidiaries taken as a whole, 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
Obligations. 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.
After any Event of Default, the Bank may require the Borrower to
deliver cash collateral to the Bank, together with agreements related
thereto satisfactory to the Bank in its sole discretion, in an amount equal
to the aggregate undrawn outstanding amount of all letters of credit issued
pursuant to Section 2.8 of this Agreement.
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.
31
<PAGE>
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
32
<PAGE>
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 purchase 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.
33
<PAGE>
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.
13.14 TIME OF PAYMENTS. In the event that any payment is due from
the Borrower under this Agreement or any note, instrument, agreement, or
document related hereto, such payment shall be made in immediately
available funds to the Bank at or before 2:00 p.m. on the Business Day on
which such payment is due. Payments made after such time shall continue to
bear interest until the next succeeding Business Day at the rates otherwise
provided in this Agreement.
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 Ryan
--------------------------------
Title: Treasurer
______________________________
RADIONICS, INC.
By: /s/ Frank Ryan
______________________________
Title: Treasurer
______________________________
34
<PAGE>
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
* Copies of schedules will be provided upon request.
INDEX TO EXHIBITS
EXHIBIT A - Revolving Line Note
EXHIBIT B - Mortgage Loan Note
EXHIBIT C - Term Loan Note
35
<PAGE>
EXHIBIT A
AMENDED AND RESTATED REVOLVING LINE NOTE
$17,000,000 June 24, 1997
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 June 24, 1997, between the undersigned
("Borrower") and Fleet Bank ("Bank"), as the same has been and 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 May 31, 1996, as amended and
restated by the Amended and Restated Revolving Line Note dated February 18,
1997 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 Seventeen Million Dollars ($17,000,000), 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 three business days prior to each
Rate Change Date may notify the Bank of its election to have a portion of
the outstanding principal amount
<PAGE>
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,
including after acceleration and judgment, 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.
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.
<PAGE>
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:/s/ Frank Ryan
____________________________
Title: Treasurer
__________________________
RADIONICS, INC.
By: /s/ Frank Ryan
____________________________
Title: Treasurer
__________________________
<PAGE>
EXHIBIT B
AMENDED AND RESTATED MORTGAGE LOAN NOTE
$3,400,000 June 24, 1997
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 June 24, 1997
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").
This Amended and Restated Mortgage Loan Note evidences the same
obligations as evidenced by, and amends and restates in its entirety, the
Term Loan Note dated May 31, 1996 in the original principal amount of
$3,400,000 given by the Borrower to the Bank.
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.
<PAGE>
All Obligations under and related to this Mortgage Loan Note shall be
due and payable in full on 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,
<PAGE>
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: Frank Ryan
____________________________
Title: Treasurer
__________________________
<PAGE>
EXHIBIT C
AMENDED AND RESTATED TERM LOAN NOTE
$14,350,000 June 24, 1997
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 June 24, 1997 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").
This Amended and Restated Term Loan Note evidences the same
obligations as evidenced by, and amends and restates in its entirety, the
Term Loan Note dated May 31, 1996 in the original principal amount of
$14,350,000 given by the Borrower to the Bank.
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,
<PAGE>
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 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: /s/ Frank Ryan
____________________________
Title: Treasurer
__________________________
DETECTION SYSTEMS, INC.
1997 STOCK OPTION PLAN
1. PURPOSE
The purpose of the Detection Systems, Inc. ("the Company") 1997 Stock
Option Plan ("the Plan") is to enable eligible key employees and nonemployees
of the Company and its subsidiaries to purchase shares of Common Stock of the
Company by means of incentive stock options and nonqualified stock options
(collectively referred to as "options"). Through the use of such options, the
Company expects to be able to attract and retain the best available talent and
to encourage the highest level of performance of its key personnel.
2. ADMINISTRATION
The Plan shall be administered by a Stock Option Committee (the
"Committee") consisting of not fewer than three members appointed by the Board
of Directors of the Company, each of whom, to the extent feasible, shall be a
director meeting the definition as a "non-employee director" and an "outside
director," respectively, under regulations promulgated under Section 16(b) of
the Securities Exchange Act of 1934, as amended (the Exchange Act"), and
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
or comparable provisions as in effect from time to time. The Board shall fill
any vacancy on the Committee.
Subject to the provisions of the Plan, the Committee shall possess the
authority, in its discretion, (a) to determine from among those persons who
perform services to the Company to whom, and the time or times at which,
options will be awarded, the number of shares included in the option and any
other terms and conditions that may apply to such option; (b) to determine
whether the options shall be incentive or nonqualified options; (c) to
interpret the Plan; (d) to make and amend rules and regulations relating
thereto; (e) to prescribe the form and conditions of the option agreements; and
(f) to make all other determinations necessary or advisable for the
administration of the Plan. The Committee's determinations shall be conclusive
and binding upon the Company, the participants and all other persons.
3. ELIGIBILITY
Options may be awarded under the Plan only to key employees and key
nonemployees of the Company and its subsidiaries (which shall include all
corporations of which at least fifty percent of the voting stock is owned by
the Company directly or through one or more corporations at least fifty percent
of the voting stock of which is so owned). Notwithstanding the foregoing, any
director who is not an officer or employee of the Company or one of its
subsidiaries shall not be eligible to participate in this Plan.
4. SHARES AVAILABLE
An aggregate of 250,000 shares of the Common Stock (par value $.05 per
share) of the Company (subject to substitution or adjustment as provided in
Section 8 hereof) shall be available for options under the Plan. Such shares
may be authorized and unissued shares or may be treasury shares. If an option
expires, terminates or is canceled without being exercised, new options may be
thereafter granted covering such shares. In order to meet the requirements of
Code Section 162(m), which section limits the Company's tax deduction for
compensation paid to certain officers to $1 million per year, the Plan limits
to 100,000 the aggregate number of options that may be awarded to any one
employee. No stock option may be granted more than ten years after the
effective date of the Plan.
5. TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
Incentive stock options may be granted only to employees of the Company
and its subsidiaries. Each incentive stock option granted under the Plan to an
employee shall be designated as such and shall be evidenced by an incentive
stock option agreement in such form as the Committee shall approve from time to
time, which agreement shall conform with this Plan and which shall contain the
following terms and conditions:
(a) NUMBER OF SHARES. The option agreement shall specify the number of
shares to which it pertains.
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(b) PURCHASE PRICE. The purchase price for each option shall be not less
than the fair market value of the stock at the time such option is
granted. The Committee shall determine the purchase price. If an option
is granted to an employee who at the time of grant owns stock possessing
more than ten percent of the total combined voting power of all classes of
stock of the Company (a "10-percent Shareholder"), the purchase price
shall be at least 110% of the fair market value of the stock subject to
the option.
(c) DURATION OF OPTION. Each stock option by its terms shall not be
exercisable after the expiration of ten years from the date such option is
granted. In the case of an incentive stock option granted to a 10-percent
Shareholder, the option by its terms shall not be exercisable after the
expiration of five years from the date such option is granted.
(d) OPTIONS NONTRANSFERABLE. Each option by its terms shall not be
transferable by the optionee otherwise than by will or the laws of descent
and distribution, and shall be exercisable during his lifetime, only by
the optionee, the optionee's guardian or the optionee's legal
representative.
(e) EXERCISE PERIOD. Subject to the restriction in Section 5(f), the
exercise of each option shall be subject to such conditions as may be
imposed by the Committee and specified in the option agreement. The
Committee may, among other things, specify a minimum length of employment
and may stagger the period of exercise by providing that only a certain
percentage of options may be exercised each year.
(f) PAYMENT OF OPTION PRICE. An option shall be exercised upon written
notice to the Company accompanied by payment in full for the shares being
acquired. The payment shall be made in cash, check or wire transfer; by
delivery of shares of Common Stock of the Company registered in the name
of the optionee, endorsed in blank, the value of which will be deemed
equal to the closing market price of such shares on the date of exercise;
or, at the discretion of the Committee, by a so-called "cashless exercise"
transaction that affords the optionee the opportunity to sell immediately
some or all of the shares underlying the exercise portion of the option in
order to generate sufficient cash to pay the option exercise price and/or
to satisfy withholding tax obligations related to the option.
(g) MAXIMUM VALUE OF SHARES. No incentive option shall be granted to an
employee under this Plan or any other incentive stock option plan of the
Company or its subsidiaries to purchase shares as to which the aggregate
fair market value (determined as of the date of grant) of the Common Stock
which first become exercisable by the employee in any calendar year
exceeds $100,000.
(h) RIGHTS AS A SHAREHOLDER. The optionee shall have no rights as a
shareholder with respect to any shares for which he is granted an option
until the date of issuance to him of a stock certificate for such shares
and no adjustment shall be made for any dividends or other rights the
record date for which is prior to the date such stock certificate is
issued.
(i) GENERAL RESTRICTION. Each option shall be subject to the requirement
that, if at any time the Board of Directors shall determine, in its
discretion, that the listing, registration or qualification of the shares
subject to such option upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory
body, is necessary or desirable as a condition of, or in connection with,
the granting of such option or the issuance or purchase of shares
thereunder, such option may not be exercised in whole or in part unless
such listing, registration, qualification, consent or approval shall have
been effected or obtained free of any conditions not acceptable to the
Board of Directors.
6. TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS
Options other than incentive stock options may be granted under this Plan
to both eligible employees and eligible nonemployees. Each such nonqualified
option shall be evidenced by a nonqualified stock option agreement, shall be
designated as a "nonqualified stock option," and shall conform to the foregoing
provisions of Section 5 except the purchase price requirements of Section 5(b),
the 10-percent Shareholder restriction of Section 5(c), the prohibition on
transferability of Section 5(d) to the extent provided in the nonqualified
stock option agreement, and the maximum value of grants of Section 5(g). The
Committee may include, in its discretion, any terms or conditions in addition
to those specified in Section 5. To the extent an option exceeds the
limitations of Section 5(g), it shall be deemed a
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nonqualified option and shall otherwise remain in full force and effect.
A nonqualified option may have a duration of 10 years and one day from the
date such option is granted.
7. TERMINATION OF EMPLOYMENT - EFFECT ON OPTIONS
If the employment of an optionee terminates for any reason other than
death or disability, an option may be exercised by him at any time prior to the
earlier of the expiration date of the option or the expiration of three months
after the date of termination, but only if, and to the extent that, he was
entitled to exercise the option at the date of such termination.
Notwithstanding the foregoing, an option may not be exercised after termination
of employment if the Committee determines that the termination of employment of
such optionee resulted from willful acts, or failure to act, by the optionee
detrimental to the Company or any of its subsidiaries. The Committee shall
determine whether an authorized leave of absence shall constitute a termination
of employment for purposes of this Plan.
If an optionee's employment terminates by reason of disability (within the
meaning of Section 105 (d)(4) of the Internal Revenue Code) or death, his
option may be exercised at any time prior to the earlier of the expiration of
the option or the expiration of one year following the date employment
terminated due to disability or death.
If employment of the optionee terminates for any reason other than
disability, retirement or death, any unpaid balance remaining on any promissory
note used in the purchase of stock shall become due and payable upon not less
than three months' notice from the Company, which notice may be given at any
time after such termination; provided, however, that such unpaid balance on
such promissory note shall become due and payable five years from the date of
such termination, unless the note has an earlier due date. In the case of
termination due to death, any unpaid balance remaining on such note on the date
of death shall become due and payable one year from such date. "Retirement"
shall mean early or normal retirement as defined in the Company's retirement
plan or, in the event there is no such plan, age 65.
8. ADJUSTMENT OF SHARES
In the event of any change in the Common Stock of the Company by reason of
any stock dividend, recapitalization, reorganization, merger, consolidation,
split-up, combination, or exchange of shares, or rights offering to purchase
Common Stock at a price substantially below fair market value, or of any
similar change affecting the Common Stock, the number and kind of shares which
thereafter may be optioned and sold under the Plan and the number and kind of
shares subject to option in outstanding option agreements and the purchase
price per share thereof shall be appropriately adjusted consistent with such
change in such manner as the Committee may deem equitable to prevent
substantial dilution or enlargement of the rights granted to, or available for,
participants in the Plan.
9. NO EMPLOYMENT RIGHTS
Neither the Plan nor any options granted under it shall confer upon any
recipient any right with respect to continuance of employment by the Company or
any subsidiary, nor shall they interfere in any way with the right of the
Company or any subsidiary by which a recipient is employed to terminate his
employment at any time.
10. WITHHOLDING TAXES
Whenever the Company proposes or is required to issue or transfer shares
of Common Stock under the Plan to an employee pursuant to the exercise of a
nonqualified stock option, the Company shall have the right to require the
recipient to remit to the Company an amount sufficient to satisfy any federal,
state or local withholding tax requirements prior to the delivery of any
certificate or certificates for such shares. To the extent provided in the
nonqualified stock option agreement, the amount of such withholding tax
requirements may be satisfied by delivery of shares of the Common Stock of the
Company registered in the name of the optionee, duly assigned to the Company.
Any shares so delivered shall be deemed to have a value equal to the fair
market value of the shares on such date.
11. CHANGE IN CONTROL
Upon acquisition of thirty<E^>percent or more of the Company's outstanding
shares of stock having general voting rights by an unaffiliated person, entity
or group, the Committee shall notify, in writing, each holder of an outstanding
option of such change in control. Notwithstanding any other provision of this
Plan or any option agreement, all options shall become fully exercisable on
receipt of such notice.
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12. AMENDMENT AND DISCONTINUANCE
This Plan may be amended, modified or terminated by the shareholders of
the Company or by the Board of Directors, except that the Board may not,
without approval of the shareholders, materially increase the benefits accruing
to participants under the Plan, increase the maximum number of shares as to
which options may be granted under the Plan, change the minimum option price,
change the class of eligible employees, extend the period for which options may
be granted or exercised, or withdraw the authority to administer the Plan from
a Committee consisting of directors not eligible to receive options under the
Plan. Notwithstanding the foregoing, to the extent permitted by law, the
Committee may amend the Plan without the approval of shareholders, to the
extent it deems necessary to cause options granted under the Plan to be exempt
from Section 16(b) of the Exchange Act and deductible compensation under
Section 16s(m) of the Code. Except as required by law, no amendment,
modification, or termination of the Plan may, without the written consent of a
participant to whom any option shall theretofore have been awarded, adversely
affect the rights of such participant under such option.
13. EFFECTIVE DATE
The effective date of this Plan is August 20, 1997, provided that the Plan
is adopted by the shareholders of the Company on that date.
14. GOVERNING LAW
To the extent not inconsistent with the provisions of the Internal Revenue
Code that relate to incentive stock options and nonqualified stock options,
this Plan and any option agreement adopted pursuant to it shall be construed
under the laws of the State of New York.
Consent of Independent Accountants
We hereby consent to the use and incorporation by reference in the
Prospectus constituting part of this Registration Statement on Form S-
2 of our report dated June 2, 1997 relating to the financial
statements of Detection Systems, Inc., which appears in such
Prospectus and on page 27 of the Annual Report on Form 10-K for the
year ended March 31, 1997. We also consent to the application of such
report to the Financial Statement Schedule for the three years ended
March 31, 1997 listed under Item 14(a) of Detection Systems, Inc.'s
Annual Report on Form 10-K for the year ended March 31, 1997 when such
schedule is read in conjunction with the financial statements referred
to in our report. The audits referred to in such report also included
this Financial Statement Schedule. We also consent to the references
to us under the headings "Experts" and "Selected Consolidated
Financial Data" in such Prospectus. However, it should be noted that
Price Waterhouse LLP has not prepared or certified such "Selected
Consolidated Financial Data."
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Rochester, New York
July 22, 1997
