-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, RouHr7yHa+xYsZNXdY6ORHOoLpPovNHWjxl82vbAZ8GF7GY6wgmimD3e5OUNezSO 6L0fw2vRClYiGmYol4jzBQ== 0000028365-95-000005.txt : 199506300000028365-95-000005.hdr.sgml : 19950630 ACCESSION NUMBER: 0000028365-95-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950629 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DETECTION SYSTEMS INC CENTRAL INDEX KEY: 0000028365 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 160958589 STATE OF INCORPORATION: NY FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-08125 FILM NUMBER: 95551058 BUSINESS ADDRESS: STREET 1: 130 PERINTON PKWY CITY: FAIRPORT STATE: NY ZIP: 14450 BUSINESS PHONE: 7162234060 MAIL ADDRESS: STREET 1: 130 PERINTON PARKWAY CITY: FAIRPORT STATE: NY ZIP: 14450 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended: March 31, 1995 [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. Commission File Number: 0-8125 _____________________ DETECTION SYSTEMS, INC. (Exact name of registrant as specified in its charter) State of New York 16-0958589 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 130 Perinton Parkway Fairport, New York 14450 (Address of principal executive offices) (Zip Code) (716) 223-4060 (Registrant's telephone number, including area code) _____________________ Securities registered pursuant to Section 12(b) of the Act: None _____________________ Securities registered pursuant to Section 12(g) of the Act: Title of Class Common Stock, Par Value $.05 Per Share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes x Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes x As of June 23, 1995 the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $12,845,855 As of June 23, 1995 there were outstanding 2,804,238 shares of the registrant's common stock, par value $.05 per share. DOCUMENTS INCORPORATED BY REFERENCE Information on pages 14 through 24 of the Company's 1995 Annual Report is incorporated by reference into Part II of this Form 10-K. Portions of the Company's Proxy Statement for its 1995 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. PART I ITEM l. BUSINESS General Detection Systems, Inc. ("Company") designs, manufactures and markets electronic detection, control and signaling equipment for the security and fire protection industries. An electronic alarm system consists of intrusion and fire detectors as well as control and signaling equipment. An alarm system is turned on by setting the control instrument. When a break-in or fire occurs, the intrusion or fire detector senses the incident and activates the control instrument, which in turn triggers the signaling equipment and, in most cases, a bell or siren to provide a local alarm. Signaling equipment may consist of an automatic telephone dialer, a leased telephone line transmitter or a radio transmitter and is used to transmit the alarm signal to a remote central alarm monitoring service or directly to the police. Since its founding in 1968, Detection Systems has established a reputation for outstanding performance, quality and service. The Company's product line includes electronic intrusion detectors, fire detectors, microprocessor-based alarm control and signaling equipment, and emergency call systems. These products are used worldwide by professional installation and service companies to protect life and property in commercial, industrial, institutional and residential environments. The Company has three subsidiaries. During fiscal 1995, the Company provided an equity investment of $700,000 to its Detection Systems International, Inc. ("DSII") subsidiary for the purpose of pursuing international opportunities for its electronic security and fire protection products. An experienced international executive was appointed to lead this operation. Branch offices were established in Australia, France and Hong Kong. A manufacturing facility was leased in Southeast Asia, and manufacturing operations at this facility are targeted to commence in October 1995. The Company owns 100 percent of the common stock of DSII. Another subsidiary, Emergency Communications, Inc. ("ECI"), is involved in the development of a market for a new emergency call system to be used for personal security on college campuses and in similar environments. Total coverage systems are currently operational at two colleges. The Company purchased all of ECI's common stock through an initial equity investment of $100,000 and subsequently awarded a portion of the shares to certain directors and employees. On each anniversary, a portion of the stock is vested. At March 31, 1995, the Company owned approximately 70% of ECI's common stock. At June 1, 1995, the Company had advanced ECI approximately $850,000. The third subsidiary, Activity Monitoring Systems, Inc. ("AMS"), was involved in the development of wireless electronic house arrest products to be used by various government agencies. The Company purchased all of AMS' common stock through an initial equity investment of $100,000 and subsequently awarded a portion of the shares to certain directors and employees. On each anniversary, a portion of the stock is vested. At March 31, 1995, the Company owned approximately 80% of AMS' common stock. Further development and marketing efforts for the house detention product line were put on hold for technical license performance reasons. Product Line The Company's security detectors operate on five basic principles (1) passive infrared body heat detection, (2) photoelectric beam interruption, (3) combination passive infrared/microwave detection, (4) acoustic glass break detection and (5) vibration detection. These five types of detectors complement each other in their system applications and the types of environments in which they function best. Several different types of detectors are often used in a single alarm system. The Company's intrusion detection products include both self-contained detectors which are connected both directly (wired) and/or indirectly (wireless) to the alarm system controller and detectors that are connected to other detectors and to a detection zone control, which is in turn connected to the system controller. The Company's products are used in new alarm systems as well as to upgrade existing alarm systems. Fiscal 1995 was a significant year for new product releases. All of the Company's security detectors now feature enhanced signature recognition techniques. As a result, its passive infrared detectors can accommodate extreme environmental disturbances. Its newest duals can be used in residential or commercial environments where animals may be present. Its glass break detectors offer superior performance in both glass breakage detection and false alarm immunity. During the past several years the Company has introduced several different specialty sensor products which have been manufactured to its specifications by an offshore firm, for sale under the Detection Systems name. During fiscal 1995, the Company contracted with another offshore firm to supply vibration detectors intended for the protection of vaults, safes, ATM machines, night deposit boxes and data storage cabinets. The Company has a family of microprocessor-based alarm control equipment for use in security/fire system applications. The Company's control line is comprised of controls for both residential and commercial applications including multiplex systems to accomplish monitoring in large security system applications. The Company continues to work with a national customer to provide long-range transmissions of security and fire alarm signals over the ARDIS radio network. ARDIS, an acronym for Advanced Radio Data Information Service, offers an alternative to telephone lines as the means for contacting a central monitoring station, and ultimately the police or fire department. This increases alarm system reliability and reduces vulnerability to tampering. ECI's Security Escort personal safety system uses a digital micro- cellular architecture to provide its subscribers with 24 hour protection. In a matter of seconds, a small, hand-held Security Escort transmitter enables an individual to simultaneously trigger a strobe, sound a siren alarm and alert the appropriate security personnel as to the subscriber's name, location, address and any handicap. A unique test feature allows the subscriber to test the system at any time and receive visual confirmation that it is functioning properly. Marketing The Company's products are installed in industrial, commercial, institutional and residential buildings. The Company engages in wholesale marketing and partnering to promote its security and fire detection products. The Company markets directly to professional installation and service companies through its District Sales Managers, who are compensated on a salary plus commission basis. The Company also sells its security products to independent stocking distributors, who in turn sell to alarm installation and service companies. The Company sells security and fire detection products directly to several companies who market electronic security and fire alarm systems under their own "private label." ECI is actively promoting the Security Escort System throughout the United States. The DS system configuration continues to receive "best performance" competitive evaluation ratings. While the system was initially designed for the protection of individuals on college and university campuses, the technology is also suitable for other applications. The Company is exploring additional distribution relationships to expand its market coverage for the system to other environments, such as apartment complexes, condominiums, retirement communities, hospitals and hotels. The Company continues to develop and expand partnering and working relationships with its national and international customers. Large regional and national accounts are supported directly by a team of Regional Sales and Service Managers. Smaller firms are supported by a staff of highly trained Sales Coordinators. A call to the Company's 800 sales number, from 7 AM to 8 PM Eastern Time, results in same day shipment of most standard products from two fully stocked warehouses. Meetings with individual customers throughout North America and Europe, as well as attendance at trade shows and seminars, complement this program. The Company's sales managers provide substantial technical support to customers regarding system design, installation and service. The Company provides regular training programs for its customers' installation and service personnel and conducts technical seminars at national and regional shows. To support the on-site installer or service person, toll-free 800 lines connect directly to the Technical Service Department to provide instant help from 8 AM to 8 PM Eastern Time. The Company also participates in trade shows and advertises in trade publications. For the Company's international program, sales offices have been opened in Australia, France and Hong Kong. Employees with significant international security industry experience have been put in place to promote our products, determine future customer needs and provide technical support. Our products are currently available through independent distributors in Belgium, Italy and Sweden. The Company's DSII subsidiary is establishing relationships with qualified distributors to promote our line in other targeted countries. New distribution networks have been or are being established in China, Czech, England, Estonia, Hungary, Latvia, Lithuania, Malaysia, Netherlands, New Zealand, Russia, Singapore, Slovakia, South Africa, Taiwan and Ukraine. The Company's sales strategy includes providing our customers with an expanding product line to fulfill the majority of their electronic security and fire protection needs. In some cases, this will be accomplished through strategic alliances with other vendors to allow us to be a full-line supplier. Foreign sales (including sales to Canada) accounted for approximately 11% of net sales in fiscal 1995. The Company maintains regional sales personnel in California, Florida, Illinois, New Jersey, New York, Pennsylvania, Ohio, Tennessee, Texas and Virginia. In addition to its plant at Fairport, New York, it maintains distribution centers in Hixson, Tennessee, and Auburn, California. International sales efforts are handled out of the corporate office in Fairport; however, distribution centers have been established in Australia, France and Hong Kong. Although the Company has a broad customer base, it does have several customers who individually account for substantial amounts of business. In fiscal 1995, sales to National Guardian Corporation and to ADT Security Systems, both of whom purchase the Company's products for use as components in systems that they market, each accounted for approximately 22% and 23% of the Company's total net sales, respectively. Sales to 46 additional customers, including eleven distributors, accounted for an additional 45% of net sales. Although the Company s business is not seasonal, a significant change in purchases by one of its customers could result in significant fluctuations in sales. During the last quarter of fiscal 1995, sales were down compared to the immediately prior quarter. This decrease was impacted by reductions in purchases by one national account. Manufacturing The Company manufacturers electronic products intended primarily for the security and fire protection industries at its Fairport, New York, facility. It designs and prepares specifications for the component parts used in its products, including circuit boards, transistors, integrated circuits and cabinetry, all of which it purchases from outside sources. These components are assembled into finished products. Emphasis on technological innovation and reliability has resulted in our products having an excellent field reputation. Many units manufactured in the 1970's are still in active service today. The Company's commitment to the use of advanced technology in manufacturing resulted in a restructuring of the Company's manufacturing facility in fiscal 1994. Additions and modifications resulted in improved efficiency while contributing to further improvement in product quality. The Company has the capacity to produce 30,000 circuit boards a week. Before product assembly, components are sample tested for compliance with quality control standards and critical components are individually tested. All solid state devices (i.e. transistors and integrated circuits) are subjected to "stress conditioning." The assembly of circuit boards is accomplished by Company personnel with the aid of both automatic and semi-automatic assembly equipment. Assembled circuit boards are flow soldered and cleaned. Intermediate quality control processes are used to evaluate components and products being transferred between assembly departments. Completed circuit boards are tested on a computerized circuit board evaluator and they are calibrated against performance standards. Most products are then subjected for several days to a "burn-in" test at high temperatures prior to shipment. The Company is establishing a second manufacturing facility in Southeast Asia. It has leased a 70,000 square foot facility and manufacturing operations at this facility are targeted to commence in October 1995. Competition The security systems industry is highly competitive, with approximately 40 manufacturers providing a wide range of products, from simple sensor components to complete systems. Professional installation and service companies consider product reliability, both in performance and testing, as well as the incorporation of advanced technological features, ease of installation, sales support and price when selecting intrusion and fire detection equipment. The Company believes it competes directly with several of these firms, at least four of which have financial and other resources substantially greater than the Company's. The Company competes on the bases of performance, features, quality, reliability and delivery of its products; its technical support services offered customers; and to a lesser extent, on the basis of price. Although the Company's principal method of competition is not price, competitive market conditions have caused average sales prices to decrease steadily since the Company's founding. The Company is adding reduced featured versions of its standard product line to accommodate this trend. Research and Development During the fiscal years ended March 31, 1993, 1994 and 1995, the Company expended approximately $3,534,000, $4,161,000 and $4,070,000 respectively, on research and development activities relating to the development of new products and the improvement of existing products. The Company has been granted over 25 patents related to its products. While the Company obtains patents as appropriate and considers certain of its patents valuable, it does not believe patents to be of material importance in the successful conduct of its business. Trademarks, licenses, franchises and concessions are not material factors in the Company's business. Employees At March 31, 1995, the Company employed approximately 320 persons. None of the Company's employees is represented by a collective bargaining organization, and the Company's management believes employee relations are good. Backlog, Raw Materials, Environmental and Other Matters Backlog is not significant in the business of the Company. In general, orders are processed from inventory on a relatively current basis. Raw materials and components essential to the Company's business are readily available and the Company is not materially dependent upon any one source. The Company sources raw materials and components internationally, including several Pacific Rim countries. Compliance with federal, state and local laws and regulations which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, have not had and are not expected to have a material effect upon the capital expenditures, earnings or competitive position of the Company. A number of municipalities have enacted or are considering enacting legislation which penalizes false alarms which trigger responses by police or fire departments. The Company is unable to quantify the effect such legislation will have on the security and fire protection markets as a whole, but believes false alarm legislation is causing many installation companies to be more inclined toward the use of high quality equipment. ITEM 2. PROPERTIES. The Company's manufacturing, research and general office operations are conducted at its 92,000 square foot facility at 130 Perinton Parkway, Fairport, New York. This plant was financed by an industrial development bond issue and the bond is secured by a lien on the land and building and other assets acquired with the bond proceeds. The Company also leases small amounts of office space for its regional distribution center in Hixson, Tennessee, and Auburn, California. Internationally, the Company has leased a 70,000 square foot manufacturing facility in Southeast Asia and has branch offices/distribution centers located in Australia, France and Hong Kong. ITEM 3. LEGAL PROCEEDINGS. On January 26, 1995, the Company reached a settlement with C & K Systems on patent infringement suits commenced in fiscal 1993. The settlement was reached through an exchange of patent rights. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the Company's fourth quarter ending March 31, 1995. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. The Company's common stock trades on The Nasdaq Stock Market under the symbol: DETC. The information regarding the price range of the Company's Common Stock presented on page 16 of the Company's 1995 Annual Report to Shareholders ("Annual Report") is incorporated herein as Exhibit 1. On June 23, 1995, the closing price, as reported by The Nasdaq Stock Market, was $6.625 per share. The Company has never paid cash dividends on its Common Stock. The Company presently intends to retain all future earnings, if any, for the operation and expansion of its business and does not expect to pay any cash dividends on its Common Stock in the foreseeable future. The Company's industrial development bond issued to finance the Company's Fairport plant limits the amount of dividends the Company may declare or pay in any fiscal year to 50% of its net income for the preceding fiscal year. ITEM 6. SELECTED FINANCIAL DATA. Interim quarterly results for the Company over the past three years were as follows (thousands of dollars, except per share data): INCOME Fiscal Year Ending NET GROSS NET PER March 31, SALES MARGIN INCOME SHARE - ------------------ ------ ------ ------ ----- 1995 Fourth Quarter $8,075 $3,193 $ 27 -- Third Quarter 9,416 3,759 569 $.20 Second Quarter 8,672 3,362 460 .16 First Quarter 8,173 3,192 458 .16 1994 Fourth Quarter $8,145 $3,069 $402 $.14 Third Quarter 8,300 3,257 437 .15 Second Quarter 8,589 3,272 431 .15 First Quarter 6,321 2,215 5 -- 1993 Fourth Quarter $8,265 $3,399 $517 $.18 Third Quarter 7,485 2,796 339 .12 Second Quarter 6,732 2,473 216 .08 First Quarter 6,949 2,728 365 .13 The Company's five year summary of operations is included as Exhibit 10 to this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management's discussion and analysis of financial condition and results of operations is included as Exhibit 2 of this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Pages 17 through 24 of the Company's Annual Report for the year ended March 31, 1995 contain the information required by Item 8 of Form 10-K. This information is also included as Exhibit 3 of this Form 10-K. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Name and Age Position, Offices Held and Year Appointed Karl H. Kostusiak (56) President (1968) David B. Lederer (55) Executive Vice President, (1968) George E. Behlke (37) Vice President, Engineering (1995) R. Wayne Carlton (58) Vice President, National Sales (1993) Frank J. Ryan (41) Vice President, Secretary and Treasurer (1982) Lawrence R. Tracy (48) President, Detection Systems, International, Inc., a subsidiary of Detection Systems, Inc. (1995) Each officer is elected to serve until the first meeting of the Board of Directors held after the next annual meeting of shareholders and until his successor is elected and has qualified. There is no family relationship between any of the above officers. Messrs. Kostusiak and Lederer have been President and Executive Vice President of the Company since it was formed in 1968. Mr. Ryan has been employed by the Company in various financial positions since 1980 and was promoted to Vice President in 1989. Mr. Carlton has been employed by the Company in various sales positions since 1975 and was promoted to Vice President in 1994. Mr. Tracy was hired in February 1995 as President of the Company s Detection Systems, International, Inc. subsidiary. Mr. Behlke has been employed by the Company in various engineering positions since 1977 and was promoted in May 1995 to Vice President. The Company's Proxy Statement for the 1995 Annual Meeting of Shareholders contains the other information required by Item 10 of Form 10- K. That information is incorporated in this report as Exhibit 5. ITEM 11. EXECUTIVE COMPENSATION. The Company's Proxy Statement for the 1995 Annual Meeting of Shareholders contains the information required by Item 11 of Form 10-K. That information is incorporated in this report as Exhibit 5. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The Company has stock purchase agreements with Messrs. Kostusiak and Lederer which could in the future result in a change of control of the registrant. These agreements are included as Exhibit 4 of this Form 10-K. The Company's Proxy Statement for the 1995 Annual Meeting of Shareholders contains the information required by Item 12 of Form 10-K. The Proxy is included in this Form 10-K as Exhibit 5. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In the last fiscal year the Company and its subsidiaries contracted with Adair & Stoner, of which Mr. Adair, a Director of the Company, is a partner, for legal services rendered for the Company and its ECI subsidiary. In addition, Mr. McIrvine, another Director of the Company, performed consulting work for the Company during the last fiscal year. Messrs. Adair and McIrvine also serve as members of the compensation and stock option committees of the Board of Directors. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(I) and (2) The financial statements and schedules are included in Exhibit 3 of this Report on Form 10-K. (a)(3) See Exhibit Index attached to this Report on Form 10-K. (b) No reports on Form 8-K have been filed during the last quarter of the period covered by this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DETECTION SYSTEMS, INC. (Registrant) Date: June 27, 1995 By: /s/ Karl H. Kostusiak Karl H. Kostusiak President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date Karl H. Kostusiak President and Director June 27, 1995 Karl H. Kostusiak (Principal Executive Officer) Frank J. Ryan Vice President June 27, 1995 Frank J. Ryan Secretary/Treasurer (Principal Financial Officer and Principal Accounting Officer) Donald R. Adair Director David B. Lederer Director By: /s/ Karl H. Kostusiak Attorney-in-Fact June 27, 1995 Karl H. Kostusiak EXHIBIT INDEX Item Exhibits Location 3 Certificate of Incorporation Incorporated by reference to Exhibits 3(a) of the Company's 1993 Annual Report on Form 10-K 3 By-Laws as amended Incorporated by reference to Exhibits 3(b) of the Company's 1993 Annual Report on Form 10-K 4(a) Rights of Holders of common Incorporated by reference to Exhibit 4 stock - 1981 plan of the Company's 1993 Annual Report on Form 10-K 6 5-year summary of operations Included as Exhibit 11 of this Form 10-K. 10(a)Non-employee director stock Incorporated by reference to Exhibit option plan (warrant plan) 10(a) of the Company's 1994 Annual Report on Form 10-K 10(b) Medical reimbursement plan Incorporated by reference to Exhibit 10(b) of the Company's 1994 Annual Report on Form 10-K 10(c) Employee stock purchase plan Incorporated by reference to Exhibit 10(c) of the Company's 1994 Annual Report on Form 10-K 10(d) Line of credit agreements Included as Exhibit 6 of this Form 10K 10(e) Industrial Development Bond Incorporated by reference to Exhibit 10 Purchase Agreement, Bond, of the Company's fiscal 1982 Annual Lease Agreement, Mortgage Report on Form 10-K and Guaranty 10(f) Deferred Compensation Plan Incorporated by reference to Exhibit 10 of the Company's 1993 Annual Report on Form 10-K 10(g) 1992 Stock Option Plan Incorporated by reference to Exhibit 10(c) of the Company's 1994 Annual Report on Form 10-K 10(h) Key employee bonus plan Incorporated by reference to Exhibit 10(h) of the Company's 1994 Annual Report on Form 10-K 10(i) Executive employment Included as Exhibits 7 and 8 of this contracts Form 10-K 10(j) License and Mfg. Agreement Incorporated by reference to Exhibit Amendment No. 1 w/ ECI 10(j) of the Company's 1994 Annual Report on Form 10-K 10(k) Shareholders Agreements w/ Incorporated by reference to Exhibit ECI and AMS 10(k) of the Company's 1994 Annual Report on Form 10-K 11 Statement re: Computation Included as Exhibit 9 of this Form 10-K of Per Share Earnings 12 Stock Purchase Agreements Included as Exhibit 4 of this Form 10-K 17 Proxy Statement Included as Exhibit 5 of this Form 10-K 24 Report of Independent Included as Exhibit 12 of this Form Accountants of Financial 10-K Statement Schedules 25 Powers of Attorney Included as Exhibit 10 of this Form 10-K 26 Annual Report to Shareholders Incorporated by reference to paper copies of the Company's Annual Report to Shareholders mailed to the Securities and Exchange Commission and The Nasda Stock Market on June 22, 1995. Schedule 8 - Reserves Included as Exhibit 13 of this Form 10-K Computation of Net Income Included as Exhibit 9 of this Form 10-K EDGAR EXHIBITS Exhibit 1 Price Range of Common Stock Exhibit 2 Management Discussion and Analysis Exhibit 3 Financial and other Reports from 1995 Annual Report --Report of Independent Accountant Consolidated Balance Sheet --Consolidated Statement of Income and Retained Earnings --Consolidated Statement of Cash Flows --Notes to Consolidated Financial Statements Exhibit 4 Stock Purchase Agreements --Karl H. Kostusiak --David B. Lederer Exhibit 5 1995 Proxy Statement Exhibit 6 Credit Agreements --Fleet Bank (previously Norstar Bank) --Chemical Bank Exhibit 7 Employment Agreements --Karl H. Kostusiak --David B. Lederer Exhibit 8 Employment Agreement --Lawrence R. Tracy Exhibit 9 Computation of Per Share Earnings Statement Exhibit 10 Powers of Attorney --Donald R. Adair --Mortimer B. Fuller III --Edward C. McIrvine Exhibit 11 5-Year Summary of Operations Exhibit 12 Report of Independent Accountants of Financial Statement Schedules Exhibit 13 Schedule 8 Reserves Statement Exhibit 27 Financial Data Schedule EX-1 2 EXHIBIT 1 -- PRICE RANGE OF COMMON STOCK The quarterly high and low bid of the Company's common stock during the past three years. (In dollars) Fiscal Fiscal Fiscal Fiscal 1996 * 1995 1994 1993 High Low High Low High Low High Low ---- ---- ---- ---- ---- ----- ---- --- First Quarter ended June 30 7-1/2 6-1/2 10-1/2 6 8-1/4 5-3/4 6-1/4 5 Second Quarter ended Sept 30 9-1/2 6-1/8 6-3/4 5-3/4 6-1/8 5 Third Quarter ended Dec 31 9-3/8 5-1/2 12 6-1/8 5-5/8 4-3/4 Fourth Quarter 8 5-3/4 13 9 9-1/2 5-1/4 * Through May 11, 1995
EX-2 3 EXHIBIT 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS Sales increased 9.5% in fiscal 1995 compared to fiscal 1994, and 6.5% in fiscal 1994 compared to fiscal 1993. These increases reflect unit sales growth in most product categories and continued preference for our product line by professional alarm installation and service companies. The Company s recent international initiative, further described below, is a major commitment to the accomplishment of long term sales growth. Gross profit margins remained relatively consistent on a quarterly basis during fiscal 1995, at approximately 39% of net sales. Overall, gross profit margins improved in fiscal 1995 versus fiscal 1994 and declined in fiscal 1994 versus 1993. During these three years, the gross profit margins were approximately 39.3%, 37.7% and 38.7%, respectively. These fluctuations were attributable to varying margins associated with the products being sold during the corresponding periods. Historically, competitive market conditions have caused average sales prices to decrease. It is projected that prices will continue to decline in fiscal 1996, consistent with historical trends. The Company is adding reduced featured versions of its standard product line to accommodate this trend. Gross profit margins in fiscal 1996 are also projected to be impacted by the international initiative. The Company believes that an aggressive foreign sales program could eventually result in sales equal to the sales levels it has accomplished in the United States. During fiscal 1995, an international subsidiary was established to address this potential market. An experienced international executive was appointed to lead this operation. Branch offices were established in Australia, Hong Kong and France. A manufacturing facility in Southeast Asia has been leased and manufacturing operations at this facility are targeted to commence in October 1995. The Company believes this facility will allow the Company to achieve reduced manufacturing costs in the future when associated volumes increase. Interest expense for fiscal 1995 remained consistent with fiscal 1994 and decreased by 29% in fiscal 1994 from fiscal 1993. This decrease was primarily due to the repayment of the Company's subordinated convertible debentures in December 1992. Production expenses increased by 6.5% and 8% for fiscal 1995 versus 1994 and fiscal 1994 versus 1993, respectively. These increases are consistent with the corresponding increases in sales. The Company expects production expenses to increase in fiscal 1996 due to the start- up of its Southeast Asia manufacturing facility. Except for a non-recurring licensing payment made during fiscal 1994, development expenses remained consistent with fiscal 1994. The increase of 18% in 1994 versus 1993 resulted from the investment in development expenses associated with the Company s wireless programs. Marketing, administrative and general expenses increased by 11%, relative to the prior years, in both fiscal years 1995 and 1994. These increases are consistent with the increase in sales. Additionally, fiscal 1995 reflects two receivable write-offs associated with insolvency proceedings initiated by distributor accounts. The Company expects marketing and administrative expenses to increase during fiscal 1996 due to the start-up of the international venture. Pretax income was $2,592,000 in fiscal 1995 compared to $1,571,000 in fiscal 1994 and $2,356,000 in fiscal 1993. This reflects the sales growth in fiscal 1995 of our DS250 series smoke detector and new multiplex control line, which were introduced in fiscal 1994. Pretax income also reflects bad debt write-offs associated with insolvency filings by two distributors. The decline in pretax income for fiscal 1994 as compared with fiscal 1993 was the result of an increase in development and marketing expenses associated with the Company s wireless programs. The Company anticipates a reduction in pretax income for the forthcoming fiscal year as overhead expenses are expected to increase due to the start up of the international venture. The Company s effective income tax rates for the three years ended March 31, 1995 were 41.6%, 27.2% and 39.0%, respectively. The fiscal 1994 tax level was significantly lower than normal due to the retroactive reinstatement of research and development credits available to the Company by the Revenue Reconciliation Act of 1993 and the cumulative effect of an accounting change, as discussed in Note 1 to the financial statements. The fiscal 1995 increase was primarily due to a return to a more normal tax level. It was also impacted by the deconsolidation of Emergency Communications, Inc. in fiscal 1995 for income tax purposes. This occurred in January 1995, when the Company's equity ownership fell below 80%. Losses incurred after this date were not included in the consolidated tax provision, and losses previously recognized for tax purposes were recaptured. Net income as a percentage of sales remained consistent for fiscal 1995 as compared with fiscal 1994. Net income for fiscal 1995 was negatively impacted by the above noted increase in the provision for taxes. Although the Company has a broad customer base, it does have several customers who individually account for substantial amounts of business. Sales to the Company s largest customers accounted for 22% and 23%, 20% and 17% and 21% and 14% of total sales during fiscal 1995, 1994 and 1993, respectively. A significant change in purchases by one of these customers could result in significant fluctuations in sales and profit. During the last quarter of fiscal 1995, sales were down compared to the immediately prior quarter. This decrease was impacted by reductions in purchases by one national account. Although the sales to this account are not expected to return to prior levels, the Company s international venture is expected to minimize the impact by reducing its dependence on several large customers. The Security Escort personal safety system, marketed by the Company s Emergency Communications subsidiary, continues to generate considerable interest in the college and university community. The system is currently operational at two colleges. Additionally, the Company is exploring other distribution relationships to expand its market coverage. In fiscal 1994, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting of Income Taxes," which resulted in a favorable impact on earnings of approximately $131,000. This credit relates to deferred taxes previously recorded at higher tax rates. During fiscal 1995, 1994 and 1993 inflation did not have a significant impact on the Company's business. LIQUIDITY AND CAPITAL RESOURCES On March 31, 1995, the Company had net working capital of $15.0 million, including approximately $7.0 million in cash, cash equivalents and short-term investments. This compares with net working capital of $13.5 million, including approximately $3.9 million in cash and cash equivalents at the end of fiscal 1994. The Company has bank commitments for revolving credit facilities totaling $9,000,000, that extend into fiscal 1998. These commitments include a five-year term loan provision for repayment of the balance due, if necessary. Although the Company expects that the start-up of its international venture will require significant amounts of cash, it believes that current working capital, along with available lines of credit are sufficient to meet such requirements. On a long term basis, most cash requirements of the international venture are expected to be derived from the operations of overseas subsidiaries. Accounts receivable decreased 8.9% at March 31, 1995 as compared with March 31, 1994. This decrease was attributed to the write-offs associated with the insolvency proceedings of two distributor accounts. Accounts receivable increased 5.6% in fiscal 1994 as compared with fiscal 1993. This increase was due to the increase in sales activity. The Company's standard credit terms are net 30 days, with variations depending on pricing and prepayment discounts. Inventories decreased by 10.1% at March 31, 1995 as compared with March 31, 1994 and increased 19.1% at March 31, 1994 as compared with March 31,1993. The increase in fiscal 1994 and the subsequent decrease in fiscal 1995, relate to inventory buildups at the end of 1994 associated with several new products introduced during that time period. As product demand levels were established, production levels were adjusted accordingly. The Company expects inventory levels to increase in fiscal 1996 in order to support its international venture. The Company regularly reviews its reserve for obsolescence and adjusts it accordingly. Occasionally, a new product will render another obsolete. However, it has been the Company s policy to time the release of new products to minimize this impact. Prepaid expenses and other assets increased by 15.2% and 20.6% for fiscal 1995 versus 1994 and fiscal 1994 versus 1993, respectively. These increases were related to the timing of payments on the Company's commercial insurance package and property taxes. The Company continually reviews its capital assets and upgrades them as required to insure that its technical and manufacturing capabilities stay on the leading edge of the industries it serves. The Company expects to spend approximately $700,000 on manufacturing equipment for the Southeast Asia facility. Accounts payable increased 73.6% in fiscal 1995 as compared to fiscal 1994 and decreased by 42.8% in fiscal 1994 as compared to fiscal 1993. These changes were primarily attributable to timing of payments at the respective year-ends. Accrued payroll and benefits increased 16.4% for fiscal 1995 versus 1994 and decreased 22.4% for fiscal 1994 versus 1993. These fluctuations were attributable to performance bonus accruals established at the respective year-ends. Other accrued liabilities decreased 19.0% in fiscal 1995 as compared with fiscal 1994 and remained consistent for fiscal 1994 as compared with fiscal 1993. The decrease was primarily due to payment of unemployment insurance premiums during the last quarter of fiscal 1995 versus the accrual of such liabilities at the end of fiscal 1994. The Company is dedicated to promoting shareholder value through long term profitability and growth and believes that continued investments in future product development are essential to this goal. For this reason, it has been the Company's policy to not pay cash dividends. EX-3 4 EXHIBIT 3 Report of Independent Accountants To the Shareholders of Detection Systems, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and retained earnings and cash flows present fairly, in all material respects, the financial position of Detection Systems, Inc. and its subsidiaries at March 31, 1995, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1995 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," in 1994. /s/ Price Waterhouse LLP Rochester, New York May 11, 1995 DETECTION SYSTEMS, INC. CONSOLIDATED BALANCE SHEET March 31, 1995 1994 1993 Assets Current assets: Cash and cash equivalents $4,580,751 $3,907,111 $1,761,591 Short term investments, at cost which approximates market value 2,437,842 3,242,049 Accounts receivable, less allowance for doubtful accounts ($100,000 in 1995, 1994 and 1993) 4,916,052 5,396,835 5,110,139 Inventories 5,255,724 5,845,951 4,907,628 Income taxes receivable 94,121 139,468 Deferred income taxes 354,500 273,400 516,000 Prepaid expenses and other assets 314,285 272,881 226,266 ---------- ---------- ---------- 17,953,275 15,835,646 15,763,673 ---------- ---------- ---------- Fixed assets, net 3,920,571 3,820,085 3,921,556 Property under capital lease, net 2,725,513 2,969,051 2,698,720 Other assets 145,934 155,076 158,812 ---------- ---------- ---------- $24,745,293 $22,779,858 $22,542,761 ========== ========== ========== Liabilities and Shareholders' Equity Current liabilities: Current portion of capital lease obligations and long term debt $434,934 $437,189 $513,145 Accounts payable 1,213,958 699,278 1,223,348 Accrued payroll and benefits 1,074,103 923,071 1,190,084 Other accrued liabilities 266,526 329,118 348,351 Income taxes payable 283,994 ---------- ---------- ---------- 2,989,521 2,388,656 3,558,922 ---------- ---------- ---------- Obligations under capital leases 745,733 1,145,293 1,149,232 Deferred compensation 1,527,638 1,423,705 1,229,381 Deferred income taxes 288,200 330,600 546,400 Shareholders' equity: Common stock, par value $.05 per share Authorized - 12,000,000 shares Issued - 2,792,489 shares in 1995 and 2,771,489 in 1994 and 1993 139,624 138,574 138,574 Capital in excess of par value 6,853,246 6,724,970 6,734,022 Retained earnings 12,724,265 11,209,776 9,934,335 ---------- ---------- ---------- 19,717,135 18,073,320 16,806,931 Less - Treasury stock, at cost (36,326) (322,778) (406,128) Notes receivable for stock purchases (486,608) (258,938) (341,977) ---------- ---------- ---------- 19,194,201 17,491,604 16,058,826 ---------- ---------- ---------- $24,745,293 $22,779,858 $22,542,761 =========== ========== ========== See accompanying notes to consolidated financial statements.
DETECTION SYSTEMS, INC. CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS Year ended March 31, 1995 1994 1993 Revenues: Net sales $34,336,336 $31,354,835 $29,431,422 Interest income 113,420 195,875 239,171 ----------- ----------- ----------- 34,449,756 31,550,710 29,670,593 Costs and expenses: Production 20,829,843 19,541,360 18,035,871 Development 4,070,443 4,160,532 3,534,078 Marketing, administrative an general 6,788,924 6,111,691 5,510,588 Interest expense 168,557 165,886 234,204 ----------- ----------- ----------- 31,857,767 29,979,469 27,314,741 Income before taxes and cumulative effect of a change in accounting principle 2,591,989 1,571,241 2,355,852 Income taxes: Current - Federal 997,200 204,300 1,004,000 State 203,800 64,700 188,000 Deferred (123,500) 157,600 (273,000) ----------- ----------- ----------- 1,077,500 426,600 919,000 =========== =========== =========== Income before cumulative effect of a change in accounting principle 1,514,489 1,144,641 1,436,852 Cumulative effect of a change in accounting principle 130,800 ----------- Net income 1,514,489 1,275,441 1,436,852 Retained earnings at beginning of year 11,209,776 9,934,335 8,497,483 Retained earnings at end of year $12,724,265 $11,209,776 $9,934,335 =========== =========== =========== Earning per common and common equiva- lent share: Income before cumulative effect of a change in accounting principle $.52 $.40 $.51 Cumulative effect of a change in accounting principle .04 ---- ---- ---- Net Income $.52 $.44 $.51 ==== ==== ==== See accompanying notes to consolidated financial statements.
DETECTION SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended March 31, 1995 1994 1993 Cash Flows from Operating Activities: Net income $1,514,489 $1,275,441 $1,436,852 Adjustments to reconcile net income to net cash Provided by operating activities: Depreciation and amortization 1,502,516 1,513,105 1,515,074 Change in obsolescence reserve 140,000 (30,000) Loss (gain) on disposition of fixed assets 8,561 (11,991) 21,346 Deferred compensation 103,933 194,324 72,715 Deferred income taxes (123,500) 26,800 (273,000) Stock bonuses 48,800 152,100 199,000 Changes in operating assets and liabilities: Accounts receivable 480,783 (286,696) (1,346,796) Inventories 450,227 (908,323) (397,627) Prepaid expenses and other assets (42,278) (52,895) 54,762 Accounts payable 514,680 (524,070) 799,975 Accrued payroll and benefits 102,232 (419,113) 130,213 Other accrued liabilities (62,592) (19,233) 51,959 Income taxes receivable/payable 45,347 (423,462) 466,921 ---------- ---------- ---------- Total adjustments 3,168,709 (789,454) 1,294,542 ---------- ---------- ---------- Net cash provided by operating activities 4,683,198 485,987 2,731,394 ---------- ---------- ---------- Cash flows from investing activities: Capital expenditures (1,358,009) (1,162,917) (1,186,921) Short term investments (2,437,842) 3,242,049 (1,560,639) ---------- ---------- ---------- Net cash (used in) provided by investing activities (3,795,851) 2,079,132 (2,747,560) ---------- ---------- ---------- Cash flows from financing activities: Principal payments on long term debt and capital lease obligations (401,815) (576,936) (1,540,472) Issuance of common stock 140,375 0 0 Stock options exercised 47,733 157,337 140,692 --------- ---------- ---------- Net cash used in financing activities (213,707) (419,599) (1,399,780) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 673,640 2,145,520 (1,415,946) Cash and cash equivalents at beginning of year 3,907,111 1,761,591 3,177,537 ---------- ---------- ---------- Cash and cash equivalents at end of year $4,580,751 $3,907,111 $1,761,591 ========== ========== ========== Cash paid during the year for: Interest $173,709 $117,869 $218,198 Income taxes $1,141,276 $698,205 $610,741 See accompanying notes to consolidated financial statements.
DETECTION SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1995, 1994 AND 1993 NOTE 1 - DESCRIPTION OF OPERATIONS AND ACCOUNTING POLICIES: Operations - Detection Systems. Inc.'s (the Company) only line of business is the manufacture and sale of electronic instrumentation devices. Such devices include intrusion detectors, fire detectors and alarm control equipment for the security and fire protection industries and personal security systems. Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries, Emergency Communications, Inc. (ECI) Activity Monitoring Systems, Inc. (AMS) and Detection Systems International, Inc. (DSII). Intercompany transactions and balances are eliminated in consolidation. Emergency Communications, Inc. - During 1993, the Company formed a subsidiary, ECI, for the purpose of pursuing final development and sale of certain new products to be used for personal security on college campuses and in similar environments. The Company purchased all of ECI's common stock and subsequently awarded a portion of the shares to certain directors and employees. The stock award was recorded as compensation expense in the consolidated statement of income and retained earnings. At March 31, 1995 the Company owned approximately 70% of ECI's common stock. Activity Monitoring Systems, Inc. - During 1994, the Company formed a subsidiary, AMS, for the purpose of pursuing final development and sale of certain wireless electronic house arrest products to various government agencies. The Company purchased all of AMS's common stock and subsequently awarded a portion of the shares to certain directors and employees. The stock award was recorded as compensation expense in the consolidated statement of income and retained earnings. At March 31, 1995, the Company owned approximately 80% of AMS's common stock. Detection Systems International, Inc. - During 1995, the Company reactivated its subsidiary, DSII, for the purpose of manufacturing and selling electronic instrumentation devices for better market penetration in foreign countries. At March 31, 1995, branches in Australia and Hong Kong had been established. Investments - The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities in 1995. The Company s reported investments are classified as "available for sale" under the provisions of SFAS No. 115, and accordingly, any unrealized holding gains and losses, net of taxes, are excluded from income and recognized as a separate component of shareholders' equity until realized. Fair value of the securities is determined based on quoted market prices. The Company has not recorded any realized or unrealized holding gains and losses at March 31, 1995. Inventories - Inventories, which include materials, labor and overhead, are priced at the lower of cost, determined by the first-in, first-out method, or market value. Fixed assets and property under capital lease - The building and related improvements are depreciated on the straight- line method over an estimated useful life of 40 years. Land improvements, machinery and equipment, production tooling and furniture are depreciated on the straight-line method over estimated useful lives ranging from 3 to 10 years. Expenditures for maintenance and repairs are charged to expense as incurred and major improvements are capitalized. Retirement Plan - The Company has a defined contribution pension plan covering substantially all employees. The plan requires the Company to match 100% of an employee's contribution up to one percent of the employee's base salary and 25% of an employee's contribution between two and four percent of the employee's base salary. The Company's contributions to this plan were approximately $113,000, $111,000 and $98,400 in 1995, 1994 and 1993, respectively. Debt issue costs - Certain fees and other costs related to the financing of a capital lease agreement are included in other assets in the accompanying consolidated balance sheet, and are being amortized over the term of the agreement. Amortization expense associated with these costs was approximately $10,000 in 1995, 1994 and 1993. Revenue recognition - Revenues are recognized when product is shipped. Development costs - All product development costs are charged to operations in the period incurred. Income taxes - In April 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. The adoption of SFAS No. 109 changed the Company's method of accounting for income taxes from the deferred method (APB 11) to an asset and liability approach. Previously the Company deferred the past tax effects of timing differences between financial reporting and taxable income. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of other assets and liabilities. The adoption of SFAS No. 109 was recognized in the financial statements as the cumulative effect of a change in accounting principle and resulted in a $130,800 favorable impact on 1994 earnings. Earnings per share - The computation of earnings per common and common equivalent share is based upon the weighted average number of common and common equivalent shares outstanding during the period. The weighted average common and common equivalent shares used in this calculation were 2,989,138, 2,938,073 and 2,917,489 in 1995, 1994 and 1993, respectively. The earnings per share computations do not consider outstanding stock options and warrants when the effect of such inclusion is anti-dilutive. There was no material difference between primary and fully diluted earnings per share at March 31, 1995, 1994 and 1993, respectively. Stock Repurchase - On May 9, 1995, the Company's Board of Directors authorized the repurchase of up to 100,000 shares of its outstanding common stock for issuance in connection with incentive stock option and stock bonus plans. Cash Flow Statement - For purposes of this statement, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company accepted notes receivable from employees for stock purchases in the amount of $258,071, $6,993 and $204,136 in 1995, 1994 and 1993, respectively. During 1995, 1994 and 1993, the Company acquired vehicles and equipment under capital lease agreements of approximately $51,300, $497,000 and $44,500, respectively. NOTE 2 - INVENTORIES: Major classifications of inventory are as follows. March 31 1995 1994 1993 Component parts $2,300,894 $2,120,052 $1,662,312 Work in process 475,927 604,614 724,129 Finished products 2,853,903 3,356,285 2,786,187 ---------- ---------- ---------- 5,630,724 6,080,951 5,172,628 Less - Reserve for obsolescence (375,000) (235,000) (265,000) ---------- ---------- ---------- $5,255,724 $5,845,951 $4,907,628 ========== ========== ========== NOTE 3 - FIXED ASSETS: Major classifications of fixed assets are as follows. March 31 1995 1994 1993 Land improvements $211,735 $211,735 $211,735 Building improvements 1,503,103 1,488,827 1,369,417 Machinery and equipment 7,099,144 6,284,455 5,720,221 Production tooling 3,140,152 2,707,804 2,368,059 Furniture 701,142 687,171 653,228 ---------- ---------- ---------- 12,655,276 11,379,992 10,322,660 Less - Accumulated depreciation (8,734,705) (7,559,907) (6,401,104) ---------- ---------- ---------- $3,920,571 $3,820,085 $3,921,556 ========== ========== ========== Total depreciation expense on fixed assets was $1,197,700, $1,293,800 and $1,337,900 in 1995, 1994 and 1993, respectively. NOTE 4 - CAPITAL LEASES: During 1982, the Company entered into an agreement with a local government agency under which the agency's bond proceeds of $3,800,000 were used to purchase land and construct an operating facility for lease to the Company. These expenditures have been recorded as property under capital lease. The lease term extends to October 1997, at which time title to the property passes to the Company. Rental payments coincide with the agency's bond repayment obligation, which requires quarterly principal payments of $63,330 plus interest at two-thirds of a designated bank's prime lending rate. The bank's prime rate at March 31, 1995 was 9.00%. The lease imposes certain restrictions on the levels of capital expenditures, working capital and net worth, and limits potential dividends to one half of the prior year's net income. At March 31, 1995, the Company was in compliance with the various provisions of this lease agreement. The Company has various equipment under capital lease agreements which require payments of principal and interest of $205,200 in 1996, $147,300 in 1997, $146,500 in 1998 and $29,300 in 1999. Property acquired under capital leases consists of the following. March 31 1995 1994 1993 Land $ 270,000 $ 270,000 $ 270,000 Land improvements 225,147 225,147 225,147 Building 2,938,072 2,938,072 2,938,072 Machinery and equipment 1,327,591 1,322,445 825,404 ---------- ---------- ---------- 4,760,810 4,755,664 4,258,623 Less - Accumulated depreciation (2,035,297) (1,786,613) (1,559,903) ----------- ---------- ---------- $2,725,513 $2,969,051 $2,698,720 ========== ========== ========== Obligations under capital leases are summarized below. March 31 1995 1994 1993 Operating facility $ 696,830 $ 950,150 $1,203,470 Production and office equipment 483,837 632,332 292,240 ---------- ---------- ---------- 1,180,667 1,582,482 1,495,710 Less - Current portion (434,934) (437,189) (346,478) ---------- ---------- ---------- $ 745,733 $1,145,293 $1,149,232 ========== ========== ==========
Total depreciation expense on assets under capital lease was $294,800, $209,300 and $167,200 in 1995, 1994 and 1993, respectively. NOTE 5 - LINES OF CREDIT: The Company has two unsecured lines of credit each allowing borrowings up to $4,500,000. Interest is charged at either banks' stated prime rate or LIBOR plus 1%. The rates for these lines were 9.00% at March 31, 1995. No amounts were borrowed under these agreements at March 31, 1995, 1994 or 1993. NOTE 6 - LONG TERM DEBT During 1991, the Company obtained a $600,000 loan for the construction of a product testing facility. The loan, which matured in 1994, required principal payments of $166,700 and $200,000, plus interest at 9.15%, in 1994 and 1993. NOTE 7 - DEFERRED COMPENSATION PLANS: The Company's deferred compensation plan allows certain employees to defer the receipt of salary or bonuses which they may be entitled to receive. The compensation is normally payable at retirement, and is fully vested when deferred. For salaries or bonuses deferred, the employee may elect to be paid in either stock or cash plus interest which has accrued from the date of deferral. Unissued common share equivalents are limited to 97,200 shares under provisions of the plan. As of March 31, 1995, 1994 and 1993, unissued common share equivalents of 59,757, 57,430 and 53,269, respectively, were outstanding under the plan. The Company's stock bonus plan provides for bonuses payable in stock to certain officers and key personnel if specified sales growth and pretax profit goals are attained. The plan also provides that recipients may defer receipt of stock bonuses until retirement. The bonus is fully vested when deferred. Unissued common share equivalents outstanding under the plan were 151,740 at March 31, 1995 and 1994, and 134,460 at March 31, 1993. NOTE 8 - SHAREHOLDERS' EQUITY: The following table presents the changes in shareholders' equity balances during the three years ended March 31, 1995. Capital in Common stock Treasury stock excess of Shares Amount Shares Amount par value Balances, March 31, 1992 2,771,489 $138,574 172,207 $864,290 $6,908,484 ========= ======== ======= ======== ========== Exercise of options and warrants (102,813) (584,319) (216,662) Treasury stock purchases 18,082 126,157 Tax benefit derived from stock incentive plans 42,200 ------- Balances, March 31, 1993 2,771,489 $138,574 87,476 $406,128 $6,734,022 ========= ======== ======== ======== ========== Distribution of stock bonus (3,000) (14,405) 8,095 Exercise of options and warrants (16,612) (97,886) (17,147) Treasury stock purchases 3,039 31,117 Other 9,824 (2,176) --------- -------- -------- --------- --------- Balances, March 31, 1994 2,771,489 $138,574 80,727 $322,778 $6,724,970 ========= ======== ======== ======== ========== Distribution of stock bonus (6,550) (32,157) 16,643 Exercise of options and warrants (69,184) (276,570) (27,692) Treasury stock purchases 2,475 22,275 Common stock issued 21,000 1,050 139,325 --------- -------- -------- -------- ---------- Balances, March 31, 1995 2,792,489 $139,624 7,468 $36,326 $6,853,246 ========= ======== ======== ======== ==========
Under the terms of the Company's incentive stock option plan, common stock options may be granted to key employees by the Board of Directors. Related option exercise prices must equal or exceed the market value of the Company s common stock on the date of grant. Options are exercisable at a rate of 35% to 40% in the second year after grant, 60% in the third year, 80% in the fourth year and in full thereafter. Options expire up to ten years after they are granted. A summary of the changes in outstanding stock options is as follows. Prices during Shares under option fiscal years 1995 1994 1993 Outstanding at beginning of year $3.056 - 9.875 96,473 103,885 208,441 Granted $5.250-9.875 123,000 7,500 6,000 Exercised $3.056-6.769 (63,784) (13,912) (102,813) Cancelled $3.472-7.500 (3,896) (1,000) (7,743) ------- ------- -------- Outstanding at end of year $3.056-9.875 151,793 96,473 103,885 ======= ======= ========
Options for 22,614 shares were exercisable at March 31, 1995. A summary of changes in outstanding warrants is as follows. Prices during Shares under warrant fiscal years 1995 1994 1993 Outstanding at beginning of year $3.519-6.597 10,800 13,500 16,200 Exercised $3.519-5.961 (5,400) (2,700) Cancelled $5.278 (2,700) ------ ------ ------ Outstanding at end of year $3.519-6.597 5,400 10,800 13,500 ====== ====== ======
Warrants outstanding expire five years after they are issued. NOTE 9 - INCOME TAXES: A reconciliation of the statutory federal income tax rate to the effective rate is as follows. Year Ended March 31, 1995 1994 1993 Statutory federal rate 34.0% 34.0% 34.0% State taxes, net of federal benefit 7.9 4.1 4.0 Research and development credits (3.0) (11.3) (.6) Recapture of subsidiary excess losses 6.5 Foreign sales corporation benefit (2.1) (1.9) Other 1.7) 2.3 1.6 ----- ----- ---- Effective income tax rate 41.6% 27.2% 39.0% ===== ===== =====
Deferred tax assets (liabilities) are comprised of the following. March 31, 1995 1994 Allowance for doubtful accounts $44,500 $44,500 Book accruals not currently deductible for tax 42,200 46,800 Deferred compensation 618,200 576,100 Inventory obsolescence reserve 164,100 121,500 Vacation accrual 119,000 107,700 Valuation reserve - land held for sale 43,300 43,300 State investment tax credit carryforwards 310,900 302,200 Subsidiary net operating loss carryforwards 48,300 Other 46,200 37,000 ---------- ---------- Total deferred tax assets 1,436,700 1,279,100 ---------- ---------- Depreciation (951,300) (941,500) Prepaid assets (34,900) (58,700) Other (25,000) (33,900) --------- ---------- Total deferred tax liabilities (1,011,200) (1,034,100) ---------- ---------- Deferred tax asset valuation allowance (359,200) (302,200) ---------- ---------- Net deferred tax asset (liability) $66,300 ($57,200) ========== ==========
The state investment tax credit carryforwards expire at various times over the next seven years. As the Company has historically generated investment tax credits in excess of the amount utilized on an annual basis, a valuation allowance of $310,900 and $302,200 was recorded at March 31, 1995 and 1994, respectively. As the Company s equity ownership in ECI fell below 80% during January, 1995, losses incurred by ECI subsequent to that date are not included in the consolidated tax provision. The net operating loss carryforwards relating to the results of ECI's operations subsequent to January, 1995 expire in 2010. NOTE 10 - OTHER MATTERS: Operating lease expense for sales offices and other equipment was approximately $16,000 in 1995, 1994 and 1993. During 1995, sales to the Company's largest customers were $6,626,000 and $6,410,000, representing 19% and 19%, respectively, of total sales. During 1994, sales to the Company's largest customers were $6,381,000 and $5,304,000, representing 20% and 17%, respectively, of total sales. During 1993, sales to the Company's largest customers were $6,197,000 and $4,005,000, representing 21% and 14%, respectively, of total sales. During 1995, 1994 and 1993 sales to foreign customers were $3,867,000, $3,567,000 and $3,691,000, respectively. Financial instruments which potentially subject the Company to concentrations of credit risk consists principally of trade receivables. Concentrations of credit risk which respect to trade receivables are relatively limited due to the number of customers comprising the Company's customer base and their dispersion across different geographical regions. At March 31, 1995, 1994 and 1993, the Company had two significant concentrations of credit risk totalling approximately $1,539,000, 2,128,000 and 1,762,000, respectively. EX-4 5 EXHIBIT 4 STOCK PURCHASE AGREEMENT KARL H. KOSTUSIAK THIS AGREEMENT, dated October 20, 1994, is between DETECTION SYSTEMS, INC. ("Company"), a New York corporation, and the "Shareholder" who has signed below. The Shareholder is an executive officer and director of the Company and owns a substantial block of the issued and outstanding shares of its Common Stock, par value $0.05 per share ("Shares"). Believing it in their mutual best interests to provide for the purchase and sale of some of the Shares owned by the Shareholder upon his death, the parties hereby agree as follows: 1. Death of Shareholder (a) Option on Death. Upon the death of the Shareholder, his estate shall have the option to sell Shares to the Company pursuant to the terms of this Agreement. This option may be exercised by the executor or administrator of his estate at any time within twelve months of the date of death (or, if later, three months of the date of the executor's or administrator's appointment) by giving written notice of exercise to the Company personally or by registered or certified mail, postage prepaid. The option may be exercised with respect to any number of the Shares owned by the Shareholder at his death, up to the maximum number calculated as provided in Subsection 1(c) below. The purchase price for the Shares shall be as provided in Section 2 below and shall be tendered within 30 days after the notice of exercise is given or, if later, 20 days after the Company receives the proceeds of the life insurance described below. (b) Life Insurance. The Company agrees to maintain life insurance on the life of the Shareholder to provide proceeds for the purpose of paying the purchase price under Section 2 for the Shareholder's Shares. That life insurance is listed on Exhibit A attached hereto, and the Company agrees to execute a new Exhibit A if at any time the facts stated thereon should change. The Company agrees to hold the proceeds of such life insurance in trust for use in paying the purchase price for the deceased Shareholder's Shares, and, except as provided in Section 3 below, those proceeds shall not be an asset of the Company for use for any purpose other than repurchasing Shares under this Section 1. If the Company breaches the foregoing agreement to maintain life insurance, that breach shall not give rise to any liability of the Company hereunder unless: (1) the Shareholder ceases to be an executive officer of the Company, or ceases to be a director of the Company, and the breach occurs thereafter or (2) the breach is made pursuant to a directive of the Company's board of directors. The Company additionally agrees that it will promptly pay the premiums on the policies, will not transfer the policies or any interest therein except as provided in this Agreement, and will not borrow against the policies. (c) Shares to be Purchased. Promptly upon the Shareholder's death, the board of directors of the Company shall value the Company's Shares as provided in Section 2 below. The per Share value thus determined shall be divided into the amount of the total life insurance proceeds received; and the result thus obtained (rounded down to the nearest whole Share) shall be the maximum number of Shares that the Company shall be obligated to purchase pursuant to this Section 1. (d) Right of First Refusal. If the Shareholder's estate receives a "Third Party Offer" at any time within 12 months of the date of the Shareholder's death, then the Shareholder's estate shall first offer to sell the Shares involved to the Company as provided in this Subsection. For these purposes, a Third Party Offer shall be a bona fide written offer made by another person to purchase Shares. Upon receipt of the Third Party Offer, the Shareholder's estate shall send a copy of it to the Company, along with a statement that the estate offers the Shares to the Company and that, unless purchased by the Company pursuant to this Subsection, the estate intends to transfer the Shares pursuant to that Third Party Offer. Upon receipt of those items, the Company shall have 30 days to accept the offer. Acceptance shall be made in a writing delivered personally or sent registered or certified mail, postage prepaid, to the estate within the required acceptance period. The Company may accept the offer for some or all of the Shares involved and may use the proceeds from life insurance provided for in this Section. Any shares not sold to the Company pursuant to this Subsection may be sold pursuant to the Third Party Offer, provided that the sale is completed within 20 days after expiration of the 30 day period described above, and provided that the sale is made pursuant to the same price and terms as those set forth in the Third Party offer. (e) During the 12 month period after the Shareholder's death, the Shareholder's estate and his heirs and legatees shall not sell any Shares except that: (i) Shares may be sold as provided in this Section 1, (ii) this Section 1 shall no longer bind any party after the maximum number of Shares described in Subsection (c) above have been sold to the Company under this Section 1, and (iii) the Shareholder's estate may sell Shares to or through others during any six month period up to 1% of the outstanding shares of the Company's Common Stock. 2. Price The purchase price to be paid for each Share purchased pursuant to Section 1 shall be the fair market value as provided in this Section, calculated as of the date of death (without consideration of the proceeds of the life insurance to be received as provided in Section 1). The fair market value per Share for these purposes shall be 95% of the closing sale price of the stock as reported on NASDAQ for the last day immediately preceding the day of death for which trades are reported, provided, however, that the fair market value (i) shall not be less than 95% of the book value per Share calculated in accordance with generally accepted accounting principles as of the end of the Company's fiscal quarter ended most recently prior to the death and (ii) shall not be less than the weighted market price per Share calculated as follows: (a) Mean Sale Price. The "Mean Sale Price" for trading reported on NASDAQ for a given day shall be the midpoint between the reported high and low trade prices for the day, calculated to the nearest tenth of a cent. (b) Dollar Volume Per Day. The "Dollar Volume" for a given trading day shall be the Mean Sale Price thus calculated for each day multiplied by the reported total number of shares traded that day. (c) Calculation Periods. The Dollar Volume for each trading day shall be calculated for the five years preceding the date of death and then the Total Dollar Volume (defined below) shall be calculated for each of three time periods, namely the one year preceding the date of death, the three years preceding that date, and the five years preceding that date (each such time period being a "Calculation Period"). (d) Total Dollar Volumes. The Dollar Volumes for all days for which trades are reported during each Calculation Period shall be added together to reach "Total Dollar Volume" for that Calculation Period. (e) Total Shares Traded. The reported number of shares traded each day during each Calculation Period shall be added to the same number for each such other day to reach the "Total Shares Traded" during that Calculation Period. (f) Weighted Fair Market Value. The Total Dollar Volume for each Calculation Period shall be divided by the Total Shares Traded during that Calculation Period to reach a weighted market price for that Calculation Period. The weighted market price for purposes of this Agreement shall be the highest price calculated with respect to the three Calculation Periods. For purposes of this Agreement: (1) "NASDAQ" shall mean the National Association of Securities Dealers Automated Quotation System for each day during the Calculation Period on which that System is the principal United States market for the Shares, and for any day when it is not, then whatever established public trading market may be the principal United States market, and (2) reported trading volume and prices shall be based on the most reliable sources from which that information is received regularly by the Company. 3. Proceeds Available to Company. To the extent that the proceeds of life insurance received by the Company pursuant to Section 1 above are not used to purchase Shares owned by the Shareholder on his death, the proceeds may be retained and used by the Company for its own business purposes. 4. Delivery of Shares Upon tender of the purchase price pursuant to this Agreement, the Shareholder's estate shall deliver certificates representing the Shares to be sold, duly endorsed in blank or accompanied by duly executed stock transfer powers in blank, with signatures guaranteed and with any necessary stock transfer stamps attached, and accompanied by an incumbency certificate of the person or persons who signed the endorsements or powers and by necessary inheritance tax waivers or affidavits. 5. Notice Any notice or other writing mailed pursuant to this Agreement shall be sent (a) to the Company at its principal place of business, to the attention of the Company's Secretary, and (b) to the Shareholder or his estate at his latest address as set forth in the Company's records. The Company agrees to use its reasonable efforts to keep its records current for these purposes. Any such writing is sent or given when delivered personally or when deposited in the U.S. mail with proper postage thereon. 6. Termination of Agreement This Agreement shall terminate in its entirety upon the happening of the following event: the written consent of the Shareholder and the Company. 7. Transfer of Policies If as a result of a bankruptcy proceeding, sheriff's levy, or for any other reason, the Company is required by law to sell or transfer the life insurance policies called for in Section 1 above, or if the Company (contrary to its obligations hereunder) determines to sell the policies or to cease making premium payments thereon or takes any other action contrary to the terms of this Agreement, the Shareholder shall have the first option to acquire those policies while they remain in force. The purchase price for the policies shall be equal to 85% of their respective cash surrender values at the time of purchase, and that price may be paid by delivery to the Company of the Shareholder's promissory note for that amount, bearing interest at the Applicable Federal Rate as of the date of transfer, with principal and all interest becoming due 60 days after the death of the Shareholder. The Company agrees that, upon request by the Shareholder, the Shareholder (or some other person or entity designated by the Shareholder to be the Shareholder's agent for these purposes) shall be granted a security interest in or a contingent assignment of the policies, with at least 30 days prior notice of any transfer, cancellation, or borrowing, so as to assure that the Shareholder's option will be enforced. Nothing in this Section 7 shall relieve the Company from its obligations to secure and maintain those life insurance policies as provided in Section 1 above and nothing in this Section or consequent to its provisions shall limit the liability of the Company resulting from a breach of this Agreement by the Company. 8. Miscellaneous (a) Law Applicable. This Agreement shall be governed and construed under the laws of the State of New York without regard to its principles of conflict of laws. (b) Amendment. This Agreement may not be amended except by a writing signed by the parties. (c) Rights of Others. Except as expressly provided herein, neither the Company, nor any holder or beneficial owner of Shares, nor any other person, shall acquire or enforce any rights under this Agreement. (d) Heirs, Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, legatees, executors, administrators, successors and assigns, but the rights and obligations under this Agreement shall not be assignable. (e) Mergers, Etc. In case of any merger, consolidation or other reorganization of the Company or any recapitalization of the capital stock of the Company, the "Shares" as used herein shall include the securities received by the Shareholder in respect of or in exchange for his existing Shares. (f) Additional Actions. Each party agrees to execute and deliver all such documents and to take such further action as may be necessary to carry out the purposes and provisions of this Agreement. Without limiting the preceding sentence, (i) the Company agrees that, upon written request of the Shareholder, the Company will transfer ownership in the life insurance policies to a grantor trust or will arrange for the proceeds of the policies to be paid directly to a trust, so as to better assure the attainment of the purposes and provisions of this Agreement and (ii) the Shareholder agrees that, upon written request of the Company, the Shareholder will submit Share certificates for placement thereon of a restrictive legend referring to the provisions of this Agreement. IN WITNESS WHEREOF the Company and the Shareholder have executed this Agreement. Company: DETECTION SYSTEMS INC. By: /s/ Donald R. Adair, Director Shareholder: /s/ Karl H. Kostusiak EXHIBIT A To Stock Purchase Agreement LIST OF INSURANCE POLICIES In connection with Section 1 of the Stock Purchase Agreement, the Company maintains life insurance (with the Company as the beneficiary and with the proceeds to be received, held and paid out as provided in Section 1 of the Agreement) as follows: Death Policy Company Insured Benefit 9 626 691 Massachusetts Mutual Karl H. Kostusiak $1,000,000 2 660 835 Phoenix Home Mutual Karl H. Kostusiak $1,000,000 DETECTION SYSTEMS, INC. By: /s/ Donald R. Adair Its: Chairman, Compensation Committee STOCK PURCHASE AGREEMENT DAVID B. LEDERER THIS AGREEMENT, dated October 24, 1994, is between DETECTION SYSTEMS, INC. ("Company"), a New York corporation, and the "Shareholder" who has signed below. The Shareholder is an executive officer and director of the Company and owns a substantial block of the issued and outstanding shares of its Common Stock, par value $0.05 per share ("Shares"). Believing it in their mutual best interests to provide for the purchase and sale of some of the Shares owned by the Shareholder upon his death, the parties hereby agree as follows: 1. Death of Shareholder (a) Option on Death. Upon the death of the Shareholder, his estate shall have the option to sell Shares to the Company pursuant to the terms of this Agreement. This option may be exercised by the executor or administrator of his estate at any time within twelve months of the date of death (or, if later, three months of the date of the executor's or administrator's appointment) by giving written notice of exercise to the Company personally or by registered or certified mail, postage prepaid. The option may be exercised with respect to any number of the Shares owned by the Shareholder at his death, up to the maximum number calculated as provided in Subsection 1(c) below. The purchase price for the Shares shall be as provided in Section 2 below and shall be tendered within 30 days after the notice of exercise is given or, if later, 20 days after the Company receives the proceeds of the life insurance described below. (b) Life Insurance. The Company agrees to maintain life insurance on the life of the Shareholder to provide proceeds for the purpose of paying the purchase price under Section 2 for the Shareholder's Shares. That life insurance is listed on Exhibit A attached hereto, and the Company agrees to execute a new Exhibit A if at any time the facts stated thereon should change. The Company agrees to hold the proceeds of such life insurance in trust for use in paying the purchase price for the deceased Shareholder's Shares, and, except as provided in Section 3 below, those proceeds shall not be an asset of the Company for use for any purpose other than repurchasing Shares under this Section 1. If the Company breaches the foregoing agreement to maintain life insurance, that breach shall not give rise to any liability of the Company hereunder unless: (1) the Shareholder ceases to be an executive officer of the Company, or ceases to be a director of the Company, and the breach occurs thereafter or (2) the breach is made pursuant to a directive of the Company's board of directors. The Company additionally agrees that it will promptly pay the premiums on the policies, will not transfer the policies or any interest therein except as provided in this Agreement, and will not borrow against the policies. (c) Shares to be Purchased. Promptly upon the Shareholder's death, the board of directors of the Company shall value the Company's Shares as provided in Section 2 below. The per Share value thus determined shall be divided into the amount of the total life insurance proceeds received; and the result thus obtained (rounded down to the nearest whole Share) shall be the maximum number of Shares that the Company shall be obligated to purchase pursuant to this Section 1. (d) Right of First Refusal. If the Shareholder's estate receives a "Third Party Offer" at any time within 12 months of the date of the Shareholder's death, then the Shareholder's estate shall first offer to sell the Shares involved to the Company as provided in this Subsection. For these purposes, a Third Party Offer shall be a bona fide written offer made by another person to purchase Shares. Upon receipt of the Third Party Offer, the Shareholder's estate shall send a copy of it to the Company, along with a statement that the estate offers the Shares to the Company and that, unless purchased by the Company pursuant to this Subsection, the estate intends to transfer the Shares pursuant to that Third Party Offer. Upon receipt of those items, the Company shall have 30 days to accept the offer. Acceptance shall be made in a writing delivered personally or sent registered or certified mail, postage prepaid, to the estate within the required acceptance period. The Company may accept the offer for some or all of the Shares involved and may use the proceeds from life insurance provided for in this Section. Any shares not sold to the Company pursuant to this Subsection may be sold pursuant to the Third Party Offer, provided that the sale is completed within 20 days after expiration of the 30 day period described above, and provided that the sale is made pursuant to the same price and terms as those set forth in the Third Party offer. (e) During the 12 month period after the Shareholder's death, the Shareholder's estate and his heirs and legatees shall not sell any Shares except that: (i) Shares may be sold as provided in this Section 1, (ii) this Section 1 shall no longer bind any party after the maximum number of Shares described in Subsection (c) above have been sold to the Company under this Section 1, and (iii) the Shareholder's estate may sell Shares to or through others during any six month period up to 1% of the o}tstanding shares of the Company's Common Stock. 2. Price The purchase price to be paid for each Share purchased pursuant to Section 1 shall be the fair market value as provided in this Section, calculated as of the date of death (witho}t consideration of the proceeds of the life insurance to be received as provided in Section 1). The fair market value per Share for these purposes shall be 95% of the closing sale price of the stock as reported on NASDAQ for the last day immediately preceding the day of death for which trades are reported, provided, however, that the fair market value (i) shall not be less than 95% of the book value per Share calculated in accordance with generally accepted accounting principles as of the end of the Company's fiscal quarter ended most recently prior to the death and (ii) shall not be less than the weighted market price per Share calculated as follows: (a) Mean Sale Price. The "Mean Sale Price" for trading reported on NASDAQ for a given day shall be the midpoint between the reported high and low trade prices for the day, calculated to the nearest tenth of a cent. (b) Dollar Volume Per Day. The "Dollar Volume" for a given trading day shall be the Mean Sale Price thus calculated for each day multiplied by the reported total number of shares traded that day. (c) Calculation Periods. The Dollar Volume for each trading day shall be calculated for the five years preceding the date of death and then the Total Dollar Volume (defined below) shall be calculated for each of three time periods, namely the one year preceding the date of death, the three years preceding that date, and the five years preceding that date (each such time period being a "Calculation Period"). (d) Total Dollar Volumes. The Dollar Volumes for all days for which trades are reported during each Calculation Period shall be added together to reach "Total Dollar Volume" for that Calculation Period. (e) Total Shares Traded. The reported number of shares traded each day during each Calculation Period shall be added to the same number for each such other day to reach the "Total Shares Traded" during that Calculation Period. (f) Weighted Fair Market Value. The Total Dollar Volume for each Calculation Period shall be divided by the Total Shares Traded during that Calculation Period to reach a weighted market price for that Calculation Period. The weighted market price for purposes of this Agreement shall be the highest price calculated with respect to the three Calculation Periods. For purposes of this Agreement: (1) "NASDAQ" shall mean the National Association of Securities Dealers Automated Quotation System for each day during the Calculation Period on which that System is the principal United States market for the Shares, and for any day when it is not, then whatever established public trading market may be the principal United States market, and (2) reported trading volume and prices shall be based on the most reliable sources from which that information is received regularly by the Company. 3. Proceeds Available to Company. To the extent that the proceeds of life insurance received by the Company pursuant to Section 1 above are not used to purchase Shares owned by the Shareholder on his death, the proceeds may be retained and used by the Company for its own business purposes. 4. Delivery of Shares Upon tender of the purchase price pursuant to this Agreement, the Shareholder's estate shall deliver certificates representing the Shares to be sold, duly endorsed in blank or accompanied by duly executed stock transfer powers in blank, with signatures guaranteed and with any necessary stock transfer stamps attached, and accompanied by an incumbency certificate of the person or persons who signed the endorsements or powers and by necessary inheritance tax waivers or affidavits. 5. Notice Any notice or other writing mailed pursuant to this Agreement shall be sent (a) to the Company at its principal place of business, to the attention of the Company's Secretary, and (b) to the Shareholder or his estate at his latest address as set forth in the Company's records. The Company agrees to use its reasonable efforts to keep its records current for these purposes. Any such writing is sent or given when delivered personally or when deposited in the U.S. mail with proper postage thereon. 6. Termination of Agreement This Agreement shall terminate in its entirety upon the happening of the following event: the written consent of the Shareholder and the Company. 7. Transfer of Policies If as a result of a bankruptcy proceeding, sheriff's levy, or for any other reason, the Company is required by law to sell or transfer the life insurance policies called for in Section 1 above, or if the Company (contrary to its obligations hereunder) determines to sell the policies or to cease making premium payments thereon or takes any other action contrary to the terms of this Agreement, the Shareholder shall have the first option to acquire those policies while they remain in force. The purchase price for the policies shall be equal to 85% of their respective cash surrender values at the time of purchase, and that price may be paid by delivery to the Company of the Shareholder's promissory note for that amount, bearing interest at the Applicable Federal Rate as of the date of transfer, with principal and all interest becoming due 60 days after the death of the Shareholder. The Company agrees that, upon request by the Shareholder, the Shareholder (or some other person or entity designated by the Shareholder to be the Shareholder's agent for these purposes) shall be granted a security interest in or a contingent assignment of the policies, with at least 30 days prior notice of any transfer, cancellation, or borrowing, so as to assure that the Shareholder's option will be enforced. Nothing in this Section 7 shall relieve the Company from its obligations to secure and maintain those life insurance policies as provided in Section 1 above and nothing in this Section or consequent to its provisions shall limit the liability of the Company resulting from a breach of this Agreement by the Company. 8. Miscellaneous (a) Law Applicable. This Agreement shall be governed and construed under the laws of the State of New York without regard to its principles of conflict of laws. (b) Amendment. This Agreement may not be amended except by a writing signed by the parties. (c) Rights of Others. Except as expressly provided herein, neither the Company, nor any holder or beneficial owner of Shares, nor any other person, shall acquire or enforce any rights under this Agreement. (d) Heirs, Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, legatees, executors, administrators, successors and assigns, but the rights and obligations under this Agreement shall not be assignable. (e) Mergers, Etc. In case of any merger, consolidation or other reorganization of the Company or any recapitalization of the capital stock of the Company, the "Shares" as used herein shall include the securities received by the Shareholder in respect of or in exchange for his existing Shares. (f) Additional Actions. Each party agrees to execute and deliver all such documents and to take such further action as may be necessary to carry out the purposes and provisions of this Agreement. Without limiting the preceding sentence, (i) the Company agrees that, upon written request of the Shareholder, the Company will transfer ownership in the life insurance policies to a grantor trust or will arrange for the proceeds of the policies to be paid directly to a trust, so as to better assure the attainment of the purposes and provisions of this Agreement and (ii) the Shareholder agrees that, upon written request of the Company, the Shareholder will submit Share certificates for placement thereon of a restrictive legend referring to the provisions of this Agreement. IN WITNESS WHEREOF the Company and the Shareholder have executed this Agreement. Company: DETECTION SYSTEMS INC. By: /s/ Frank J. Ryan Vice President/Sec./Treasurer Shareholder: /s/ David B. Lederer EXHIBIT A To Stock Purchase Agreement LIST OF INSURANCE POLICIES In connection with Section 1 of the Stock Purchase Agreement, the Company maintains life insurance (with the Company as the beneficiary and with the proceeds to be received, held and paid out as provided in Section 1 of the Agreement) as follows: Death Policy Company Insured Benefit 9 626 695 Massachusetts Mutual David B. Lederer $800,000 2 660 836 Phoenix Home Mutual David B. Lederer $800,000 DETECTION SYSTEMS, INC. By: /s/ Frank J. Ryan 10/24/94 Its: Vice President/Secretary/Treasurer EX-5 6 EXHIBIT 5 June 22, 1995 Dear Shareholder: You are cordially invited to attend the Annual Meeting of Shareholders of Detection Systems, Inc. to be held on Thursday, August 3, 1995 at 130 Perinton Parkway, Fairport, New York, commencing at 1:00 p.m., Eastern Time. Your Board of Directors and management look forward to greeting personally those shareholders able to attend. This year, in addition to electing five directors and ratifying independent auditors, you are being asked to amend the 1992 Stock Option Plan. These matters are discussed in greater detail in the accompanying proxy statement. Your Board of Directors recommends a vote FOR the election of directors, FOR approval of independent auditors and FOR amendment of the 1992 Stock Option Plan. Regardless of the number of shares you own or whether you plan to attend, it is important that your shares are represented and voted at the meeting. You are requested to sign, date and mail the enclosed proxy promptly. Your interest and participation in the affairs of the Company are most appreciated. Sincerely, /s/ Karl H. Kostusiak Karl H. Kostusiak President DETECTION SYSTEMS, INC. 130 Perinton Parkway Fairport, New York 14450 (716) 223-4060 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON AUGUST 3, 1995 TO THE SHAREHOLDERS: The Annual Meeting of Shareholders of Detection Systems, Inc. will be held in the Company's facility at 130 Perinton Parkway, Fairport, NY, on August 3, 1995, at 1:00 p.m. for the following purposes: (l) To elect five directors; (2) To elect independent auditors for fiscal year 1996; (3) To amend the 1992 Stock Option Plan; and (4) To transact such other business as may properly come before the meeting or any adjournment or adjournments thereof. The Board of Directors has fixed the close of business on June 15, 1995 as the record date for the determination of shareholders entitled to notice of and to vote at the meeting. By Order of the Board of Directors FRANK J. RYAN Secretary Fairport, New York June 22, 1995 Shareholders are cordially invited to attend the meeting in person. Even if you plan to attend, please complete, sign and date the enclosed proxy and return it promptly in the enclosed return envelope. DETECTION SYSTEMS, INC. 130 Perinton Parkway Fairport, New York 14450 PROXY STATEMENT First sent to Shareholders on June 22, 1995 The enclosed proxy is solicited by the Board of Directors of Detection Systems, Inc. (the ''Company") for use at the Annual Meeting of Shareholders to be held August 3, 1995, and at any adjournments thereof. The record date for the determination of shareholders entitled to notice of and to vote at this meeting is the close of business June 15, 1995, at which time the Company had outstanding 2,804,238 shares of Common Stock. Shareholders are entitled to one vote for each share owned. Directors are elected by a plurality of votes cast. A majority of the votes cast is required to ratify the appointment of auditors and a majority of outstanding shares entitled to vote is required to amend the 1992 Stock Option Plan. Abstentions, broker non-votes and withheld votes will not be considered votes cast. All shares represented by a proxy will be voted in accordance with the specifications made thereon by the shareholder and, if no specification is made, will be voted for the election as directors of the five nominees proposed by the Board of Directors, for the election of Price Waterhouse as independent auditors and for the amendment to the Company s 1992 Stock Option Plan. Shareholders can ensure that their shares are voted at the meeting by signing and dating the enclosed proxy and returning it in the envelope provided. Sending in a signed proxy will not affect the right to attend the meeting and vote in person. A shareholder may revoke a proxy at any time before it is voted by notifying the Company s Transfer Agent, Chemical Mellon Shareholder Services, 85 Challenger Road, Ridgefield Park, NJ 07660 in writing, or by executing a subsequent proxy, which revokes the previously executed proxy. ELECTION OF DIRECTORS At the annual meeting, five directors, constituting the entire Board of Directors, are to be elected to hold office for the ensuing year and until their successors are elected and qualified. The Board of Directors proposes to nominate the following persons for election as directors: Donald R. Adair, Mortimer B. Fuller, Karl H. Kostusiak, David B. Lederer and Edward C. McIrvine. Each of these persons has consented to be named in this proxy statement and to serve if elected. The persons named in the proxy will vote for the election of these nominees unless a shareholder giving a proxy withholds authority to vote for one or more of them. If for any reason any of these nominees become unavailable for election, the proxies may exercise discretionary authority to vote for substitutes proposed by the Board of Directors. Messrs. Kostusiak and Lederer have held the indicated positions since they founded the Company in 1968. Mr. Adair is a partner of Adair & Stoner, a law firm in Rochester, New York. Mr. Fuller is President and C.E.O. of Genesee and Wyoming Industries, Inc., a holding company in Greenwich, Connecticut, which operates regional and short line freight railroads and leases rail cars. Dr. McIrvine is self-employed as a research and development management consultant. Until 1991, he served as Dean of the College of Graphic Arts and Photography at the Rochester Institute of Technology. During the fiscal year ended March 31, 1995, the Board of Directors held five meetings, in which all directors participated. The Board of Directors has an audit committee consisting of Messrs. Adair, Fuller and McIrvine. This committee, which met once during the last fiscal year, reviews reports of the Company's financial condition, financial controls and accounting procedures and approves and oversees services performed by the Company's independent auditors. It also serves as a direct access for the independent accountants to the non-employee members of the Board of Directors. There is a compensation committee consisting of Messrs. Adair, Fuller and McIrvine. This committee, which is responsible for establishing general compensation policies, establishing and administering compensation plans and programs in which officers participate and establishing the compensation arrangements for the Company s executive officers, met three times during the last fiscal year. Messrs. Adair, Fuller and McIrvine also serve on the stock option committee. This committee, which met four times during the year, is responsible for the granting of options pursuant to the Company's 1992 Stock Option Plan. There is no nominating committee of the Board of Directors. All of the Directors attended more than 75 percent of the aggregate of all meetings of the Board of Directors and the committees on which they served during the fiscal year. Directors who are not employees of the Company are paid an annual fee of $10,000 as well as $1,000 plus travel expenses, if any, for each day on which they attend Board meetings. Directors receive $500 for Board meetings held by teleconference. Certain information concerning the nominees and all officers and directors of the Company, as a group, is set forth below. Shares Beneficially Name, Age, Principal Owned as of Percent Occupation and Positions June 1, 1995(1) of Class Since - ----------------------- ------------ --------- ------ Donald R. Adair (51) 1,034 0.03% 1991 Director of the Company and Partner of Adair & Stoner Mortimer B. Fuller, III (53) 3,780(2) 0.13% 1990 Director of the Company and President of Genesee and Wyoming Industries, Inc. Karl H. Kostusiak (56) 417,928(3) 13.81% 1968 Director and President of the Company David B. Lederer (55) 305,501(3) 10.09% 1968 Director and Executive Vice President of the Company Edward C. McIrvine (61) 19,550(2) 0.65% 1981 Director of the Company and Self-employed Research and Development Management Consultant All officers and directors 865,241(2)(3) 28.58% as a group (8 persons including those named above) ______________________
Footnotes to Officers and Directors Table: (1) For all shares listed, the nominees possess both sole voting and investment power, except for those shares indicated in notes (2) and (3) below. (2) Includes 2,700, 2,700 and 16,720 shares which may be acquired upon exercise of warrants and options held by Messrs. Fuller, McIrvine and all officers and directors as a group, respectively. (3) Includes 113,714, 73,366 and 222,417 hypothetical shares credited to the accounts of Messrs. Kostusiak, Lederer and all officers and directors as a group, respectively, pursuant to the Company's deferred compensation plans, which shares may be acquired upon termination of employment. The Board of Directors recommends a vote FOR the election of Messrs. Adair, Fuller, Kostusiak, Lederer and McIrvine as Directors of the Company for the 1996 fiscal year. Proxies received by the Board of Directors will be so voted unless share owners specify in their proxies a contrary choice. EXECUTIVE COMPENSATION The Company is committed to building shareholder value through improved performance and growth. To achieve this objective, the Company seeks to create an environment in which employees are motivated to make the greatest possible contribution to shareholder value. The Company uses a merit-based system of compensation to encourage individual employees to achieve their productive and creative potential and to link individual financial goals to Company performance. The Company periodically compares its compensation system with those of competitors and refines its system as necessary to encourage maximum productivity. Summary Compensation Table: The following table sets forth information with respect to the compensation of the Company s Chief Executive Officer and other executive officers for services in all capacities to the Company in fiscal years ended March 31, 1995, 1994 and 1993. Other All Other Name and Annual Options/ Compen- Principal Fiscal Salary Bonus Compen- SARS sation Position Year ($) ($)(2) sation($)(#)(3) ($)(4) - ---------- ---- ------ ------ -------- ------ ----- Karl H. Kostusiak 1995 $196,110 $184,746 $ N/A 0 $ 2,625 President & Chief 1994 183,280 71,943 68,442 0 33,491 Executive Officer 1993 171,290 176,084 N/A 0 34,428 R. Wayne Carlton(1) 1995 $100,000 $ 28,386 $ N/A 2,500 $ 2,309 Vice President, 1994 94,320 19,299 7,760 0 3,049 National Sales 1993 N/A N/A N/A N/A N/A David B. Lederer 1995 $156,897 $147,794 $ N/A 0 $ 2,625 Executive Vice 1994 146,633 57,554 59,880 0 27,592 President 1993 137,040 140,867 N/A 0 28,048 Frank J. Ryan 1995 $100,000 $ 35,017 $ N/A 1,500 $ 2,242 Vice President, 1994 93,890 10,774 8,497 0 3,032 Secretary/Treasurer 1993 88,180 23,278 N/A 0 2,741 Lawrence R. Tracy(1) 1995 $21,000 $102,154 $ N/A 40,000 $ 0 President of 1994 N/A N/A N/A N/A N/A Detection Systems 1993 N/A N/A N/A N/A N/A International, Inc. All Executive 1995 $574,007 $498,349 $ N/A 44,000 $ 9,801 Officers as a Group 1994 518,123 159,570 144,580 0 67,164 (5 persons) 1993 396,510 340,229 N/A 0 65,217
___________________ Footnotes to Compensation Table: (1) Mr. Carlton was promoted to Vice President, National Sales on July 29 of fiscal 1994 and Mr. Tracy joined the Company as President of Detection Systems International, Inc. on February 7 of fiscal 1995. (2) Messrs. Kostusiak s, Lederer s and Ryan s bonuses were primarily based on profit performance, Mr. Carlton s on sales performance and Mr. Tracy s included a one-time employment bonus. (3) These options are exercisable 35-40 percent after one year, 60 percent after two years, 80 percent after three years and 100 percent after four years. (4) Contributions to the named executive officers under the Company s 401(k) retirement savings plan. Option/SAR Grants in Last Fiscal Year: The following table sets forth information with respect to options granted during fiscal 1995 to the named executive officers. Potential Reali- Percent of zable Value at Number of Total Op- Assumed Annual Securities tions/SARs Exercise Rates of Stock Underlying Granted to or Base Price Appreciation Option/SARs* Employees Price Expir. for Option Term Name Granted(#) in Fis Yr ($/Sh) Date 5%($)/10%($) - ---- ---------- --------- ------ ----- --------------- K. Kostusiak 0 0 0 n/a 0/0 R. Carlton 2,500 2.0% 7.25 7/12/99 5,025/11,075 D. Lederer 0 0 0 n/a 0/0 F. Ryan 1,500 1.2% 7.25 7/12/99 3,015/6,645 L. Tracy 40,000 32.5% 6.50 2/06/00 72,000/158,800
*Each grant was for incentive stock options to purchase stock under the Company s 1992 Stock Option Plan at an exercise price equal to the market price on the date of grant. Options are exercisable 35-40 percent after one year, 60 percent after two years, 80 percent after three years and 100 percent after four years. Option Exercises in Last Fiscal Year and Year-End Option Values: The following table sets forth information with respect to the named executive officers concerning the exercise of options during fiscal 1995 and unexercised options held as of March 31, 1995. The value of the underlying securities was determined by taking the market value at exercise or year end, as appropriate, minus the exercise price. The market price of the Company's stock on March 31, 1995 was $7.625 per share. Value of Number of Unexercised Unexercised In-the Money (#)Shares Options at Options at Acquired ($) 3/31/95 3/31/95 Name on Value Exer'ble/ Exerc'ble/ Exercise Realized Unexer'ble Unexer'ble Kostusiak 31,450 $92,589 0/0 0/0 Carlton 2,160 7,565 4,968/2,932 $10,810/$1,308 Lederer 20,000 58,880 0/0 0/0 Ryan 6,480 7,941 3,888/1,932 $7,700/$933 Tracy 0 0 0/40,000 0/$45,000
Recipients of options may elect to exercise their options through an installment loan arrangement with the Company. During fiscal 1995, Messrs. Kostusiak and Lederer had stock option loans outstanding that totaled $203,401 and $153,739, respectively. As of June 1, 1995, the outstanding balances of these loans were $193,219 and $142,644, respectively. The loans were charged interest rates ranging from 6.78% to 8.42%. Subsidiaries: Emergency Communications, Inc. (ECI) was formed in fiscal 1993 for the purpose of accomplishing further development, sales, installation, servicing and financing (on a partnership basis where appropriate) of a micro-cellular emergency call system, called Security Escort, to be used on college campuses and other similar environments. The Company provided the initial capitalization by purchasing 6,000 shares of ECI's common stock for $16.67 per share. Activity Monitoring Systems, Inc. (AMS) was formed in fiscal 1994 for the purpose of accomplishing further development, sales, installation, servicing and financing (on a partnership basis where appropriate) of a wireless electronic house arrest product line to be used by various government agencies. The Company provided the initial capitalization by purchasing 6,001 shares of AMS' common stock for $16.66 per share. The Company entered into five-year renewable License and Manufacturing Agreements with ECI and AMS. ECI and AMS were granted nontransferable, exclusive licenses to exploit certain of the Company's radio technology in the "emergency call" and "house arrest" markets, respectively. The subsidiaries agreed to pay the Company royalties on products sold under these licenses and that the Company would be the exclusive manufacturer and supplier of those products. A portion of the ECI and AMS shares were subsequently awarded to certain Company officers and employees during fiscal 1993 and 1994. Twenty percent of the shares awarded vested immediately, and an additional twenty percent vest annually thereafter. Subject to the completion of that vesting schedule, Messrs. Kostusiak, Carlton, Lederer and Ryan will acquire from the Company 1,500, 40, 1,200 and 40 shares, respectively, of each of these two subsidiaries. The shares of ECI and AMS shares are currently valued at $60 and $20 respectively. During fiscal 1995, the Company provided an equity investment of $700,000 to its Detection Systems International, Inc. (DSII) subsidiary for the purpose of pursuing international opportunities for its electronic security and fire protection products. The Company owns 100 percent of the common stock for this subsidiary. The Board of Directors authorized the Company to make loans to ECI, AMS and DSII while external sources of financing are being investigated. As of June 1, 1995, outstanding loans were $851,500, $0 and $4,000, respectively, to these subsidiaries. The executive officers received no compensation from the subsidiaries in fiscal 1995. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors is responsible for (a) establishing general compensation policies, (b) establishing and administering compensation plans and programs in which officers participate and (c) establishing the specific compensation arrangements for the Company s executive officers. The members of this Committee also serve on the Stock option committee under the Company s Stock Option Plan. Committee Objectives: The Compensation Committee has sought four key objectives for the Company s executive compensation plans, programs and arrangements. These are to (a) tie executive compensation to the Company s financial performance, (b) encourage equity ownership in the Company by all executives, (c) tie executive compensation programs to the achievement of long-term company strategic objectives and (d) provide overall executive compensation that will attract and retain an effective management team. The Committee recognizes that different plans or arrangements will serve one or more of those objectives in varying degrees, that the relative significance of the stated objectives may shift from time to time and that new objectives may arise and become key. Tying Compensation to Company Financial Performance: Beginning in 1988, the Company has entered into five-year employment agreements with Messrs. Kostusiak and Lederer. Each year, the agreements have been re-examined, reviewed and revised as appropriate and then re-executed for a new five-year period. Among other goals, the agreements seek to create a strong tie between the compensation of Messrs. Kostusiak and Lederer and the Company s financial performance. The agreements do this by providing for (a) an opportunity for an annual cash bonus based on pre-tax profits and (b) an opportunity for an annual stock bonus based on growth of both sales and pre-tax profits. Specifically, the cash bonus for Mr. Kostusiak is a percentage of the amount by which the Company s pre-tax profits for the fiscal year exceed $250,000. The stock bonus for Mr. Kostusiak is a maximum of 20,000 shares of Company common stock if sales for the fiscal year have increased at least 10 percent over the previous year and if the Company s pre-tax profits are at least equal to 10 percent of the total sales. The stock bonus is scaled back for lower performance levels, so that it will be zero shares for zero sales growth and it will be zero shares if pre-tax profit is 5 percent or less of total sales. The intention is to provide strong incentives for managing the Company's financial performance so that pre-tax profits will be greater than 5 percent of sales and so that sales will increase significantly each year. (Other aspects of these agreements are described below under "Executive Agreements.") Since the cash bonuses are directly dependent on pre-tax profits and the stock bonuses are directly dependent on growth in both sales and pre-tax profits, the Committee believes that a significant portion of the compensation of Messrs. Kostusiak and Lederer is tied to corporate performance. (See the table under "Executive Compensation.") The Committee believes that these provisions of the employment agreement functioned as intended during the past three years. In particular, Mr. Kostusiak s bonus compensation was as follows: Fiscal Cash Stock Pre-Tax Year Bonus Bonus Sales Profit - ----- ------- ------ ------ ------- 1995 $116,734 $59,290 $34,336,000 $2,592,000 1994 71,943 -- 31,355,000 1,571,000 1993 112,484 63,600 29,431,000 2,356,000 When the Company's employment agreement with Mr. Kostusiak was renewed and extended at the beginning of fiscal 1995, the Committee concluded that (a) the factors and criteria previously used for bonuses, as described above, continued to be sound and should be continued and (b) Mr. Kostusiak's base salary should be increased as shown in the compensation table on page five to reflect his sound general performance as Chief Executive Officer. Thus, a very significant portion of his potential earnings continue to depend on the Company's financial performance. Equity Ownership by Management: In addition to the stock bonus plan described above, the Company maintains a plan for granting stock options to key employees. Under the plan, options are granted at exercise prices that equal or exceed the fair market value of the option shares on the date of grant, and the option rights vest incrementally over four years. From time to time, options are granted under the plan by the Option Committee to Company executives and other key employees. No options have been granted to Messrs. Kostusiak or Lederer since 1987. The Committee believes that the options themselves, even when unexercised, provide incentives for key personnel to improve shareholder value, since only then will the options become valuable. In previous fiscal years, at the Committee's recommendation, the Board of Directors awarded shares of certain Company subsidiaries to key personnel including Mr. Kostusiak. It is the Committee's belief that direct equity ownership in the Company's subsidiaries, in selected cases, can provide added incentives for key personnel to pursue the Company s strategic objectives in the markets addressed by those subsidiaries, including the Company's rights to manufacture products for those markets and to earn royalties on the products sold. Achievement of Long-Term Company Objectives: The Committee believes that having officers who own substantial equity positions in the Company and, in selected cases, its subsidiaries, as discussed in the preceding sections, provides considerable incentive for executive officers to pursue the Company s long-term strategic objectives. Attracting and Retaining Management: The Committee believes that the Company is attracting and retaining effective management personnel and that the Company's approach to executive compensation is appropriate for achieving that objective. The Committee anticipates that from time to time, independent studies of the Company's overall executive compensation and other investigations will be conducted so as to test the Company's compensation approach against compensation programs offered by others. Compensation Committee Donald R. Adair, Chairman Mortimer B. Fuller Edward C. McIrvine COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION: In the last fiscal year the Company and its subsidiaries paid $15,980 to Adair & Stoner, of which Mr. Adair is a partner, for legal services rendered for the Company and its Emergency Communications Inc. subsidiary and $7,500 to Edward C. McIrvine for consulting work performed for the Company regarding the house arrest market. Messrs. Adair and McIrvine also served as members of the compensation and stock option committees of the Board of Directors. EXECUTIVE AGREEMENTS The Company has employment agreements with three of its executive officers, Messrs. Kostusiak, Lederer and Tracy. The agreements with Messrs. Kostusiak and Lederer are through May 2000 and the agreement with Mr. Tracy is through February 1999. The agreements provide for severance benefits under certain circumstances. The terms "change of control," "cause" and "disability" are used in the following description as defined in the agreements. These agreements terminate upon the executive's death or permanent disability. Under the agreements with Messrs. Kostusiak and Lederer, if the Company terminates the executive's employment without cause, the Company will continue compensation and benefits to the executive for the then remaining balance of the term of employment or for a period of three years from the date of termination, whichever is longer. Under Mr. Tracy s agreement, the same applies except that compensation will continue for the then remaining balance of the term of employment or for a period of one year from the date of termination, whichever is longer. The continuation of compensation and benefits includes the executive's base salary plus participation in all applicable executive incentive compensation plans and fringe benefit packages. Further, if Mr. Kostusiak's or Mr. Lederer's, employment is terminated by the Company without cause after expiration of the agreement but prior to the Company and the executive reaching agreement with respect to the executive's retirement benefits, the Company will also continue the executive's compensation and benefits for a period of two years from the date of termination. If the Company terminates Mr. Kostusiak's or Mr. Lederer's employment for cause, each will receive compensation and benefits for the remaining balance of the term of employment or for a period of three years from the date of termination, whichever is longer, provided that this compensation is reduced by any monetary damage suffered by the Company due to the cause. The same applies for Mr. Tracy, except that compensation and benefits will continue for the remaining balance of the term of employment or for a period of one year from the date of termination, whichever is longer. If, within four months after a change in control, Mr. Kostusiak's or Mr. Lederer's employment is terminated by the Company or the executive, each would be entitled to receive (a) the base salary through the termination date, as in effect at the time of termination or at the time the change in control occurs, whichever is higher, plus any bonus which has been earned but not yet paid; (b) an amount equal to three times the highest total cash and stock bonus compensation paid to him in any of the Company's preceding three fiscal years and (c) the continuation of fringe benefits for three years after termination. No provision relating to a change of control is included in Mr. Tracy's agreement. All three agreements restrict the executives from competing with the Company for various periods subsequent to termination of employment, depending on the circumstances of the termination. PRINCIPAL HOLDERS OF COMMON STOCK Based on reports filed with the Securities and Exchange Commission, the following persons beneficially own more than 5% of the Company's outstanding Common Stock as of June 15, 1995. BENEFICIAL OWNERSHIP TABLE Number of Name of Shares Percent Title of Beneficial Beneficially of Class Owner Owned Class - ------ ------ ------ ------ Common Stock Karl H. Kostusiak 130 Perinton Parkway Fairport, NY 14450 417,928 13.81% Common Stock David B. Lederer 130 Perinton Parkway Fairport, NY 14450 305,501 10.09% Common Stock Dimensional Fund Advisors, Inc. 1299 Ocean Ave. 11th Floor Santa Monica, CA 90401 160,448 5.76% - -------------------- Footnotes to Beneficial Ownership Table: (1) Messrs. Kostusiak and Lederer currently possess both sole voting and investment power except for 113,714 and 73,366 shares respectively, which may be acquired upon termination of employment pursuant to the Company s deferred compensation plans. (2) The shares held by Dimensional Fund Advisors Inc., a registered investment advisor, are held in portfolios of DFA Investment Dimensions Group Inc., a registered open-end investment company, or in series of the DFA Investment Trust Company, a Delaware business trust, or the DFA Group Trust and DFA Participation Group Trust, investment vehicles for qualified employee benefit plans, all of which Dimensional Fund Advisors Inc. serves as investment manager. Dimensional disclaims beneficial ownership of all such shares. Persons who are officers of Dimensional Fund Advisors Inc. also serve as officers of DFA Investment Dimensions Group Inc. (the "Fund") and the DFA Investment Trust Company (the "Trust"). In their capacities as officers, these persons vote 44,124 additional shares which are owned by the Fund and have shared power to vote 12,200 shares which are owned by the Trust. COMPARISON OF TOTAL SHAREHOLDER RETURN The Company s common stock trades on The Nasdaq Stock Market under the symbol: DETC. The following graph sets forth Detection Systems Total Shareholder Return Index as compared to The Nasdaq Index and the Nasdaq Electronic Component Stock Industry Index. The graph is based on the assumption that $100 was invested in each entity on March 31, 1990, and that all dividends were reinvested. Graph follows with the following data points: Detection NASDAQ Nasdaq Electronic Date Systems, Inc. Index Industry Index - ----- ------------- ------ --------------- 3/28/91 124 114 111 3/31/91 97 146 137 3/31/93 143 167 225 3/31/94 171 181 273 3/31/95 132 201 359 PROPOSAL TO AMEND THE 1992 STOCK OPTION PLAN The Board of Directors has adopted, subject to approval by the shareholders, the Detection Systems, Inc. Restated 1992 Stock Option Plan (the "Plan"), a copy of which is set forth as Exhibit A to this proxy statement. The Plan was amended, restated and renamed as a result of the Board's decision to increase the number of authorized shares by 100,000 shares, to expand eligibility to include certain nonemployees who perform services to or on behalf of Detection Systems, Inc. and its subsidiaries and to remove Messrs. Kostusiak and Lederer as potential recipients of option shares under the Plan. 1992 Stock Option Plan as Amended: The purpose of the Plan is to enable eligible key employees and nonemployees of the Company and its subsidiaries to purchase shares of Common Stock of the Company by means of stock options. Through the use of such options, the Company expects to be able to attract and retain the best available talent and to encourage the highest level of performance of its key personnel. A total of 250,000 shares of Common Stock of the Company, par value $.05 per share, shall be available for options under the Plan (with appropriate change in that number in the event of a stock split, stock dividend or other change in the Company's Common Stock). These shares may be either authorized and unissued shares or may be treasury shares. Options may be either incentive stock options, as defined in Section 422 of the Internal Revenue Code, or options which do not meet the requirements of that section (nonqualified options). If an option expires, terminates or is canceled without being exercised, new options may be thereafter granted covering such shares. No stock option may be granted more than ten years after the effective date of the Plan. The Plan is administered by the stock option committee of the Board of Directors ("Committee"), none of the members of which is, or shall within a year prior to serving on the Committee, have been eligible to receive any options under the Plan. The Committee determines who shall be granted options under the Plan, the number of shares to be awarded and the terms of such award, and interprets the provisions of the Plan. The Board of Directors may amend or terminate the Plan, without the approval of the shareholders, except that it may not, without such approval, materially increase the benefits accruing to participants under the Plan, increase the number of shares subject to options, change the minimum exercise price, change the class of employees eligible to receive awards or extend the period during which awards may be granted or exercised. No amendment of the Plan may, without a recipient's consent, adversely affect his rights under an option or warrant then held by him. The Plan provides that options may be granted to key employees or nonemployees of the Company and its subsidiaries. However, options may not be granted to members of the Committee, to directors who are not officers or employees of the Company or its subsidiaries, nor to Mr. Kostusiak or Mr. Lederer. The Plan places no limitation on the number of shares with respect to which options may be granted to any such individual, except that incentive options may not be granted in excess of any limitations imposed by the Code. The Code presently imposes a limit on the grant of incentive options. It imposes no limit on the grant of nonqualified options. The purchase price for each option may not be less than the fair market value of the stock at the time such option is granted. If an option is granted to an employee who, at the time of such grant, owns stock possessing more than 10% of the voting power of all stock of the Company, the purchase price shall be at least 110% of the fair market value of the stock subject to the option. An option shall be exercised upon written notice to the Company accompanied by payment in full for the shares being acquired. The payment shall be made in cash; by check; by delivery of certificates for Common Stock of the Company endorsed in blank, the value of which will be deemed equal to the closing market price of such shares on the date of delivery; by a loan/installment payment arrangement, if the Committee permits and upon such terms as the Committee specifies, or by a combination of the foregoing. With respect to a loan/installment payment arrangement to an optionee who is a director of the Company, approval of the Plan by the shareholders will constitute authorization of such loan in accordance with Section 714 of the New York Business Corporation Law. Each option will have a maximum term of ten years, or such lesser period as the Committee specifies, except that an incentive option granted to an employee who, at the time of the grant, owns stock possessing more than 10% of the voting power of all stock of the Company will have a term not in excess of five years. Options are exercisable at such time or times and under such conditions as may be impaired by the Committee and set forth in an option agreement. The benefits or amounts that will be received or allocated in the future under the Plan are not determinable. The following table indicates the number of options granted under the plan for fiscal year 1995, subject to shareholder approval. Number of Dollar Value Name and Position Options of Options Granted Granted - ------------------ --------- ----------- K. Kostusiak, President (1) 0 0 R. Carlton, Vice President, National Sales 2,500 18,125 D. Lederer, Executive Vice President (1) 0 0 F. Ryan, Vice President 1,500 10,875 L. Tracy, President of Detection Systems International, Inc. 40,000 260,000 Executive Group 44,000 289,000 Non-Executive Director Group (1) 0 0 Non-Executive Officer Employee Group(3) 110,000 807,875 __________________________ Footnotes to above table: (1) Neither Mr. Kostusiak, Mr. Lederer nor the Company's non- executive directors are eligible for benefits under the revised plan. (2) Options were granted at prices ranging from $6.50 to $7.625 and with expiration dates ranging from 7/12/99 and 3/9/00. (3) Includes a total of 32,000 shares valued at $240,000 that were granted subject to shareholder approval of the Restated 1992 Stock Option Plan. There are currently outstanding options exercisable for 122,000 shares and there are 28,000 shares available for grant under the Plan. An additional 32,000 shares have been granted subject to shareholder approval of the revised Plan. On June 1, 1995, the high, low and closing bids for the Company's Common Stock, as reported by The Nasdaq Stock Market, were each $6.750. Should the amendment not be approved, the 1992 Plan will remain in force as originally adopted, and the option grants as described above will not be effective. The Board of Directors recommends a vote FOR the proposal to amend the 1992 Stock Option Plan. Proxies received by the Board of Directors will be so voted unless share owners specify in their proxies a contrary choice. ELECTION OF AUDITORS The Board of Directors has recommended that Price Waterhouse LLP be elected independent auditors of the Company for the fiscal year ending March 31, 1996. They have served the Company as independent auditors since 1968. Representatives of that firm will be present at the meeting, will have an opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions from shareholders. The Board of Directors recommends a vote FOR the proposal to ratify the appointment of Price Waterhouse LLP as independent auditors of the company for the 1996 fiscal year. Proxies received by the Board of Directors will be so voted unless share owners specify in their proxies a contrary choice. EXPENSES OF SOLICITATION The cost of the solicitation of proxies will be borne by the Company. In addition to solicitation by mail, employees of the Company may, without extra remuneration, solicit proxies personally, or by telephone or facsimile. The Company has retained D. F. King & Co., Inc. to aid in the solicitation of proxies for shares held of record by banks, brokers and other custodians, nominees and fiduciaries. The Company will pay D. F. King & Co., Inc. an anticipated fee of $4,500, plus expenses, for these services, and will also reimburse such record holders for their expenses in forwarding proxies and proxy soliciting material to the beneficial owners of the shares held by them. OTHER MATTERS The Board of Directors knows of no matters to be presented at the meeting other than those described in this proxy statement. However, if any other matters properly come before the meeting, it is intended that the persons named in the enclosed proxy will vote on such matters in accordance with their best judgment. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers and persons who own more than 10 percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission reports of ownership of common stock of the Company. Officers, directors and greater than 10-percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports are required, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10-percent beneficial owners were complied during the fiscal year ended March 31, 1995. The Company paid a premium of $34,885 in fiscal 1995 for director and officer liability insurance. This policy is renewed annually and provides protection for the directors and officers of Detection Systems and its subsidiaries. In order to be eligible for inclusion in the Company's proxy materials for next year's Annual Meeting, shareholder proposals for presentation at that meeting must be received at the Company's principal executive offices by February 28, 1996. Shareholders are urged to sign, date and return the enclosed proxy in the enclosed return envelope. Prompt response is helpful, and your cooperation will be appreciated. SHAREHOLDERS MAY OBTAIN WITHOUT CHARGE A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K. REQUESTS SHOULD BE DIRECTED TO: Detection Systems, Inc. Ella D. Gardner, Accounting Manager 130 Perinton Parkway Fairport, New York 14450 Dated: June 22, 1995 EX-6 7 EXHIBIT 6 Dated as of December 31, 1991 CREDIT AGREEMENT Norstar Bank, National Association, a national banking corporation with offices at One East Avenue, Rochester, New York 14638 (called the "Bank") and Detection Systems, Inc., a New York corporation doing business at 130 Perinton Parkway, Fairport, New York 14450 (called the "Borrower") agree as follows: The definitions for all capitalized terms used in this Agreement and not appearing in the text of this Agreement may be found under Article 12 of this Agreement. ARTICLE I LOANS A. Line of Credit. The Bank shall make available to Borrower a revolving line of credit (the "Line of Credit") in a maximum aggregate amount not to exceed $3,000,000. Borrower from time to time may request advances and may reborrow hereunder so long as aggregate amounts outstanding under the Line of Credit at any time never exceed the maximum amount available hereunder. Advances may be requested in person, in writing, or by telephone. Checks written on Borrower's Cash Concentration Account (described herein) shall be treated as requests for advances under the Line of Credit. The principal amount of all loans outstanding from time to time under the Line of Credit shall bear interest, payable on the first day of each calendar month and at the Expiration Date, at a rate per year equal to the "prime" commercial loan rate of the Bank established or announced from time to time (or the equivalent thereof), but never exceeding the maximum rate allowed by law. All changes in the interest rate due to a change in the prime rate shall take place automatically and without notice to Borrower as of the effective date of the change in such prime rate. Interest shall be calculated on the basis of a 360 day year. All cash or cash equivalent proceeds from the sale of Borrower's inventory, and all proceeds from the collection of Borrower's accounts receivable shall be deposited in a Cash Concentration Account with the Bank. So long as amounts are outstanding under the Line of Credit, said Account shall be accessible only by the Bank and all collected funds in excess of $125,000 shall be applied daily to payment of Borrower's indebtedness under the Line of Credit, which indebtedness shall be evidenced by a Master Note (a "Master Note") in substantially the form of Exhibit A attached hereto and made a part hereof. The Line of Credit shall terminate on the Expiration Date. B. Term Loan. Subject to the terms and conditions of this Agreement, the Bank shall loan to Borrower on the Expiration Date the unpaid principal balance of the Line of Credit outstanding on the Expiration Date (the "Term Loan"). The Term Loan shall be evidenced by a Term Loan Note in substantially the form attached hereto as Exhibit B (the "Term Loan Note"). Proceeds of the Term Loan shall be used to repay the Line of Credit. The Term Loan Note shall be dated the date of the loan and shall bear interest until paid at a rate per annum equal to six-tenths of one percent (.6% or .006) above the "prime" commercial loan rate of the Bank established or announced from time to time (or the equivalent thereof), but never exceeding the maximum rate allowed by law. All changes in the interest rate due to a change in the prime rate shall take place automatically and without notice to Borrower as of the effective date of the change in such prime rate. Interest shall be calculated on the basis of a 360 day year. The Borrower shall make sixty (60) equal monthly principal payments pursuant to the Term Loan Note in substantially equal amounts based upon the principal amount of the Term Note and pursuant to a schedule to be annexed to the Term Note commencing on the first day of the second calendar month following the Expiration Date (September 1, 1994), and continuing on the first day of each of the next succeeding fifty-nine (59) months. Each principal payment shall be accompanied by a payment of all accrued interest. All remaining principal and interest shall be due and payable in full on August 1, 1999. C. Late Payments. Any payment of any kind (including without limitation a payment of principal, interest, or expenses) not made within ten days after the same shall become due under this Agreement or the Notes shall be subject to an additional late payment charge equal to two percent (2%) of the payment due. ARTICLE II PARTICIPATION RIGHTS The Bank shall have the right to sell or repurchase participations in the obligations of the Borrower covered by this Agreement without giving prior notice to the Borrower. ARTICLE III PREPAYMENTS The Borrower shall have the right, at its option, to prepay obligations outstanding under the Line of Credit in whole or in part without penalty at any time. The Borrower shall have the right, at its option, to prepay obligations outstanding under the Term Loan Note in whole or in part at any time. All prepayments shall be applied first to items described in Article IV hereof, then to all accrued interest and then unless otherwise specifically directed by Borrower, in such order and to such obligations as the Bank in its sole discretion may choose without penalty. ARTICLE IV EXPENSES A. Placement and Administration Expense. The Borrower shall pay any fees, expenses, and disbursements, including legal fees, of the Bank related to preparation and execution of this Agreement and any loans made hereunder. B. Collection Costs. At the request of the Bank, the Borrower shall promptly pay any expenses, reasonable attorney's fees, costs, or disbursements in connection with collection of any of Borrower's obligations or enforcement of any of the Bank's rights hereunder or under any security agreement, guarantee, or other agreement given by Borrower to the Bank. This obligation shall survive the payment of any notes or other obligations executed hereunder. The Bank may apply any payments of any nature received by it first to the payment of obliga tions under this section, notwithstanding any conflicting provision contained in any other agreement with the Borrower. C. Facility Fees. The Borrower shall pay the following fees to the Bank for providing this loan facility: 1. $18,000 due at closing; 2. $18,000 due on the anniversary of the closing date; 3. $13,500 on the second anniversary of the closing date; and 4. an additional $4,500 on the Expiration Date if the Term Loan is made by the Bank on the Expiration Date. ARTICLE V COLLATERAL A. Security Agreement. As collateral for the Borrower's obligations hereunder, the Borrower shall execute and deliver to the Bank a Security Agreement and ancillary UCC-1 Financing Statements (the "Security Documents") which by their terms grant to the Bank a first security interest in certain of the personal property of Borrower, as follows: accounts, inventory, chattel paper and general intangibles. All collateral first shall be applied to secure the Borrower's obligations under the Master Note, and only after satisfaction of same shall it be applied to all other obligations of the Borrower to the Bank. B. Springing Lien. B.1 Safekeeping of the Security Documents. The Bank shall hold the Security Documents received by it in safekeeping in escrow in accordance with the provisions of this Agreement. The Financing Statements shall be filed only as provided in Section B.2 hereof. If, prior to such filing, all of the Loans shall be paid in full and the commitments of the Bank under this Agreement shall be terminated in full, the Bank shall surrender the Security Documents to the Borrower. Except as expressly provided in the immediately preceding sentence, the Borrower shall not be entitled to obtain possession of the Security Documents following delivery thereof to the Bank, nor shall the Borrower be entitled at any time to give any instructions or directions to the Bank with respect to the safekeeping or recording thereof or any other matter relating thereto. B.2 Filing of the Financing Statements. B.2.1 Promptly upon receipt by the Bank of information indicating that a Specified Event has occurred, the Bank, in its sole discretion, may give notice thereof to the Borrower, and take the Security Documents out of escrow and cause the Financing Statements to be duly filed in the appropriate public offices, and once filed the Financing Statements shall remain filed until all the Loans shall be paid in full and all the commitments of the Bank under this Agreement shall be terminated in full, regardless of whether or not the Specified Event which resulted in such filing continues. B.2.2 Effective upon the occurrence of a Specified Event , the Borrower irrevocably appoints the Bank as its lawful attorney and agent to execute any Financing Statements in the Borrower's name and on the Borrower's behalf, and to file Financing Statements naming the Borrower as debtor signed by the Bank alone in any appropriate public office. C. Further Assurances. The Borrower shall execute such documentation and deliver such items as the Bank deems necessary from time to time to perfect its interests in all collateral provided hereunder, and authorizes the Bank to file financing statement without its signature from time to time. ARTICLE VI REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants as follows: A. Organization and Power. The Borrower is duly formed, validly existing and in good standing under the laws of the State of New York, is duly qualified to transact business and is in good standing in all states and countries in which it owns properties or in which the failure to do so could materially adversely affect the Borrower's financial condition or business operations. The Borrower has full power and authority to own its properties, to carry on its business as now being conducted, to execute and perform this Agreement, and to borrow hereunder. The Borrower has no subsidiaries, defined to include companies at least fifty percent (50%) of the stock of which is owned by Borrower. B. Proceedings of Borrower. All necessary action on the part of the Borrower and any other persons relating to authorization of the execution and delivery of this Agreement and the performance of other obligations hereunder including, but not limited to, the delivery of any notes and security agreements contemplated hereunder, has been taken. All of the same are valid and enforceable in accordance with their respective terms. Said action will not violate any provision of law or the Borrower's Certificate of Incorporation or By-laws. Such action will not violate, be in conflict with, result in a breach of, or constitute a default under any agreement to which the Borrower is a party or by which any of its properties is bound, or any order, writ, injunction or decree of any court or governmental instrumentality, and will not result in the creation or imposition of any lien, charge or encumbrance upon any of its properties with the sole exception of those in favor of the Bank contemplated hereby. No consent or approval of any court or governmental instrumentality is required in connection with authorization, execution, delivery, and performance of this Agreement and any related notes and security agreements. C. Litigation. At the date of the Agreement, there is no action, suit or proceeding at law or in equity or by or before any governmental instrumentality or other agency pending or, to its knowledge, threatened against or affecting the Borrower which, if adversely determined would have a material adverse effect on the financial condition or the business thereof. D. Financial Statements. All financial statements furnished by the Borrower to the Bank are complete and correct, have been prepared in accordance with generally accepted accounting principles consistently followed throughout the period indicated, and fairly present the financial condition of the Borrower as of the respective dates thereof and the results of its operations for the respective periods covered thereby. E. Adverse Changes. Since the latest financial statements described in Section D of Article VI, there has been no material, adverse change in the condition, financial or otherwise, of the Borrower. F. Taxes. The Borrower has filed or caused to be filed all tax returns which, to the knowledge of its officers are required to be filed, and has paid or caused to be paid all taxes as shown on said returns or any assessment received to the extent that such taxes have become due. G. Properties. The Borrower has good and marketable title to all of its property and assets, including without limitation, the property and assets set forth in the financial statements referred to in Section D of Article VI hereof. The Borrower has undisturbed peaceable possession under all leases under which it is operating, none of which contains unusual or burdensome provisions which may materially affect its operations, and all such leases are in full force and effect. The Borrower is the sole owner of all of its assets given as collateral pursuant to Article V hereof, which collateral is free of any liens, security interests, assignments, pledges, or encumbrances of any kind excluding only interests held by the Bank. Upon the execution of the security agreements related hereto and upon the occurrence of a Specified Event, the Bank will have a valid and enforceable first lien covering such collateral. H. Indebtedness. The Borrower has no outstanding indebtedness other than that shown on the financial statements referred to in Section D of Article VI hereof, and other than trade payables not yet due incurred in the ordinary course of its business. I. Franchises, Permits. The Borrower has all franchises, permits, licenses, and other authority as is necessary to enable it to conduct their businesses as now being conducted, and is not in default under such franchises, permits, licenses, and authority. J. ERISA. No action, event, or transaction has occurred which could give rise to a lien or encumbrance on Borrower's assets as a result of the application of relevant provisions of the Employee Retirement Income Security Act of 1974. K. Margin Securities. No proceeds of any borrowing hereunder will be used by Borrower for the purpose of carrying margin securities within the meaning of Regulation U of the Board of Governors of the Federal Reserve. L. Pre-Existing Debt and Pre-Existing Liens. Annexed hereto as Schedule 1 is a true and complete list of all Pre-Existing Debt and Pre-Existing Liens. The previous representations in this Article VI are subject to the exception of the items listed on Schedule 1. M. Compliance With Law. The Borrower is not in violation of any laws, ordinances, governmental rules or regulations to which it is subject which violation might materially adversely affect the condition (financial or otherwise) of the Borrower. The Borrower has obtained and is in compliance with all licenses, permits, franchises, and governmen tal authorizations necessary for the ownership of its properties and the conduct of its business, for which failure to comply could materially adversely affect the condition (financial or otherwise of Borrower). N. Patents, Trademarks, and Authorizations. The Borrower owns or possesses all patents, trademarks, service marks, tradenames, copyrights, licenses, authorizations, and all rights with respect to the foregoing, necessary to the conduct of its business as now conducted without any material conflict with the rights of others. ARTICLE VII CONDITIONS OF LENDING The following conditions must be satisfied by the Borrower before the Bank shall have any obligation to make any advance under the Line of Credit or to make the Term Loan under this Agreement: A. Representations and Warranties. The representations and warranties of the Borrower contained in Article VI shall be true and correct as of the time of the making of each Loan with the same effect as if made on and as of such date. B. No Defaults. There shall exist no condition or event constituting an event of default under Article X hereof at the time of making of each loan hereunder. C. Performance. The Borrower shall have performed and complied with all agreements and conditions required to be performed or complied with by it prior to or at the time of making each loan hereunder. D. Officer's Certificate. The Borrower shall have delivered to the Bank, at the Bank's request, a signed certificate dated the date of each Loan made hereunder certifying to the matters covered by Sections A, B, and C of this Article VII. E. Opinions of Counsel. The Borrower shall deliver an opinion of its counsel, dated the date of this Agreement and, if the Term Loan is to be made, dated the date of the execution of the Term Loan Note, in substantially the form of Exhibits C-1 and C-2 annexed hereto, respectively. F. Documents to be Delivered. The Borrower shall have delivered to the Bank the Security Documents and any other related documents as may be reasonably required by the Bank. The Borrower also shall deliver such consents and waivers as may be required by the Bank from landlords and lessors to assure that the Bank's interest in the collateral described in Article V hereof is not subject to any claim by such landlords or lessors. The Borrower also shall have delivered such other items and documents as may be required or by the Bank including without limitation the Master Note and, if the Term Loan is to be made, the Term Loan Note. G. Certified Resolutions. The Borrower shall have delivered the Certificates of its Secretary, certifying as of the date of this Agreement, resolutions of its Board of Directors authorizing execution and delivery of this Agreement and any other agreements and notes to be delivered hereunder. H. Fees and Taxes. The Borrower shall have paid all filing fees, taxes, and assessments related to the borrowings and the perfection of any collateral security required hereunder. I. Insurance. The Borrower shall have delivered evidence satisfactory to the Bank of the existence of insurance required hereunder. ARTICLE VIII AFFIRMATIVE COVENANTS OF BORROWER So long as any obligations of Borrower to the Bank shall be outstanding unless the Bank shall otherwise consent in writing, the Borrower shall: A. Financial Statements. Furnish to the Bank as soon as available, but in no event more than ninety (90) days after the close of each fiscal year of Borrower, copies of annual consolidated and consolidating financial statements of Borrower, prepared in accordance with generally accepted accounting principles and certified and accompanied by an unqualified opinion by an independent certified public accountant satisfactory to the Bank. Said financial statements shall include at least a balance sheet, and a statement of profit and loss. Financial statements shall be accompanied by a certificate to the effect that to the best knowledge of said accountant and after due investiga tion, no Event of Default, or event which with the passage of time or notice or both would constitute an Event of Default, has occurred pursuant to Article X hereof (or specifying any such defaults). Borrower shall also furnish to the Bank unaudited unconsolidated financial statements not more than forty-five (45) days after the close of each fiscal quarter. Said statements shall: (i) be in reasonable detail satisfactory to the Bank, (ii) be prepared in accordance with generally accepted accounting principles, (iii) include at least a balance sheet and a statement of profit and loss, (iv) be accompanied by a certificate of the chief financial officer of Borrower to the effect that no Event of Default, or event which with the passage of time or notice or both would constitute an Event of Default, has occurred pursuant to Article X hereof (or specifying any such default), and (v) be certified to be true and correct by the chief financial officer of Borrower. B. Payments. Make all payments promptly and as the same become due under this Agreement and the notes related hereto. C. Existence. Cause to be done all things necessary to preserve and to keep in full force and effect its existence, rights, and franchises and to comply with all valid laws and regulations now in effect or hereafter promulgated by any properly constituted governmental authority having jurisdiction. D. Maintenance of Properties. At all times maintain, preserve, protect, and keep its property used or useful in conducting its businesses in good repair, working order, and condition and from time to time, make all needful and proper repairs, renewals, replacements, betterments and improvements thereto, so that the business carried on may be properly and advantageously conducted at all times. In the event Borrower purchases additional vehicles or equipment covered by certificates to title, it shall promptly furnish such titles to the Bank. E. Current Ratio. Maintain its Consolidated Current Assets in relation to its Consolidated Current Liabilities so that the ratio of its Consolidated Current Assets to its Consolidated Current Liabilities is at least equal to 2.5 to 1 measured as at the end of each fiscal quarter. F. Minimum Working Capital. Maintain Borrower's Consolidated Working Capital so that it is not less than $7,360,000 as at the end of each fiscal quarter. G. Minimum Tangible Net Worth. Maintain Borrower's Consoli dated Tangible Net Worth so that it is not less than $11,000,000 as at the end of each fiscal quarter. H. Debt to Worth Ratio. Maintain Borrower's Consolidated Indebtedness in relation to its Consolidated Tangible Net Worth so that the ratio of Borrower's Consolidated Indebtedness to its Consolidated Tangible Net Worth does not exceed a ratio of 1 to 1 measured as at the end of each fiscal quarter. I. Material Changes, Judgments, Defaults. Notify the Bank immediately of any material adverse change in its financial condition including the filing of any suits, judgments, or liens. Borrower shall notify the Bank of any change in its name, identity, or corporate or organizational structure. Borrower shall notify the Bank immediately of the occurrence of any Event of Default under Article X hereof, or of any event that with notice or the passage of time or both would constitute such an Event of Default. J. Other Reports and Inspections. Furnish to the Bank additional information, reports, or financial statements as the Bank may, from time to time, reasonably request. The Borrower shall permit any person designated by the Bank to inspect the property, assets, and books of the Borrower at reasonable times, and shall discuss its affairs, finances, and accounts at reasonable times with the Bank from time to time as often as may be reasonably requested. K. Taxes. Pay and discharge all taxes, assessments, levies, and governmental charges upon the Borrower, its income and property, prior to the date on which penalties are attached thereto, provided, however, that the Borrower may challenge any tax by appropriate proceedings diligently pursued so long as no lien or charge against the assets of the Borrower attaches prior to the resolution of such contest. L. Insurance. Maintain or cause to be maintained insurance, of kinds and in amounts satisfactory to the Bank, with responsible insurance companies on all of its real and personal properties in such amounts and against such risks as are prudent, including but not limited to, insurance against loss by fire and theft, worker's compensation insurance, and liability insurance. The Borrower shall also maintain flood insurance covering any of its properties located in flood zones. The Borrower shall provide to the Bank, upon its request, a detailed list of its insurance carriers and coverage and shall obtain such additional insurance as the Bank may reasonably request. Insurance policies shall show the Bank as loss payee as its interests may appear and shall provide for at least thirty (30) day's prior notice of cancellation to the Bank. M. ERISA Compliance. Comply in all material respects with the provisions of ERISA and regulations and interpretations related thereto. N. Franchises/Permits/Laws. Preserve and keep in full force and effect all franchises, permits, licenses, and other authority as are necessary to enable it to conduct its business as being conducted on the date of this Agreement and comply with all laws, regulations, and requirements now in effect or hereafter promulgated by any properly constituted governmental authority having jurisdiction over it. ARTICLE IX NEGATIVE COVENANTS OF BORROWER So long as any obligations of Borrower to the Bank shall be outstanding unless the Bank shall otherwise consent in writing, the Borrower shall not, directly or indirectly: A. Mortgages and Liens. Create, incur, assume, or allow to exist, voluntarily or involuntarily, any mortgage, pledge, lien or other encumbrance of any kind (including the charge upon property purchased under conditional sales or other title retention agreements) upon, or any security interest in, any assets of the Borrower, except: (i) a springing lien similar to that provided to the Bank pursuant to Article V hereof may be granted to another financial institution in the Specified Collateral to secure up to an aggregate principal amount of $3,000,000 of Indebtedness provided that such other financial institu tion shall enter into an Inter-Creditor Agreement with the Bank which is reasonably satisfactory to the Bank in form and substance, (ii) any mortgage or security interest in real estate (including fixtures) securing indebtedness in any amount (provided that the Borrower shall remain in full compliance with all other covenants hereunder after giving effect to such Indebtedness), and (iii) any mortgage, security interest, pledge or assignment pertaining to assets of the Borrower other than the Specified Collateral securing Indebtedness in addition to that referred to in clauses "(i)" and "(ii)" above up to an aggregate principal amount of $500,000. B. Borrowings and Contingent Liabilities. Incur loans or become liable in any manner with respect to borrowed monies excluding: (1) trade accounts payable in the ordinary course of business, (2) Pre-Existing Debt, and (3) Indebtedness from another financial institution up to an aggregate principal amount of $3,000,000, (4) Indebtedness secured by real estate (including fixtures) in any amount (provided that Borrower shall remain in full compliance with all other covenants hereunder after giving effect to such indebtedness), and (5) other Indebtedness up to an aggregate amount of $500,000. Borrower shall not assume, guarantee, endorse, contingently agree to purchase, or otherwise become liable in any manner upon any obligation, contingent or otherwise, whether funded or current, or guarantee the dividends of any person, firm, corporation, or other entity, except for endorsement of negotiable instruments for deposit, collection, or similar transactions in the ordinary course of business and except for guarantees of the obligations of persons or entities provided to the Bank. C. Loans and Investments. Make loans or advances to any person, firm, joint venture, corporation or other entity whatsoever except for (i) normal advances to cover travel or similar expenses of employees in the ordinary course of business, (ii) loans to or investments in subsidiaries or affiliates of the Borrower not in excess of One Hundred Thousand Dollars ($100,000) in the aggregate at any time outstanding, provided however, that such affiliate loans or investments may be prohibited at any time by the Bank in its sole discretion, and (iii) loans which are subordinated in right of payment to the Bank in a form reasonably acceptable to the Bank. D. Mergers, Sales and Acquisitions. Without the prior written consent of the Bank which will not be unreasonably withheld, (i) enter into any merger or consolidation (including inter-company mergers and consolidations), (ii) acquire all or substantially all the stock or assets of any person, firm, joint venture, corporation, or other entity, or (iii) sell, lease, transfer, or otherwise dispose of any of its assets except in the ordinary course of its business; provided that such mergers, consolidations and acquisitions shall be permitted if immediately after giving effect thereto (i) Borrower shall be in full compliance with all terms, conditions and covenants of this Agreement, and (ii) the management or control of the Borrower shall not have been materially changed (except for material changes approved in writing by the Bank), and (iii) the type of business conducted by the Borrower is not materially changed (except for material changes approved in writing by the Bank). E. Amendments. Without the prior written consent of the Bank which will not be unreasonably withheld, amend or modify its Certificate of Incorporation, By-laws, or other governing instruments. F. Dividends and Purchase of Borrower Stock; Distributions. Declare or pay any dividends or apply any of its property to the purchase, redemption or other retirement of, or set apart any sum for the payment of any dividends on, or make any other distribution by reduction of capital or otherwise in respect of, any shares of the Borrower's capital stock; provided, however, that (i) with respect to any year Borrower may pay dividends and make capital distributions to the Shareholders or may repurchase stock if and only if the sum of such payments and distributions and purchases does not exceed 50% of Borrower's Consolidated Net Income for such fiscal year, and (ii) no Event of Default shall exist. G. Judgments. Allow any judgments to exist against it in excess of Fifty Thousand Dollars ($50,000) which are not fully covered by insurance or for which an appeal or other proceeding for the review thereof shall not have been taken and for which a stay of execution pending such appeal shall not have been obtained. H. Material Changes. Permit any material adverse change to be made in the basic character of its business, management, nature of operations as carried on at the date of execution of this Agreement, or financial condition. I. ERISA. Allow any action, event, or transaction to occur which could give rise to a lien or encumbrance on Borrower's assets as a result of the application of relevant provisions of the Employee Retirement Income Security Act of 1974. J. Margin Securities. Allow any proceeds of the Term Loan or the Line of Credit to be used for the purpose of carrying margin securities within the meaning of Regulation U of the Board of Governors of the Federal Reserve. ARTICLE X DEFAULTS A. Defaults. The following events (hereinafter called "Events of Default") shall constitute defaults under this Agreement and under any notes or obligations executed in connection herewith, provided however, (i) with respect to subsections 2, 3, 6 and 7 of this Section A that the Bank has given Borrower twenty (20) days notice of same and such default remains unremedied within said twenty (20) day period, or (ii) that twenty (20) days have passed since notice pursuant to Section I of Article VIII hereof has been given to Bank by Borrower and such default remains unremedied within said twenty (20) days period, or (iii) that twenty (20) days have passed since Borrower should have given notice pursuant to said Section I of Article VIII with respect to defaults pursuant to subsection 2 of this section A. 1. Nonpayment. Failure to make any payments of any type under the terms of this Agreement, or of any of the agreements contemplated hereunder, or under the terms of any notes related hereto, within ten (10) days after the same have become past due. 2. Performance. Failure by Borrower or any guarantor of obligations covered hereby to observe or perform any other condition, covenant, or term of this Agreement or any other agreement with the Bank, excluding, however, Section I of Article VIII. 3. Reports. Failure to provide any report or financial statement or certificate of no default, or to allow any inspection for which this Agreement provides. 4. Representations. Failure of any representation or warranty made in connection with the execution and performance of this Agreement or any certificate of officers pursuant hereto, to be truthful, accurate or correct in any material respect. 5. Financial Difficulties. Financial difficulties of Borrower as evidenced by: a. any admission in writing of inability to pay debts as they become due; or b. the filing of a voluntary petition in bankruptcy, or under any chapters of the Bankruptcy Code, or under any Federal or state statute providing for the relief of debtors, or any similar proceeding shall be commenced against the Borrower without the application or consent of the Borrower and such proceeding shall continue undismissed for a period of 60 days, or an order for relief against the Borrower shall be entered against the Borrower in an involuntary case under the Bankruptcy Code; or c. making an assignment for the benefit of creditors; or d. consenting to the appointment of a trustee or receiver for all or a major part of its property; or e. the entry of a court order appointing a receiver or a trustee for all or a major part of its property; or the occurrence of any event, action, or transaction which could give rise to a lien or encumbrance on Borrower's assets as a result of application of relevant provisions of the Employee Retirement Income Security Act of 1974. 6. Documents and Guarantees. Failure of any agreement, document, or guarantee executed in connection herewith to remain in full force and effect, or any repudiation of the same by any party thereto. 7. Repayment Impaired. Material or reasonably projected material change or any other condition by reason of which the Bank in good faith believes the Borrower's ability to timely repay its obligations is impaired. 8. Cash Flow Failure. Failure by the Borrower to maintain its Consolidated Debt Coverage Cash Flow in relation to its Consolidated Current Portion of funded Indebtedness so that the ratio of its Consolidated Debt Coverage Cash Flow to its Consolidated Current Portion of Funded Debt fails to be greater than 1.5 to 1 measured at the end of six consecutive quarters. 9. Default Under Other Indebtedness. The occurrence and continuation of an event of default (after the expiration of applicable notice, grace, or cure periods, if any) with respect to any Indebtedness of Borrower in excess of $100,000. B. Remedies. If any one or more Events of Default occur, the Bank may, at its option, take either or both of the following actions at the same or different times: (i) terminate any further commitments or obligations of the Bank, and (ii) accelerate all obligations of Borrower to the Bank such that the same become forthwith due and payable without presentment, demand, protest, or other notice of any kind, all of which are hereby expressly waived. In case any such Events of Default shall occur, the Bank shall be entitled to use any legal remedy, and the Bank shall be entitled to recover judgment against the Borrower for all obligations of Borrower to the Bank either before, or after, or during the pendency of any proceedings for the enforcement of any security interests or guarantees and, in the event of realization of any funds from any security or guarantee and application thereof to the payment of the obligations due, the Bank shall be entitled to enforce payment of and recover judgment for all amounts remaining due and unpaid upon such obligations. The Bank may proceed to protect and enforce its rights by any other appropriate proceedings, including action for the specific performance of any covenant or agreement contained in this Agreement and other agreements contemplated hereunder held by the Bank. ARTICLE XI MISCELLANEOUS A. Waiver. No failure on the part of the Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement or the Notes shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement or the Notes preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. B. Notices. All notices and other communications provided for herein (including, without limitation, any modifications of, or waivers or consents under, this Agreement) shall be given or made by telex, telegraph, cable or in writing and telexed, telecopied, telegraphed, cabled, mailed or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature page hereof or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telex or telecopier, delivered to the telegraph or cable office or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. C. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that the Bank may not assign its rights under the Security Documents so long as the Security Documents are held in escrow pursuant to Section B.1 of Article V. D. Confidentiality. The Bank will use its best efforts to maintain the confidentiality of all non-public information obtained by the Bank pursuant to this Agreement and designated in writing by the Borrower as confidential and useful to trade competitors or investors ("Confidential Information"); provided, however, that the Bank may disclose any such Confidential Information to its officers, employees and agents and to the independent auditors and counsel of the Bank, and may disclose to other Persons any such Confidential Information (a) as shall be required or requested by any municipal, state or federal regulatory body or any successor thereto having or claiming to have jurisdiction over the Bank, (b) as shall be required by or appropriate in response to any summons or subpoena or in connection with any litigation or (c) to the extent that the Bank shall believe it appropriate in order to protect the Bank's interests in the Loans or in order to comply with any law, order, regulation or ruling applicable to the Bank. E. Entire Agreement. This Agreement contains the entire agreement and is the final expression between the Borrower and the Bank with respect to all subject matters contained herein, and may not be contradicted by evidence of any prior or contemporaneous agreement. This Agreement cannot be amended, modified or changed in any way except by a written instrument executed by the Borrower and the Bank. F. Severability. In the event that any one or more of the provisions contained in the Revolving Line Note of this Agreement, or any other agreement, document, or guarantee related hereto shall, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of the Revolving Line Note, this Agreement, or such other agreement, document, or guarantee. G. Governing Law. This Agreement and the notes and agreements hereunder, together with all of the rights and obligations of the parties hereto, shall be construed, governed and enforced in accordance with the laws of the State of New York. H. Set-off. The Bank shall have a right of set-off, in the full amount of all of Borrower's obligations to the Bank, against any deposits, assets held by, or other amounts owed by the Bank to or held by the Bank for, the Borrower as well as a lien on any and all property of the Borrower, which is or may be in the Bank's possession. ARTICLE XII Definitions A. Accounting Terms and Determinations, Generally. Unless otherwise specified herein, all accounting terms used and/or defined herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be furnished to the Bank hereunder shall be prepared, in accordance with GAAP as in effect from time to time, applied on a basis consistent with the audited consolidated financial statements of the Borrower and its consolidated Subsidiaries (if any). The term "inter-company items" means debits and credits between a Person and its Subsidiaries or between such Subsidiaries. All references to a Subsidiary or subsidiar ies of any Person shall be deemed to mean if any shall exist. For so long as such Person has no Subsidiary, all definitions and covenants referring to such Person and its Subsidiaries on a consolidated basis and all references to consolidated financial statements shall be deemed to refer to such Person alone, but shall remain applicable in all other respects. B. As used in this Agreement, the following terms shall have the following meanings. "Consolidated Current Assets" means, in respect of a Person and its Subsidiaries on a consolidated basis, all assets of such Person and its Subsidiaries which should, in accordance with GAAP be classified as current assets after eliminating inter-company items, but in any event excluding any assets which are pledged or deposited as security for, or for the purpose of paying, any Indebtedness (other than Indebtedness incurred pursuant to and under this Agreement). "Consolidated Current Liabilities" means, in respect of a Person and its Subsidiaries on a consolidated basis, all Indebtedness of such Person and its Subsidiaries which should, in accordance with GAAP, be classified as current liabilities after eliminating inter-company items. "Consolidated Debt Coverage Cash Flow" means, in respect of a Person and its Subsidiaries on a consolidated basis and in respect of any period of calculation, the sum of Consolidated Net Income, plus Consolidated Depreciation, plus Consolidated Non-Cash Expense Items. "Consolidated Depreciation" means, in respect of a Person and its Subsidiaries on a consolidated basis and in respect of any period of calculation, the economic depreciation of the assets of such Person and its Subsidiaries computed in accordance with GAAP and as such item is utilized from time to time in the computation of such Person's Consolidated Net Income. "Consolidated Current Portion of Funded Indebtedness" means, in respect of a Person and its Subsidiaries on a consolidated basis and in respect of any period of calculation, all principal paid in respect of current maturities of Consolidated Funded Indebtedness. "Consolidated Funded Indebtedness" means, in respect of a Person and its Subsidiaries on a consolidated basis, all Funded Indebtedness of such Person and its Subsidiaries after eliminating inter-company items. "Consolidated Net Income" means, in respect of a Person and its Subsidiaries on a consolidated basis and in respect of any period of calculation, the net income of such Person and its Subsidiaries computed in accordance with GAAP and as such item is reported from time to time on such Person's consolidated statement of income and retained earnings. "Consolidated Non-Cash Expense Items" means, in respect of a Person and its Subsidiaries on a consolidated basis and in respect of any period of calculation, all non-cash charges or credits deducted from income to obtain net income. "Consolidated Tangible Net Worth" means, in respect of Borrower and its Subsidiaries on a consolidated basis, the consolidated stockholders' equity in such Person and its Subsidiaries determined in accordance with GAAP, except that there shall be deducted therefrom all intangible assets (other than leasehold improvements) of the Borrower and its Subsidiaries, such as organization costs, unamortized debt discount and expense, goodwill, patents, trademarks, copyrights, contractual franchises, research and development expenses, any amount reflected as treasury stock and all amounts due from Affiliates. "Consolidated Working Capital" means the excess of Consolidated Current Assets over Consolidated Current Liabilities on any date on which such computation is made. "Expiration Date" means July 31, 1994. "Funded Indebtedness" means and includes (i) any Indebtedness which matures more than one year from the date of determination, (ii) any Indebtedness regardless of its term, if such Indebtedness is renewable pursuant to the terms thereof, or of a revolving credit or a similar agreement, to a date more than one year from the date of determination, and (iii) any Indebtedness, regardless of its term, which by its terms or the agreement pursuant to which it is issued may be paid with the proceeds of another Indebtedness which may be incurred pursuant to the terms of such first mentioned Indebtedness or of such agreement, which other Indebtedness matures more than one year from the date of determination. "GAAP" shall mean generally accepted accounting principles consistently applied in the United States. "Guaranty" shall mean, with respect to any Person, all guaranties of, and all other obligations which in effect guaranty any Indebtedness, dividend or other obligation of any other Person (the "primary obligor") in any manner, including obligations incurred through an agreement, contingent or otherwise, by such Person: (1) to purchase such Indebtedness or obligation or any Property constituting security therefor; (2) to advance or supply funds (A) for the purchase or payment of such Indebtedness or obligation, or (B) to maintain working capital or any balance sheet or income statement condition; (3) to lease Property or to purchase securities or other property or services, primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the primary obligor to make payment of the indebtedness or obligation; or (4) otherwise to assure the owner of such Indebtedness or obligation, or the primary obligor, against loss; but excluding endorsements in the ordinary course of business of negotiable instruments for deposit or collection. The amount of any Guaranty shall be deemed to be the maximum amount for which such Person may be liable upon the occurrence of any contingency or otherwise, under or by virtue of the Guaranty. "Indebtedness" shall mean all items (other than capital stock, additional paid-in capital, retained earnings and deferred credits) which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet as at the date on which Indebtedness is to be determined. "Indebtedness" shall also include, whether or not so reflected, (i) indebtedness, obliga tions, and liabilities secured by any mortgage, pledge or lien existing on property owned subject to such mortgage, pledge or lien whether or not the indebtedness, obligations or liabilities secured thereby shall have been assumed, (ii) all Guaranties, (iii) obligations as lessee under leases which should have been or should be reported as capital leases in accordance with GAAP, and (iv) the amount of any reimbursement obligation in respect of any letter of credit, but, if such letter of credit is issued in connection with the account party's ordinary course of business such as but not limited to performance bonds or other similar bonds, the purchase of goods and the payment of insurance premiums, only to the extent that drafts under such letter of credit shall have been honored and, in any case, only to the extent that the liability covered by such letter of credit would not be included in determining total liabilities as shown on the liability side of a balance sheet as at the date on which Indebtedness is to be determined, but shall not include (a) any indebtedness evidences of which are held in treasury (but the subsequent resale of such indebtedness shall be deemed to constitute the creation thereof), (b) any particular indebtedness if, upon or prior to the maturity thereof, there shall have been deposited with the proper depository, in trust, money (or evidence of such indebtedness as permitted by the instrument creating such indebtedness) in the necessary amount to pay, redeem or satisfy such indebtedness, and (c) any portion of any indebtedness to the extent that there shall have been deposited with the proper depository, in trust, money or cash equivalents to pay, redeem or satisfy a portion of such indebtedness, whether pursuant to sinking fund payments or any similar or other arrangement, provided, however, that, in subclauses (b) and (c), if such deposit is not irrevocable, it must be expressly required by the terms of such indebtedness or by a financing arrangement with respect thereto with a party which is not an Affiliate. "Loans" means the principal amount of all debt evidenced by the Notes (including all advances under the Line of Credit) and all interest and charges due thereon. "Notes" means the Master Note and the Term Loan Note. "Person" means an individual, a corporation, a company, a voluntary association, a partnership, a joint venture, a trust, an unincorporated organization or a government or any agency, instrumental ity or political subdivision thereof. "Pre-Existing Debt" means all debt of the Borrower for payment of borrowed money (and excluding trade debt) and all commitments by any Person to make loans of money to Borrower in existence on the date of this Agreement, including refinancing of such debt on substantially similar terms. "Pre-Existing Liens" means all contractual liens, mortgages and security interests in existence on the date of this Agreement whereby an interest in the Borrower's property is granted as security for payment of Indebtedness. "Security Agreement" shall mean the Security Agreement executed and delivered by the Borrower to the Bank of even date herewith pursuant to Section A of Article V hereof. "Specified Collateral" means all of the Borrower's "Accounts", "Inventory", "Chattel Paper" and "General Intangibles", as such terms are further defined in the Security Agreement. "Specified Event" means the failure by the Borrower to maintain its Consolidated Debt Coverage Cash Flow in relation to its Consolidated Current Portion of Funded Indebtedness so that the ratio of its Consolidated Debt Coverage Cash Flow to its Consolidated Current Portion of Funded Debt is greater than 1.5 to 1 measured at the end of any fiscal quarter of the Borrower. "Subsidiary" shall mean, in respect of any Person, any corpora tion, association or partnership of which at least a majority of the outstanding Voting Stock, voting power or ownership interest is at the time directly or indirectly owned or controlled by such Person or one or more of the Subsidiaries or by such Person and one or more of the Subsidiaries. "Voting Stock" shall mean the shares of stock of a corporation having by the terms thereof ordinary voting power to elect the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contin gency). IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. DETECTION SYSTEMS, INC. By: /s/ Frank J. Ryan Name: Frank J. Ryan Title: Vice President Address for Notices: 130 Perinton Parkway Fairport, New York 14450 Attention: Frank J. Ryan Vice President NORSTAR BANK, National Association By: /s/ Jeffrey S. Holmes Name: Jeffrey S. Holmes Title: Vice President Payment Office and Address for Notices: One East Avenue Rochester, New York 14638 Attention: Detection Systems Account Officer EXHIBIT B TERM LOAN NOTE Rochester, New York Date: July 31, 1994 $ FOR VALUE RECEIVED, THE UNDERSIGNED, DETECTION SYSTEMS, INC., a New York corporation ("Borrower"), hereby promises to pay to the order of NORSTAR BANK, NATIONAL ASSOCIATION ("Bank") at its principal office at One East Avenue, Rochester, New York 14638, the principal sum of Dollars ($ ) on August 1, 1999. Unpaid principal shall bear interest at a rate per annum equal to six-tenths of one percent (.6% or .006) above the "prime" commercial loan rate of the Bank established or announced from time to time (or the equivalent thereof) until paid in full, but never exceeding the maximum rate allowed by law. All changes in the interest rate due to a change in the prime rate shall take place automatically and without notice to Borrower as of the effective date of the change in such prime rate. Interest shall be calculated on the basis of a 360 day year. Accrued interest is due and payable on the first business day of each calendar month beginning September 1, 1994 and continuing until the principal is paid in full. The Borrower shall make sixty (60) monthly principal payments in the amount of $ commencing on September 1, 1994 and continuing on the first day of each of the next succeeding fifty-nine (59) months. All remaining principal and interest shall be due and payable in full on August 1, 1999. This Note is the "Term Loan Note" referred to in, and is entitled to the benefits of the Credit Agreement dated as of December 31, 1991, between Borrower and the Bank which Agreement among other things contains provisions for prepayment and for the acceleration of the maturity hereof upon the happening of certain stated events. Any payment not received within ten (10) days after the date due may be subject to an additional late charge equal to two percent (2%) of the payment due. This Note is freely prepayable at any time in whole or in part without premium or penalty. DETECTION SYSTEMS, INC. By Its EXHIBIT C-1 DRAFT OF OPINION OF COUNSEL , 1991 Norstar Bank, National Association One East Avenue Rochester, New York 14238 We are general legal counsel to Detection Systems, Inc. (the "Company"), a corporation having a principal place of business at 130 Perinton Parkway, Rochester, New York 14450. As such, we are familiar with the character and operation of the Company. We are admitted to practice law in the State of New York. We have reviewed the following documents executed and delivered by the Company and the Subsidiaries this date (hereinafter collectively referred to as the "Contract Documents"). 1. Credit Agreement between the Company and you. 2. Master Note issued by the Company to you pursuant to the Credit Agreement. 3. Accounts, Inventory, Chattel Paper and General Intangibles Securities Agreement granted by the Company to you. We have examined the originals or conformed copies of such corporate records, agreements and instruments of the Company, certifi cates of public officials and of officers of the Borrower, and such other documents and records, and such matters of law, as we have deemed appropriate as a basis for the opinions hereinafter expressed. In rendering this opinion, we have assumed, without investigation, the authenticity of any document or other instrument submitted to us as an original, the conformity to the originals of any documents or other instruments submitted to us as a copy, and the genuineness of all signatures on such originals or copies. Based upon and subject to the foregoing, and upon an examination of such other documents and instruments and an investigation of such other matters of law as we have deemed necessary to render this opinion, we are of the opinion that: 1. The Company is a corporation, duly organized, validly existing and in good standing under the laws of the State of New York and is duly qualified in those jurisdictions where the nature of the business transacted by the Company makes such qualification necessary. 2. The Company has all necessary power and authority to enter into the Contract Documents and to perform the terms and provisions thereof. 3. The Company has taken all necessary action to authorize the execution, delivery and performance of the Contract Documents such that the Contract Documents constitute legal, valid, and binding agreements of the Company and the Subsidiaries, enforceable in accordance with their terms, except (a) to the extent that enforceability may be subject to limitations imposed by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) including, among others, limitations on the availability of equitable remedies; and (b) to the extent that enforceability may be limited by applicable bankruptcy, reorganization, arrangements, insolvency, moratorium or similar laws affecting the enforcement of creditors' rights generally as at the time in effect. 4. The execution, delivery, and performance by the Company and the Subsidiaries of the Contract Documents does not and will not violate or contravene any law applicable to the Company or the Subsidiaries, their assets, any provision of their constitutional documents, any governmental rule, regulation, or order applicable to the Company and the Subsidiaries, or the provisions of any indenture, mortgage, contract or other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiar ies is bound. 5. All governmental and other consents that are required to have been obtained by the Company or the Subsidiaries with respect to the Contract documents or any supporting documents to which the Company or any of the Subsidiaries is a party have been obtained and are in full force and effect, and all conditions of any such consents have been complied with. 6. There is no action, proceeding or investigation pending or threatened (or any basis known therefor) which might result, either in any case or in the aggregate, in any material adverse change in the business, operations, affairs, condition (financial or otherwise), properties or prospects of the Company or in any material liability on the part of the Company. Very truly yours, EXHIBIT C-2 DRAFT OF OPINION OF COUNSEL , 1994 Norstar Bank, National Association One East Avenue Rochester, New York 14238 We are general legal counsel to Detection Systems, Inc. (the "Company"), a corporation having a principal place of business at 130 Perinton Parkway, Rochester, New York 14450. As such, we are familiar with the character and operation of the Company. We are admitted to practice law in the State of New York. We have reviewed the following documents executed and delivered by the Company and the Subsidiaries this date (hereinafter collectively referred to as the "Contract Documents"). 1. Credit Agreement between the Company and you. 2. Term Note issued by the Company to you pursuant to the Credit Agreement. 3. Accounts, Inventory, Chattel Paper and General Intangibles Securities Agreement granted by the Company to you. We have examined the originals or conformed copies of such corporate records, agreements and instruments of the Company, certifi cates of public officials and of officers of the Borrower, and such other documents and records, and such matters of law, as we have deemed appropriate as a basis for the opinions hereinafter expressed. In rendering this opinion, we have assumed, without investigation, the authenticity of any document or other instrument submitted to us as an original, the conformity to the originals of any documents or other instruments submitted to us as a copy, and the genuineness of all signatures on such originals or copies. Based upon and subject to the foregoing, and upon an examination of such other documents and instruments and an investigation of such other matters of law as we have deemed necessary to render this opinion, we are of the opinion that: 1. The Company is a corporation, duly organized, validly existing and in good standing under the laws of the State of New York and is duly qualified in those jurisdictions where the nature of the business transacted by the Company makes such qualification necessary. 2. The Company has all necessary power and authority to enter into the Contract Documents and to perform the terms and provisions thereof. 3. The Company has taken all necessary action to authorize the execution, delivery and performance of the Contract Documents such that the Contract Documents constitute legal, valid, and binding agreements of the Company and the Subsidiaries, enforceable in accordance with their terms, except (a) to the extent that enforceability may be subject to limitations imposed by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) including, among others, limitations on the availability of equitable remedies; and (b) to the extent that enforceability may be limited by applicable bankruptcy, reorganization, arrangements, insolvency, moratorium or similar laws affecting the enforcement of creditors' rights generally as at the time in effect. 4. The execution, delivery, and performance by the Company and the Subsidiaries of the Contract Documents does not and will not violate or contravene any law applicable to the Company or the Subsidiaries, their assets, any provision of their constitutional documents, any governmental rule, regulation, or order applicable to the Company and the Subsidiaries, or the provisions of any indenture, mortgage, contract or other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiar ies is bound. 5. All governmental and other consents that are required to have been obtained by the Company or the Subsidiaries with respect to the Contract documents or any supporting documents to which the Company or any of the Subsidiaries is a party have been obtained and are in full force and effect, and all conditions of any such consents have been complied with. 6. There is no action, proceeding or investigation pending or threatened (or any basis known therefor) which might result, either in any case or in the aggregate, in any material adverse change in the business, operations, affairs, condition (financial or otherwise), properties or prospects of the Company or in any material liability on the part of the Company. Very truly yours, CREDIT AGREEMENT AMENDMENT THIS CREDIT AGREEMENT AMENDMENT is made this 31st day of March, 1992 between Norstar Bank, National Association, a national banking corporation with offices at One East Avenue, Rochester, New York 14638 (called the "Bank") and Detection Systems, Inc., a New York corporation doing business at 130 Perinton Parkway, Fairport, New York 14450 (called the "Borrower"). WHEREAS, the Bank and the Borrower entered into a Credit Agreement dated as of December 31, 1991 (the "Credit Agreement"); and WHEREAS, the Bank has agreed with the Borrower to modify certain terms of the Credit Agreement; and WHEREAS, the Borrower has agreed that its obligations under the Credit Agreement shall continue notwithstanding the modifications, NOW, THEREFORE, the Borrower and the Bank agree as follows: 1. The second paragraph of Article VIII, Section A, shall be amended to read as follows: Borrower shall also furnish to the Bank its unaudited financial statements not more than forty-five (45) days after the close of each fiscal quarter. Said statements shall: (i) be in reasonable detail satisfactory to the Bank, (ii) be prepared in accordance with generally accepted accounting principles, (iii) include at least a balance sheet and a statement of profit and loss, (iv) be accompanied by a certificate of the chief financial officer of Borrower to the effect that no Event of Default, or event which with the passage of time or notice or both would constitute an Event of Default, has occurred pursuant to Article X hereof (or specifying any such default), and (v) be certified to be true and correct by the chief financial officer of Borrower. If the Borrower shall create or acquire any Subsidiary, the financial statements required by this paragraph shall be deemed to refer to consolidated and consolidating statements of each type that is required. 2. Article IX, Section F, shall be amended to read as follows: F. Dividends and Purchase of Borrower Stock; Distributions. Declare or pay any dividends or apply any of its property to the purchase, redemption or other retirement of, or set apart any sum for the payment of any dividends on, or make any other distribution by reduction of capital or otherwise in respect of, any shares of the Borrower's capital stock; provided, however, that (i) with respect to any year Borrower may pay dividends and make capital distributions to the Shareholders or may repurchase stock if and only if the sum of such payments and distributions and purchases does not exceed 50% of Borrower's Consolidated Net Income for the immediately preceding fiscal year, and (ii) no Event of Default shall exist. IN WITNESS WHEREOF, the parties have caused this Credit Agreement Amendment to be executed by their duly authorized officers as of the date above written. NORSTAR BANK, N.A. By: /s/ Jeffery S. Holmes Title: Vice President DETECTION SYSTEMS, INC. By: /s/ Frank J. Ryan Title: Vice President SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT, is made this 29th day of March, 1995, between FLEET BANK, successor by merger to Norstar Bank, National Association, at One East Avenue, Rochester, New York 14638 (called the "Bank") and DETECTION SYSTEMS, INC., at 130 Perinton Parkway, Fairport, New York 14450 (called the "Borrower") agree as follows: WHEREAS, the Bank and the Borrower entered into a certain Credit Agreement dated as of December 31, 1991, which credit agreement was amended by a certain Credit Agreement Amendment dated March 31, 1992 (collectively, the "Credit Agreement"); and WHEREAS, the Bank has agreed with the Borrower to modify certain terms of the Credit Agreement; and WHEREAS, the Borrower has agreed that its obligations under the Credit Agreement shall continue notwithstanding the modifications, NOW THEREFORE, the Bank and the Borrower agree as follows: 1. Article I of the Credit Agreement is hereby amended to read in its entirety as follows: LOANS A. Line of Credit. The Bank shall make available to the Borrower a revolving line of credit (the "Line of Credit") in a maximum aggregate amount not to exceed $4,500,000. The Borrower from time to time may request advances and may reborrow hereunder so long as aggregate amounts outstanding under the Line of Credit at any time never exceed the maximum amount available hereunder. Advances may be requested in person, in writing, or by telephone. Checks written on the Borrower's Cash Concentration Account (described herein) shall be treated as requests for advances under the Line of Credit. The principal amount of all loans outstanding from time to time under the Line of Credit shall bear interest, payable on the first day of each calendar month and at the Expiration Date, at one hundred (100) basis points above the LIBOR Rate, but never exceeding the Prime Rate, and never exceeding the maximum rate allowed by law. Changes in the rate of interest applicable to the Line of Credit shall become effective automatically and without notice on each Rate Change Date. Interest shall be calculated based on actual days elapsed divided by a year of 360 days. The Bank may increase the rate of interest on loans outstanding under the Line of Credit by one hundred (100) basis points in the event that the Borrower fails to maintain all of its depository relationships with the Bank. All cash or cash equivalent proceeds from the sale of the Borrower's inventory, and all proceeds from the collection of the Borrower's accounts receivable shall be deposited in a Cash Concentration Account with the Bank. So long as amounts are outstanding under the Line of Credit, said Account shall be accessible only by the Bank and all collected funds in excess of $125,000 shall be applied daily to payment of the Borrower's indebtedness under the Line of Credit, which indebtedness shall be evidenced by an Amended and Restated Master Note in substantially the form of Exhibit A attached hereto and made a part hereof (the "Amended and Restated Master Note"). The Line of Credit shall terminate on the Expiration Date. The Borrower shall pay to the Bank in advance each year an annual facility fee equal to sixty (60) basis points (.60%) of the maximum available credit under the Line of Credit. B. Term Loan. Subject to the terms and conditions of this Agreement, the Bank shall loan to the Borrower on the Expiration Date the unpaid principal balance of the Line of Credit outstanding on the Expiration Date (the "Term Loan"). The Term Loan shall be evidenced by an Amended and Restated Term Note in substantially the form attached hereto as Exhibit B (the "Amended and Restated Term Note"). Proceeds of the Term Loan shall be used to repay the Line of Credit. Outstanding amounts of the Term Loan shall bear interest until paid in full at one hundred sixty (160) basis points above the LIBOR Rate, but never exceeding the Prime Rate plus .60%, and never exceeding the maximum rate allowed by law. Changes in the rate of interest applicable to the Amended and Restated Term Note shall become effective automatically and without notice on each Rate Change Date. Interest shall be calculated based on actual days elapsed divided by a year of 360 days. The Bank may increase the rate of interest on outstanding amounts of the Term Loan by one hundred (100) basis points in the event that the Borrower fails to maintain all of its depository relationships with the Bank. The Borrower shall make sixty (60) equal monthly principal payments pursuant to the Amended and Restated Term Note in substantially equal amounts based upon the principal amount of the Amended and Restated Term Note and pursuant to a schedule to be annexed to the Amended and Restated Term Note commencing on the first day of the second calendar month following the Expiration Date (December 1, 1997), and continuing on the first day of each of the next succeeding month. Each principal payment shall be accompanied by a payment of all accrued interest. All remaining principal and interest shall be due and payable in full on October 31, 2002. C. Late Payments. Any payment of any kind (including without limitation a payment of principal, interest, or expenses) not made within ten (10) days after the same shall become due under this Agreement or the Notes shall be subject to an additional late payment charge equal to five percent (5%) of the payment due. 2. Article III of the Credit Agreement is hereby amended to read in its entirety as follows: PREPAYMENTS The Line of Credit shall be freely prepayable in whole or in part at the option of the Borrower, but only on a Rate Change Date and after five (5) business days' prior written notice, or upon payment of all Break Costs. The Term Loan shall be freely prepayable in whole or in part at the option of Borrower, but only on a Rate Change Date and after five (5) business days' prior written notice, or upon payment of all Break Costs. All prepayments shall be applied first to items described in Article IV hereof, then to all accrued interest and then unless otherwise specifically directed by the Borrower, in such order and to such obligations as the Bank in its sole discretion may choose without penalty. 3. (a) Article VIII, Sections F and G of the Credit Agreement are hereby amended to read in their entireties as follows: F. Minimum Working Capital. Maintain the Borrower's Consolidated Working Capital so that it is not less than $9,000,000 as at the end of each fiscal quarter. G. Minimum Tangible Net Worth. Maintain the Borrower's Consolidated Tangible Net Worth so that it is not less than $15,000,000 as at the end of each fiscal quarter. (b) Article VIII, is hereby further amended to redesignate Sections "I," "J," "K," "L," "M," and "N" to "J," "K," "L," "M," "N," and "O" respectively. (c) Article VIII, is hereby further amended to add new Section "I" to read in its entirety as follows: I. Minimum Debt Service Coverage. Maintain the Borrower's Consolidated Debt Coverage Cash Flow in relation to its Consolidated Current Portion of funded Indebtedness so that the ratio of its Consolidated Debt Coverage Cash Flow to its Consolidated Current Portion of Funded Debt is at least equal to 1.5 to 1 measured as at the end of each fiscal quarter. 4. Article X, Section 8 of the Credit Agreement is hereby amended to read in its entirety as follows: 8. Cash Flow Failure. Failure by the Borrower to maintain its Consolidated Debt Coverage Cash Flow in relation to its Consolidated Current Portion of funded Indebtedness so that the ratio of its Consolidated Debt Coverage Cash Flow to its Consolidated Current Portion of Funded Debt fails to be greater than 1.5 to 1 measured at the end of each fiscal quarter. 5. Article XII of the Credit Agreement is hereby amended to include the following definitions in their entireties in alphabetical order as follows: "Break Costs" shall mean an amount equal to the amount (if any) required to compensate the Bank for any additional losses (including without limitation any loss, cost, or expense incurred by reason of the liquidation or reemployment of deposits or funds acquired by the Bank to fund or maintain the Line of Credit and Term Loan), costs, and expenses (including without limitation penalties) it may reasonably incur as a result of or in connection with prepayments by the Borrower. "Increased Cost" means any additional amounts sufficient to compensate any Bank for any increased costs of funding or maintaining the Borrower's obligations to the Bank, including those related to this Agreement and obligations under the Amended and Restated Master Note and the Amended and Restated Term Note, as a result of any law or guideline adopted pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption after the date of this Agreement of any law or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank or the Bank's holding company, if any, with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, which has or would have the effect of reducing the rate of return on the Bank's capital or on the capital of the Bank's holding company, if any, as a consequence of the transactions contemplated by this Agreement and all related documents and agreements, the existence of the Bank's commitment, or the notes bearing interest at a rate based on the LIBOR Rate, to a level below that which the Bank or the Bank's holding company could have achieved but for such adoption, change or compliance (taking into consideration such Bank's policies on capital adequacy). "LIBOR Rate" shall mean, with respect to any interest rate period, the rate per anum equal to the quotient obtained by dividing (and rounding to the nearest 1/100 of 1%) (i) LIBOR as defined below by (ii) a percentage equal to 100% minus the then stated maximum rate of all reserve requirements pursuant to Regulation D of the Federal Reserve Board, including without limitation any marginal, emergency, supplemental, special, or other reserves required by applicable law. The LIBOR Rate shall be further adjusted to reflect any Increased Cost. LIBOR is the rate per annum equal to the rate of interest per annum at which deposits in United States Dollars are offered to prime banks in the London interbank market at 11:00 a.m. (London time) on the day (the "Interest Setting Date") two banking days prior to the respective Rate Change Date determined on the basis of the provisions set forth below: (A) On the Interest Setting Date, the Bank will determine the interest rate for deposits in U.S. Dollars for a one-month period which appears on the Telerate Page 3750 as of 11:00 a.m., London time on such date or if such page on such service ceases to display such information, such other page as may replace it on that service for the purpose of display of such information (the "Telerate Rate"). If such rate does not appear on the Telerate, then the rate will be determined in accordance with (B) below. (B) If the Bank is unable to determine the Telerate Rate, then on the Interest Setting Date, the Bank will determine the arithmetic mean (rounded if necessary to the nearest one-hundredth percent (1/100%)) of the interest rate for a one-month period quoted on Reuters Screen page "LIBO" or (1) if such page on such service ceases to display such information, such other page as may replace it on that service for the purpose of displaying such information or (2) if that service ceases to display such information, such page as displays such information on such other service (or, if more than one, that one approved by the Bank as may replace the Reuters Screen) as at or about 11:00 a.m. (London time) on that Interest Setting Date (the rate quoted as aforesaid being the "LIBO Screen Rate"). If the Bank is to make a determination pursuant to this paragraph and one or more of the LIBO Screen Rates required for such determination shall be unavailable, the determination shall be made on the basis of those rates which are available. If, subsequent to the date of this Agreement, LIBOR cannot be determined pursuant to this formula or there is any change in any law or application thereof that makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for the Bank to hold obligations of the Borrower to the Bank if the rate is determined with reference to the LIBOR Rate (collectively, a "LIBOR End Date"), then the last determinable LIBOR Rate shall be used to calculate interest during the period between the LIBOR End Date and the earlier of (i) the date on which the Bank and the Borrower agree upon a mutually acceptable alternative base rate, or (ii) the date five (5) business days after the LIBOR End Date. If the Bank and the Borrower cannot agree upon a mutually acceptable base rate within five (5) business days after a LIBOR End Date, commencing on the next day interest shall be calculated at the prime commercial loan rate of the Bank established or announced from time to time (the "Prime Rate"). "Rate Change Date" shall mean the first day of each month. 6. The term "Expiration Date" defined in Article XII of the Credit Agreement is hereby amended to be defined as "October 31, 1997." 7. The terms "Master Note" and "Term Note" in the Credit Agreement are hereby amended to read "Amended and Restated Master Note" and "Amended and Restated Term Note," respectively, throughout the Credit Agreement. 8. Exhibits A and B to the Credit Agreement are respectively amended to read in their entirety in the form of Exhibits A and B attached to and made a part of this Amendment. 9. All other terms and conditions of the Credit Agreement shall continue unchanged in full force and effect. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized, respective officers as of the day and year first written above. FLEET BANK By: /s/ Jeffery S. Holmes Title: Vice President DETECTION SYSTEMS, INC. By: Frank J. Ryan Title: Vice President STATE OF NEW YORK) COUNTY OF MONROE ) SS.: On the 29th day of March, 1995, before me personally came FRANK RYAN, to me known, who, being by me duly sworn, did depose and say that he resides at PITTSFORD, NY; that he is the VICE PRESIDENT of DETECTION SYSTEMS, INC., the corporation described in the foregoing instrument, and that he executed said instrument by authority of the Board of Directors of said corporation. /S/ Betty L. Green Notary Public Betty L. Green Notary Public, State of New York No. 4999625 Qualified in Ontario County Commission Expires 7/27/96 STATE OF NEW YORK) COUNTY OF MONROE ) SS.: On the 19th day of April, 1995, before me personally came Jeffery S. Holmes, to me known, who, being by me duly sworn, did depose and say that he resides in Pittsford, New York; that he is the Vice President of FLEET BANK, the bank described in the foregoing instrument, and that he executed said instrument by authority of the Board of Directors of said bank. /s/ Ellen R. Gerhardy-Morgan Notary Public Ellen R. Gerhardy-Morgan Notary Public, State of New York Qualified in Genesee County My commission expires 3/30/97 EXHIBIT A AMENDED AND RESTATED MASTER NOTE $4,500,000 March , 1995 Rochester, New York FOR VALUE RECEIVED, DETECTION SYSTEMS, INC., a New York corporation with offices at 130 Perinton Parkway, Fairport, New York 14450 (the "Borrower") hereby promises to pay to the order of FLEET BANK ("Bank"), the principal sum of Four Million Five Hundred Thousand Dollars ($4,500,000), or if less, the aggregate unpaid principal amount of all advances made by Bank to the Borrower pursuant to the Line of Credit. The Bank shall maintain a record of amounts of principal and interest payable by the Borrower from time to time, and the records of the Bank maintained in the ordinary course of business shall be prima facie evidence of the existence and amounts of the Borrower's obligations recorded therein. In addition, the Bank may send by facsimile transmission (with confirmed receipt) or deliver a credit memo to the Borrower indicating the date and amount of each advance hereunder (but any failure to do so shall not relieve the Borrower of the obligation to repay any advance). Unless the Borrower questions the accuracy of a credit memo within two (2) business days after such transmission or delivery by the Bank, the Borrower shall be deemed to have accepted and be obligated by the terms of each such credit memo as accurately representing an advance hereunder. In the event of transfer of this Amended and Restated Note, or if the Bank shall otherwise deem it appropriate, the Borrower hereby authorizes the Bank to endorse on this Amended and Restated Note the amount of advances and payments to reflect the principal balance outstanding from time to time. The Bank is hereby authorized to honor borrowing and other requests received from the purported Chief Executive Officer, President, or Chief Financial Officer of the Borrower orally, by telecopy, in writing, or otherwise. Bank's crediting of the Borrower's account with the amount requested shall conclusively establish the Borrower's obligation to repay the amount advanced. Credit Agreement. This Amended and Restated Master Note is made in connection with a certain Credit Agreement between the Borrower and the Bank dated as of December 31, 1991, as modified and amended by that certain Credit Agreement Amendment dated March 31, 1992, and as modified and amended by that certain Second Amendment to Credit Agreement, and as further modified, extended, or replaced from time to time (collectively the "Credit Agreement") and evidences all loans made by the Bank under Section A of Article I thereof. This Amended and Restated Master Note is entitled to the benefits of and is subject to the Credit Agreement. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Credit Agreement. Interest. This Amended and Restated Master Note shall bear interest on outstanding balances, until paid in full, at one hundred (100) basis points above the LIBOR Rate, but never more than the Prime Rate, and never more than the maximum rate allowed by law. Changes in the LIBOR Rate shall become effective automatically and without notice on each respective Rate Change Date. Interest shall be calculated on the basis of actual days elapsed in a year of 360 days. All payments shall be in lawful money of the United States in immediately available funds. Interest shall continue to accrue after maturity at the note rate until this note is paid in full. The Bank may increase the rate of interest on loans outstanding hereunder by one hundred (100) basis points in the event that the Borrower fails to maintain all of its depository relationships with the Bank. Payments. The Borrower shall pay all accrued interest hereunder on the first day of each month. All remaining outstanding principal and accrued interest shall be due and payable in full on the Expiration Date. Late Charge. Any payment not received within ten (10) days of the date due may be subject to an additional late charge equal to five percent (5%) of the payment due. Prepayment. This Amended and Restated Master Note is freely prepayable in whole or in part at the option of the Borrower, but only on a Rate Change Date and after five business days' prior written notice, or upon payment of all Break Costs. Maximum Rate. At no time shall the Borrower be obligated or required to pay interest under this Amended and Restated Master Note at a rate which exceeds the maximum rate permitted by applicable law or regulation. If by the terms of this Amended and Restated Master Note the Borrower is at any time required or obligated to pay interest at a rate in excess of such maximum rate, the rate of interest under this Amended and Restated Master Note shall be deemed to be immediately reduced to such maximum rate and each payment of interest that exceeds such maximum rate shall be deemed a voluntary prepayment of principal. Holidays. If this Amended and Restated Master Note or any payment hereunder becomes due on a Saturday, Sunday or other holiday on which the Bank is authorized to close, the due date for this Amended and Restated Master Note or payment shall be extended to the next succeeding business day, but any interest or fees shall be calculated based upon the actual time of payment. Events of Default. If not sooner demanded, this Amended and Restated Master Note shall, at the Bank's option, become immediately due and payable without presentment, demand, protest, or other notice of any kind, all of which are hereby expressly waived, upon the happening of an Event of Default. Modification of Terms. The terms of this Amended and Restated Master Note cannot be changed, nor may this Amended and Restated Master Note be discharged in whole or in part, except by a writing executed by the holder. In the event that holder demands or accepts partial payments of this Amended and Restated Master Note, such demand or acceptance shall not be deemed to constitute a waiver of the right to demand the entire unpaid balance of this Amended and Restated Master Note at any time in accordance with the terms hereof. Any delay by holder in exercising any rights hereunder shall not operate as a waiver of such rights. Collection Costs. The Borrower on demand shall pay all expenses of Bank, including without limitation reasonable attorneys' fees, in connection with enforcement and collection of this Amended and Restated Master Note. Miscellaneous. Except for such notice as may be required under the Credit Agreement, to the fullest extent permissible by law, the Borrower waives presentment, demand for payment, protest, notice of nonpayment, and all other demands or notices otherwise required by law in connection with the delivery, acceptance, performance, default, or enforcement of this Amended and Restated Master Note. The Borrower consents to extensions, postponements' indulgences, amendments to notes and agreements, substitutions or releases of collateral, and substitutions or releases of other parties primarily or secondarily liable herefor, and agrees that none of the same shall affect the Borrower's obligations under this Amended and Restated Master Note which shall be unconditional. Laws. The Borrower agrees that this Amended and Restated Master Note shall be governed by the laws of the State of New York. The Borrower consents to exclusive jurisdiction in the courts of Monroe County, State of New York and in the courts of the United States (Western District of New York) having jurisdiction thereof. This Note amends and restates, to the extent applicable, the terms of indebtedness of the Borrower to the Bank in the original principal sum of Three Million and 00/100 Dollars ($3,000,000), dated December 31, 1991 (the "Prior Note"), as previously amended. Following the execution and delivery of this Amended and Restated Master Note to the Bank, this Amended and Restated Master Note shall evidence all of the indebtedness evidenced by the Prior Note and this Amended and Restated Master Note. DETECTION SYSTEMS, INC. By: __________________________ Title: _______________________ EXHIBIT B AMENDED AND RESTATED TERM NOTE $ July 31, 1997 Rochester, New York FOR VALUE RECEIVED, DETECTION SYSTEMS, INC., a New York corporation with offices at 130 Perinton Parkway, Fairport, New York 14450 (the "Borrower"), hereby promises to pay to the order of FLEET BANK (the "Bank"), at any of its banking offices, or at such other places as Bank may specify in writing to the Borrower, the principal sum of Dollars ($ ), or if less, the aggregate unpaid principal amount of all advances made by Bank to the Borrower, on the terms specified below. Credit Agreement. This Amended and Restated Term Note is made in connection with a certain Credit Agreement between the Borrower and the Bank dated as of December 31, 1991, as modified and amended by that certain Credit Agreement Amendment dated March 31, 1992, and as further modified and amended by that certain Second Amendment to Credit Agreement, and as further modified, extended, or replaced from time to time (collectively the "Credit Agreement"), and evidences all loans made by the Bank under Section B of Article I thereof. This Amended and Restated Term Note is entitled to the benefits of and is subject to the Credit Agreement. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Credit Agreement. Interest. This Amended and Restated Term Note shall bear interest on outstanding principal balances, calculated on the basis of a 360 day year and using the actual number of days elapsed, at a rate per annum of one hundred sixty (160) basis points above the LIBOR Rate, but never more than the Prime Rate plus .60%, and never more than the maximum rate allowed by law. Changes in the rate of interest applicable to this Amended and Restated Term Note shall become effective automatically and without notice on each respective Rate Change Date. All payments shall be in lawful money of the United States in immediately available funds. Interest shall continue to accrue after maturity at the note rate until this note is paid in full. The Bank may increase the rate of interest on loans outstanding hereunder by one hundred (100) basis points in the event that the Borrower fails to maintain all of its depository relationships with the Bank. Payments. Payments of all accrued interest under this Amended and Restated Term Note shall be made on the first day of each month beginning December 1, 1997 and continuing until the principal is paid in full. The Borrower shall make sixty (60) equal monthly principal payments in the amount of Dollars ($ ) commencing on December 1, 1997 and continuing on the first day of each succeeding month. All remaining principal and interest with respect to this Amended and Restated Term Note shall be due and payable in full on October 31, 2002. Late Charge. Any payment not received within ten (10) days after the date due may be subject to an additional late charge equal to five percent (5%) of the payment due. Prepayment. This Amended and Restated Term Note is freely prepayable in whole or in part at the option of the Borrower, but only on a Rate Change Date and after five business days' prior written notice, or upon payment of all Break Costs. Maximum Rate. This Amended and Restated Term Note is subject to the express condition that at no time shall the Borrower be obligated or required to pay interest on the principal balance of this Amended and Restated Term Note at a rate which could subject the holder of this Amended and Restated Term Note to either civil or criminal liability as a result of being in excess of the maximum rate which the Borrower is permitted by law to contract or agree to pay. If by the terms of this Amended and Restated Term Note, the Borrower is at any time required or obligated to pay interest on the principal balance of this Amended and Restated Term Note at a rate in excess of such maximum rate, the rate of interest under this Amended and Restated Term Note shall be deemed to be immediately reduced to such maximum rate and interest payable hereunder shall be computed at such maximum rate and the portion of all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of this Amended and Restated Term Note. Holidays. If this Amended and Restated Term Note or any payment hereunder becomes due on a Saturday, Sunday or other holiday on which the Bank is authorized to close, the due date for this Amended and Restated Term Note or payment shall be extended to the next succeeding business day, but any interest or fees shall be calculated based upon the actual time of payment. Events of Default. This Amended and Restated Term Note shall, at the Bank's option, become immediately due and payable without presentment, demand, protest, or other notice of any kind, all of which are hereby expressly waived, upon the occurrence of an Event of Default. Modification of Terms. The terms of this Amended and Restated Term Note cannot be changed, nor may this Amended and Restated Term Note be discharged in whole or in part, except by a writing executed by Bank. In the event that the Bank demands or accepts partial payments of this Amended and Restated Term Note, such demand or acceptance shall not be deemed to constitute a waiver of the right to demand the entire unpaid balance of this Amended and Restated Term Note at any time in accordance with the terms hereof. Any delay or omission by Bank in exercising any rights hereunder shall not operate as a waiver of such rights. Collection Costs. The Borrower on demand shall pay all expenses of Bank, including without limitation reasonable attorneys' fees, in connection with enforcement and collection of this Amended and Restated Term Note. Miscellaneous. Except for such notice as may be required under the Credit Agreement, to the fullest extent permissible by law, the Borrower waives presentment, demand for payment, protest, notice of nonpayment, and all other demands or notices otherwise required by law in connection with the delivery, acceptance, performance, default, or enforcement of this Amended and Restated Term Note. The Borrower consents to extensions, postponements' indulgences, amendments to notes and agreements, substitutions or releases of collateral, and substitutions or releases of other parties primarily or secondarily liable herefor, and agrees that none of the same shall affect the Borrower's obligations under this Amended and Restated Term Note which shall be unconditional. Laws. The Borrower agrees that this Amended and Restated Term Note shall be governed by the laws of the State of New York. The Borrower consents to exclusive jurisdiction in the courts of Monroe County, State of New York and in the courts of the United States (Western District of New York) having jurisdiction thereof. DETECTION SYSTEMS, INC. By: ___________________________ Title: ________________________ Chemical Bank 300 Linden Oaks Rochester, NY 14625 March 29, 1995 Frank J. Ryan, Vice President Detection Systems, Inc. 130 Perinton Parkway Fairport, NY 14450 Dear Frank: We are pleased to advise you that Chemical Bank (the "Bank") has approved a Revolving Credit facility for up to $4,500,000 to Detection Systems, Inc. (the "Borrower") for general corporate purposes and to replace an existing credit facility with National Westminister Bank. The proposed transaction is subject to the negotiation of a new Credit Agreement between the Borrower and the Bank which is substantially the same, in terms and conditions, as an existing Credit Agreement dated December 31, 1991 between the Borrower and Norstar Bank. The significant aspects of this commitment are as follows: BORROWER: Detection Systems, Inc. AMOUNT: Up to $4,500,000 PURPOSE: General corporate purposes and to replace a similar existing facility with National Westminister Bank. GUARANTORS: All current or future subsidiaries of the Borrower. TERM: Revolving for a 3 year period from the date of closing (the "Revolver"). Any balance outstanding on the third anniversary of the closing date will be converted to a five (5) year term loan (the "Term Loan"). This Term Loan shall be amortized in sixty (60) equal monthly principal payments plus interest commencing one month after the conversion from the Revolver to the Term Loan. INTEREST RATE: For the Revolver, the Borrower shall be able to choose either: A) The Bank's Prime Rate. B) Subject to availability at the Bank, the London Interbank Offering Rate (LIBOR) adjusted for statutory reserves, if any, plus 100 basis points for periods of 30, 60, or 90 day maturities, subject to three days written notice. For the Term Loan, the Borrower shall be able to choose either: A) The Bank's Prime Rate plus one half of one percent (1/2%). B) Subject to availability at the Bank, the London Interbank Offering Rate (LIBOR) adjusted for statutory reserves, if any, plus 150 basis points for periods of 30, 60, or 90 day maturities, subject to three days written notice. COMMITMENT FEE ON UNUSED PORTION: One half of one percent on the average unused amount of the Revolver, payable quarterly in arrears. FINANCIAL TESTS: Financial covenants include current ratio, minimum working capital, minimum tangible net worth, debt to worth, and consolidated debt coverage cash flow ratio. (For the purposes of calculating the above current ratio and working capital, any outstanding under this Revolving Credit will be classified as current liabilities and included in said calculation.) This commitment is based upon the information you have provided to us and is subject to the execution of a satisfactory loan agreement containing the usual covenants, terms and conditions for such facilities. In addition, this commitment is subject to the Borrower executing a modified loan agreement with Norstar Bank, which will be identical to the loan agreement contemplated hereunder, in all material terms and conditions. As such, the text of this letter is intended to provide a general description of the transaction as contemplated by us and will not be considered as prejudicing the terms and conditions to be contained in the final documentation. If this letter correctly sets forth your understanding of the terms that we have discussed, please indicate your approval by signing and returning this letter to us. Based upon your acceptance of this commitment letter, we shall authorize our special counsel to prepare the necessary legal documentation, the costs and charges of which shall be for your account whether or not the transaction is completed. This commitment is additionally contingent upon your acceptance not later than April 4, 1995, and to final documentation for the transaction being concluded and executed not later than April 30, 1995. We appreciate this opportunity to be of service to you and look forward to establishing a mutually beneficial relationship. Very truly yours, CHEMICAL BANK By: /s/ Philip M. Hendrix Vice President Accepted this 29th day of March, 1995 DETECTION SYSTEMS, INC. By: Frank J. Ryan EX-7 8 EXHIBIT 7a EMPLOYMENT AGREEMENT AGREEMENT made as of the 9th day of May, 1995 between KARL H. KOSTUSIAK ("Executive") and Detection Systems, Inc., a New York corporation ("Company"). WITNESSETH: In consideration of the mutual covenants contained herein, the parties agree as follows: 1. Offer of Employment and Term. The Company agrees to employ Executive in the capacity of President and Chief Executive Officer for the Term of Employment commencing as of the date of this Agreement (the "Commencement Date"). The Company agrees to provide Executive with such office, operational and administrative support as is consistent with his position. Executive's employment under this agreement will be in the vicinity of Rochester, New York. "Term of Employment" as used herein shall mean the period commencing on the Commencement Date and continuing thereafter for a period of five years, unless the Company and Executive agree in writing to extend the Term of Employment, in which case the Term of Employment shall have the meaning as determined at that time; provided, however, that Executive's employment may be earlier terminated as hereinafter set forth, in which event the Term of Employment shall mean the period from the Commencement Date through the date of such earlier termination. Notwithstanding any of the other provisions of this Agreement, however, this Agreement will automatically terminate upon Executive's death and thereupon all payments and non-vested benefits payable hereunder shall cease, except death benefits provided under the Company's employee plans. The Company may terminate this Agreement due to Executive's permanent disability, as determined by the Board of Directors in good faith based on the certification of an independent M.D., and thereupon all payments and non-vested benefits hereunder shall cease. 2. Executive's Acceptance. Executive agrees to accept the executive employment described in this Agreement. Executive further agrees that he will devote his full time and best efforts during reasonable business hours to performance of the duties and responsibilities of his office during the Term of Employment. Executive also agrees not to disclose trade secrets of the Company, or to engage in any other activity which is detrimental to the interests of the Company, during the Term of Employment. 3. Compensation and Benefits. The compensation and benefits which the Company shall provide Executive for his services during the Term of Employment shall include but not be limited to: (i) Base salary equal to or greater than $205,916 per year; (ii) Participation in all Company executive incentive compensation plans. Such incentive compensation plans shall include: an annual cash bonus of not less than 5% of the amount by which the Company's pre-tax profits exceed $250,000, and an annual stock bonus to a maximum of 20,000 shares per year based on a formula that allows the maximum in the case of sales growth greater than 10% for a fiscal year and a pre-tax profit greater than 10% of sales. This bonus will be scaled linearly according to both sales and profit performance. The sales factor for this calculation will be 100% for 10% sales growth, and 0% for no sales growth. The profit factor will be 100% for 10% pre-tax profit, and 0% for 5% pre-tax profit. (iii) Grants of options under any Company employee stock option plan in such amounts as are determined by the Board of Directors or the Committee of the Board administering such plan; (iv) Participation in all Company pension, deferred compensation, insurance, health and welfare or other benefit plans in which the Company's senior executives are entitled to participate; and (v) Continuation of all plans in which the Executive participates, including existing fringe benefits and executive perquisites to which Executive is entitled as of the date of this Agreement, except that such plans, benefits and perquisites as are generally available to the Company's senior executives may be changed consistent with business conditions in a manner which does not discriminate against Executive. 4. Termination Without Cause. The Company may terminate Executive's employment without Cause as hereinafter defined and for any reason. If Executive is terminated without Cause, Company will continue to compensate and provide benefits to Executive as if he had continued in the Company's employment under this Agreement for the then remaining balance of the Term of Employment or for a period of three (3) years from the date of termination, whichever is longer. Executive will comply with Section 8 of this Agreement while receiving such compensation. If Executive's employment is terminated by the Company without Cause and for any reason after termination of the term of employment but prior to the Company and the Executive reaching a written agreement with respect to the Executive's retirement benefits, Company will continue to compensate and provide benefits to Executive as if he had continued in the Company's employment under this Agreement for a period of two (2) years from the date of termination. Executive will comply with Section 8 of this Agreement while receiving such compensation. 5. Termination for Cause. The Company may terminate Executive's employment immediately and without prior notice to Executive for "Cause" as defined below. The existence of Cause shall be determined by the Company's Board of Directors (other than Executive) acting in good faith. "Cause" is defined, and shall be limited to, a good faith determination by the Board of Directors that any of the following have occurred: (a) Executive has misappropriated a material amount of funds or property of the company; (b) Executive has obtained a material personal profit from any unlawful Company transaction with a third party; (c) Executive has obtained a material personal profit from the use of the Company's trade secrets other than on its behalf and/or if the Company has suffered material financial harm from the disclosure of trade secrets by Executive; or (d) Willful and prolonged absence from work by Executive or willful refusal by Executive to perform his duties and responsibilities under circumstances which, in either case, constitute a substantial abdication of Executive's duties and responsibilities of his office. If Executive's employment is terminated by the Company for Cause, he shall be paid compensation and provided benefits in accordance with the provisions of the first paragraph of Section 4 above, provided that his cash compensation shall be reduced by the amount of any monetary damage suffered by the Company due to the Cause, prorated over the term of such payments. 6. Resignation. Executive may voluntarily resign from the Company after giving 90 days' prior written notice of his intention to resign and the Term of Employment shall terminate on the effective date of such resignation. If Executive resigns or otherwise voluntarily leaves the Company's employment prior to a Change in Control, he shall forfeit all compensation and non-vested benefits, from and after the effective date of such resignation, provided in this Agreement. 7. Change in Control. (i) A "Change in Control" of the Company shall be deemed to have occurred if: (a) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company or any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (b) there is elected 35% or more of the members of the Board of Directors of the Company without the approval of the nomination of such members by a majority of the Board serving prior to such election; (c) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent more than 75% of the combined voting power of the voting securities of the Company, or such surviving entity, outstanding immediately after such merger or consolidation; or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as defined above) acquires more than 50% of the combined voting power of the Employer's then-outstanding securities; or (d) the Shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (ii) If any Change in Control of the Company occurs and Executive's employment is terminated by the Company or the Executive within four months after the date of the Change in Control for any reason other than Executive's Death, the Company shall pay and provide to Executive the following amounts and benefits: (a) the sum of Executive's full base salary thro}gh the date of termination of his employment at the rate in effect at the time of termination or at the time the Change in Control occurs, whichever is higher, and an amount equal to the amount of any bonus which has been earned by him but not yet paid to him. These two amounts shall be paid to Executive in a lump sum within five days following the date of termination, or in the case of a bonus which is not readily calculable at such time, within five days after such bonus can be calculated; and (b) an amount equal to three times the highest total cash and stock bonus cash value compensation (including base salary and bonuses) paid Executive in any of the Company's last three fiscal years completed prior to such termination. This amount shall be paid to Executive as provided in the last sentence of subsection (a) above; and (c) the benefits provided Executive under Section 3(iv), such as, but not limited to, life, accident, disability, health and travel insurance, and other benefits in effect for Executive at the time notice of termination is given or at the time the Change in Control occurs, whichever may be higher in the case of each benefit, shall be provided to Executive by the Company to the same extent as if Executive had continued to be an employee of the Company for three (3) years from such termination, and such benefits shall, to the extent that they may not be provided or paid under any benefit plan or program, be provided or paid for by the Company by means other than such plan or program. (iii) If applicable, the provisions of Section 7(ii) shall control over the provisions of Sections 4 and/or 5. In the event that Executive's employment is not terminated by the Company or the Executive for any reason other than the Executive's death within the four month period specified in Section 7(ii), the provisions of Sections 4 and 5 shall once again be applicable thereafter. (iv) In the event that the payments and benefits specified in this Section 7 would be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986 (the "Code"), as amended (or any similar tax that may hereinafter be imposed) because of "excess parachute payments," as defined in Section 280G of the Code, Executive and Employer agree that the amounts payable pursuant to this Section 7 shall be reduced by such amount as shall be necessary to avoid the imposition of the Excise Tax. 8. Noncompetition. If prior to a Change in Control Executive's employment terminates due to his resignation, other voluntary departure or due to termination by the Company for Cause or without Cause, for eighteen (18) months subsequent to such termination, Executive shall not, without the prior written consent of the Board of Directors of the Company, engage, as an employee, partner, consultant, venturer, entrepreneur or otherwise, in the development or sale of any product or service which is competitive with any product or service of the Company. If subsequent to a Change in Control Executive's employment terminates as above provided, Executive shall similarly refrain from competing with the Company for a period of twelve (12) months subsequent to such termination. In the event the Company terminates Executive's employment due to permanent disability as provided in Section 1, whether prior to or after a Change in Control, Executive shall not be restricted from competing with the Company immediately upon such termination. 9. Expenses. If the Company is found by a court of competent jurisdiction to have breached this Agreement, the Company shall pay the costs and expenses incurred by Executive in any litigation seeking damages in respect of such breach or to enforce the performance of this Agreement by Company. 10. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be given by prepaid and certified return receipt requested first class mail addressed: (i) if to the Company, to each member of the Board of Directors at the address to which the Company then addresses correspondence to such persons; (ii) if to Executive, at his home mailing address on file with the Company; and (iii) to such other address as the party to which such notice is to be given shall have notified (in accordance with the provisions of this Section 10) as its substitute address for the purpose of this Agreement. Any notice given as aforesaid shall be deemed conclusively to have been received on the fifth business day after such mailing. 11. Amendment. It is agreed that no change or modification of this Agreement shall be made except in a writing signed by both parties. 12. Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not be affected thereby. 13. Law Governing. The validity, interpretation and effect of this Agreement shall be governed by the laws of the State of New York. 14. Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the employment of Executive by the Company. There are no restrictions, agreements, promises, warranties, covenants or undertakings other than those expressly set forth herein. This Agreement supersedes all prior agreements, arrangements and understandings between the parties, whether oral or written, with respect to the employment of Executive. IN WITNESS WHEREOF, Executive for himself, and the undersigned director of the Company on behalf of the Company by authority of its Board of Directors, have executed this Agreement as of the day and year first above written. Executive /s/ Karl H. Kostusiak 6/9/95 DETECTION SYSTEMS, INC. /s/ Donald R. Adair 6/21/95 EMPLOYMENT AGREEMENT AGREEMENT made as of the 9th day of May, 1995 between DAVID B. LEDERER ("Executive") and Detection Systems, Inc., a New York corporation ("Company"). WITNESSETH: In consideration of the mutual covenants contained herein, the parties agree as follows: 1. Offer of Employment and Term. The Company agrees to employ Executive in the capacity of Executive Vice President for the Term of Employment commencing as of the date of this Agreement (the "Commencement Date"). The Company agrees to provide Executive with such office, operational and administrative support as is consistent with his position. Executive's employment under this agreement will be in the vicinity of Rochester, New York. "Term of Employment" as used herein shall mean the period commencing on the Commencement Date and continuing thereafter for a period of five years, unless the Company and Executive agree in writing to extend the Term of Employment, in which case the Term of Employment shall have the meaning as determined at that time; provided, however, that Executive's employment may be earlier terminated as hereinafter set forth, in which event the Term of Employment shall mean the period from the Commencement Date through the date of such earlier termination. Notwithstanding any of the other provisions of this Agreement, however, this Agreement will automatically terminate upon Executive's death and thereupon all payments and non-vested benefits payable hereunder shall cease, except death benefits provided under the Company's employee plans. The Company may terminate this Agreement due to Executive's permanent disability, as determined by the Board of Directors in good faith based on the certification of an independent M.D., and thereupon all payments and non-vested benefits hereunder shall cease. 2. Executive's Acceptance. Executive agrees to accept the executive employment described in this Agreement. Executive further agrees that he will devote his full time and best efforts during reasonable business hours to performance of the duties and responsibilities of his office during the Term of Employment. Executive also agrees not to disclose trade secrets of the Company, or to engage in any other activity which is detrimental to the interests of the Company, during the Term of Employment. 3. Compensation and Benefits. The compensation and benefits which the Company shall provide Executive for his services during the Term of Employment shall include but not be limited to: (i) Base salary equal to or greater than $164,742 per year; (ii) Participation in all Company executive incentive compensation plans. Such incentive compensation plans shall include: an annual cash bonus of not less than 4% of the amount by which the Company's pre-tax profits exceed $250,000, and an annual stock bonus to a maximum of 16,000 shares per year based on a formula that allows the maximum in the case of sales growth greater than 10% for a fiscal year and a pre-tax profit greater than 10% of sales. This bonus will be scaled linearly according to both sales and profit performance. The sales factor for this calculation will be 100% for 10% sales growth, and 0% for no sales growth. The profit factor will be 100% for 10% pre-tax profit, and 0% for 5% pre-tax profit. (iii) Grants of options under any Company employee stock option plan in such amounts as are determined by the Board of Directors or the Committee of the Board administering such plan; (iv) Participation in all Company pension, deferred compensation, insurance, health and welfare or other benefit plans in which the Company's senior executives are entitled to participate; and (v) Continuation of all plans in which the Executive participates, including existing fringe benefits and executive perquisites to which Executive is entitled as of the date of this Agreement, except that such plans, benefits and perquisites as are generally available to the Company's senior executives may be changed consistent with business conditions in a manner which does not discriminate against Executive. 4. Termination Without Cause. The Company may terminate Executive's employment without Cause as hereinafter defined and for any reason. If Executive is terminated without Cause, Company will continue to compensate and provide benefits to Executive as if he had continued in the Company's employment under this Agreement for the then remaining balance of the Term of Employment or for a period of three (3) years from the date of termination, whichever is longer. Executive will comply with Section 8 of this Agreement while receiving such compensation. If Executive's employment is terminated by the Company without Cause and for any reason after termination of the term of employment but prior to the Company and the Executive reaching a written agreement with respect to the Executive's retirement benefits, Company will continue to compensate and provide benefits to Executive as if he had continued in the Company's employment under this Agreement for a period of two (2) years from the date of termination. Executive will comply with Section 8 of this Agreement while receiving such compensation. 5. Termination for Cause. The Company may terminate Executive's employment immediately and without prior notice to Executive for "Cause" as defined below. The existence of Cause shall be determined by the Company's Board of Directors (other than Executive) acting in good faith. "Cause" is defined, and shall be limited to, a good faith determination by the Board of Directors that any of the following have occurred: (a) Executive has misappropriated a material amount of funds or property of the company; (b) Executive has obtained a material personal profit from any unlawful Company transaction with a third party; (c) Executive has obtained a material personal profit from the use of the Company's trade secrets other than on its behalf and/or if the Company has suffered material financial harm from the disclosure of trade secrets by Executive; or (d) Willful and prolonged absence from work by Executive or willful refusal by Executive to perform his duties and responsibilities under circumstances which, in either case, constitute a substantial abdication of Executive's duties and responsibilities of his office. If Executive's employment is terminated by the Company for Cause, he shall be paid compensation and provided benefits in accordance with the provisions of the first paragraph of Section 4 above, provided that his cash compensation shall be reduced by the amount of any monetary damage suffered by the Company due to the Cause, prorated over the term of such payments. 6. Resignation. Executive may voluntarily resign from the Company after giving 90 days' prior written notice of his intention to resign and the Term of Employment shall terminate on the effective date of such resignation. If Executive resigns or otherwise voluntarily leaves the Company's employment prior to a Change in Control, he shall forfeit all compensation and non-vested benefits, from and after the effective date of such resignation, provided in this Agreement. 7. Change in Control. (i) A "Change in Control" of the Company shall be deemed to have occurred if: (a) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company or any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (b) there is elected 35% or more of the members of the Board of Directors of the Company without the approval of the nomination of such members by a majority of the Board serving prior to such election; (c) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent more than 75% of the combined voting power of the voting securities of the Company, or such surviving entity, outstanding immediately after such merger or consolidation; or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as defined above) acquires more than 50% of the combined voting power of the Employer's then-outstanding securities; or (d) the Shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (ii) If any Change in Control of the Company occurs and Executive's employment is terminated by the Company or the Executive within four months after the date of the Change in Control for any reason other than Executive's Death, the Company shall pay and provide to Executive the following amounts and benefits: (a) the sum of Executive's full base salary through the date of termination of his employment at the rate in effect at the time of termination or at the time the Change in Control occurs, whichever is higher, and an amount equal to the amount of any bonus which has been earned by him but not yet paid to him. These two amounts shall be paid to Executive in a lump sum within five days following the date of termination, or in the case of a bonus which is not readily calculable at such time, within five days after such bonus can be calculated; and (b) an amount equal to three times the highest total cash and stock bonus cash value compensation (including base salary and bonuses) paid Executive in any of the Company's last three fiscal years completed prior to such termination. This amount shall be paid to Executive as provided in the last sentence of subsection (a) above; and (c) the benefits provided Executive under Section 3(iv), such as, but not limited to, life, accident, disability, health and travel insurance, and other benefits in effect for Executive at the time notice of termination is given or at the time the Change in Control occurs, whichever may be higher in the case of each benefit, shall be provided to Executive by the Company to the same extent as if Executive had continued to be an employee of the Company for three (3) years from such termination, and such benefits shall, to the extent that they may not be provided or paid under any benefit plan or program, be provided or paid for by the Company by means other than such plan or program. (iii) If applicable, the provisions of Section 7(ii) shall control over the provisions of Sections 4 and/or 5. In the event that Executive's employment is not terminated by the Company or the Executive for any reason other than the Executive's death within the four month period specified in Section 7(ii), the provisions of Sections 4 and 5 shall once again be applicable thereafter. (iv) In the event that the payments and benefits specified in this Section 7 would be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986 (the "Code"), as amended (or any similar tax that may hereinafter be imposed) because of "excess parachute payments," as defined in Section 280G of the Code, Executive and Employer agree that the amounts payable pursuant to this Section 7 shall be reduced by such amount as shall be necessary to avoid the imposition of the Excise Tax. 8. Noncompetition. If prior to a Change in Control Executive's employment terminates due to his resignation, other voluntary departure or due to termination by the Company for Cause or without Cause, for eighteen (18) months subsequent to such termination, Executive shall not, without the prior written consent of the Board of Directors of the Company, engage, as an employee, partner, consultant, venturer, entrepreneur or otherwise, in the development or sale of any product or service which is competitive with any product or service of the Company. If subsequent to a Change in Control Executive's employment terminates as above provided, Executive shall similarly refrain from competing with the Company for a period of twelve (12) months subsequent to such termination. In the event the Company terminates Executive's employment due to permanent disability as provided in Section 1, whether prior to or after a Change in Control, Executive shall not be restricted from competing with the Company immediately upon such termination. 9. Expenses. If the Company is found by a court of competent jurisdiction to have breached this Agreement, the Company shall pay the costs and expenses incurred by Executive in any litigation seeking damages in respect of such breach or to enforce the performance of this Agreement by Company. 10. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be given by prepaid and certified return receipt requested first class mail addressed: (i) if to the Company, to each member of the Board of Directors at the address to which the Company then addresses correspondence to such persons; (ii) if to Executive, at his home mailing address on file with the Company; and (iii) to such other address as the party to which such notice is to be given shall have notified (in accordance with the provisions of this Section 10) as its substitute address for the purpose of this Agreement. Any notice given as aforesaid shall be deemed conclusively to have been received on the fifth business day after such mailing. 11. Amendment. It is agreed that no change or modification of this Agreement shall be made except in a writing signed by both parties. 12. Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not be affected thereby. 13. Law Governing. The validity, interpretation and effect of this Agreement shall be governed by the laws of the State of New York. 14. Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the employment of Executive by the Company. There are no restrictions, agreements, promises, warranties, covenants or undertakings other than those expressly set forth herein. This Agreement supersedes all prior agreements, arrangements and understandings between the parties, whether oral or written, with respect to the employment of Executive. IN WITNESS WHEREOF, Executive for himself, and the undersigned director of the Company on behalf of the Company by authority of its Board of Directors, have executed this Agreement as of the day and year first above written. Executive /s/ David B. Lederer 6/9/95 DETECTION SYSTEMS, INC. by: /s/ Donald R. Adair 6/21/95 EX-8 9 EXHIBIT 7b EMPLOYMENT AGREEMENT AGREEMENT made as of the 7th day of February 1995 between LAWRENCE R. TRACY ("Executive") and Detection Systems, Inc., a New York corporation ("Company"). WITNESSETH: In consideration of the mutual covenants contained herein, the parties agree as follows: 1. Offer of Employment and Term. The Company agrees to employ Executive in the capacity of President, International Division (or business equivalent) for the Term of Employment commencing as of the date of this Agreement (the "Commencement Date"). The Company agrees to provide Executive with such office, operational and administrative support as is consistent with his position. Executive's employment under this agreement will be in the vicinity of his home in Auburn, California or as convenient to that as practicable with an appropriate comparable office to be provided at the Company s corporate headquarters in Fairport, New York. The Company will not require the Executive to travel more than fifty percent (50%) of his time in the first year of this Agreement and thirty percent (30%) thereafter in order to fulfill Executives responsibilities. "Term of Employment" as used herein shall mean the period commencing on the Commencement Date and continuing thereafter for a period of four years, unless the Company and Executive agree in writing to extend the Term of Employment, in which case the Term of Employment shall have the meaning as determined at that time; provided, however, that Executive's employment may be earlier terminated as hereinafter set forth, in which event the Term of Employment shall mean the period from the Commencement Date through the date of such earlier termination. Notwithstanding any of the other provisions of this Agreement, however, this Agreement will automatically terminate upon Executive's death and thereupon all payments and non-vested benefits payable hereunder shall cease, except death benefits provided under the Company's employee plans. The Company may terminate this Agreement due to Executive's permanent disability, as determined by the Board of Directors in good faith based on the certification of an independent M.D., and thereupon all payments and non-vested benefits hereunder shall cease. For the purposes of this Agreement, permanent disability shall be defined as any illness, injury or physical or mental condition which shall prevent the Executive from performing his usual duties and services for the Company on substantially the same basis under which he was performing or was obligated to perform them prior to the occurrence or onset of such illness, injury or condition for a period of (i) three consecutive months, or (ii) more than six months in any twelve month period. 2. Executive's Acceptance. Executive agrees to accept the executive employment described in this Agreement. Executive further agrees that he will devote his full time and best efforts during reasonable business hours to performance of the duties and responsibilities of his office during the Term of Employment. Executive also agrees not to disclose Confidential Information of the Company, or to engage in any other activity which is detrimental to the interests of the Company, during the Term of Employment. 3. Compensation and Benefits. The compensation and benefits which the Company shall provide Executive for his services during the Term of Employment shall include but not be limited to the following, subject to adjustment to maintain a compensation level at 70 percent of the equivalent Detection Systems cash bonus amounts paid to the Company s CEO beginning the third fiscal year of employment and at 70 percent of the equivalent Detection Systems stock bonus amounts paid to the Company s CEO beginning with the fiscal year beginning April 1, 1995, except for the Company s regular quarterly profit sharing bonus without vesting requirement for the quarter beginning April 1, 1995.: (i) Base salary at this time equal to $140,000 per year; (ii) Participation in all Company executive incentive compensation plans effective the fiscal year beginning April 1, 1995. Such incentive compensation plans shall include an annual cash bonus at this time of 3-1/2% of the amount by which the Company's pre-tax profits exceed $250,000. The amount of this bonus shall be reduced by $48,000 each year for the first two years, Such incentive compensation plan shall also include an annual stock bonus at this time of 14,000 shares per year based on a formula that allows the maximum in the case of sales growth greater than 10% for a fiscal year and a pretax profit greater than 10% of sales. This bonus will be scaled linearly according to both sales and profit performance. The sales factor for this calculation will be 100% for 10% sales growth, and 0% for no sales growth. The profit factor will be 100% for 10% pre-tax profit, and 0% for 5% pre-tax profit. For example, if sales increase in a particular year by 5% and if pre-tax profit is 7-1/2%, then the stock bonus would be 3,500 shares (14,000 * .5 * .5 = 3,500). (iii) Executive can draw cash advances from first two year future annual cash bonuses, as described in section (ii) above to achieve a total monthly cash payment of $15,000, for two years. During years three and four of this Agreement, monthly cash compensation will be paid (and/or advanced against cash bonus formulas) at a rate equal to the trailing twelve month cash compensation that was earned per the formulas, not to exceed $19,000 per month, with the balance of earned annual bonuses paid approximately two months after fiscal year end. Repayment of the first two year advances will only be made from cash income in excess of $15,000 per month from first two year total cash compensation. All obligations for repayment will be forgiven if Executive leaves the Company for any reason; (iv) Executive will be granted an option of 40,000 shares under the Company s employee stock option plan, with a grant date effective the date of employment, which shall be the date of this Agreement, with up to two-fifths of the shares exercisable after one year has elapsed, up to three-fifths of the shares exercisable after two years have elapsed, up to four-fifths of the shares exercisable after three years have elapsed and up to five-fifths of the shares exercisable after four years have elapsed. (For other specific terms and conditions, see the attached plan); (v) Participation in all existing executive fringe benefits and executive perquisites to which non-founder executives are entitled as of the date of this Agreement including car allowance, pension, deferred compensation, insurance, health, disability and other benefit plans, except that such plans, benefits and perquisites as are generally available to the Company's senior executives may be changed consistent with business conditions in a manner which does not discriminate against Executive. (vi) Vacation time at the rate of three (3) weeks per year to be increased to four (4) weeks per year after five (5) years of service. (vii) Executive will receive a car allowance of $500 per month plus fuel expense. 4. Termination Without Cause. The Company may terminate Executive's employment without Cause as hereinafter defined and for any reason. If Executive is terminated without Cause, Company will pay the Executive cash compensation as per the above cash compensation plan and provide benefits to Executive as if he had continued in the Company's employment under this Agreement except for stock bonuses for the then remaining balance of the Term of Employment or for a period of one (1) year from the date of termination, whichever is longer. The stock options will cease vesting and the stock bonuses will no longer be payable from the date of termination. Executive will comply with Sections 7, 8, 9, 10 and 11 of this Agreement while receiving such compensation. 5. Termination for Cause. The Company may terminate Executive's employment immediately and without prior notice to Executive for "Cause" as defined below. The existence of Cause shall be determined by the Company's Board of Directors (other than Executive) acting in good faith. "Cause" is defined, and shall be limited to, a good faith determination by the Board of Directors that any of the following have occurred: (a) Executive has misappropriated a material amount of funds or property of the company; (b) Executive has obtained a material personal profit from any unlawful Company transaction with a third party; (c) Executive has obtained a material personal profit from the use of the Company's trade secrets other than on its behalf and/or if the Company has suffered material financial harm from the disclosure of trade secrets by Executive; or (d) Willful and prolonged absence from work by Executive or willful refusal by Executive to perform his duties and responsibilities under circumstances which, in either case, constitute a substantial abdication of Executive's duties and responsibilities of his office. If Executive's employment is terminated by the Company for Cause, he shall be paid compensation and provided benefits in accordance with the provisions of the first paragraph of Section 4 above, provided that his cash compensation shall be reduced by the amount of any monetary damage suffered by the Company due to the Cause, prorated over the term of such payments, and Executive shall not receive any stock bonus. 6. Resignation. Executive may voluntarily resign from the Company after giving 90 days' prior written notice of his intention to resign and the Term of Employment shall terminate on the effective date of such resignation. If Executive resigns or otherwise voluntarily leaves the Company's employment, he shall forfeit all compensation and non-vested benefits, from and after the effective date of such resignation, provided in this Agreement. Executive will comply with Sections 7, 8, 9, 10 and 11 of this Agreement in the event of such resignation. If Executive resigns or otherwise voluntarily leaves the Company s employment during the 90-day period following a change in the chief executive officer of the Company, the provisions of Section 11 shall not apply, at the Executive s option. 7. Executive s Acknowledgments. a. The Executive acknowledges and agrees that: (i) in the course of the Executive s employment by the Company [it will be necessary for the Executive to acquire or develop] confidential information relating to the Company and its business, including but not limited to information concerning the Company s sales, sales volume, sales methods, sales proposals, trade secrets, confidential information of customers, pricing information, the Company s processes, computer programs, system documentation, ideas, improvements, inventions or other confidential or proprietary information belonging to the Company, or relating to the Company s affairs (collectively referred to here as the Confidential Information ); (ii) the Confidential Information is the property of the Company; (iii) the use, misappropriation or disclosure of the Confidential Information would constitute a breach of trust and could cause irreparable injury to the Company; (iv) it is essential to the protection of the Company s good will and to the maintenance of the Company s competitive position that the Confidential Information be kept secret and that the Executive not disclose the Confidential Information to others or use the Confidential Information to the Executive s own advantage; and (v) the covenants in Sections 7, 8, 9, 10 and 11 are (x) reasonable under all circumstances of this particular situation as to time, area and scope of activity, (y) necessary to protect the legitimate interests of the Company and (z) are not unduly burdensome to the Executive. b. The Executive further recognizes and agrees that the Executive s duties for the Company may include the preparation of materials, including written or graphic materials for the Company, and that any such materials conceived or written by the Executive shall be done within the scope of his employment as a work made for hire, as defined and used in the Copyright Act of 1976, as amended (17 U.S.C. 101 et seq.). The Executive agrees that because any such work is a work made for hire, the Company will solely retain and own all rights in said materials, including rights of copyright. c. The Executive certifies that he has not, and covenants that he will not, disclose or use during his employment by the Company any confidential information which the Executive acquired as a result of any previous employment, and Executive will not violate any agreement with a prior employer. Additionally, Employer agrees to not ask Executive for any such previously obtained confidential information. 8. Intellectual Property Rights. The Executive agrees to disclose and assign to the Employer his entire right, title and interest in and to all inventions and improvements related to the Employer s business (including but not limited to all financial and sales information), whether patentable or not, whether made or conceived by him individually or jointly with others at any time during his employment by the Company hereunder. Such inventions and improvements are to become and remain the property of the Company whether or not patent applications are filed thereon, and the Executive agrees, upon request and at the expense of the Company, to make and execute applications for letters patent, in the United States and any other countries, through attorneys designated by the Company and to assign all applications and patents which may issue thereon to the Company or its nominees and to make all such other applications and execute all such documents as may be necessary to effectuate the purpose of this Section 8. The Company shall determine, in its reasonable judgment after consulting the Executive, whether any invention or improvement is related to the business of the Company. 9. Non-Disclosure of Confidential Information. The Executive agrees to hold and safeguard the Confidential Information in trust for the Company, its successors and assigns and agrees that the Executive shall not, without the prior written consent of the Company, use for personal gain or private purposes or misappropriate or disclose or make available to anyone for use outside the Company s organization at any time during the Executive s employment with the Company or subsequent to the termination of the Executive s employment with the Company for any reason, including without limitation termination by the Company for Cause or without Cause, any of the Confidential Information, whether or not developed by the Executive, except as required in the performance of the Executive s duties to the Company. 10. Non-Solicitation of Employees and Former Employees. The Executive agrees that, during the Executive s employment with the Company, or while receiving termination compensation for any reason, the Executive shall not actively solicit any employee of the Company to leave the Company for any reason whatsoever or hire any employee of the Company or person who was employed by the Company at any time during the two years preceding the termination of the Executive s employment. 11. Noncompetition. If Executive s employment is terminated by the Company without Cause, for a period of twelve (12) months subsequent to such termination, or the period during which the Company continues to compensate Executive, if longer, Executive shall not, without the prior written consent of the Board of Directors of the Company, engage, as an employee, partner, consultant, venturer, entrepreneur or otherwise, in the development, manufacture or sale of any product or service which is competitive with any product or service of the Company. If Executive s employment is terminated due to Cause, his resignation or other voluntary departure, for a period of eighteen (18) months subsequent to such termination, or the period during which the Company continues to compensate Executive, if longer, Executive shall not, without the prior written consent of the Board of Directors of the Company, engage, as an employee, partner, consultant, venturer, entrepreneur or otherwise, in the development, manufacture or sale of any product or service which is competitive with any product or service of the Company. For the purposes of this Agreement, a competitive product is defined as any electronic security or fire protection product, including CCTV and Access Control, to all existing and potential customers of Company. This Agreement shall not prohibit Executive from engaging, as an employee, partner, consultant, venturer, entrepreneur or otherwise, with a company whose primary business purpose is as an electronic security or fire protection installation company, provided the company is not otherwise competitive with the Company, after the date of termination. At the end of the term of the Agreement and thereafter, Executive agrees that he shall not compete in any way as defined above for a period of twelve (12) months if the Company elects to pay a monthly compensation equal to the average monthly cash compensation of the previous four (4) years of employment during that twelve (12) month period 12. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be given by prepaid and certified return receipt requested first class mail addressed: (i) if to the Company, to Detection Systems, Inc., 130 Perinton Parkway, Fairport, NY 14450, Attention: President; (ii) if to Executive, at his home mailing address on file with the Company; and (iii) to such other address as the party to which such notice is to be given shall have notified (in accordance with the provisions of this Section 12) as its substitute address for the purpose of this Agreement. Any notice given as aforesaid shall be deemed conclusively to have been received on the fifth business day after such mailing. 13. Amendment. It is agreed that no change or modification of this Agreement shall be made except in a writing signed by both parties. 14. Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not be affected thereby. 15. Law Governing. The validity, interpretation and effect of this Agreement shall be construed and interpreted in accordance with the laws of the State of New York, without regard to conflict of laws principles. All disputes, controversies, or differences which may arise between the parties, out of or in relation to or in connection with this Agreement, or for the breach thereof, which cannot be resolved between the parties shall be submitted to the exclusive jurisdiction of the courts of New York State sitting in Rochester, New York, USA. Prevailing party in any dispute shall be reimbursed for reasonable legal fees as part of their settlement. 16. Assignment. This Agreement shall not be assignable except to a successor by merger or purchase of substantially all of the stock or assets of the Company. This Agreement shall be binding upon the parties and any corporation, other entity or individual which, directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the respective parties. 17. Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the employment of Executive by the Company. There are no restrictions, agreements, promises, warranties, covenants or undertakings other than those expressly set forth herein. This Agreement supersedes all prior agreements, arrangements and understandings between the parties, whether oral or written, with respect to the employment of Executive. IN WITNESS WHEREOF, Executive for himself, and the undersigned director of the Company on behalf of the Company by authority of its Board of Directors, have executed this Agreement as of the day and year first above written. EXECUTIVE /s/ Lawrence R. Tracy DETECTION SYSTEMS, INC. /s/ Karl H. Kostusiak, President EX-9 10 Exhibit 8 DETECTION SYSTEMS, INC. COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Year Ended March 31, 1995 1994 1993 ------- --------- --------- Income before cumulative effect of a change in accounting principle $1,514,489 $1,144,641 $1,436,852 Add - Interest on 9% convertible 13,500 debentures (2) Add - Interest on deferred compensation 51,032 30,296 33,071 ---------- ---------- ---------- Income before cumulative effect of a change in accounting principle applicable to common stock 1,565,521 1,174,937 1,483,423 Cumulative effect of change in accounting principle 130,800 ---------- ---------- ---------- Adjusted net income applicable to common stock $1,565,521 $1,305,737 $1,483,423 ========== ========== ========== Number of shares: Weighted average number of shares 2,746,756 2,682,542 2,632,812 Add - Common stock equivalents due to Assumed exercise of stock options and warrants 30,885 46,361 65,307 Assumed conversion of shares earned in deferred compensation plan 211,497 209,170 187,729 Assumed conversion of convertible debentures(2) 31,641 --------- ---------- ---------- Total common and common equivalent shares 2,989,138 2,938,073 2,917,489 ========== ========== ========== Earnings per common and common equivalent share (1): Income before cumulative effect of a change in accounting principle $.52 $.40 $.51 Cumulative effect of a change in accounting principle .04 ---- ---- ---- Net income $.52 $.44 $.51 NOTES: (1) All per share amounts reflect the September 13, 1991 8% stock dividend. (2) During 1993, convertible debentures were dilutive only in the first quarter. Exhibit 10 DETECTION SYSTEMS, INC. COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Year Ended March 31, 1992 1991 --------- --------- Income before cumulative effect of a change in accounting principle $1,494,128 $1,907,976 Add - Interest on 9% convertible 54,000 59,400 debentures (2) Add - Interest on deferred compen- sation 26,240 30,700 --------- --------- Income before cumulative effect of a change in accounting principle applicable to common stock 1,574,368 1,998,076 Cumulative effect of change in accounting principle --------- --------- Adjusted net income applicable to common stock $1,574,368 $1,998,076 ========== ========== Number of shares: Weighted average number of shares 2,573,604 2,569,200 Add - Common stock equivalents due to - Assumed exercise of stock options and warrants 115,237 125,635 Assumed conversion of shares earned in deferred compensation plan 134,460 162,686 Assumed conversion of convertible debentures(2) 126,563 117,188 -------- -------- Total common and common equivalent shares 2,949,864 2,974,709 ========== ========== Earnings per common and common equivalent share (1): Income before cumulative effect of a change in accounting principle $.53 $.67 Cumulative effect of a change in accounting principle ---- ---- Net income $.53 $.67 NOTES: (1) All per share amounts reflect the September 13, 1991 8% stock dividend. (2) During 1993, convertible debentures were dilutive only in the first quarter. EX-10 11 EXHIBIT 9 POWER OF ATTORNEY The undersigned, being a director of Detection Systems, Inc. ("Company"), hereby constitutes and appoints Karl H. Kostusiak, Frank J. Ryan and David B. Lederer, or any of them, his true and lawful attorneys and agents, each with full power and authority to act as such without the other, to sign the name of the undersigned to the Company's fiscal 1995 Annual Report on Form 10-K, and any amendments thereto, filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and the related rules and regulations thereunder, the undersigned hereby ratifying and confirming all that said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed and delivered these presents as of this 9th day of May, 1995. /s/ Donald R. Adair POWER OF ATTORNEY The undersigned, being a director of Detection Systems, Inc. ("Company"), hereby constitutes and appoints Karl H. Kostusiak, Frank J. Ryan and David B. Lederer, or any of them, his true and lawful attorneys and agents, each with full power and authority to act as such without the other, to sign the name of the undersigned to the Company's fiscal 1995 Annual Report on Form 10-K, and any amendments thereto, filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and the related rules and regulations thereunder, the undersigned hereby ratifying and confirming all that said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed and delivered these presents as of this 9th day of May, 1995. /s/ Mortimer B. Fuller III POWER OF ATTORNEY The undersigned, being a director of Detection Systems, Inc. ("Company"), hereby constitutes and appoints Karl H. Kostusiak, Frank J. Ryan and David B. Lederer, or any of them, his true and lawful attorneys and agents, each with full power and authority to act as such without the other, to sign the name of the undersigned to the Company's fiscal 1995 Annual Report on Form 10-K, and any amendments thereto, filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and the related rules and regulations thereunder, the undersigned hereby ratifying and confirming all that said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed and delivered these presents as of this 9th day of May, 1995. /s/ Edward C. McIrvine EX-11 12 FIVE YEAR SUMMARY OF OPERATIONS Year Ended March 31, 1995 1994 1993 FOR THE YEAR Net Sale s $34,336,000 $31,355,000 $29,431,000 Income Before Taxes and Cumulative Effect of a Changes in Accounting Principle 2,592,000 1,571,000 2,356,000 Provision for Taxes 1,078,000 427,000 919,000 Cumulative Effect of a Change in Accounting Principle 131,000 Net Income 1,514,000 1,275,000 1,437,000 AT YEAR END Current Assets $17,953,000 $15,836,000 $15,764,000 Current Liabilities 2,990,000 2,389,000 3,559,000 Working CapitaL 14,963,000 13,447,000 12,205,000 Total AssetS 24,745,000 22,780,000 22,543,000 Long-term Debt and Obligations under Capital Lease 746,000 1,145,000 1,149,000 Deferred Compensation 1,528,000 1,424,000 1,229,000 Shareholders' Equity 19,194,000 17,492,000 16,059,000 Number of EmployeeS 320 354 389 Number of Shareholders 3,000 3,000 2,800 PER SHARE AMOUNTS Net Income $.52 $.44 $.51 Shareholders' Equity $6.89 $6.50 $5.98 RATIOS/PERCENTAGES Gross Profit/Sales 39.3% 37.7% 38.7% Pre-Tax Profit/Sales 7.5% 5.0% 8.0% Net Income/Sales 4.4% 4.1% 4.9% Current Ratio 6.0 to 1 6.6 to 1 4.4 to 1 Year Ended March 31, 1992 1991* FOR THE YEAR Net Sales $27,254,000 $28,135,000 Income Before Taxes and Cumulative Effect of a Changes in Accounting Principle 2,351,000 2,958,000 Provision for Taxes 857,000 1,050,000 Cumulative Effect of a Change in Accounting Principle Net Income 1,494,000 1,908,000 AT YEAR END Current Assets $13,852,000 $13,755,000 Current Liabilities 3,117,000 2,778,000 Working CapitaL 10,734,000 10,977,000 Total AssetS 20,942,000 20,630,000 Long-term Debt and Obligations under Capital Lease 1,622,000 3,120,000 Deferred Compensation 1,157,000 1,156,000 Shareholders' Equity 14,481,000 12,952,000 Number of EmployeeS 301 340 Number of Shareholders 2,300 2,200 PER SHARE AMOUNTS Net Income $.53 $.67 Shareholders' Equity $5.57 $5.06 RATIOS/PERCENTAGES Gross Profit/Sales 38.8% 40.2% Pre-Tax Profit/Sales 8.6% 10.5% Net Income/Sales 5.5% 6.8% Current Ratio 4.4 to 1 5.0 to 1 * Restated to give effect to the September 13, 1991 8% stock dividend.
EX-12 13 EXHIBIT S-2 Report of Independent Accountants on Financial Statement Schedules To the Shareholders of Detection Systems, Inc. Our audits of the financial statements referred to in our report dated May 11, 1995 appearing on page 24 of the 1995 Annual Report to Shareholders of Detection Systems, Inc. (which report and financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in the preceding index of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. PRICE WATERHOUSE LLP Rochester, New York May 11, 1995 EX-13 14 Exhibit S-8 DETECTION SYSTEMS, INC. SCHEDULE VIII - RESERVES Year ended March 31, 1995 Additions Balance at charged to Deduction: Balance beginning costs and Write-off at end Description of year expenses of assets of year - ------------------------------- -------- -------- -------- -------- Allowance for doubtful accounts $100,000 $349,550 $349,550 $100,000 Allowance for obsolete inventory 235,000 178,742 38,742 375,000 -------- -------- -------- -------- $335,000 $528,292 $388,292 $475,000 ======== ======== ======== ======== Year ended March 31, 1994 Additions Balance at charged to Deduction: Balance beginning costs and Write-off at end Description of year expenses of assets of year - ------------------------------- -------- ------- ------- -------- Allowance for doubtful accounts $100,000 $ 779 $ 779 $100,000 Allowance for obsolete inventory 265,000 10,090 40,090 235,000 -------- ------- ------- -------- $365,000 $10,869 $40,869 $335,000 ======== ======= ======= ======== Year ended March 31, 1993 Additions Balance at charged to Deduction: Balance beginning costs and Write-off at end Description of year expenses of assets of year - ------------------------------- -------- ------- -------- -------- Allowance for doubtful accounts $100,000 $ 46,028 $ 46,028 $100,000 Allowance for obsolete inventory 265,000 119,537 119,537 265,000 -------- ------- -------- -------- $365,000 $165,565 $165,565 $365,000 ======== ======== ======== ======== EX-27 15
5 0000028365 DETECTION SYSTEMS INC. YEAR MAR-31-1995 MAR-31-1995 4,580,751 2,437,842 5,016,052 (100,000) 5,255,724 17,953,275 17,416,086 (10,770,002) 24,745,293 2,989,521 0 6,469,936 0 0 12,724,265 24,745,293 34,336,336 34,449,756 20,829,843 31,689,210 10,859,367 0 168,557 2,591,989 1,077,500 0 0 0 0 1,514,489 .52 .52
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