Exhibit 99-1.
EMPLOYMENT AGREEMENT
AGREEMENT, made as of the 27th day of September, 2000 between Karl H.
Kostusiak ("Executive") and Detection Systems, Inc., a New York corporation
("Company").
W I T N E S S E T H:
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 capacities of Chairman, President, and Chief Executive
Officer for the Term of Employment commencing as of the date of this
Agreement (the "Commencement Date"). The Company agrees to provide
Executive with such office 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 5 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. Except as provided in Section 4 below,
upon the end of the Term of Employment hereunder, the Non-Competition,
Disability, and Retirement Agreement attached as Exhibit A (hereinafter the
"N-CDR Agreement") shall become effective as provided in Sections 1 and 19
thereof. Whenever the N-CDR Agreement becomes effective, this Agreement
shall terminate, except for any accrued liabilities hereunder.
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 and survivor benefits for his spouse
which are provided under the Company's employee plans or the N-CDR
Agreement, which shall upon the death become effective pursuant to Sections
1 and 19 thereof.
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 in any such case the N-CDR
Agreement shall thereupon become effective pursuant to Sections 1 and 19
thereof.
2. Executive's Acceptance. Executive hereby accepts the executive
employment described in this Agreement. Executive further agrees that he
will devote himself 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 $345,551 per year;
(b) Participation in all Company executive incentive compensation
plans. Such incentive compensation plans shall include an annual cash bonus
equal to an amount not less than 5% of the amount by which the Company's
pre-tax profits exceed 4% of net sales. If Executive is employed by the
Company for only part of a year or his employment is terminated before year
end, the bonus for that year will be pro rated based on the portion of the
year Executive was employed by the Company (except as otherwise provided in
Section 4 below);
(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.
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 3 years from the date of termination,
whichever is longer. So long as Executive is being paid currently under
this Section 4, Executive shall comply with Section 2 of the N-CDR
Agreement. At the end of the period set forth above in this Section 4
(during which period the Company shall continue to compensate Executive
pursuant to this Agreement), the N-CDR Agreement shall become effective in
accordance with Sections 1 and 19 thereof.
5. Termination for Cause. The Company may terminate Executive's
employment immediately and without prior notice to the 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 knowingly misappropriated for his benefit a material
amount of funds or property of the Company;
(b) Executive has obtained a material personal profit from any illegal
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;
(d) The Company has suffered material financial harm from knowingly
illegal action by Executive, other than on the Company's behalf or for its
benefit; or
(e) 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, provided that
Executive has been given written notice of that absence or refusal and
Executive has not substantially cured the stated Cause within 60 days
thereafter (but action taken by Executive in reliance upon Section 7 below
shall not be deemed an absence or refusal for purposes of this Section 5).
If Executive's employment is terminated by the Company for Cause, he
shall continue to be paid compensation and provided benefits in accordance
with the provisions of Section 4 above and the N-CDR Agreement, provided
that his cash compensation shall be reduced by the amount of any monetary
damage suffered by the Company due to the Cause, as determined by a court
of competent jurisdiction, prorated over the actuarially determined term of
such payments and based on a final court determination; and at the end of
the period specified in Section 4, the N-CDR Agreement shall become
effective in accordance with Sections 1 and 19 thereof.
6. Resignation. Executive may voluntarily resign from full time
employment with the Company, effective no earlier than 90 days after the
Executive has given written notice thereof to the Company's Secretary or
the Chairman of the Compensation Committee of the Board of Directors and
the Term of Employment shall terminate on the effective date set forth in
the notice. 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, except that upon that effective date the N-CDR Agreement
shall become effective in accordance with Sections 1 and 19 thereof.
7. Change in Control; Potential 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 that election or, if the election was by shareholders,
without the Board's approval of the nomination having been
included in the Company's proxy statement for that shareholder
meeting;
(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 25% 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:
(i) any Change in Control of the Company occurs while this
Agreement is effective, and
(ii) Executive gives notice to the Company or the Company
(acting upon a determination of its Board of Directors) gives notice
to Executive, in either case to the effect that the six month period
called for by this Section 7(b) shall begin to run, and
(iii) Executive's employment is terminated by Executive or by
the Company (other than for Executive's death or disability) within
six months after the date the notice provided for in (ii) above is
received (in Executive's case the termination being effected by
Executive giving notice within that six month period, effective
within 30 days after the notice is given, that his employment is
terminated), regardless the reason, if any, and regardless which
party gave the notice provided for in (ii) above,
then the Company shall, upon receipt of said notice,
immediately pay, transfer, and provide to Executive the
following amounts, benefits, and assets:
(1) The Company shall pay to Executive the sum of
Executive's full base salary through the effective 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 effective date of termination,
or in the case of a bonus which is not readily calculable at
that time, within five days after the bonus can be calculated.
(2) The Company shall pay to Executive an amount equal to
3 times the highest total cash compensation (including base
salary and bonuses) paid to 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 (1) above.
(3) The Company shall pay to Executive an amount equal to
the total amounts that would be expended for the benefits to be
provided Executive under Section 3 above if Executive had
continued to be an employee of the Company for 3 years after
the termination (such as, but not limited to, the 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).
This amount shall be paid to Executive as provided in the last
sentence of subsection (1) above either in cash or in the form
of an annuity contract issued by an independent insurance
company licensed to do business in New York that will provide
payment of all such total amounts.
(4) All options and other rights that Executive may hold
to purchase or otherwise acquire Common Stock of the Company
shall immediately become exercisable in full for the total
number of shares that are or might become purchasable
thereunder, in each case without further condition or
limitation except the giving of notice of exercise and the
payment of the purchase price thereunder (but without amendment
of the plan under which they were issued). At his discretion,
Executive may elect to surrender to the Company his rights in
any such options and rights held by him and, upon that
surrender, the Company shall pay him an amount in cash equal to
the aggregate spread between the exercise prices of all those
options and rights and the value of the Common Stock
purchasable thereunder (or of any other security into which the
Common Stock has been exchanged or converted) as of the date of
the termination of employment, the value to be determined by
the reported last sale price of the Common Stock or that other
security (or the mean between the reported last bid and asked
prices) on that date on NASDAQ (or, if it is not NASDAQ, on
whatever may then be the principal exchange or quotation system
on which the Company's Common Stock or that other security is
traded at that time).
(5) The Company shall transfer to Executive any and all
of its right, title, and interest in and to all Company life
insurance policies on Executive's life (except with respect to
Nationwide Insurance Policy No. N100169260 (the "Nationwide
Policy")) (and upon that transfer, Executive shall be deemed to
have released the Company from any and all obligations it then
owes to him to maintain and pay premiums on those policies and
any obligation on the part of the Company to repurchase common
stock of the Company from Executive or his estate using the
proceeds of such life insurance policies shall be of no further
force or effect).
(6) In addition to the amounts specified in clauses (1)
through (5) of this paragraph (b), the Company shall pay to
Executive, at the same time as those amounts are paid, an
additional amount which, after taking into account all federal,
state, and local income and excise taxes that Executive is
required to pay with respect to receipt of the additional
amount under this clause (6), will render the net after-tax
payment to Executive under this clause (6) equal to the sum of:
(A) all federal, state, and local excise taxes that
Executive is required to pay with respect to the payments
made pursuant to clauses (1) through (5) above; and
(B) all federal, state, and local income and excise
taxes that Executive is required to pay with respect to
the payment made pursuant to this clause (6).
The foregoing amounts of federal, state, and local income and
excise taxes shall be determined initially by a nationally
recognized law firm or firm of independent public accountants
retained by Executive at his expense or, at Executive's option,
by a law firm or firm of independent public accountants at the
Company's expense, and such determination and the basis
therefor shall be furnished in writing to Executive and the
Company. Payment shall be made by the Company in accordance
with that initial determination regardless whether there is a
dispute over the accuracy thereof. If either party disputes
that initial determination the matter shall promptly be
referred to a nationally recognized law firm or firm of
independent public accountants selected by the Executive (which
firm shall not have been involved in the initial
determination), and Executive and the Company shall promptly
furnish to that firm such information as it reasonably
requests. The Company shall make such additional payment to
Executive or Executive shall refund to the Company, as the case
may be, in accordance with the latter firm's determination. The
fees and expenses of that firm shall be borne by the Company.
Notwithstanding any provision in this Agreement or the N-CDR
Agreement to the contrary, at no time may the aggregate value
of the payments and benefits to be provided to Executive
pursuant to Sections 7(b)(iii)(2) through 7(b)(iii)(6) hereof
and Section 3 of the N-CDR Agreement exceed 2.77% of the then
current market capitalization of the Company (the "Cap
Amount"). If the aggregate value of such payments and benefits
to be provided to Executive exceed the Cap Amount, Executive
shall, subject to the Cap Amount, determine which payments or
benefits shall be reduced and the amount of each applicable
reduction.
(c) A "Potential Change in Control" of the Company shall be deemed to
have occurred if circumstances exist which are determined by a majority of
the non- employee directors of the Board to reasonably be expected to lead
to a Change in Control within a period of no more than 8 business days
after such determination.
(d) The Company shall, immediately upon receipt of notice from the
Executive that a Potential Change in Control has occurred, transfer to an
escrow account for the Executive's benefit (subject to Section 7(e) hereof)
the life insurance policies referenced in Section 7(b)(iii)(5) hereof and
an amount in cash sufficient to either (as determined by the compensation
committee of the Board) (i) fund the payments and benefits to which
Executive would be entitled upon a termination following a Change in
Control in accordance with Section 7(b) hereof and all amounts set forth in
Sections 3 and 9 (but excluding Section 4) of the N-CDR Agreement,
presuming Executive will not violate any non-competition provisions set
forth in the N-CDR Agreement or (ii) purchase and fully pay for an annuity
policy sufficient to fund the same; provided, however, that the aggregate
amount transferred to such escrow account in respect of the payments made
and benefits provided to Executive pursuant to Sections 7(b)(iii)(2)
through 7(b)(iii)(6) hereof and Section 3 of the N-CDR Agreement may not
exceed 2.77% of the then current market capitalization of the Company
determined as of the date of the Potential Change in Control (the
"Potential Change in Control Cap Amount"). If the Nationwide Policy is
contributed to fund the escrow account contemplated by this Section 7(d),
the amount of funding required to be provided by the Company shall be
reduced by the cash surrender value of the Nationwide Policy at the time of
funding.
(e) If a Change in Control occurs and either Executive or the Company
gives notice pursuant to Section 7(b)(ii) hereof and Executive's employment
hereunder is terminated pursuant to Section 7(b)(iii) hereof, any funds or
property held in the escrow account shall be immediately transferred to
Executive in full satisfaction of the Company's obligation to pay or fund
the payments and benefits set forth in Section 7(b) of this Agreement and
Sections 3 and 9 of the N-CDR Agreement. In the event the Cap Amount, as
determined based upon the market capitalization of the Company immediately
prior to the Change in Control (the "Change in Control Cap Amount"),
exceeds the Potential Change in Control Cap Amount, the Company shall
transfer to Executive the amount of such excess as soon as administratively
practicable following such Change in Control. In the event the Change in
Control Cap Amount is less than the Potential Change in Control Cap Amount
(such difference, the "Overage"), the amount payable to Executive pursuant
to this Section 7(e) shall be reduced by the amount of the Overage and such
amount shall be returned to the Company or its successor, as applicable, as
soon as practicable following such Change in Control. Within 10 days after
(x) it has been conclusively determined jointly by the Executive's counsel
and the Company's counsel that a Change in Control has not occurred or (y)
the notice period set forth in Section 7(b)(ii) hereof has expired without
Executive's termination of employment during such period, the escrow agent
shall return to the Company all funds and property contributed to the
escrow account by the Company, plus any interest accrued thereon.
(f) The Company may withhold from any payments due to Executive under
paragraph (b) such amounts as its attorneys or independent public
accountants may determine are required to be withheld under applicable
federal, state, and local tax laws.
(g) 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 within the six
month period specified in Section 7(b), the provisions of Sections 4 and 5
once again shall be applicable thereafter.
(h) In addition to payment of the amounts set forth in Section 7(b)
above and the funding of the escrow account as provided in Section 7(d)
above, beginning on the effectiveness of any termination of employment to
which Section 7(b) applies, the Company shall compensate and pay benefits
to and may retain the consulting services of Executive in accordance with
the N-CDR Agreement, which shall become effective in accordance with
Sections 1 and 19 thereof.
8. Retirement. The Company and Executive hereby agree that Executive
shall retire from full-time employment with the Company effective with the
close of business on December 31 of the year in which Executive attains the
age of 68, and beginning on January 1 of the next year, the Company will
pay Executive retirement benefits for his lifetime and for his spouse's
lifetime, if his spouse survives him, in accordance with the applicable
provisions of the N-CDR Agreement, which shall become effective in
accordance with Sections 1 and 19 thereof.
9. Change in Employment Status. If approved by the Executive and the
Board of Directors during the Term of Employment, Executive may become an
independent consultant with terms and conditions of that relationship
substantially equal in all respects to those set forth in the N-CDR
Agreement, which in that event shall become effective in accordance with
Sections 1 and 19 thereof.
10. Expenses and Interest. If any contest or dispute shall arise
hereunder, including without limitation any contest or dispute in respect
of the failure of the Company to make any payment or provide any benefit
hereunder (including a payment required hereunder but made pursuant to the
N-CDR Agreement) when due, the Company shall pay directly, or at the
Executive's election reimburse Executive, on a current basis, for the costs
and expenses (including reasonable attorneys fees and related expenses)
incurred by Executive in connection with such contest or dispute, together
with interest on each payment or benefit paid or provided late by the
Company calculated to the date of actual payment or provision at an annual
rate equal to 3% over the highest rate then paid by the Company under its
short term borrowing arrangements with an independent institutional lender
(and if there is no such lender, then 4% above the prevailing prime rate as
reported in the Wall Street Journal); provided, however, Executive shall be
required to repay any such amounts to the Company to the extent a court
issues a final and non-appealable order setting forth the determination
that the position taken by Executive was frivolous or advanced in bad
faith.
11. Notices. Any notice required or permitted to be given hereunder
shall be in writing and may be delivered personally or given by prepaid,
certified, return receipt requested, first class mail addressed:
(a) if to the Company, to at least two members of the Board of
Directors at the addresses to which the Company then sends correspondence
to them;
(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 11) 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, including the N-CDR Agreement,
which is being executed simultaneously herewith, 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.
16. Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the heirs, legatees, administrators, successors, and
assigns of the respective parties.
IN WITNESS WHEREOF, Executive, for himself, and the undersigned
director of the Company, acting 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.
/s/ Karl H. Kostusiak
Karl H. Kostusiak,
Executive
DETECTION SYSTEMS, INC.
By: /s/ Donald R. Adair
Donald R. Adair,
Chairman of the
Compensation Committee
of the Board of Directors
Attachment: Exhibit A - Non-Competition, Disability, and Retirement Agreement
EXHIBIT A
NON-COMPETITION, DISABILITY, AND RETIREMENT AGREEMENT
AGREEMENT made as of the 27th day of September between Karl H.
Kostusiak ("Executive") and Detection Systems, Inc., a New York corporation
("Company"). It is the intent that this Agreement will supersede the
Employment Agreement, dated concurrently herewith, upon the occurrence of
one of the contingencies set forth in Section 19 below.
WITNESSETH:
In consideration of the mutual covenants contained herein, the
parties agree as follows:
1. Effectiveness and Terms. This Agreement shall be binding on the
parties upon its execution, which is concurrent with execution of an
Employment Agreement between the parties bearing the same date as this
Agreement (the "Employment Agreement"), and this Agreement shall become
effective when any one of the contingencies set forth in Section 19 occurs
(the "Commencement Date" herein). "Term of Consulting Service" as used
herein shall mean the period commencing on the Commencement Date and
continuing thereafter through December 31 of the year in which Executive's
68th birthday occurs, unless the Company and Executive agree in writing to
extend the Term of Consulting Service, in which case the Term of Consulting
Service shall have the meaning as determined at that time; provided,
however, that Executive's consulting services may be earlier terminated as
hereinafter expressly set forth, in which event the Term of Consulting
Service shall mean the period from the Commencement Date through the date
of such earlier termination. Except as expressly provided in this
Agreement, terms defined in that Employment Agreement are used herein with
the same meanings.
2. Non-Competition. During the period of effectiveness of this
Agreement, 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 sold or under active development by the Company during the Term of
Consulting Service.
3. Compensation for Non-Competition. In consideration for Executive's
non-competition as provided in Section 2 above, the Company shall pay and
provide to Executive a non-competition fee, paid as soon as practicable
following the Commencement Date, equal to 2 times the Executive's highest
total cash compensation (including base salary and bonuses) paid to
Executive in any of the Company's last three fiscal years prior to the
Commencement Date; and
Beginning on the January 1 after the year in which Executive attains
the age of 68, the retirement benefits set forth in Sections 9 and 10 below
shall be the full consideration to be paid to Executive for his
non-competition.
4. Consulting Services. If this Agreement becomes effective upon the
occurrence of any contingency set forth in Section 19 other than subsection
19(b) or (c), beginning upon the date of that occurrence Executive shall
hold himself available to the Company for providing consulting services to
it as an independent contractor at mutually agreeable times and places; and
the Company shall have the right to call upon Executive, so long as
Executive is able, for up to 8 days of consulting services per year to
provide information concerning matters that occurred, were developed, or
were determined while Executive was a full-time or part-time employee of
the Company. Unless otherwise agreed, those consulting services shall be
rendered at a place and time mutually agreed (but within 25 miles of
Executive's residence at the time) and shall be paid at the rate of $1,500
per day (or up to 100 hours of consulting services per year at an hourly
rate to be agreed upon). Any other consulting services shall be provided
if, as, and when the parties may agree.
Notwithstanding any of the other provisions of this Agreement, the
Term of Consulting Services will automatically terminate upon Executive's
death and thereupon all payments and non-vested benefits payable hereunder
and under Section 3 above shall cease, except for any death benefits and
any survivor benefits for his spouse which are provided under the Company's
employee plans and except for the retirement benefits set forth in Section
9 for any surviving spouse. Those retirement benefits shall be paid
pursuant to Section 9 commencing after Executive's 68th birthday would have
occurred, except that the surviving spouse may elect, by written notice
given to the Company's President or Secretary, to receive early retirement
benefits as provided in Section 10 below, in which case the provisions of
Section 9 below shall apply, except that the initial retirement wage
benefit shall be calculated as provided in Section 10.
The Company may terminate Executive's consulting services 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 under this Section 4 and
under Section 3 shall cease except that the disability and retirement
benefits shall be paid in accordance with the provisions of Sections 9, 10,
and 11 below.
5. Executive's Acceptance. Executive agrees to provide the consulting
services described in this Agreement. Executive further agrees that he will
devote his reasonable efforts during reasonable business hours to
performance of the consulting services set forth herein during the Term of
Consulting Service.
6. [Intentionally left blank]
7. Termination for Cause. The Company may terminate Executive's
consulting services 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 knowingly misappropriated for his benefit a material
amount of funds or property of the Company;
(b) Executive has obtained a material personal profit from any illegal
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; or
(d) The Company has suffered material financial harm from knowingly
illegal action by Executive other than on the Company's behalf or for its
benefit.
If Executive's consulting services are terminated by the Company for
Cause, he shall continue to be paid compensation and benefits for his
non-competition in accordance with the provisions of Section 3 above and
retirement benefits in accordance with Section 9 and, if elected, Section
10 below, provided that his cash compensation (including retirement benefit
payments to be provided under this Agreement) shall be reduced by the
amount of any monetary damage suffered by the Company due to the Cause, as
determined by a court of competent jurisdiction, prorated over the
actuarially determined term of all such payments beginning on such
determination.
8. Resignation. Executive may voluntarily resign from his consulting
services with the Company by giving written notice thereof to the Company's
President or Secretary, but no resignation shall affect Executive's
obligation to provide the minimum consulting services provided for in the
second sentence of Section 4 above.
9. Retirement. The Company hereby agrees that, if not ended sooner,
the Term of Service as used in the Employment Agreement shall end at the
close of business on December 31 of the year in which Executive attains the
age of 68, and beginning on the opening of business on January 1 of the
next year (and regardless whether the Term of Service ended prior to that
December 31), 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 equal to 60% of the base salary rate
being paid to Executive at the end of his full time employment with the
Company, increased for each year after the end of his full time employment
by any increase in the CPI (as defined below), except that the retirement
wage benefit for his spouse shall be 75% of the amount thus calculated for
each year after the year of Executive's death;
(b) continuation of Executive's participation (for himself and his
spouse) in the health program in effect on the date of this Agreement
(including for dental and eye care coverage, an annual physical
examination, and similar benefits); 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,
plus CPI increases,
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, all Urban
Wage Earners 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 multiplying the wage benefit paid during
the previous year by any fraction greater than one calculated
by dividing the 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 CPI
shall not be used to decrease the wage benefit.
The parties agree: (x) that the foregoing retirement benefits are in
addition to any other retirement benefits that may be available to
Executive (such as the Company's 401(k) savings plan), (y) that payment of
these retirement benefits may be terminated if a court of law determines
that Executive has violated the provisions of Section 2 above, and (z) that
the Company will purchase and maintain life insurance sufficient to fund
the estimated benefits for Executive's spouse (estimated no later than
Executive's retirement date; 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 trust designated for this purpose.
(d) The retirement benefits provided under this Section 9 (and, if
applicable, Section 10) shall be paid as provided herein regardless whether
the Company has any claims against Executive for default under this
Agreement or for any other breach of duty or otherwise, and, except as
otherwise provided in Section 7 above, the Company shall pay those
retirement benefits as provided and must pursue remedies for any such
default or other breach of duty or other claim separately and
independently.
10. Early Retirement Benefits. The parties agree that, in the
circumstances expressly provided in this Agreement, Executive and/or
Executive's spouse shall be paid early retirement benefits in accordance
with the following:
(a) The provisions of Section 9 shall apply to Executive's and the
spouse's retirement benefits as provided therein, except as expressly
modified by this Section 10, and shall be paid beginning at the time
payment of the early retirement benefits actually commences as provided in
this Agreement;
(b) The initial retirement wage benefit shall not be the amount set
forth in Section 9(a) above, but shall be calculated as follows: multiply
the initial retirement wage benefit (calculated in accordance with Section
9(a) above) by the actuarially determined number of years it would be paid
during Executive's then actuarially determined remaining lifespan as if
Executive's 68th birthday had just occurred; then divide that amount by the
number of years then actuarially determined to be Executive's actual
expected remaining lifespan based on his actual age at that time. The
amount thus calculated shall be the initial annual retirement wage benefit
for purposes of Section 9(a) above.
11. Disability. If Executive is determined to be permanently disabled
in accordance with the provisions of Section 4 above or the provisions of
Section 1 of the Employment Agreement, Executive shall be paid disability
benefits from that date through December 31 of the year in which Executive
attains the age of 68, which disability benefits shall be equal to the
non-competition compensation and benefits and the minimum consulting fees
that would have been paid to Executive pursuant to Sections 3 and 4 above
if he had not become disabled, provided that, to the extent the disability
wage benefits are not taxable income to Executive under the U.S. Internal
Revenue Code of 1986, as amended, the disability benefit amount shall equal
60% of the compensation and fees that would have been paid pursuant to
Sections 3 and 4 above.
12. Stock Transfers by Executive and Executive's Estate and Heirs. So
long as this Agreement is in effect, Executive shall not sell any shares of
Company Common Stock except (a) in transactions approved in advance by the
Company's Board of Directors, (b) pursuant to all the conditions of Rule
144 promulgated by the Securities and Exchange Commission under the
Securities Act of 1933, as amended (or any rule thus promulgated which is a
successor to Rule 144); provided, however, that no such sales shall be made
in any block trade or (c) when there is any tender offer pending with
respect to any securities issued by the Company or there is any program
announced by any person other than the Company to acquire shares of the
Company's Common Stock. Executive agrees that restrictive legends referring
to the provisions of this Section 12 shall be placed upon all certificates
representing shares to which this Section 12 applies. The provisions of
this Section 12 shall terminate upon any Change in Control or Executive's
death, whichever may first occur and shall not apply thereafter.
13. Expenses and Interest. If any contest or dispute shall arise
hereunder, including without limitation any contest or dispute in respect
of the failure of the Company to make any payment or provide any benefit
hereunder when due, the Company shall pay directly, or at the Executive's
election reimburse Executive, on a current basis, for the costs and
expenses (including reasonable attorneys fees and related expenses)
incurred by Executive in connection with such contest or dispute, together
with interest on each payment or benefit paid or provided late by the
Company calculated to the date of actual payment or provision at an annual
rate equal to 3% over the highest rate then paid by the Company under its
short term borrowing arrangements with an independent institutional lender
(and if there is no such lender, then 4% above the prevailing prime rate as
reported in the Wall Street Journal); provided, however, Executive shall be
required to repay any such amounts to the Company to the extent a court
issues a final and non-appealable order setting forth the determination
that the position taken by Executive was frivolous or advanced in bad
faith.
14. Notices. Any notice required or permitted to be given hereunder
shall be in writing and may be delivered personally or given by prepaid,
certified, return receipt requested, first class mail addressed:
(a) if to the Company, to at least two members of the Board of
Directors, c/o the Company's Secretary at the address of the Company's
principal office;
(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 14) 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.
15. Amendment. It is agreed that no change or modification of this
Agreement shall be made except in a writing signed by both parties.
16. 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.
17. Law Governing. The validity, interpretation, and effect of this
Agreement shall be governed by the laws of the State of New York.
18. Entire Agreement. This Agreement contains the entire
understanding of the parties with respect to the consulting services of
Executive by the Company during the Term of Consulting Service and with
respect to non-competition and disability and retirement benefits (but does
not affect pension and other benefit plans and arrangements in which
Executive participates). There are no restrictions, agreements, promises,
warranties, covenants, or undertakings other than those expressly set forth
herein with respect to the Term of Consulting Service. Upon the occurrence
of one of the contingencies set forth in Section 19 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 employment or consulting services of Executive on
and after the Commencement Date. Thus, whenever this Agreement becomes
effective, the provisions of the Employment Agreement shall no longer be
effective except for any claims that may have accrued thereunder.
19. Contingencies. (a) This Agreement shall be effective immediately
upon the occurrence of any one of the following:
(a) Upon the end of the 5-year Term of Service as provided in Section 1
of the Employment Agreement;
(b) Upon Executive's death as provided in Section 1 of the Employment
Agreement;
(c) Upon Executive's permanent disability as provided in Section 1 of
the Employment Agreement;
(d) At the end of the period specified in Section 4 of the Employment
Agreement after termination of Executive's employment without Cause;
(e) At the end of the period specified in Section 5 of the Employment
Agreement after termination of Executive's employment for Cause;
(f) Upon any voluntary resignation by Executive from full time
employment with the Company prior to a Change in Control as provided in
Section 6 of the Employment Agreement;
(g) Upon the effectiveness of any termination of Executive's employment
after a Change in Control as provided in Section 7 of the Employment Agreement;
(h) Upon Executive's retirement as provided in Section 8 of the
Employment Agreement; or
(i) Upon any change of Executive's employment status to that of
independent consultant as provided in Section 9 of the Employment
Agreement.
20. Change in Control; Potential Change in Control.
(a) A "Change in Control" of the Company shall be deemed to have
occurred if no Change in Control occurred during the effectiveness of the
Employment Agreement and:
(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 that election or, if the election was by shareholders,
without the Board's approval of the nomination having been
included in the Company's proxy statement for that shareholder
meeting;
(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 25% 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 and all or
substantially all of the Company's assets.
(b) If:
(i) any Change in Control of the Company occurs while this
Agreement is effective, and
(ii) Executive gives notice to the Company or the Company
(acting upon a determination of its Board of Directors) gives notice
to Executive, in either case to the effect that the 6 month period
called for by this Section 20(b) shall begin to run, and
(iii) Executive's consulting services are terminated by
Executive or by the Company (other than for Executive's death or
disability) within 6 months after the date the notice provided for in
(ii) above is received (in Executive's case the termination being
effected by Executive giving notice within that 6 month period,
effective within 30 days after the notice is given, that his
consulting services are terminated to the extent permitted under
Section 4 above), regardless the reason, if any, and regardless which
party gave the notice provided for in (ii) above,
then the Company shall, upon receipt of said notice, immediately pay,
transfer, and provide to Executive the following amounts, benefits, and
assets:
(1) The Company shall pay to Executive the sum of
Executive's minimum consulting fees through the effective date
of termination of his consulting services 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 amounts shall be paid to Executive in a lump sum
within five days following the effective date of termination,
or in the case of a bonus which is not readily calculable at
that time, within 5 days after the bonus can be calculated.
(2) The Company shall pay to Executive an amount equal to
3 times the highest total cash compensation (including any base
salary, non-competition compensation, bonuses, and consulting
fees) 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 (1) above.
(3) All options and other rights that Executive may hold
to purchase or otherwise acquire Common Stock of the Company
shall immediately become exercisable in full for the total
number of shares that are or might become purchasable
thereunder, in each case without further condition or
limitation except the giving of notice of exercise and the
payment of the purchase price thereunder (but without amendment
of the plan under which they were issued). At his discretion,
Executive may elect to surrender to the Company his rights in
any such options and rights held by him and, upon that
surrender, the Company shall pay him an amount in cash equal to
the aggregate spread between the exercise prices of all those
options and rights and the value of the Common Stock
purchasable thereunder (or of any other security into which the
Common Stock has been exchanged or converted) as of the date of
the termination of consulting services, the value to be
determined by the reported last sale price of the Common Stock
or that other security (or the mean between the reported last
bid and asked prices) on that date on NASDAQ (or, if it is not
NASDAQ, on whatever may then be the principal exchange or
quotation system on which the Company's Common Stock or that
other security is traded at that time).
(4) The Company shall transfer to Executive any and all
of its right, title, and interest in and to all Company life
insurance policies (except with respect to Nationwide Insurance
Policy No. N100169260 (the "Nationwide Policy")) (and upon that
transfer, Executive shall be deemed to have released the
Company from any and all obligations it then owes to him to
maintain and pay premiums on those policies and any obligation
on the part of the Company to repurchase common stock of the
Company from Executive or his estate using the proceeds of such
life insurance policies shall be of no further force or
effect).
(5) In addition to the amounts specified in clauses (1)
through (4) of this paragraph (b), the Company shall pay to
Executive, at the same time as those amounts are paid, an
additional amount which, after taking into account all federal,
state, and local income and excise taxes that Executive is
required to pay with respect to receipt of the additional
amount under this clause (5), will render the net after-tax
payment to Executive under this clause (5) equal to the sum of:
(A) all federal, state, and local excise taxes that
Executive is required to pay with respect to the payments
made pursuant to clauses (1) through (4) above; and
(B) all federal, state, and local income and excise
taxes that Executive is required to pay with respect to
the payment made pursuant to this clause (5).
The foregoing amounts of federal, state, and local income and
excise taxes shall be determined initially by a nationally
recognized law firm or firm of independent public accountants
retained by Executive at his expense or, at Executive's option,
by a law firm or firm of independent public accountants at the
Company's expense, and such determination and the basis
therefor shall be furnished in writing to Executive and the
Company. Payment shall be made by the Company in accordance
with that initial determination regardless whether there is a
dispute over the accuracy thereof. If either party disputes
that initial determination the matter shall promptly be
referred to a nationally recognized law firm or firm of
independent public accountants selected by the Executive (which
firm shall not have been involved in the initial
determination), and Executive and the Company shall promptly
furnish to that firm such information as it reasonably
requests. The Company shall make such additional payment to
Executive or Executive shall refund to the Company, as the case
may be, in accordance with the latter firm's determination. The
fees and expenses of that firm shall be borne by the Company.
Notwithstanding any provision in this N-CDR Agreement or the
Employment Agreement to the contrary, at no time may the
aggregate value of the payments and benefits to be provided to
Executive pursuant to Sections 20(b)(iii)(2) through
20(b)(iii)(6) hereof exceed 2.77% of the then current market
capitalization of the Company (the "Cap Amount"). If the
aggregate value of such payments and benefits to be provided to
Executive exceed the Cap Amount, Executive shall, subject to
the Cap Amount, determine which payments or benefits shall be
reduced and the amount of each applicable reduction.
(c) A "Potential Change in Control" of the Company shall be deemed to
have occurred if circumstances exist which are determined by a majority of
the non- employee directors of the Board to reasonably be expected to lead
to a Change in Control within a period of no more than 8 business days
after such determination.
(d) The Company shall, immediately upon receipt of notice from the
Executive that a Potential Change in Control has occurred, transfer to an
escrow account for the Executive's benefit (subject to Section 20(e)
hereof) the life insurance policies referenced in Section 20(b)(iii)(4)
hereof and an amount in cash sufficient to either (as determined by the
compensation committee of the Board) (i) fund the payments and benefits to
which Executive would be entitled upon a termination following a Change in
Control in accordance with Section 20(e) hereof and all amounts to which
Executive is entitled under Section 9 (but excluding Section 4) of this
Agreement or (ii) purchase and fully pay for an annuity policy sufficient
to fund the same; provided, however, that the aggregate amount transferred
to such escrow account in respect of the payments made and benefits
provided to Executive pursuant to Sections 20(b)(iii)(2) through
20(b)(iii)(6) hereof, when combined with any amounts previously paid to
Executive pursuant to Section 3 hereof, may not exceed 2.77% of the then
current market capitalization of the Company determined as of the date of
the Potential Change in Control (as adjusted, the "Potential Change in
Control Cap Amount"). If the Nationwide Policy is contributed to fund the
escrow account contemplated by this Section 20(d), the amount of funding
required to be provided by the Company shall be reduced by the cash
surrender value of the Nationwide Policy at the time of funding.
(e) If a Change in Control occurs and either Executive or the Company
gives notice pursuant to Section 20(b)(ii) hereof and Executive's
consulting services hereunder are terminated pursuant to Section 20(b)(iii)
hereof, any funds or property held in the escrow account shall be
immediately transferred to Executive in full satisfaction of the Company's
obligation to pay or fund the payments and benefits set forth in Sections
3, 9 and 20(b) of this Agreement. In the event the Cap Amount, as
determined based upon the market capitalization of the Company immediately
prior to the Change in Control (the "Change in Control Cap Amount"),
exceeds the Potential Change in Control Cap Amount, the Company shall
transfer to Executive the amount of such excess as soon as administratively
practicable following such Change in Control. In the event the Change in
Control Cap Amount is less than the Potential Change in Control Cap Amount
(such difference, the "Overage"), the amount payable to Executive pursuant
to this Section 20(e) shall be reduced by the amount of the Overage and
such amount shall be returned to the Company or its successor, as
applicable, as soon as practicable following such Change in Control. Within
10 days after it has been conclusively determined jointly by the
Executive's counsel and the Company's counsel that a Change in Control has
not occurred, the escrow agent shall return to the Company all funds and
property contributed to the escrow account by the Company, plus any
interest accrued thereon.
(f) The Company may withhold from any payments due to Executive under
paragraph (b) such amounts as its attorneys or independent public
accountants may determine are required to be withheld under applicable
federal, state, and local tax laws.
(g) If applicable, the provisions of this Section 20 shall control
over the provisions of Section 7. In the event that Executive's consulting
services are not terminated by the Company or the Executive within the 6
month period specified in Section 20(b), the provisions of Section 7 once
again shall be applicable thereafter.
21. Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the heirs, legatees, administrators, successors, and
assigns of the respective parties.
IN WITNESS WHEREOF, Executive for himself, and the undersigned
director of the Company, acting 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.
/s/ Karl H. Kostusiak
Karl H. Kostusiak,
Executive
DETECTION SYSTEMS, INC.
By: /s/ Donald R. Adair
Donald R. Adair,
Chairman of the
Compensation Committee
of the Board of Directors
