UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to __________
Commission File Number: 0-8125
----------------------------
DETECTION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
State of New York 16-0958589
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
130 Perinton Parkway, Fairport, New York 14450
(Address of principal executive offices) (Zip Code)
(716) 223-4060
(Registrant's telephone number, including area code)
----------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes __X__ No _____
As of August 13, 1997 there were outstanding 4,751,750 shares of
the registrant's common stock, par value $.05 per share.
<PAGE>
PART I FINANCIAL INFORMATION
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited)
<TABLE>
Assets June 30, 1997 Mar 31, 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $2,906,543 $2,244,265
Accounts receivable, less allowance
for doubtful accounts of $313,800 22,545,395 15,246,309
Inventories 35,168,061 29,995,215
Income taxes receivable 197,962 0
Deferred income tax charges 2,132,156 2,132,156
Prepaid expenses and other assets 1,613,582 883,137
---------- ----------
64,563,699 50,501,082
---------- ----------
Fixed assets at cost 28,704,758 25,247,291
Less accumulated depreciation 16,108,609 13,999,120
---------- ----------
12,596,149 11,248,171
Deferred income taxes 3,046,200 3,046,200
Unallocated excess of purchase price
over net assets acquired 4,908,862 0
Goodwill and other intangibles 2,836,186 2,942,626
Other assets 753,241 537,772
---------- ----------
Total Assets $88,704,337 $68,275,851
========== ==========
Liabilities
Current liabilities:
Current portion of long term debt 1,668,884 $953,648
Current portion of capital lease
obligation 136,450 147,574
Short term borrowings 1,545,454 0
Accounts payable 18,388,899 12,259,380
Accrued payroll and benefits 2,849,158 2,818,487
Other accrued liabilities 4,626,978 3,254,593
---------- ----------
29,215,823 19,433,682
Obligations under capital leases 25,973 54,125
Other long term liabilities 3,976,068 2,924,975
Long term debt 31,758,004 28,031,802
Redeemable common stock 4,060,461 0
Shareholders' equity:
Common stock, par value $.05 per
share; Authorized - 12,000,000
shares; Issued - 4,745,051 shares
at June 30, 1997, and 4,478,993
shares at March 31, 1997 226,165 223,950
Capital in excess of par value 10,149,258 9,448,917
Retained earnings 9,739,524 8,594,306
---------- ----------
20,114,947 18,267,173
Less - Treasury stock, at cost (49,672) (52,553)
Notes receivable for stock (377,937) (378,373)
purchases
Cumulative translation adjustment (19,330) (4,980)
---------- ----------
Total liabilities and shareholders
equity 19,668,008 17,831,267
---------- ----------
$88,704,337 $68,275,851
========== ==========
</TABLE>
See accompanying notes to financial information.
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Income Statement
(Unaudited)
<TABLE>
June 30, 1997 June 30, 1996
For the Three Months Ended: (Current Year)(Preceding Year)
-------------- --------------
<S> <C> <C>
Net sales $28,207,788 $23,178,323
Costs and expenses:
Production $17,555,932 $15,365,822
Research and development 2,084,958 1,759,931
Marketing, administrative and
general 6,181,557 4,691,654
---------- ----------
Total costs and expenses $25,822,447 $21,817,407
Operating Income 2,385,341 1,360,916
Interest Income 14,362 19,342
Interest expense (637,469) (354,975)
Income before taxes 1,762,234 1,025,283
Provision for taxes 629,000 401,000
---------- ----------
Net income 1,133,234 624,283
========== ==========
Retained earnings at beginning
of period 8,594,306 4,869,023
Amortization of redeemable
common stock 11,984 0
---------- ----------
Retained earnings at end of period 9,739,524 5,493,306
========== ==========
Earnings per common and common
equivalent share $0.22 $0.13
==== ====
</TABLE>
(See accompanying notes to financial information)
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
<TABLE>
For the Three Months Ended June 30, 1997 1996
Cash flows from operating ---- ----
activities:
<S> <C> <C>
Net income 1,133,234 624,283
--------- ----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 967,801 744,831
Deferred compensation 457,415 37,048
Stock based compensation 85,975
Gain on sale of land (205,000)
Changes in assets and liabilities:
Accounts receivable (937,778) (1,452,924)
Inventories 989,194 (367,450)
Prepaid expenses and other assets (641,538) (189,607)
Accounts payable 242,736 (127,267)
Accrued payroll and benefits (109,412) 677,076
Other accrued liabilities (126,100) 444,900
Income taxes receivable (985,669) 391,088
--------- ---------
Total adjustments (262,376) 157,695
--------- ---------
Net cash provided by operating
activities 870,858 781,978
Cash flows from investing
activities:
Capital expenditures (1,062,147) (500,811)
Purchase of RAS (3,600,933)
--------- ----------
Net cash used in investing
activities (4,663,080) (500,811)
Cash flows from financing
activities:
Proceeds from borrowings 4,441,438 295,180
Principal payments on debt and
capital lease obligations (78,476) (473,033)
Common stock transactions, net 105,888 247,340
--------- ----------
Net cash provided by financing
activities 4,468,850 69,487
Effect of exchange rates (14,350)
Net increase in cash and cash
equivalents 662,278 350,654
Cash and cash equivalents at beginning
of period 2,244,265 913,716
Cash and cash equivalents at
end of period 2,906,543 1,264,370
========= ==========
Cash paid during the year for:
Interest 412,482 103,786
Income taxes 741,601 5,897
</TABLE>
See accompanying notes to financial information.
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
THREE-MONTH PERIOD ENDED
June 30, 1997
(Unaudited)
NOTE 1. GENERAL
The accompanying unaudited interim consolidated financial
statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (SEC). The
interim consolidated financial statements include the
consolidated accounts of Detection Systems, Inc. and its majority-
owned subsidiaries (collectively, "the Company") with all
significant intercompany transactions eliminated. In the opinion
of management, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair statement of the
financial position, results of operations and cash flows for the
interim periods presented have been made. Certain footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles (GAAP)
have been condensed or omitted pursuant to such SEC rules and
regulations. These financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the
year ended March 31, 1997.
Cash flow statement - During the first quarter of fiscal 1998,
the Company issued 221,738 and 34,121 shares of common stock in
connection with the acquisitions of DA Systems and Seriee S.A.,
respectively (see Note 3).
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 quarters ended
June 30, 1997 and 1996, basic pro forma earnings per share would
have been $.23 and $.14, respectively, and pro forma diluted
earnings per share would have been $.22 and $.13, respectively.
NOTE 2. INVENTORIES
Major classifications of inventory follow:
June 30, 1997 March 31, 1997
------------- --------------
Component Parts $18,094,205 $19,457,368
Work In Process 3,123,052 2,697,459
Finished Products 13,950,804 7,840,388
---------- ----------
$35,168,061 $29,995,215
========== ==========
<PAGE>
NOTE 3. ACQUISITIONS
In May 1997, the Company acquired all of the outstanding stock of
DA Systems, in exchange for 221,738 of its common stock. 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 to the
Company at that price after that date. The cost of this
acquisition was approximately $4.0 million. DA Systems is a
leading British manufacturer of security control equipment with
annual net sales of approximately $10.8 million.
In June 1997, the Company acquired 99.5% of the outstanding stock
of Seriee S.A. of France, in exchange for 34,121 shares of its
common stock, valued at approximately $.6 million. Seriee is a
leading manufacturer of electronic control and communication
equipment with annual net sales of approximately $6.3 million.
In June 1997, the Company acquired 98.7% of the outstanding stock
of Radio-Active Systems N.V.("RAS") of Belgium for approximately
$3.6 million in cash. RAS has the largest security equipment
distribution network in Belgium with annual net sales of
approximately $10 million.
These transactions have been accounted for as purchases and,
accordingly, the results of DA Systems, Seriee and RAS are
included in the consolidated financial statements since the date
of acquisition. The financial statements reflect the preliminary
allocation of purchase price as the purchase price allocation has
not been finalized.
<PAGE>
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
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. The impact that the implementation of these
strategies has had on the Company is demonstrated by an increase
in the Company's net sales of 21.7% to $28.2 million in the three
months ended June 30, 1997 from $23.2 million in the comparable
period in 1996 and a corresponding increase in the Company's net
income of 81.5% to $1.1 million from $624,000 for the same
periods.
The Company's acquisitions consisted of: (i) the purchase in
February 1996 of Radionics which had annual net sales of
approximately 43.1 million, (ii) the purchase in July 1996 of
certain assets of Senses which had annual net sales of
approximately $2.0 million, (iii) the purchase in May 1997 of DA
Systems which had annual net sales of approximately $10.8
million, (iv) the purchase in June 1997 of Seriee which had
annual net sales of approximately $6.3 million, and (v) the
purchase in June 1997 of RAS which had annual net sales of
approximately $10.0 million. These acquisitions had a
significant impact on the comparative information for the three
month periods ending June 30, 1996 and 1997 with respect to
results of operations and as of March 31, 1997 and June 30, 1997
with respect to asset and liability balances. The acquisitions
were funded by borrowings under a commercial credit facility and
the issuance of the Company's common stock.
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 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,
<PAGE>
administrative and sales personnel, marketing/selling supplies,
advertising, depreciation and professional fees.
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:
<TABLE>
Fiscal Year Ended Three Months
March 31 Ended June 30,
1995 1996 1997 1996 1997
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Production 60.7 66.9 64.2 66.3 62.2
Research and development 11.9 11.2 8.0 7.6 7.4
Purchased in-process
research
and development 22.3
Marketing, administrative 21.1 20.2 21.9
and general 19.7 25.1
---- ---- ---- ---- ----
Operating income (loss) 7.7 (25.5) 6.7 5.9 8.5
Interest income 0.3 0.8 0.2 0.0 0.0
Interest expense 0.5 0.8 1.7 1.5 2.3
---- ---- ---- ---- ----
Income (loss) before
income 7.5 (25.5) 5.2 4.4 6.2
taxes
Provision (benefit) for
income taxes 3.1 (6.7) 1.5 1.7 2.2
---- ---- ---- ---- ----
Net income (loss) 4.4% (18.8)% 3.7% 2.7% 4.0%
=== ===== === === ===
</TABLE>
Three Months Ended June 30, 1997 Compared to Three Months Ended
June 30, 1996
The Company's net sales increased 21.7% to $28.2 million in
the 1997 period from $23.2 million in the comparable period in
1996. The net sales of Senses and DA Systems, which were
acquired in July 1996 and May 1997, respectively, accounted for
$2.5 million of this increase. The remaining $2.5 million
increase represents sales growth from existing operations.
Production expenses increased 14.3% to $17.6 million in the
1997 period from $15.4 million in the comparable period in 1996.
As a percentage of net sales, production expenses decreased to
62.2% in the 1997 period from 66.3% in the comparable period in
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 further
transitioning of domestic manufacturing to the Company's China
facility during fiscal 1997 and the first quarter of fiscal 1998.
The Company anticipates continued consolidation of its
manufacturing operations during fiscal 1998 and 1999.
Research and development expenses increased 18.5% to $2.1
million in the 1997 period from $1.8 million in the comparable
period in 1996. As a percentage of net sales, research and
development expenses decreased to 7.4% in the 1997 period from
7.6% in the comparable period in 1996. The increase in research
and development expenses was primarily due to the addition of DA
Systems and Senses research and development expenses. The
decrease in research and development expenses as a percentage of
net sales was primarily
<PAGE>
due to savings achieved from the continued consolidation of
certain research and development efforts of Radionics and the
Company.
Marketing, administrative and general expenses increased 31.8%
to $6.2 million in the 1997 period from $4.7 million in the
comparable period in 1996. As a percentage of net sales,
marketing, administrative and general expenses increased to 21.9%
in the 1997 period from 20.2% in the comparable period in 1996.
The increase in marketing, administrative and general expenses
was primarily due to additional marketing related to acquisitions
and international marketing efforts which, in turn, increased
marketing, administrative and general expenses as a percentage of
net sales.
Interest expense increased to $637,000 in the 1997 period from
$355,000 in the comparable period in 1996. This increase was
primarily due to additional borrowings required to finance the
Company's international expansion and increased inventory levels
necessary during the transition of the Radionics manufacturing
operations to the Company's China facility. Interest income
decreased to $14,000 in the 1997 period from $19,000 in the
comparable period in 1996.
Income before income taxes increased 71.9% to $1.8 million in
the 1997 period from $1.0 million in the comparable period in
1996. This improvement was due to the factors described above.
The Company's effective income tax rate for the 1997 period
was 35.7% compared to 39.1% for the comparable period in 1996.
The lower effective rate for the 1997 period reflects the
benefits of certain lower foreign income tax rates associated
with the source of the Company's income during such period. This
rate is higher than the annual rate of 29.0% for fiscal 1997 due
to the source of pretax income among domestic and international
entities.
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 its acquisitions and the development of
the China facility, the Company has required external sources of
financing to satisfy its liquidity needs.
Three Months Ended June 30, 1997. During the three months
ended June 30, 1997, the Company's operating activities provided
$.9 million of operating cash flow. Net income, depreciation and
amortization provided $2.1 million, a decrease in inventories,
excluding the impact of acquisitions, provided $1.0 million and
an increase in accounts payable provided $.2 million. Increases
in prepaid expenses and other assets, accounts receivable and
income taxes receivable used $.6 million, $.9 million and $1.0
million of operating cash flow, respectively, and other account
changes provided $.1 million of operating cash flow.
During the three months ended June 30, 1997, cash used for
investing activities was $4.7 million and was utilized for the
acquisition of RAS and capital expenditures, primarily for
tooling of fixtures for both new products as well as moving
existing products to lower cost, offshore suppliers.
<PAGE>
During the three months ended June 30, 1997, cash flows
provided by financing activities were $4.5 million, primarily
representing proceeds from borrowings to finance the acquisition
of RAS.
Capital Resources. On June 30, 1997, the Company had cash
balances of $2.9 million. On that date, the Company had a $17.0
million revolving credit facility under which it had borrowed
$15.7 million. 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 investment in facilities and
equipment necessary to produce and market its security detection,
fire detection, security, fire and access control products as
well as certain new products. 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.
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.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
Item 5. Other matters
Item 6. Exhibits and Reports for Form 8-K.
A. Exhibits
See Exhibit Index
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DETECTION SYSTEMS, INC.
Registrant
DATE: August 15, 1997 By: /s/ Karl H. Kostusiak
Karl H. Kostusiak, President
By: /s/ Frank J. Ryan
Frank J. Ryan, Vice President,
Secretary and Treasurer
(Chief Financial & Accounting
Officer)
<PAGE>
EXHIBIT INDEX
3 (a) Detection Systems, Inc. Certification of
Incorporation, as amended, are incorporated by
reference to Exhibit 3(a) to the Company's 1997
Annual Report on Form 10-K.
3 (b) Detection Systems, Inc. By-laws, as amended, are
incorporated by reference to Exhibit 3(b) to the
Company's 1997 Annual Report on Form 10-K.
10 (a) Executive Employment Agreement with Karl H. Kostusiak
is included as Exhibit 10(a) of this Interim Report
on Form 10-Q.
10 (b) Executive Employment Agreements with David B. Lederer
are included as Exhibit 10(b) of this Interim Report
on Form 10-Q.
(11) Statement regarding computation of per share earnings
is included as Exhibit 11 of this Interim Report on
Form 10-Q.
(27) Financial data schedule is included as Exhibit 27 to
the electronic Edgar filing of this Interim Report on
Form 10-Q.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 2,906,543
<SECURITIES> 0
<RECEIVABLES> 22,545,395
<ALLOWANCES> (313,800)
<INVENTORY> 29,995,215
<CURRENT-ASSETS> 64,563,699
<PP&E> 28,704,758
<DEPRECIATION> 16,108,609
<TOTAL-ASSETS> 88,704,337
<CURRENT-LIABILITIES> 29,215,823
<BONDS> 0
4,060,461
0
<COMMON> 9,947,814
<OTHER-SE> 9,720,194
<TOTAL-LIABILITY-AND-EQUITY> 88,704,337
<SALES> 28,207,788
<TOTAL-REVENUES> 28,222,150
<CGS> 17,555,932
<TOTAL-COSTS> 25,822,447
<OTHER-EXPENSES> 8,266,515
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 637,469
<INCOME-PRETAX> 1,762,234
<INCOME-TAX> 629,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,133,234
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
EXHIBIT 10(B)
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 12th day of August, 1997 between
David B. Lederer ("Executive") and Detection Systems, Inc., a New
York corporation ("Company").
WITNESSETH:
In consideration of the mutual covenants contained herein,
the parties agree as follows:
1. Offer of Employment and Term. The Company agrees to
employ Executive in the capacity of Executive Vice President for
the Term of Employment commencing as of the date of this
Agreement (the "Commencement Date"). The Company agrees to
provide Executive with such office and such operational and
administrative support as is consistent with his position.
Executive's employment under this Agreement will be in the
vicinity of Rochester, New York. "Term of Employment" as used
herein shall mean the period commencing on the Commencement Date
and continuing thereafter for a period of five years, unless the
Company and Executive agree in writing to extend the Term of
Employment, in which case the Term of Employment shall have the
meaning as determined at that time; provided, however, that
Executive's employment may be earlier terminated as hereinafter
set forth, in which event the Term of Employment shall mean the
period from the Commencement Date through the date of such
earlier termination.
Notwithstanding any of the other provisions of this
Agreement, however, this Agreement will automatically terminate
upon Executive's death and thereupon all payments and non-vested
benefits payable hereunder shall cease, except for any death
benefits provided under the Company's employee plans. The
Company may terminate this Agreement due to Executive's permanent
disability, as determined by the Board of Directors in good faith
based on the certification of an independent M.D., and thereupon
all payments and non-vested benefits hereunder shall cease.
2. Executive's Acceptance. Executive agrees to accept
the executive employment described in this Agreement. Executive
further agrees that he will devote his full time and best efforts
during reasonable business hours to performance of the duties and
responsibilities of his office during the Term of Employment.
Executive also agrees not to disclose trade secrets of the
Company, or to engage in any other activity which is detrimental
to the interests of the Company, during the Term of Employment.
3. Compensation and Benefits. The compensation and
benefits which the Company shall provide Executive for his
services during the Term of Employment shall include but not be
limited to:
(a) Base salary equal to or greater than $174,800 per
year. In addition, Executive will receive a $85,771 per annum
advance against year-end cash bonuses, retroactive to June 1,
1997, paid on a pro rata monthly basis.
(b) Participation in all Company executive incentive
compensation plans. Such incentive compensation plans shall
include: an annual cash bonus of not less than 4% of the amount
by which the Company's pre-tax profits exceed $500,000, subject
to the provision below concerning achievement of the EPS
(Earnings Per Share) Goal.
If a participant in a bonus program is employed by the
Company for only part of a year or his or her employment is
terminated before year end, the participant's bonus for that year
will be pro rated based on the portion of the year the
participant was employed by the Company. Each cash bonus
provided for above shall not be earned unless the Company
achieves the EPS Goal, as defined below:
(1) for any given fiscal year the "EPS Goal"
shall be a goal for after-tax earnings per share for the
year established by the Board of Directors within the first
120 days of that year;
(2) all calculations under this Section 3(b) shall
be made in accordance with generally accepted accounting
principles applied consistently with the Company's
practices;
(3) Bonuses will be paid in the following order:
The General Employee Bonus will be paid in total first on a
pro rata basis and the Executive Cash Bonuses will be paid
second on a pro rata basis.
(c) Grants of options under any Company employee stock
option plan, where permitted by the Plan, in such amounts as are
determined by the Board of Directors or the Committee of the
Board administering such plan;
(d) Participation in all Company pension, deferred
compensation, insurance, health and welfare or other benefit
plans in which the Company's senior executives are entitled to
participate; and
(e) Continuation of all plans in which the Executive
participates, including existing fringe benefits and executive
perquisites to which Executive is entitled as of the date of this
Agreement, except that such plans, benefits and perquisites as
are generally available to the Company's senior executives may be
changed consistent with business conditions in a manner which
does not discriminate against Executive.
4. Termination Without Cause. The Company may terminate
Executive's employment without Cause as hereinafter defined and
for any reason. If Executive is terminated without Cause,
Company will continue to compensate and provide benefits to
Executive as if he had continued in the Company's employment
under this Agreement for the then remaining balance of the Term
of Employment or for a period of three (3) years from the date of
termination, whichever is longer. Executive will comply with
Section 8 of this Agreement while receiving such compensation.
If Executive's employment is terminated by the Company
without Cause and for any reason after termination of the term of
employment but prior to the Company and the Executive reaching a
written agreement with respect to the Executive's full retirement
benefits, Company will continue to compensate and provide
benefits to Executive as if he had continued in the Company's
employment under this Agreement for a period of two (2) years
from the date of termination. Executive will comply with Section
8 of this Agreement while receiving such compensation.
5. Termination for Cause. The Company may terminate
Executive's employment immediately and without prior notice to
Executive for "Cause" as defined below. The existence of Cause
shall be determined by the Company's Board of Directors (other
than Executive) acting in good faith. "Cause" is defined, and
shall be limited to, a good faith determination by the Board of
Directors that any of the following has occurred:
(a) Executive has misappropriated a material amount
of funds or property of the Company;
(b) Executive has obtained a material personal
profit from any unlawful Company transaction with a third party;
(c) Executive has obtained a material personal
profit from the use of the Company's trade secrets other than on
its behalf and/or if the Company has suffered material financial
harm from the disclosure of trade secrets by Executive; or
(d) Willful and prolonged absence from work by
Executive or willful refusal by Executive to perform his duties
and responsibilities under circumstances which, in either case,
constitute a substantial abdication of Executive's duties and
responsibilities of his office.
If Executive's employment is terminated by the Company for
Cause, he shall be paid compensation and provided benefits in
accordance with the provisions of the first paragraph of Section
4 above, provided that his cash compensation shall be reduced by
the amount of any monetary damage suffered by the Company due to
the Cause, prorated over the term of such payments.
6. Resignation. Executive may voluntarily resign from
the Company after giving 90 days' prior written notice of his
intention to resign and the Term of Employment shall terminate on
the effective date of such resignation. If Executive resigns or
otherwise voluntarily leaves the Company's employment prior to a
Change in Control, he shall forfeit all compensation and non-
vested benefits, from and after the effective date of such
resignation, provided in this Agreement.
7. Change in Control.
(a) A "Change in Control" of the Company shall
be deemed to have occurred if:
(1)any "person," as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (other
than the Company or any corporation owned, directly
or indirectly, by the shareholders of the Company in
substantially the same proportions as their
ownership of stock of the Company), is or becomes
the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of
securities of the Company representing 25% or more
of the combined voting power of the Company's then
outstanding securities;
(2)there is elected 35% or more of the
members of the Board of Directors of the Company
without the approval of the nomination of such
members by a majority of the Board serving prior to
such election;
(3)the shareholders of the Company approve
a merger or consolidation of the Company with any
other corporation, other than (i) a merger or
consolidation which would result in the voting
securities of the Company outstanding immediately
prior thereto continuing to represent more than 75%
of the combined voting power of the voting
securities of the Company, or such surviving entity,
outstanding immediately after such merger or
consolidation; or (ii) a merger or consolidation
effected to implement a recapitalization of the
Company (or similar transaction) in which no
"person" (as defined above) acquires more than 50%
of the combined voting power of the Companys then-
outstanding securities; or
(4)the Shareholders of the Company approve
an agreement for the sale or disposition by the
Company of all or substantially all of the Company's
assets.
(b) If any Change in Control of the Company occurs
and Executive's employment is terminated by the Company or the
Executive within four months after the date of the Change in
Control for any reason other than Executive's Death, the Company
shall pay and provide to Executive the following amounts and
benefits:
(1)the sum of Executive's full base salary
through the date of termination of his employment at
the rate in effect at the time of termination or at
the time the Change in Control occurs, whichever is
higher, and an amount equal to the amount of any
bonus which has been earned by him but not yet paid
to him. These two amounts shall be paid to
Executive in a lump sum within five days following
the date of termination, or in the case of a bonus
which is not readily calculable at such time,
within five days after such bonus can be calculated;
and
(2)an amount equal to three times the
highest total cash and stock option cash value
compensation (including base salary and bonuses)
paid Executive in any of the Company's last three
fiscal years completed prior to such termination.
This amount shall be paid to Executive as provided
in the last sentence of subsection (a) above; and
(3)the benefits provided Executive under
Section 3, such as, but not limited to, life,
accident, disability, health and travel insurance,
and other benefits in effect for Executive at the
time notice of termination is given or at the time
the Change in Control occurs, whichever may be
higher in the case of each benefit, shall be
provided to Executive by the Company to the same
extent as if Executive had continued to be an
employee of the Company for three (3) years from
such termination, and such benefits shall, to the
extent that they may not be provided or paid under
any benefit plan or program, be provided or paid for
by the Company by means other than such plan or
program.
(c) If applicable, the provisions of Section 7(b)
shall control over the provisions of Sections 4 and/or 5. In the
event that Executive's employment is not terminated by the
Company or the Executive for any reason other than the
Executive's death within the four month period specified in
Section 7(b), the provisions of Sections 4 and 5 shall once again
be applicable thereafter.
(d) In the event that the payments and benefits
specified in this Section 7 would be subject to the tax (the
"Excise Tax") imposed by Section 4999 of the Internal Revenue
Code of 1986 (the "Code"), as amended (or any similar tax that
may hereinafter be imposed) because of "excess parachute
payments," as defined in Section 280G of the Code, Executive and
Company agree that the amounts payable pursuant to this Section 7
shall be reduced by such amount as shall be necessary to avoid
the imposition of the Excise Tax.
8. Noncompetition. If prior to a Change in Control
Executive's employment terminates due to his resignation or other
voluntary departure or due to termination by the Company for
Cause or without Cause, for eighteen (18) months subsequent to
such termination, Executive shall not, without the prior written
consent of the Board of Directors of the Company, engage, as an
employee, partner, consultant, venturer, entrepreneur or
otherwise, in the development or sale of any product or service
which is competitive with any product or service of the Company.
If subsequent to a Change in Control Executive's employment
terminates as above provided, Executive shall similarly refrain
from competing with the Company for a period of twelve (12)
months subsequent to such termination. In the event the Company
terminates Executive's employment due to permanent disability as
provided in Section 1, whether prior to or after a Change in
Control, Executive shall not be restricted from competing with
the Company immediately upon such termination.
9. Retirement. The Company hereby agrees that, after
Executive's retirement from full time employment with the
Company, as agreed between the Company and Executive, the Company
will pay Executive retirement benefits for his lifetime and for
his spouse's lifetime, if his spouse survives him, as follows:
(a) a retirement wage benefit initially equal to 12%
of Executive's base salary as set forth in Section 3(a) above,
increased each year thereafter by any increase, less 0.5%, in the
CPI as defined below (except that the wage benefit shall be 75%
of that amount after Executive's death);
(b) continuation of Executive's full health program
or similar benefit for Executive and his spouse; and
(c) continuation of all other benefits provided at
time of retirement, such continuation limited in individual
benefit cost to 60% of the maximum annual cost of such benefit in
any year prior to retirement.
For these purposes:
(1) unless otherwise agreed or directed by law
or a court, "spouse" shall mean the person to whom Executive is
married at the time any benefit is to be paid, or, after
Executive's death, the person to whom Executive was married at
the time of his death;
(2) "CPI" shall mean the Consumer Price Index
as determined by the United States Department of Labor, Bureau of
Labor Statistics, or any successor governmental agency or,
lacking any such successor, any other authoritative source
designated in good faith by the Board of directors; and the wage
benefit shall be increased as of January 1 each year by
increasing the wage benefit paid during the previous year by any
positive percentage calculated by (A) dividing CPI most recently
computed and available at the end of that previous year by the
CPI most recently computed and available at the end of the year
previous to that (the quotient to be expressed as a percentage)
and (B) subtracting 100.5%.
The parties agree: (y) that payment of these
retirement benefits may be terminated if a court of law
determines that Executive has violated the provisions of Section
8 above, and (z) that the Company will purchase and maintain life
insurance sufficient to fund the estimated benefits for the
spouse (any excess policy proceeds to be available, if agreed, to
purchase shares of the Company's Common Stock held in Executive's
estate) and the policy or policies of such insurance shall be
held in a trust designed for this purpose.
10. Expenses. If the Company is found by a court of
competent jurisdiction to have breached this Agreement, the
Company shall pay the costs and expenses incurred by Executive in
any litigation seeking damages in respect of such breach or to
enforce the performance of this Agreement by Company.
11. Notices. Any notice required or permitted to be
given hereunder shall be in writing and may be given by prepaid
and certified return receipt requested first class mail
addressed:
(a) if to the Company, to each member of the Board
of Directors at the address to which the Company then addresses
correspondence to such persons;
(b) if to Executive, at his home mailing address on
file with the Company; and
(c) to such other address as the party to which such
notice is to be given shall have notified (in accordance with the
provisions of this Section 10) as its substitute address for the
purpose of this Agreement.
Any notice given as aforesaid shall be deemed conclusively
to have been received on the fifth business day after such
mailing.
12. Amendment. It is agreed that no change or
modification of this Agreement shall be made except in a writing
signed by both parties. Nevertheless, this Agreement might
become supersided as of April 2, 1998, by the Part-Time
Employment Agreement between the parties dated as of August 5,
1997, as set forth in the Preamble and Sections 1 and 16 of that
Part-Time Employment Agreement.
13. Severability. In the event that any one or more of
the provisions of this Agreement shall be or become invalid,
illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions shall not be
affected thereby.
14. Law Governing. The validity, interpretation and
effect of this Agreement shall be governed by the laws of the
State of New York.
15. Entire Agreement. This Agreement contains the entire
understanding of the parties with respect to the employment of
Executive by the Company. There are no restrictions, agreements,
promises, warranties, covenants or undertakings other than those
expressly set forth herein. This Agreement supersedes all prior
agreements, arrangements and understandings between the parties,
whether oral or written, with respect to the employment of
Executive.
IN WITNESS WHEREOF, Executive for himself, and the
undersigned director of the Company on behalf of the Company by
authority of its Board of Directors, have executed this Agreement
as of the day and year first above written.
8/15/97 /s/ David B. Lederer
David B. Lederer, Executive
DETECTION SYSTEMS, INC.
8/15/97 By: /s/ Donald R. Adair
Donald R. Adair, Chairman of the
Compensation Committee of the
Board of Directors
PART-TIME EMPLOYMENT AGREEMENT
AGREEMENT made as of the 12th day of August, 1997 between
David B. Lederer ("Executive") and Detection Systems, Inc., a New
York corporation ("Company"). It is the intent that this
Agreement will supersede the previously effective Employment
Agreement, also dated the 12th day of August, 1997, upon the
Executive's change in employment status, pursuant to Section 16
below.
WITNESSETH:
In consideration of the mutual covenants contained herein,
the parties agree as follows:
1. Offer of Employment and Term. Provided the
contingency set forth in Section 16 occurs, the Company agrees to
employ Executive in the capacity of Vice President , Business
Development for the Term of Employment commencing on the
effective date set forth in Section 16 (the "Commencement Date").
The Company agrees to provide Executive with such offices and
such operational and administrative support as is consistent with
his position and responsibilities under this Agreement. "Term of
Employment" as used herein shall mean the period commencing on
the Commencement Date and continuing thereafter for a period of
five years, unless the Company and Executive agree in writing to
extend the Term of Employment, in which case the Term of
Employment shall have the meaning as determined at that time;
provided, however, that Executive's employment may be earlier
terminated as hereinafter set forth, in which event the Term of
Employment shall mean the period from the Commencement Date
through the date of such earlier termination.
Notwithstanding any of the other provisions of this
Agreement, however, this Agreement will automatically terminate
upon Executive's death and thereupon all payments and non-vested
benefits payable hereunder shall cease, except any death benefits
provided under the Company's employee plans. The Company may
terminate this Agreement due to Executive's permanent disability,
as determined by the Board of Directors in good faith based on
the certification of an independent M.D., and thereupon all
payments and non-vested benefits hereunder shall cease.
2. Executive's Acceptance. Executive agrees to accept
the executive employment described in this Agreement. Executive
further agrees that he will devote approximately half time and
his best efforts during reasonable business hours to performance
of the duties and responsibilities of his office during the Term
of Employment. Executive also agrees not to disclose trade
secrets of the Company, or to engage in any other activity which
is detrimental to the interests of the Company, during the Term
of Employment.
3. Compensation and Benefits. The compensation and
benefits which the Company shall provide Executive for his
services during the Term of Employment shall include but not be
limited to:
(a) Base salary equal to or greater than $90,000 per year
including directors fees, if applicable;
(b) The Executive will not participate in any of the
Company's executive incentive compensation plans as currently
defined;
(c) Grants of options under any Company employee stock
option plan, where permitted by the Plan, in such amounts as are
determined by the Board of Directors or the Committee of the
Board administering such plan;
(d) Participation in Company pension, deferred
compensation, insurance, health and welfare or other benefit
plans in which the Company's senior executives are entitled to
participate as specified in Appendix A; and
(e) Continuation of all plans in which the Executive
participates, including existing fringe benefits and executive
perquisites to which Executive is entitled as of the date of this
Agreement, except that such plans, benefits and perquisites as
are generally available to the Company's senior executives may be
changed consistent with business conditions in a manner which
does not discriminate against Executive.
4. Termination Without Cause. The Company may terminate
Executive's employment without Cause as hereinafter defined and
for any reason. If Executive is terminated without Cause,
Company will continue to compensate and provide benefits to
Executive as if he had continued in the Company's employment
under this Agreement for the then remaining balance of the Term
of Employment or for a period of three (3) years from the date of
termination, whichever is longer. Executive will comply with
Section 8 of this Agreement while receiving such compensation.
5. Termination for Cause. The Company may terminate
Executive's employment immediately and without prior notice to
Executive for "Cause" as defined below. The existence of Cause
shall be determined by the Company's Board of Directors (other
than Executive) acting in good faith. "Cause" is defined, and
shall be limited to, a good faith determination by the Board of
Directors that any of the following has occurred:
(a) Executive has misappropriated a material amount
of funds or property of the Company;
(b) Executive has obtained a material personal
profit from any unlawful Company transaction with a third party;
(c) Executive has obtained a material personal
profit from the use of the Company's trade secrets other than on
its behalf and/or if the Company has suffered material financial
harm from the disclosure of trade secrets by Executive; or
(d) Willful and prolonged absence from work by
Executive or willful refusal by Executive to perform his duties
and responsibilities under circumstances which, in either case,
constitute a substantial abdication of Executive's duties and
responsibilities of his office.
If Executive's employment is terminated by the Company for
Cause, he shall be paid compensation and provided benefits in
accordance with the provisions of Section 4 above, provided that
his cash compensation shall be reduced by the amount of any
monetary damage suffered by the Company due to the Cause,
prorated over the term of such payments.
6. Resignation. Executive may voluntarily resign from
the Company after giving 90 days' prior written notice of his
intention to resign and the Term of Employment shall terminate on
the effective date of such resignation. If Executive resigns or
otherwise voluntarily leaves the Company's employment prior to a
Change in Control, he shall forfeit all compensation and non-
vested benefits provided in this Agreement, from and after the
effective date of such resignation.
7. Change in control.
(a) A "Change in Control" of the Company shall
be deemed to have occurred if:
(1)any "person," as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (other
than the Company or any corporation owned, directly
or indirectly, by the shareholders of the Company in
substantially the same proportions as their
ownership of stock of the Company), is or becomes
the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of
securities of the Company representing 25% or more
of the combined voting power of the Company's then
outstanding securities;
(2)there is elected 35% or more of the
members of the Board of Directors of the Company
without the approval of the nomination of such
members by a majority of the Board serving prior to
such election;
(3)the shareholders of the Company approve
a merger or consolidation of the Company with any
other corporation, other than (i) a merger or
consolidation which would result in the voting
securities of the Company outstanding immediately
prior thereto continuing to represent more than 75%
of the combined voting power of the voting
securities of the Company, or such surviving entity,
outstanding immediately after such merger or
consolidation; or (ii) a merger or consolidation
effected to implement a recapitalization of the
Company (or similar transaction) in which no
"person" (as defined above) acquires more than 50%
of the combined voting power of the Company's then-
outstanding securities; or
(4)the Shareholders of the Company approve
an agreement for the sale or disposition by the
Company of all or substantially all of the Company's
assets.
(b) If any Change in Control of the Company occurs
and Executive's employment is terminated by the Company or the
Executive within four months after the date of the Change in
Control for any reason other than Executive's Death, the Company
shall pay and provide to Executive the following amounts and
benefits:
(1)the sum of Executive's full base salary
through the date of termination of his employment at
the rate in effect at the time of termination or at
the time the Change in Control occurs, whichever is
higher, and an amount equal to the amount of any
bonus which has been earned by him but not yet paid
to him. These two amounts shall be paid to
Executive in a lump sum within five days following
the date of termination, or in the case of a bonus
which is not readily calculable at such time,
within five days after such bonus can be calculated;
and
(2)an amount equal to three times the
highest total cash, stock and stock option cash
value compensation (including base salary and
bonuses) paid Executive in any of the Company's last
three fiscal years completed prior to such
termination. This amount shall be paid to Executive
as provided in the last sentence of subsection (a)
above; and
(3)the benefits provided Executive under
Section 3(d), such as, but not limited to, life,
accident, disability, health and travel insurance,
and other benefits in effect for Executive at the
time notice of termination is given or at the time
the Change in Control occurs, whichever may be
higher in the case of each benefit, shall be
provided to Executive by the Company to the same
extent as if Executive had continued to be an
employee of the Company for one year from such
termination, and such benefits shall, to the extent
that they may not be provided or paid under any
benefit plan or program, be provided or paid for by
the Company by means other than such plan or
program.
(c) If applicable, the provisions of Section 7(b)
shall control over the provisions of Sections 4 and/or 5. In the
event that Executive's employment is not terminated by the
Company or the Executive for any reason other than the
Executive's death within the four month period specified in
Section 7(b), the provisions of Sections 4 and 5 shall once again
be applicable thereafter.
(d) In the event that the payments and benefits
specified in this Section 7 would be subject to the tax (the
"Excise Tax") imposed by Section 4999 of the Internal Revenue
Code of 1986 (the "Code"), as amended (or any similar tax that
may hereinafter be imposed) because of "excess parachute
payments," as defined in Section 280G of the Code, Executive and
Company agree that the amounts payable pursuant to this Section 7
shall be reduced by such amount as shall be necessary to avoid
the imposition of the Excise Tax.
8. Noncompetition. If prior to a Change in Control
Executive's employment terminates due to his resignation or other
voluntary departure or due to termination by the Company for
Cause or without Cause, for eighteen (18) months subsequent to
such termination, Executive shall not, without the prior written
consent of the Board of Directors of the Company, engage, as an
employee, partner, consultant, venturer, entrepreneur or
otherwise, in the development or sale of any product or service
which is competitive with any product or service of the Company.
If subsequent to a Change in Control Executive's employment
terminates as above provided, Executive shall similarly refrain
from competing with the Company for a period of twelve (12)
months subsequent to such termination. In the event the Company
terminates Executive's employment due to permanent disability as
provided in Section 1, whether prior to or after a Change in
Control, Executive shall not be restricted from competing with
the Company immediately upon such termination.
9. Retirement. The Company hereby agrees that, after
Executive's retirement from employment under this Agreement, as
agreed between the Company and Executive, the Company will pay
Executive retirement benefits for his lifetime and for his
spouse's lifetime, if his spouse survives him, as follows:
(a) a retirement wage benefit initially equal to 12%
of Executive's base salary for the last year of full time
employment with the Company, increased each year thereafter by
any increase, less 0.5%, in the CPI as defined below, not to
exceed 4% in any year (except that the wage benefit shall be 75%
of that amount after Executive's death);
(b) continuation of Executive's full health program
or similar benefit for Executive and his spouse; and
(c) continuation of all other benefits provided at
time of retirement, such continuation limited in individual
benefit cost to 60% of the maximum annual cost of such benefit in
any year prior to retirement.
For these purposes:
(1) unless otherwise agreed or directed by law
or a court, "spouse" shall mean the person to whom Executive is
married at the time any benefit is to be paid, or, after
Executive's death, the person to whom Executive was married at
the time of his death;
(2) "CPI" shall mean the Consumer Price Index
as determined by the United States Department of Labor, Bureau of
Labor Statistics, or any successor governmental agency or,
lacking any such successor, any other authoritative source
designated in good faith by the Board of Directors; and the wage
benefit shall be increased as of January 1 each year by
increasing the wage benefit paid during the previous year by any
positive percentage calculated by (A) dividing CPI most recently
computed and available at the end of that previous year by the
CPI most recently computed and available at the end of the year
previous to that (the quotient to be expressed as a percentage)
and (B) subtracting 100.5%.
The parties agree: (y) that payment of these
retirement benefits may be terminated if a court of law
determines that Executive has violated the provisions of Section
7 above, and (z) that the Company will purchase and maintain life
insurance sufficient to fund the estimated benefits for the
spouse (any excess policy proceeds to be available, if agreed, to
purchase shares of the Company's Common Stock held in Executive's
estate) and the policy or policies of such insurance shall be
held in a trust designed for this purpose.
10. Expenses. If the Company is found by a court of
competent jurisdiction to have breached this Agreement, the
Company shall pay the costs and expenses incurred by Executive in
any litigation seeking damages in respect of such breach or to
enforce the performance of this Agreement by Company.
11. Notices. Any notice required or permitted to be
given hereunder shall be in writing and may be given by prepaid
and certified return receipt requested first class mail
addressed:
(a) if to the Company, to each member of the Board
of Directors at the address to which the Company then addresses
correspondence to such persons;
(b) if to Executive, at his home mailing address on
file with the Company; and
(c) to such other address as the party to which such
notice is to be given shall have notified (in accordance with the
provisions of this Section 10) as its substitute address for the
purpose of this Agreement.
Any notice given as aforesaid shall be deemed conclusively
to have been received on the fifth business day after such
mailing.
12. Amendment. It is agreed that no change or
modification of this Agreement shall be made except in a writing
signed by both parties.
13. Severability. In the event that any one or more of
the provisions of this Agreement shall be or become invalid,
illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions shall not be
affected thereby.
14. Law Governing. The validity, interpretation and
effect of this Agreement shall be governed by the laws of the
State of New York.
15. Entire Agreement. This Agreement contains the entire
understanding of the parties with respect to the employment of
Executive by the Company during the Term of Employment. There
are no restrictions, agreements, promises, warranties, covenants
or undertakings other than those expressly set forth herein with
respect to the Term of Employment. Upon the occurrence of the
contingency set forth in Section 16 below, as of the Commencement
Date this Agreement supersedes all prior agreements, arrangements
and understandings between the parties, whether oral or written,
with respect to the employment of Executive on and after the
Commencement Date.
16. Contingency. This Agreement shall be effective
April 2, 1998 provided that prior to that date the Executive has
been able to sell at least 135,000 of his shares of Company
common stock in a public offering that is registered under the
Securities Act of 1933 and is underwritten on a firm commitment
basis by underwriters acceptable to both the Company and the
Executive.
IN WITNESS WHEREOF, Executive for himself, and the undersigned
director of the Company on behalf of the Company by authority of
its Board of Directors, have executed this Agreement as of the
day and year first above written.
8/15/97 /s/ David B. Lederer
David B. Lederer, Executive
DETECTION SYSTEMS, INC.
8/15/97 By: /s/ Donald R. Adair
Donald R. Adair, Chairman of the
Compensation Committee of the
Board of Directors
Appendix A
Executive Officer Benefits
for
David B. Lederer ("the Executive")
1. General Employee Bonus. The Executive is eligible to
participate in the Company's general profit-sharing plan
(yearly distribution of 4% of pre-tax profits in excess of
$500,000 to all employees) to be paid if the EPS goal is met.
2. Life Insurance. Life insurance policy with Columbian Mutual,
with guaranteed conversion privilege and a face value of
$800,000, shall be purchased by the Company for the benefit of
the Executive. This insurance shall be in addition to the
group life insurance plan that covers all employees of the
Company.
3. Personal tax and investment advisory services. An amount up to
2% of base salary per tax year shall be authorized for personal
tax and investment advisory services for the Executive.
4. Medical expenses. Reimbursement of all personal and family
medical expenses not covered by Company insurance plans, up to
10% of base salary, shall be granted to the Executive.
5. Automobile allowance. The Executive shall receive a Company
vehicle with a lease payment not to exceed $500 per month plus
service and gas reimbursement.
6. Long-Term Care Insurance. The Executive and his spouses
will be provided up to an aggregate of $2,000 in long-term care
insurance premium payments per year.
7. Founder Retirement Planning. The Executive shall be
provided retirement benefits at a rate equal to 12% of the
Executive's base salary for the last year of full time employment
with the Company, increased each year thereafter by any increase,
less 0.5% in the CPI as defined in the Executive's Employment
Agreement, plus a provision for medical insurance, the retirement
and medical payments to continue for Executive's life (and,
should his spouse survive him, for her life, in her case the
payment to be at three-fourths the rate paid during the
Executive's lifetime.)
8. Other Benefits:
A. Participation in Company 401K Plan.
B. Participation in Company group health insurance plans
including basic medical, major medical, dental and extended
disability, with premiums paid in full by the Company.
C. Monroe Country Club or equivalent membership for the
Executive
D. Miscellaneous: Paid vacation time, paid holidays, Workers'
Compensation, travel accident insurance, tuition reimbursement,
stock purchase plan, and all other benefits which are generally
applicable to all benefited part-time employees.
E. Participation in appropriate industry affairs such as SIA,
NFPA, NEMA and ULI/IAC including reimbursement for reasonable
travel expenses.
Exhibit 10(a)
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 12th day of August, 1997 between
Karl H. Kostusiak ("Executive") and Detection Systems, Inc., a
New York corporation ("Company").
WITNESSETH:
In consideration of the mutual covenants contained herein,
the parties agree as follows:
1. Offer of Employment and Term. The Company agrees to
employ Executive in the capacity of Chairman, President and CEO
for the Term of Employment commencing as of the date of this
Agreement (the "Commencement Date"). The Company agrees to
provide Executive with such office and such operational and
administrative support as is consistent with his position.
Executive's employment under this Agreement will be in the
vicinity of Rochester, New York. "Term of Employment" as used
herein shall mean the period commencing on the Commencement Date
and continuing thereafter for a period of five years, unless the
Company and Executive agree in writing to extend the Term of
Employment, in which case the Term of Employment shall have the
meaning as determined at that time; provided, however, that
Executive's employment may be earlier terminated as hereinafter
set forth, in which event the Term of Employment shall mean the
period from the Commencement Date through the date of such
earlier termination.
Notwithstanding any of the other provisions of this
Agreement, however, this Agreement will automatically terminate
upon Executive's death and thereupon all payments and non-vested
benefits payable hereunder shall cease, except for any death
benefits provided under the Company's employee plans. The
Company may terminate this Agreement due to Executive's permanent
disability, as determined by the Board of Directors in good faith
based on the certification of an independent M.D., and thereupon
all payments and non-vested benefits hereunder shall cease.
2. Executive's Acceptance. Executive agrees to accept
the executive employment described in this Agreement. Executive
further agrees that he will devote his full time and best efforts
during reasonable business hours to performance of the duties and
responsibilities of his office during the Term of Employment.
Executive also agrees not to disclose trade secrets of the
Company, or to engage in any other activity which is detrimental
to the interests of the Company, during the Term of Employment.
3. Compensation and Benefits. The compensation and
benefits which the Company shall provide Executive for his
services during the Term of Employment shall include but not be
limited to:
(a) Base salary equal to or greater than $218,460 per
year. In addition, Executive will receive $107,254 per annum
advance against year-end cash bonuses, retroactive to June 1,
1997, paid on a pro rata monthly basis.
(b) Participation in all Company executive incentive
compensation plans. Such incentive compensation plans shall
include: an annual cash bonus of not less than 5% of the amount
by which the Company's pre-tax profits exceed $500,000, subject
to the provision below concerning achievement of the EPS
(Earnings Per Share) Goal.
If a participant in a bonus program is employed by the
Company for only part of a year or his or her employment is
terminated before year end, the participant's bonus for that year
will be pro rated based on the portion of the year the
participant was employed by the Company. Each cash bonus
provided for above shall not be earned unless the Company
achieves the EPS Goal, as defined below:
(1) for any given fiscal year the "EPS Goal"
shall be a goal for after-tax earnings per share for the
year established by the Board of Directors within the first
120 days of that year;
(2) all calculations under this Section 3(b) shall
be made in accordance with generally accepted accounting
principles applied consistently with the Company's
practices;
(3) Bonuses will be paid in the following order:
The General Employee Bonus will be paid in total first on a
pro rata basis and the Executive Cash Bonuses will be paid
second on a pro rata basis.
(c) Grants of options under any Company employee stock
option plan, where permitted by the Plan, in such amounts as are
determined by the Board of Directors or the Committee of the
Board administering such plan;
(d) Participation in all Company pension, deferred
compensation, insurance, health and welfare or other benefit
plans in which the Company's senior executives are entitled to
participate; and
(e) Continuation of all plans in which the Executive
participates, including existing fringe benefits and executive
perquisites to which Executive is entitled as of the date of this
Agreement, except that such plans, benefits and perquisites as
are generally available to the Company's senior executives may be
changed consistent with business conditions in a manner which
does not discriminate against Executive.
4. Termination Without Cause. The Company may terminate
Executive's employment without Cause as hereinafter defined and
for any reason. If Executive is terminated without Cause,
Company will continue to compensate and provide benefits to
Executive as if he had continued in the Company's employment
under this Agreement for the then remaining balance of the Term
of Employment or for a period of three (3) years from the date of
termination, whichever is longer. Executive will comply with
Section 8 of this Agreement while receiving such compensation.
If Executive's employment is terminated by the Company
without Cause and for any reason after termination of the term of
employment but prior to the Company and the Executive reaching a
written agreement with respect to the Executive's full retirement
benefits, Company will continue to compensate and provide
benefits to Executive as if he had continued in the Company's
employment under this Agreement for a period of two (2) years
from the date of termination. Executive will comply with Section
8 of this Agreement while receiving such compensation.
5. Termination for Cause. The Company may terminate
Executive's employment immediately and without prior notice to
Executive for "Cause" as defined below. The existence of Cause
shall be determined by the Company's Board of Directors (other
than Executive) acting in good faith. "Cause" is defined, and
shall be limited to, a good faith determination by the Board of
Directors that any of the following has occurred:
(a) Executive has misappropriated a material amount
of funds or property of the Company;
(b) Executive has obtained a material personal
profit from any unlawful Company transaction with a third party;
(c) Executive has obtained a material personal
profit from the use of the Company's trade secrets other than on
its behalf and/or if the Company has suffered material financial
harm from the disclosure of trade secrets by Executive; or
(d) Willful and prolonged absence from work by
Executive or willful refusal by Executive to perform his duties
and responsibilities under circumstances which, in either case,
constitute a substantial abdication of Executive's duties and
responsibilities of his office.
If Executive's employment is terminated by the Company for
Cause, he shall be paid compensation and provided benefits in
accordance with the provisions of the first paragraph of Section
4 above, provided that his cash compensation shall be reduced by
the amount of any monetary damage suffered by the Company due to
the Cause, prorated over the term of such payments.
6. Resignation. Executive may voluntarily resign from
the Company after giving 90 days' prior written notice of his
intention to resign and the Term of Employment shall terminate on
the effective date of such resignation. If Executive resigns or
otherwise voluntarily leaves the Company's employment prior to a
Change in Control, he shall forfeit all compensation and non-
vested benefits, from and after the effective date of such
resignation, provided in this Agreement.
7. Change in Control.
(a) A "Change in Control" of the Company shall
be deemed to have occurred if:
(1)any "person," as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (other
than the Company or any corporation owned, directly
or indirectly, by the shareholders of the Company in
substantially the same proportions as their
ownership of stock of the Company), is or becomes
the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of
securities of the Company representing 25% or more
of the combined voting power of the Company's then
outstanding securities;
(2)there is elected 35% or more of the
members of the Board of Directors of the Company
without the approval of the nomination of such
members by a majority of the Board serving prior to
such election;
(3)the shareholders of the Company approve
a merger or consolidation of the Company with any
other corporation, other than (i) a merger or
consolidation which would result in the voting
securities of the Company outstanding immediately
prior thereto continuing to represent more than 75%
of the combined voting power of the voting
securities of the Company, or such surviving entity,
outstanding immediately after such merger or
consolidation; or (ii) a merger or consolidation
effected to implement a recapitalization of the
Company (or similar transaction) in which no
"person" (as defined above) acquires more than 50%
of the combined voting power of the Company's then-
outstanding securities; or
(4)the Shareholders of the Company approve
an agreement for the sale or disposition by the
Company of all or substantially all of the Company's
assets.
(b) If any Change in Control of the Company occurs
and Executive's employment is terminated by the Company or the
Executive within four months after the date of the Change in
Control for any reason other than Executive's Death, the Company
shall pay and provide to Executive the following amounts and
benefits:
(1)the sum of Executive's full base salary
through the date of termination of his employment at
the rate in effect at the time of termination or at
the time the Change in Control occurs, whichever is
higher, and an amount equal to the amount of any
bonus which has been earned by him but not yet paid
to him. These two amounts shall be paid to
Executive in a lump sum within five days following
the date of termination, or in the case of a bonus
which is not readily calculable at such time,
within five days after such bonus can be calculated;
and
(2)an amount equal to three times the
highest total cash, stock and stock option cash
value compensation (including base salary and
bonuses) paid Executive in any of the Company's last
three fiscal years completed prior to such
termination. This amount shall be paid to Executive
as provided in the last sentence of subsection (a)
above; and
(3)the benefits provided Executive under
Section 3, such as, but not limited to, life,
accident, disability, health and travel insurance,
and other benefits in effect for Executive at the
time notice of termination is given or at the time
the Change in Control occurs, whichever may be
higher in the case of each benefit, shall be
provided to Executive by the Company to the same
extent as if Executive had continued to be an
employee of the Company for three (3) years from
such termination, and such benefits shall, to the
extent that they may not be provided or paid under
any benefit plan or program, be provided or paid for
by the Company by means other than such plan or
program.
(c) If applicable, the provisions of Section 7(b)
shall control over the provisions of Sections 4 and/or 5. In the
event that Executive's employment is not terminated by the
Company or the Executive for any reason other than the
Executive's death within the four month period specified in
Section 7(b), the provisions of Sections 4 and 5 shall once again
be applicable thereafter.
(d) In the event that the payments and benefits
specified in this Section 7 would be subject to the tax (the
"Excise Tax") imposed by Section 4999 of the Internal Revenue
Code of 1986 (the "Code"), as amended (or any similar tax that
may hereinafter be imposed) because of "excess parachute
payments," as defined in Section 280G of the Code, Executive and
Company agree that the amounts payable pursuant to this Section 7
shall be reduced by such amount as shall be necessary to avoid
the imposition of the Excise Tax.
8. Noncompetition. If prior to a Change in Control
Executive's employment terminates due to his resignation or other
voluntary departure or due to termination by the Company for
Cause or without Cause, for eighteen (18) months subsequent to
such termination, Executive shall not, without the prior written
consent of the Board of Directors of the Company, engage, as an
employee, partner, consultant, venturer, entrepreneur or
otherwise, in the development or sale of any product or service
which is competitive with any product or service of the Company.
If subsequent to a Change in Control Executive's employment
terminates as above provided, Executive shall similarly refrain
from competing with the Company for a period of twelve (12)
months subsequent to such termination. In the event the Company
terminates Executive's employment due to permanent disability as
provided in Section 1, whether prior to or after a Change in
Control, Executive shall not be restricted from competing with
the Company immediately upon such termination.
9. Retirement. The Company hereby agrees that, after
Executive's retirement from full time employment with the
Company, as agreed between the Company and Executive, the Company
will pay Executive retirement benefits for his lifetime and for
his spouse's lifetime, if his spouse survives him, as follows:
(a) a retirement wage benefit initially equal to 12%
of Executive's base salary as set forth in Section 3(a) above,
increased each year thereafter by any increase, less 0.5%, in the
CPI as defined below (except that the wage benefit shall be 75%
of that amount after Executive's death);
(b) continuation of Executive's full health program
or similar benefit for Executive and his spouse; and
(c) continuation of all other benefits provided at
time of retirement, such continuation limited in individual
benefit cost to 60% of the maximum annual cost of such benefit in
any year prior to retirement.
For these purposes:
(1) unless otherwise agreed or directed by law
or a court, "spouse" shall mean the person to whom Executive is
married at the time any benefit is to be paid, or, after
Executive's death, the person to whom Executive was married at
the time of his death;
(2) "CPI" shall mean the Consumer Price Index
as determined by the United States Department of Labor, Bureau of
Labor Statistics, or any successor governmental agency or,
lacking any such successor, any other authoritative source
designated in good faith by the Board of directors; and the wage
benefit shall be increased as of January 1 each year by
increasing the wage benefit paid during the previous year by any
positive percentage calculated by (A) dividing CPI most recently
computed and available at the end of that previous year by the
CPI most recently computed and available at the end of the year
previous to that (the quotient to be expressed as a percentage)
and (B) subtracting 100.5%.
The parties agree: (y) that payment of these
retirement benefits may be terminated if a court of law
determines that Executive has violated the provisions of Section
8 above, and (z) that the Company will purchase and maintain life
insurance sufficient to fund the estimated benefits for the
spouse (any excess policy proceeds to be available, if agreed, to
purchase shares of the Company's Common Stock held in Executive's
estate) and the policy or policies of such insurance shall be
held in a trust designed for this purpose.
10. Change in Employment Status. If approved by the
Executive and the Board of Directors during the Term of
Employment, executive may become a part time employee with terms
and conditions of employment substantially equal in all respects
to those of David B. Lederer as set forth in his Part Time
Employment Agreement dated August 5, 1997 effective April 2,
1998, except for the basic compensation which shall be $112,500.
11. Expenses. If the Company is found by a court of
competent jurisdiction to have breached this Agreement, the
Company shall pay the costs and expenses incurred by Executive in
any litigation seeking damages in respect of such breach or to
enforce the performance of this Agreement by Company.
12. Notices. Any notice required or permitted to be
given hereunder shall be in writing and may be given by prepaid
and certified return receipt requested first class mail
addressed:
(a) if to the Company, to each member of the Board
of Directors at the address to which the Company then addresses
correspondence to such persons;
(b) if to Executive, at his home mailing address on
file with the Company; and
(c) to such other address as the party to which such
notice is to be given shall have notified (in accordance with the
provisions of this Section 10) as its substitute address for the
purpose of this Agreement.
Any notice given as aforesaid shall be deemed conclusively
to have been received on the fifth business day after such
mailing.
13. Amendment. It is agreed that no change or
modification of this Agreement shall be made except in a writing
signed by both parties.
14. Severability. In the event that any one or more of
the provisions of this Agreement shall be or become invalid,
illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions shall not be
affected thereby.
15. Law Governing. The validity, interpretation and
effect of this Agreement shall be governed by the laws of the
State of New York.
16. Entire Agreement. This Agreement contains the entire
understanding of the parties with respect to the employment of
Executive by the Company. There are no restrictions, agreements,
promises, warranties, covenants or undertakings other than those
expressly set forth herein. This Agreement supersedes all prior
agreements, arrangements and understandings between the parties,
whether oral or written, with respect to the employment of
Executive.
IN WITNESS WHEREOF, Executive for himself, and the
undersigned director of the Company on behalf of the Company by
authority of its Board of Directors, have executed this Agreement
as of the day and year first above written.
8/15/97 /s/ Karl H. Kostusiak
Karl H. Kostusiak, Executive
DETECTION SYSTEMS, INC.
8/15/97 By: /s/ Donald R. Adair
Donald R. Adair, Chairman of the
Compensation Committee of the
Board of Directors
Exhibit 11
DETECTION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Computation of Net Income Per Common
And Common Equivalent Share
For the Three Months Ended: June 30, 1997
-------------
Net Income $1,133,234
Less: amortization of redeemable stock 11,984
---------
Adjusted net income applicable to common stock $1,145,218
=========
Number of Shares
Weighted average number of shares 4,508,453
Common Stock equivalent due to assumed exercise
of stock options and warrants and deferred
compensation plan shares 602,866
---------
5,111,319
=========
Net Income per Common and Common Equivalent share $0.22
====
