-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MZkw0bw9BMSzLWEVerjD40JFrrflaZXueVCanIa5mkenbku+xr25UiKcIYZdsv+q GPOme3gJj8/QEcAQRJJWyg== 0000028365-99-000010.txt : 19990817 0000028365-99-000010.hdr.sgml : 19990817 ACCESSION NUMBER: 0000028365-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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-Q SEC ACT: SEC FILE NUMBER: 000-08125 FILM NUMBER: 99693183 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-Q 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to __________ Commission File Number: 0-8125 ---------------------------- DETECTION SYSTEMS, INC. (Exact name of registrant as specified in its charter) State of New York 16-0958589 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 130 Perinton Parkway, Fairport, New York 14450 (Address of principal executive offices) (Zip Code) (716) 223-4060 (Registrant's telephone number, including area code) ---------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes __X__ No _____ As of August 9, 1999 there were outstanding 6,350,213 shares of the registrant's common stock, par value $.05 per share. PART I FINANCIAL INFORMATION DETECTION SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheet (in thousands, except per share data)
Assets June 30, 1999 March 31, 1999 Current assets: (Unaudited) Cash and cash equivalents $ 7,510 $ 4,414 Accounts receivable, less allowance for doubtful accounts ($1,023 and $1,006, respectively) 22,781 20,916 Inventories, net 33,669 37,762 Other current assets 3,293 3,249 ------ ------ 67,253 66,341 ------ ------ Fixed assets, net 12,550 12,420 Goodwill, net 9,209 9,381 Other assets 5,196 4,670 ------ ------ $94,208 $92,812 ====== ====== Liabilities Current liabilities: Short term borrowings $1,518 $ 1,416 Current portion of long term debt 1,281 647 Accounts payable 7,878 7,076 Accrued payroll and benefits 2,176 1,863 Income taxes payable 1,754 2,108 Other current liabilities 3,391 4,134 ------ ------ 17,998 17,244 Other liabilities 2,659 2,645 Long term debt 16,451 17,179 Shareholders' equity: Common stock, par value $.05 per share; Authorized - 12,000 shares; Issued - 6,576 shares and 6,562 shares, respectively 329 328 Capital in excess of par value 45,128 45,073 Other accumulated comprehensive loss (323) (310) Retained earnings 15,868 14,447 ------ ------ 61,002 59,538 Less - Treasury stock, at cost (3,854) (3,780) Notes receivable for stock purchases (48) (14) ------ ------ 57,100 55,744 ------ ------ $94,208 $92,812 ====== ======
(See accompanying notes to financial statements) DETECTION SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statement of Operations and Retained Earnings (Unaudited) (in thousands, except per share data)
June 30, 1999 June 30, 1998 For the Three Months Ended: (Current Year) (Preceding Year) -------------- --------------- Net sales $34,766 $33,808 Costs and expenses: Production 20,964 21,038 Research and development 2,293 2,134 Marketing, administrative and general 9,059 8,876 ------ ------ Total costs and expenses 32,316 32,048 Operating income 2,450 1,760 Other income (expense) Net interest (expense) (220) (355) Other income (expense) 40 (42) ------ ------ Income before income taxes 2,270 1,363 Provision for income taxes 849 531 ------ ------ Net income 1,421 832 Other comprehensive (loss) Foreign currency translation adjustment (13) (115) ------ ------ Total comprehensive income 1,408 717 Retained earnings at beginning of period 14,447 9,976 Less: other comprehensive loss 13 115 ------ ------ Retained earnings at end of period $15,868 $10,808 ====== ====== Earnings per share Basic $0.22 $0.13 ==== ==== Diluted $0.21 $0.12 ==== ====
(See accompanying notes to financial statements) DETECTION SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows (Unaudited) (in thousands of dollars)
For the Three Months Ended June 30, 1999 1998 Cash flows from operating activities: ---- ---- Net income $ 1,421 $ 832 ------- ------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 651 924 Changes in assets and liabilities: Accounts receivable (1,865) (158) Inventories 4,093 (2,313) Accounts payable 802 (1,299) Accrued payroll and benefits 313 124 Other assets & liabilities (1,452) 533 ------- ------- Total adjustments 2,542 (2,189) ------- ------- Net cash provided by (used in) operating activities 3,963 (1,357) Cash flows from investing activities: Capital expenditures (810) (831) Acquisition of businesses -- (473) ------- ------- Net cash used in investing activities (810) (1,304) Cash flows from financing activities: Proceeds from borrowings 102 2,095 Principal payments on debt and capital lease obligations (94) (641) Common stock transactions, net (52) 7 ------- ------- Net cash (used in) provided by financing activities (44) 1,461 Effect of exchange rates (13) (114) ------- ------- Net increase (decrease) in cash and cash equivalents 3,096 (1,314) Cash and cash equivalents at beginning of period 4,414 3,160 ------- ------- Cash and cash equivalents at end of period 7,510 $ 1,846 ======= ======= Cash paid during the year for: Interest $ 375 $ 419 ======= ======= Income taxes $ 1,400 $ 313 ======= =======
(See accompanying notes to financial statements) DETECTION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 (Unaudited) NOTE 1. GENERAL The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The interim consolidated financial statements include the consolidated accounts of Detection Systems, Inc. and its majority-owned subsidiaries (collectively, "the Company") with all significant intercompany transactions eliminated. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented have been made. Certain prior period balances have been reclassified to conform with the current period presentation. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such SEC rules and regulations. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended March 31, 1999. Cash flow statement -- Non-cash transactions during the first quarter of fiscal 1999 consisted of the acquisition of certain businesses with shares of the Company's common stock. See Note 3. NOTE 2. INVENTORIES Major classifications of inventory follow (in thousands): June 30, 1999 March 31, 1999 ------------- -------------- Component Parts $11,790 $14,838 Work In Process 2,059 2,464 Finished Products 19,820 20,460 ------ ------ $33,669 $37,762 ====== ====== NOTE 3. ACQUISITIONS Fiscal 1999 Acquisitions - In June 1998, the Company acquired all of the outstanding shares of Efsec AB("Efsec")for approximately $1,250,000, comprised of cash and 28,161 shares of its common stock. Efsec is a Swedish distributor of electronic security equipment with annual net sales of approximately $3,000,000 prior to its acquisition. In June 1998, the Company acquired all of the outstanding stock of Alarm Center Kft ("Alarm Center") for $135,000 in cash. Alarm Center is a Hungarian distributor of electronic security equipment with annual net sales of approximately $500,000 prior to its acquisition. These transactions have been accounted for as purchases and, accordingly, the results of these businesses are included in the consolidated financial statements as of the date of acquisition. The financial statements reflect the final allocation of the purchase price for each business. NOTE 4 - EARNINGS PER SHARE There are no significant reconciling items between net income as presented in the consolidated statement of operations and net income available to common stockholders used in the calculation of earnings per share. Reconciling items between the number of shares used in the calculation of basic and diluted earnings per share relate to deferred compensation plans, options and warrants, as follows (in thousands): Three months Ended June 30, 1999 1998 ---- ---- Weighted average number of shares outstanding 6,336 6,291 Shares associated with deferred compensation, option and warrant plans 482 524 NOTE 5 - RESTRUCTURING The Company recorded a restructuring charge of approximately $400,000 during the first quarter of fiscal 1999 for severance costs related to the termination of employees at the Fairport, New York and Southall, England facilities. The charge has been included in the results from continuing operations and had a material impact on operating results in the first quarter of 1999. NOTE 6 - GEOGRAPHIC INFORMATION The Company's operating structure includes operating segments in the United States, Asia Pacific and Europe. Management evaluates the performance of its operating segments separately to monitor the different factors affecting financial performance in the different regions. Segment profit or loss includes substantially all of the segment's costs of production, distribution and administration. The Company manages income taxes on a global basis, thus, the Company evaluates segment performance based on profit or loss before income taxes. The following table presents net sales and income (loss) before income taxes of the Company's domestic and foreign operations. Net sales and income (loss) before income taxes of the Company's domestic operations include the impact of export sales. Inter-area sales are presented on a basis intended to reflect the market value of the products as nearly as possible.
For the Three Months Ended June 30, 1999 1998 ---- ---- (in thousands) Sales to unaffiliated customers United States operations $21,223 $22,032 Asia Pacific operations 5,653 4,774 European operations 7,890 7,002 ------- ------- $34,766 $33,808 ======= ======= Sales between affiliates United States operations $2,262 $1,797 Asia Pacific operations 7,250 7,688 European operations 117 90 ------ ------ $9,629 $9,575 ====== ====== Income (loss) before income taxes United States operations $1,070 $1,275 Asia Pacific operations 874 725 European Operations (205) (318) Eliminations 531 (319) ----- ----- $2,270 $1,363 ===== =====
NOTE 7 - OTHER MATTERS The Company's Board of Directors has authorized the repurchase of up to $10,000,000 of the Company's common stock in open market transactions. DETECTION SYSTEMS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company is a supplier of equipment to the electronic protection industry. The Company designs, manufactures and markets electronic detection, control and communication equipment for security, fire protection, access control and closed circuit television ("CCTV") applications, offering products primarily for the commercial and mid- to high-end residential portions of the market. From its founding in 1968 until 1995, the Company was primarily a provider of security sensor devices for the domestic market. In 1995, the Company adopted a strategy designed to expand its product offerings, establish an international sales presence, increase its manufacturing capacity and improve its overall cost structure. The Company has since made nine acquisitions, opened four sales offices and established a manufacturing facility in Asia. These initiatives have enabled the Company to significantly expand its product catalog and market reach and to increase its net sales from $34,336,000 in fiscal 1995 to $138,045,000 in fiscal 1999. The Company recognizes net sales upon shipment of products to customers. Production expenses include materials, direct labor and manufacturing overhead as well as an allocated portion of indirect overhead. Outgoing freight, customs and other costs associated with delivery of products to customers are classified under marketing, administrative and general expenses. Research and development expenses include costs associated with salaries and benefits for certain engineering employees, supplies, agency approvals, depreciation and occupancy, as well as charges for independent testing and independent contractors engaged for specific projects. Marketing, administrative and general expenses include costs related to the Company's sales efforts and corporate and general administrative functions, including costs of executive, administrative and sales personnel, marketing/selling supplies, advertising, depreciation and professional fees. Results of Operations The following table sets forth, for the periods indicated, the percentages which certain items of income and expense bear to net sales:
(Unaudited) Fiscal Year Ended Three Months Ended March 31, June 30, 1999 1998 1999 1998 Net sales 100.0% 100.0% 100.0% 100.0% Costs and expenses: Production 61.7 65.6 60.3 62.2 Research and development 6.1 6.8 6.6 6.3 Marketing, administrative and general 25.9 23.8 26.1 26.3 ---- ---- ---- ---- Operating income 6.3 3.8 7.0 5.2 Net interest expense (1.1) (1.6) (0.6) (1.1) Other income (expense) 0.1 (0.4) 0.1 (0.1) ---- ---- ---- ---- Income before income taxes 5.3 1.8 6.5 4.0 Provision for income taxes 2.1 0.7 2.4 1.6 ---- ---- ---- ---- Net income 3.2% 1.1% 4.1% 2.4% === === === ===
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 The Company's net sales increased 2.8% to $34,766,000 in the first quarter of fiscal 2000 from $33,808,000 in the comparable period in fiscal 1999. The net sales of acquired businesses accounted for $550,000 of this increase while sales from on-going operations accounted for $408,000. Net sales during this period by the Company's on-going operations have been favorably impacted compared to the year ago period by strong sales in the Asia-Pacific region, which increased 18.0%. Sales by on-going operations in the Unites States and European regions were consistent with the year ago period. Production expenses decreased 0.4% to $20,964,000 in the fiscal 2000 period from $21,038,000 in the comparable period in fiscal 1999. As a percentage of net sales, production expenses decreased to 60.3% in the fiscal 2000 period compared to 62.2% in the comparable period in fiscal 1999. The decrease in production expenses in the aggregate and as a percentage of net sales was primarily due to improvements in the Company's manufacturing cost structure. Research and development expenses increased 7.5% to $2,293,000 in the fiscal 2000 period from $2,134,000 in the comparable period in fiscal 1999. As a percentage of net sales, research and development expenses increased to 6.6% in the fiscal 2000 period from 6.3% in the comparable period in 1999. The increase in research and development expenses is primarily attributable to modest increases in headcount to support the Company's research and development efforts. Marketing, administrative and general expenses increased 2.1% to $9,059,000 in the fiscal 2000 period from $8,876,000 in the comparable period in fiscal 1999. The year ago period included a $400,000 restructuring charge. Excluding the impact of this charge, marketing, administrative and general expenses increased 6.9%. Approximately $400,000 of this increase relates to the acquisition of Efsec and Alarm Center (See Note 3). The remaining increase is attributable to the addition of personnel in our sales and marketing departments. As a percentage of net sales, marketing, administrative and general expenses decreased to 26.1% in the fiscal 2000 period from 26.3% in the comparable period in fiscal 1999. Net interest expense decreased to $220,000 in the fiscal 2000 period from $355,000 in the comparable period in 1999, as borrowings outstanding were lower during the current period. The Company's effective income tax rate for the fiscal 2000 period was 37.4% compared to 39.0% for the comparable period in fiscal 1999. Liquidity and Capital Resources The Company considers liquidity to be its ability to meet its long- and short-term cash requirements. Prior to 1996, those requirements were primarily met by cash generated by the Company's operating activities and cash reserves. Since the implementation of the Company's strategy designed to enhance its product offerings, manufacturing capacity and international operations, particularly its acquisitions and the development of the Asia facility, the Company has required external sources of financing to satisfy its liquidity needs. Three Months Ended June 30, 1999. During the three months ended June 30, 1999, the Company's operating activities provided $3,963,000 of operating cash flow. Net income, depreciation and amortization provided $2,072,000. A decrease in inventories provided $4,093,000. An increase in accounts payable provided $802,000, while an increase in accounts receivable used $1,865,000. Other account changes used $1,139,000 of operating cash flow. During the three months ended June 30, 1999, cash used for investing activities was $810,000, relating to capital expenditures. During the three months ended June 30, 1999, cash used in financing activities was $44,000, primarily representing principal repayments of debt. Capital Resources. On June 30, 1999, the Company had cash balances of $7,510,000. On that date, the Company had a $17,000,000 revolving credit facility that was not drawn. This credit facility bears interest based upon either the federal funds rate, the prime rate or LIBOR, each adjusted by a factor which varies based upon the rates of funded debt to earnings before interest, tax, depreciation and amortization, and matures on July 31, 2000. The Company expects to continue to pursue expansion/acquisition opportunities and the development of new products and markets. Significant expenditures will also include continued research and development investment in detection, control and communication projects. The Company also plans to continue its efforts to market its products internationally. The Company's Board of Directors has authorized the repurchase of up to $10,000,000 of the Company's common stock in open market transactions. The Company believes that the combination of its current cash balances, cash flows from operations and existing credit facilities will be sufficient to fund its planned operations during fiscal 2000. However, there can be no assurance that existing cash flow will be sufficient to fund the Company's on-going operations. Year 2000. The Company has appointed a team to assess the impact of the year 2000 on its information systems, products, and business. This team includes two members of senior management and is led by the Vice President of Operations. To ensure year 2000 compliance, the Company has established specific categories to be reviewed: Products. The Company places a high priority on ensuring its products are year 2000 ready. The Company has completed its review of all products that are manufactured domestically and at its Asia manufacturing facility as well as products purchased for resale by its domestic businesses. The Company believes these products to be year 2000 compatible. The Company is completing its assessment of year 2000 compatibility of products manufactured and purchased for resale at its other foreign subsidiaries. The Company does not expect significant issues with year 2000 readiness of products sold by its foreign subsidiaries as products sold by the Company generally do not use date information for calculations or comparisons. Manufacturing. Some of the tools and equipment (hardware and software) used to develop and manufacture the Company's products are date-sensitive. The Company believes that the date-sensitive tools and equipment used by it to manufacture products are now year 2000 compatible. As a result the Company does not expect significant interruption to its manufacturing capabilities because of the failure of tools and/or equipment. Non-Manufacturing Business Applications. The Company is in the process of fixing and testing all non-manufacturing business applications such as core financial information and reporting systems, procurement, human resources/payroll, factory applications, customer service systems, and revenue systems, and does not expect any significant year 2000 problems in this area. The Company's domestic business information systems required upgrades and enhancements to be made year 2000 compatible. These upgrades have been made and are currently being tested. Necessary upgrades to other information technology infrastructure have been identified and remediation is in process. Testing of year 2000 upgrades is expected to be completed prior to the year 2000. Most of the Company's non-US subsidiaries' information systems require various degrees of upgrade or replacement to be capable of handling year 2000 issues (excluding the Hong Kong subsidiary, which utilizes the Company's domestic information system). The Company has purchased a new enterprise resource planning system capable of handling the year 2000 that is currently being implemented at its foreign subsidiaries. This implementation is expected to be complete at all locations prior to December 31, 1999. The Company expects to be capable of handling the year 2000 at all locations without significant interruption to business activity. Facilities and Infrastructure. The Company has evaluated its facilities and infrastructure (health, safety and environment systems, buildings, security/alarms/doors, desktop computers, networks) to ensure they are year 2000 compatible. Upgrades are being implemented where needed and the Company does not expect significant interruption to its operations because of year 2000 problems with its facilities and infrastructure. Logistics. Of importance to the Company for year 2000 is the readiness of suppliers and the products the Company procures from suppliers as well as customers and service providers. The Company has a comprehensive program to identify and obtain year 2000 information from its critical suppliers, customers and service providers. The program includes awareness letters, questionnaires, and a review of year 2000 web-sites. The Company has mailed a questionnaire to substantially all suppliers, customers and service providers regarding year 2000 readiness. Responses are currently being received and evaluated and no significant issues have been noted as of the date of this report. If a supplier, customer or service provider is of concern regarding year 2000 readiness, the Company will develop contingency plans to minimize the year 2000 risk. The Company estimates that its aggregate costs for year 2000 activities from 1997 through 2000 will be approximately $875,000. External costs incurred through December 31, 1998 were approximately $795,000 and primarily related to computer hardware and software. It is anticipated that the remaining year 2000 costs will relate to computer software, computer hardware and consulting fees. The Company does not separately track internal costs relating to the year 2000, and they are not included in the Company's estimate of year 2000 costs. These costs do not include estimates for potential litigation, which at the present time is not viewed as a significant risk. The Company reviews and updates data for costs incurred and forecasted costs each quarter. These costs are based on management's estimates, which were determined based on assumptions of future events, some within the Company's control, but some outside the Company's control. Management's estimate of the costs and completion dates are dependent on various factors including the availability of skilled resources and the ability to locate and modify all relevant software code. No amount of preparation and testing can guarantee year 2000 compliance. Nevertheless, the Company recognizes that failing to resolve its year 2000 issues on a timely basis would, in a worst case scenario, significantly limit its ability to manufacture and distribute its products and process its daily business transactions for a period of time, especially if such failure is coupled with third party or infrastructure failures. Similarly, the Company could be significantly affected by the failure of one or more significant suppliers, customer or components of the infrastructure to conduct their respective operations without interruption after 1999. Because of the difficulty of assessing the year 2000 compliance of such third parties, the Company considers the potential disruptions caused by such parties to present the most reasonably likely worst-case scenarios. Adverse effects on the Company could include business disruption, increased costs, loss of sales and other similar ramifications. However, the Company believes it is taking appropriate preventive measures and will be successful in avoiding any material adverse effect on the Company's operations or financial condition. For additional information regarding the risks associated with the Company's compliance with year 2000, see "Risk Factors-Year 2000" in Item 1 of the Company's Form 10-K for the year ended March 31, 1998. Euro Conversion. The Company is assessing the potential impact that may result from the completion of the euro conversion in a number of areas, including the following: (1) accounting and tax; (2) management information systems required to accommodate euro-denominated transactions; (3) the impact on currency exchange costs and currency exchange rate risk,; and (4) the impact on existing contracts. There has been no significant impact to the Company resulting from the initial transition to the euro. Dividend Policy. The Company is dedicated to promoting shareholder value through long term profitability and growth and believes that continued investments in future product development are essential to this goal. For this reason, it has been the Company's policy to not pay cash dividends. Forward-Looking Statements This quarterly report contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs, including, but not limited to, statements concerning industry performance, the Company's operations, performance, financial condition, growth and acquisition strategies, margins and growth in sales of the Company's products. For this purpose, any statements contained in this quarterly report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "plan," "anticipate," "intend," "could," "estimate," "continue," "goal" or "strategy" or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company's control, and actual results may differ materially depending on a variety of important factors, including those described previously in the "Risk Factors" section of the Company's 1999 Form 10-K for the year ended March 31, 1999. PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. At the Annual Meeting of Shareholders held on August 12, 1999, the following individuals were elected to the Board of Directors:
Nominated Director FOR WITHHELD ABSTAINED ------------------ --------- --------- --------- Donald R. Adair 4,508,711 1,414,081 0 Mortimer B. Fuller III 4,508,736 1,414,056 0 Karl H. Kostusiak 4,508,669 1,414,123 0 David B. Lederer 4,508,736 1,414,056 0 Edward C. McIrvine 4,508,736 1,414,056 0
The following proposals were also approved: FOR WITHHELD ABSTAINED --------- -------- --------- Amend the Company's 1997 Stock Option Plan to increase the number of shares authorized for options under the Plan 4,120,278 1,599,443 44,017 FOR WITHHELD ABSTAINED --------- -------- --------- Adopt the Company's Non- Employee Director Stock Option Plan and to ratify options granted pursuant to the Plan 4,124,604 1,593,965 45,169 FOR WITHHELD ABSTAINED --------- -------- --------- Amend the Company's Certificate of Incorporation to achieve consistency with recent changes in New York Business Corporation Law concerning approval of loans to directors 5,515,404 209,576 38,758 FOR WITHHELD ABSTAINED --------- --------- --------- PricewaterhouseCoopers LLP be retained as independent auditors of the Company for the fiscal year ending March 31, 2000 5,791,870 97,399 33,523
Item 5. Other Information A. Shareholder Proposals - Deadline for Inclusion in Proxy Materials As set forth in the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders, any proposal by a stockholder of the Company intended to be presented at the 2000 Annual Meeting of Stockholders must be received by the Company on or before March 11, 2000 to be included in the proxy materials of the Company relating to such meeting. B. Shareholder Proposals - Discretionary Voting of Proxies In accordance with recent amendments to Rule 14a-4 under the Securities Exchange Act of 1934, if notice of a proposal by a shareholder of the Company intended to be presented at the 2000 Annual Meeting of Shareholders is received by the Company after May 25, 2000, the persons authorized under the Company's management proxies may exercise discretionary authority to vote or act on such proposal if the proposal is raised at the 2000 Annual Meeting of Shareholders. Item 6. Exhibits and Reports for Form 8-K. A. Exhibits See Exhibit Index B. Reports on Form 8-K No reports on Form 8-K were filed during the quarter. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DETECTION SYSTEMS, INC. Registrant DATE: August 16, 1999 By: /s/ Karl H. Kostusiak Karl H. Kostusiak, President By: /s/ Frank J. Ryan Frank J. Ryan, Vice President, Secretary and Treasurer (Principal Financial Officer) By: /s/ Christopher P. Gerace Christopher P. Gerace, Vice President Chief Accounting Officer (Principal Accounting Officer) EXHIBIT INDEX Item No. Exhibits Location 3(a) Detection Systems, Inc. Incorporated by reference to Certificate of Exhibit 3 of the Company's Incorporation as amended Quarterly Report on Form 10-Q for the quarter ended 9/30/98 3(b) Detection Systems, Inc. Incorporated by reference to By-Laws as amended Exhibit 3(b) of the Company's 1997 Annual Report on Form 10-K 10(a) Medical reimbursement plan Incorporated by reference to Exhibit 10(b) of the Company's 1997 Annual Report on Form 10-K 10(b) Employee stock purchase plan Incorporated by reference to Exhibit 10 of the Company's 1994 Annual Report on Form 10-K 10(c) Fleet Amended & Restated Incorporated by reference to Credit Facility Agreement Exhibit 10(c) of the Company's dated September 30,1998 Quarterly Report on Form 10-Q for the quarter ended 9/30/98 10(d) Deferred Compensation Plan Incorporated by reference to and Deferred Bonus Plan Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended 12/31/97 10(e) 1992 Restated Stock Option Incorporated by reference to Plan Exhibit 22 of the Company's 1995 Annual Report on Form 10-K 10(f) 1997 Stock Option Plan Incorporated by reference to Exhibit 10(o)of the Company's Registration Statement on Form S- 2 (No. 333-31951) filed on 7/24/97. 10(g) Non-Employee Director Stock Incorporated by reference to Option Plan Exhibit 10(m) of the Company's Quarterly Report on Form 10-Q for the quarter ended 9/30/98 10(h) Executive Officer Cash Incorporated by reference to Bonus Plan Exhibit 10(h)of the Company's 1999 Annual Report on Form 10-K 10(i) Executive employment Included as Exhibit 10(i) of this contract with Karl H. Quarterly Report on Form 10-Q Kostusiak 10(j) Executive employment Included as Exhibit 10(j) of this contract with David B. Quarterly Report on Form 10-Q Lederer 10(k) Stock Purchase Agreements Incorporated by reference to with Karl H. Kostusiak and Exhibit 10(n) of the Company's David B. Lederer 1997 Annual Report on Form 10-K 11 Statement re: Computation Included as Exhibit 11 of this of Per Share Earnings Quarterly Report on Form 10-Q 27 Financial Data Schedule Included as Exhibit 27 of this Quarterly Report on Form 10-Q EX-10 2 EXHIBIT 10I EMPLOYMENT AGREEMENT AGREEMENT, made as of the 1st day of June, 1999 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 capacities of Chairman, President, and Chief Executive Officer for the Term of Employment commencing as of the date of this Agreement (the "Commencement Date"). The Company agrees to provide Executive with such office and such operational and administrative support as is consistent with his position. Executive's employment under this Agreement will be in the vicinity of Rochester, New York. "Term of Employment" as used herein shall mean the period commencing on the Commencement Date and continuing thereafter for a period of 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. Except as provided in Section 4 below, upon the end of the Term of Employment hereunder, the Non-Competition, Disability, and Retirement Agreement attached as Exhibit A (hereinafter the "N-CDR Agreement") shall become effective as provided in Sections 1 and 19 thereof. Whenever the N-CDR Agreement becomes effective, this Agreement shall terminate, except for any accrued liabilities hereunder. Notwithstanding any of the other provisions of this Agreement, however, this Agreement will automatically terminate upon Executive's death and thereupon all payments and non-vested benefits payable hereunder shall cease, except for any death benefits and survivor benefits for his spouse which are provided under the Company's employee plans or the N-CDR Agreement, which shall upon the death become effective pursuant to Sections 1 and 19 thereof. The Company may terminate this Agreement due to Executive's permanent disability, as determined by the Board of Directors in good faith based on the certification of an independent M.D., and in any such case the N-CDR Agreement shall thereupon become effective pursuant to Sections 1 and 19 thereof. 2. Executive's Acceptance. Executive hereby accepts the executive employment described in this Agreement. Executive further agrees that he will devote himself during reasonable business hours to performance of the duties and responsibilities of his office during the Term of Employment. Executive also agrees not to disclose trade secrets of the Company, or to engage in any other activity which is detrimental to the interests of the Company, during the Term of Employment. 3. Compensation and Benefits. The compensation and benefits which the Company shall provide Executive for his services during the Term of Employment shall include but not be limited to: (a) Base salary equal to or greater than $335,486 per year. (b) Participation in all Company executive incentive compensation plans. Such incentive compensation plans shall include an annual cash bonus equal to an amount not less than 5% of the amount by which the Company's pre-tax profits exceed 4% of net sales. If Executive is employed by the Company for only part of a year or his employment is terminated before year end, the bonus for that year will be pro rated based on the portion of the year Executive was employed by the Company (except as otherwise provided in Section 4 below). (c) Grants of options under any Company employee stock option plan, where permitted by the Plan, in such amounts as are determined by the Board of Directors or the Committee of the Board administering such plan; (d) Participation in all Company pension, deferred compensation, insurance, health and welfare or other benefit plans in which the Company's senior executives are entitled to participate; and (e) Continuation of all plans in which the Executive participates, including existing fringe benefits and executive perquisites to which Executive is entitled as of the date of this Agreement. 4. Termination Without Cause. The Company may terminate Executive's employment without Cause as hereinafter defined and for any reason. If Executive is terminated without Cause, Company will continue to compensate and provide benefits to Executive as if he had continued in the Company's employment under this Agreement for the then remaining balance of the Term of Employment or for a period of three (3) years from the date of termination, whichever is longer. So long as Executive is being paid currently under this Section 4, Executive shall comply with Section 2 of the N-CDR Agreement. At the end of the period set forth above in this Section 4 (during which period the Company shall continue to compensate Executive pursuant to this Agreement), the N-CDR Agreement shall become effective in accordance with Sections 1 and 19 thereof. 5. Termination for Cause. The Company may terminate Executive's employment immediately and without prior notice to the Executive for "Cause" as defined below. The existence of Cause shall be determined by the Company's Board of Directors (other than Executive) acting in good faith. "Cause" is defined, and shall be limited to, a good faith determination by the Board of Directors that any of the following has occurred: (a) Executive has knowingly misappropriated for his benefit a material amount of funds or property of the Company; (b) Executive has obtained a material personal profit from any illegal Company transaction with a third party; (c) Executive has obtained a material personal profit from the use of the Company's trade secrets other than on its behalf; (d) The Company has suffered material financial harm from knowingly illegal action by Executive, other than on the Company's behalf or for its benefit; or (e) Willful and prolonged absence from work by Executive or willful refusal by Executive to perform his duties and responsibilities under circumstances which, in either case, constitute a substantial abdication of Executive's duties and responsibilities of his office, provided that Executive has been given written notice of that absence or refusal and Executive has not substantially cured the stated Cause within 60 days thereafter (but action taken by Executive in reliance upon Section 7 below shall not be deemed an absence or refusal for purposes of this Section 5). If Executive's employment is terminated by the Company for Cause, he shall continue to be paid compensation and provided benefits in accordance with the provisions of Section 4 above and the N-CDR Agreement, provided that his cash compensation shall be reduced by the amount of any monetary damage suffered by the Company due to the Cause, as determined by a court of competent jurisdiction, prorated over the actuarially determined term of such payments and based on a final court determination; and at the end of the period specified in Section 4, the N-CDR Agreement shall become effective in accordance with Sections 1 and 19 thereof. 6. Resignation. Executive may voluntarily resign from full time employment with the Company, effective no earlier than 90 days after the Executive has given written notice thereof to the Company's Secretary or the Chairman of the Compensation Committee of the Board of Directors and the Term of Employment shall terminate on the effective date set forth in the notice. If Executive resigns or otherwise voluntarily leaves the Company's employment prior to a Change in Control, he shall forfeit all compensation and non-vested benefits, from and after the effective date of such resignation, except that upon that effective date the N-CDR Agreement shall become effective in accordance with Sections 1 and 19 thereof. 7. Change in Control. (a) A "Change in Control" of the Company shall be deemed to have occurred if: (1) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company or any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (2) there is elected 35% or more of the members of the Board of Directors of the Company without the approval of the nomination of such members by a majority of the Board serving prior to such election; (3) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent more than 75% of the combined voting power of the voting securities of the Company, or such surviving entity, outstanding immediately after such merger or consolidation; or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as defined above) acquires more than 25% of the combined voting power of the Company's then-outstanding securities; or (4) The shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (b) If: (i) any Change in Control of the Company occurs while this Agreement is effective, and (ii) Executive gives notice to the Company or the Company (acting upon a determination of its Board of Directors) gives notice to Executive, in either case to the effect that the six month period called for by this Section 7(b) shall begin to run, and (iii) Executive's employment is terminated by Executive or by the Company (other than for Executive's death or disability) within six months after the date the notice provided for in (ii) above is received (in Executive's case the termination being effected by Executive giving notice within that six month period, effective within 30 days after the notice is given, that his employment is terminated), regardless the reason, if any, and regardless which party gave the notice provided for in (ii) above, then the Company shall, upon receipt of said notice, immediately pay, transfer, and provide to Executive the following amounts, benefits, and assets: (1) The Company shall pay to Executive the sum of Executive's full base salary through the effective date of termination of his employment at the rate in effect at the time of termination or at the time the Change in Control occurs, whichever is higher, and an amount equal to the amount of any bonus which has been earned by him but not yet paid to him. These two amounts shall be paid to Executive in a lump sum within five days following the effective date of termination, or in the case of a bonus which is not readily calculable at that time, within five days after the bonus can be calculated. (2) The Company shall pay to Executive an amount equal to three times the highest total cash 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 (1) above. (3) The Company shall pay to Executive an amount equal to the total amounts that would be expended for the benefits to be provided Executive under Section 3 above if Executive had continued to be an employee of the Company for three (3) years after the termination (such as, but not limited to, the life, accident, disability, health and travel insurance, and other benefits in effect for Executive at the time notice of termination is given or at the time the Change in Control occurs, whichever may be higher in the case of each benefit). This amount shall be paid to Executive as provided in the last sentence of subsection (1) above either in cash or in the form of an annuity contract issued by an independent insurance company licensed to do business in New York that will provide payment of all such total amounts. (4) All options and other rights that Executive may hold to purchase or otherwise acquire Common Stock of the Company shall immediately become exercisable in full for the total number of shares that are or might become purchasable thereunder, in each case without further condition or limitation except the giving of notice of exercise and the payment of the purchase price thereunder (but without amendment of the plan under which they were issued). At his discretion, Executive may elect to surrender to the Company his rights in any such options and rights held by him and, upon that surrender, the Company shall pay him an amount in cash equal to the aggregate spread between the exercise prices of all those options and rights and the value of the Common Stock purchasable thereunder (or of any other security into which the Common Stock has been exchanged or converted) as of the date of the termination of employment, the value to be determined by the reported last sale price of the Common Stock or that other security (or the mean between the reported last bid and asked prices) on that date on NASDAQ (or, if it is not NASDAQ, on whatever may then be the principal exchange or quotation system on which the Company's Common Stock or that other security is traded at that time). (5) The Company shall repay any policy loans previously taken on the Company's insurance policies on Executive's life (provided that the directors of the Company were given written notice promptly after the making of any such loans which were made while Executive was the chief executive officer of the Company), and then shall transfer to Executive any and all of its right, title, and interest in and to all Company life insurance policies on Executive's life (and upon that transfer, Executive shall be deemed to have released the Company from any and all obligations it then owes to him to maintain and pay premiums on those policies, all other provisions of any agreements under which those policies were agreed to be maintained, however, to remain in effect). (6) In addition to the amounts specified in clauses (1) through (5) of this paragraph (b), the Company shall pay to Executive, at the same time as those amounts are paid, an additional amount which, after taking into account all federal, state, and local income and excise taxes that Executive is required to pay with respect to receipt of the additional amount under this clause (6), will render the net after-tax payment to Executive under this clause (6) equal to the sum of: (A) all federal, state, and local excise taxes that Executive is required to pay with respect to the payments made pursuant to clauses (1) through (5) above; and (B) all federal, state, and local income and excise taxes that Executive is required to pay with respect to the payment made pursuant to this clause (6). The foregoing amounts of federal, state, and local income and excise taxes shall be determined initially by a nationally recognized firm of independent public accountants retained by Executive at his expense or, at Executive's option, by independent public accountants at the Company's expense, and such determination and the basis therefor shall be furnished in writing to Executive and the Company. Payment shall be made by the Company in accordance with that initial determination regardless whether there is a dispute over the accuracy thereof. If either party disputes that initial determination the matter shall promptly be referred to a nationally recognized firm of independent public accountants selected by the Executive (which firm shall not have been involved in the initial determination), and Executive and the Company shall promptly furnish to that firm such information as it reasonably requests. The Company shall make such additional payment to Executive or Executive shall refund to the Company, as the case may be, in accordance with the latter firm's determination. The fees and expenses of that firm shall be borne by the Company. (c) The Company may withhold from any payments due to Executive under paragraph (b) such amounts as its independent public accountants may determine are required to be withheld under applicable federal, state, and local tax laws. (d) If applicable, the provisions of Section 7(b) shall control over the provisions of Sections 4 and/or 5. In the event that Executive's employment is not terminated by the Company or the Executive within the six month period specified in Section 7(b), the provisions of Sections 4 and 5 once again shall be applicable thereafter. (e) In addition, if any Change in Control of the Company occurs while this Agreement is effective, the Company shall purchase and fully pay for an annuity policy sufficient to pay the retirement benefits called for by Section 9 of the N-CDR Agreement and shall transfer ownership thereof to a "rabbi" trust for the benefit of Executive (but subject to the claims of Company creditors to the extent required under applicable tax laws so that the transfer to the trust will not itself be an event upon which Executive recognizes income for federal or state income tax purposes). In lieu of purchasing the annuity policy, the Company may deposit cash into such a trust sufficient to provide, based on assumptions believed reasonable in the written opinion of a nationally recognized employee benefits organization, for assuring payment of those retirement benefits to Executive and his spouse. (f) In addition to payment of the amounts set forth in Section 7(b) above and the funding of the "rabbi" trust as provided in Section 7(e) above, beginning on the effectiveness of any termination of employment to which Section 7(b) applies, the Company shall compensate and pay benefits to and may retain the consulting services of Executive in accordance with the N-CDR Agreement, which shall become effective in accordance with Sections 1 and 19 thereof. 8. Retirement. The Company and Executive hereby agree that Executive shall retire from full-time employment with the Company effective with the close of business on December 31 of the year in which Executive attains the age of 69, and beginning on January 1 of the next year, the Company will pay Executive retirement benefits for his lifetime and for his spouse's lifetime, if his spouse survives him, in accordance with the applicable provisions of the N-CDR Agreement, which shall become effective in accordance with Sections 1 and 19 thereof. 9. Change in Employment Status. If approved by the Executive and the Board of Directors during the Term of Employment, Executive may become an independent consultant with terms and conditions of that relationship substantially equal in all respects to those set forth in the N-CDR Agreement, which in that event shall become effective in accordance with Sections 1 and 19 thereof. . 10. Expenses and Interest. If the Company is found by a court of competent jurisdiction to have breached this Agreement, the Company shall pay the costs and expenses (including reasonable attorneys fees and related expenses) incurred by Executive in any litigation seeking damages in respect of such breach or to enforce the performance of this Agreement by the Company, together with interest on each installment of wages or benefits paid late by the Company calculated to the date of actual payment at an annual rate equal to 3% over the highest rate then paid by the Company under its short term borrowing arrangements with an independent institutional lender (and if there is no such lender, then 4% above the prevailing prime rate as reported in the Wall Street Journal). . 11. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be delivered personally or given by prepaid, certified, return receipt requested, first class mail addressed: (a) if to the Company, to at least two members of the Board of Directors at the addresses to which the Company then sends correspondence to them; (b) if to Executive, at his home mailing address on file with the Company; and (c) to such other address as the party to which such notice is to be given shall have notified (in accordance with the provisions of this Section 11) as its substitute address for the purpose of this Agreement. Any notice given as aforesaid shall be deemed conclusively to have been received on the fifth business day after such mailing. 12. Amendment. It is agreed that no change or modification of this Agreement shall be made except in a writing signed by both parties. 13. Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal, or unenforceable in any respect, the validity, legality, and enforceability of the remaining provisions shall not be affected thereby. 14. Law Governing. The validity, interpretation, and effect of this Agreement shall be governed by the laws of the State of New York. 15. Entire Agreement. This Agreement, including the N-CDR Agreement, which is being executed simultaneously herewith, contains the entire understanding of the parties with respect to the employment of Executive by the Company. There are no restrictions, agreements, promises, warranties, covenants, or undertakings other than those expressly set forth herein. This Agreement supersedes all prior agreements, arrangements, and understandings between the parties, whether oral or written, with respect to the employment of Executive. 16. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the heirs, legatees, administrators, successors, and assigns of the respective parties. IN WITNESS WHEREOF, Executive, for himself, and the undersigned director of the Company, acting on behalf of the Company by authority of its Board of Directors, have executed this Agreement as of the day and year first above written. /s/ Karl H. Kostusiak Karl H. Kostusiak, Executive DETECTION SYSTEMS, INC. By: /s/ Donald R. Adair Donald R. Adair, Chairman of the Compensation Committee of the Board of Directors Attachment: Exhibit A - Non-Competition, Disability, and Retirement Agreement EXHIBIT A NON-COMPETITION, DISABILITY, AND RETIREMENT AGREEMENT AGREEMENT made as of the 1st day of June, 1999 between Karl H. Kostusiak ("Executive") and Detection Systems, Inc., a New York corporation ("Company"). It is the intent that this Agreement will supersede the Employment Agreement, dated concurrently herewith, upon the occurrence of one of the contingencies set forth in Section 19 below. WITNESSETH: In consideration of the mutual covenants contained herein, the parties agree as follows: 1. Effectiveness and Terms. This Agreement shall be binding on the parties upon its execution, which is concurrent with execution of an Employment Agreement between the parties bearing the same date as this Agreement (the "Employment Agreement"), and this Agreement shall become effective when any one of the contingencies set forth in Section 19 occurs (the "Commencement Date" herein). "Term of Consulting Service" as used herein shall mean the period commencing on the Commencement Date and continuing thereafter through December 31 of the year in which Executive's 69th birthday occurs, unless the Company and Executive agree in writing to extend the Term of Consulting Service, in which case the Term of Consulting Service shall have the meaning as determined at that time; provided, however, that Executive's consulting services may be earlier terminated as hereinafter expressly set forth, in which event the Term of Consulting Service shall mean the period from the Commencement Date through the date of such earlier termination. Except as expressly provided in this Agreement, terms defined in that Employment Agreement are used herein with the same meanings. 2. Non-Competition. During any period (a) in which Executive is being paid currently the compensation called for by Section 3 below, (b) in which Executive is being paid currently for disability benefits as provided under Section 11 below, or (c) in which Executive is being paid currently for retirement benefits as provided under Section 9 or 10 below, Executive shall not, without the prior written consent of the Board of Directors of the Company, engage, as an employee, partner, consultant, venturer, entrepreneur, or otherwise, in the development or sale of any product or service which is competitive with any product or service sold or under active development by the Company during the Term of Consulting Service. 3. Compensation for Non-Competition. In consideration for Executive's non-competition as provided in Section 2 above, the Company shall pay and provide to Executive the following compensation and benefits through December 31 of the year in which Executive attains the age of 69: (a) An annual non-competition fee equal to or greater than $154,500, that fee to be increased each year if and to the extent the CPI (defined below) has increased during the preceding year (and any fees earned as a director of the Company shall be credited to that fee), which fee shall be paid in full on January 2 of each year; (b) The Executive will not participate in any of the Company's executive incentive compensation plans except for any such plan or plans which expressly refer to this Agreement; (c) Grants of options under any Company stock option plan that permits such options, in such amounts as are determined by the Board of Directors or the Committee of the Board administering the plan; (d) Participation in Company pension, deferred compensation, insurance, health and welfare and other benefit plans in effect on the date of this Agreement; and (e) Continuation of all plans in which the Executive participates, including existing fringe benefits and executive perquisites to which Executive is entitled as of the date immediately prior to the Commencement Date under this Agreement. Beginning on the January 1 after the year in which Executive attains the age of 69, the retirement benefits set forth in Sections 9 and 10 below shall be the full consideration to be paid to Executive for his non-competition. 4. Consulting Services. If this Agreement becomes effective upon the occurrence of any contingency set forth in Section 19 other than subsection 19(b) or (c), beginning upon the date of that occurrence Executive shall hold himself available to the Company for providing consulting services to it as an independent contractor at mutually agreeable times and places; and the Company shall have the right to call upon Executive, so long as Executive is able, for up to 8 days of consulting services per year to provide information concerning matters that occurred, were developed, or were determined while Executive was a full-time or part-time employee of the Company. Unless otherwise agreed, those consulting services shall be rendered at a place and time mutually agreed (but within 25 miles of Executive's residence at the time) and shall be paid at the rate of $1,500 per day (or up to 100 hours of consulting services per year at an hourly rate to be agreed upon). Any other consulting services shall be provided if, as, and when the parties may agree. Notwithstanding any of the other provisions of this Agreement, the Term of Consulting Services will automatically terminate upon Executive's death and thereupon all payments and non-vested benefits payable hereunder and under Section 3 above shall cease, except for any death benefits and any survivor benefits for his spouse which are provided under the Company's employee plans and except for the retirement benefits set forth in Section 9 for any surviving spouse. Those retirement benefits shall be paid pursuant to Section 9 commencing after Executive's 69th birthday would have occurred, except that the surviving spouse may elect, by written notice given to the Company's President or Secretary, to receive early retirement benefits as provided in Section 10 below, in which case the provisions of Section 9 below shall apply, except that the initial retirement wage benefit shall be calculated as provided in Section 10. The Company may terminate Executive's consulting services due to Executive's permanent disability, as determined by the Board of Directors in good faith based on the certification of an independent M.D., and thereupon all payments and non-vested benefits under this Section 4 and under Section 3 shall cease except that the disability and retirement benefits shall be paid in accordance with the provisions of Sections 9, 10, and 11 below. 5. Executive's Acceptance. Executive agrees to provide the consulting services described in this Agreement. Executive further agrees that he will devote his reasonable efforts during reasonable business hours to performance of the consulting services set forth herein during the Term of Consulting Service. 6. [Intentionally left blank] 7. Termination for Cause. The Company may terminate Executive's consulting services immediately and without prior notice to Executive for "Cause" as defined below. The existence of Cause shall be determined by the Company's Board of Directors (other than Executive) acting in good faith. "Cause" is defined, and shall be limited to, a good faith determination by the Board of Directors that any of the following has occurred: (a) Executive has knowingly misappropriated for his benefit a material amount of funds or property of the Company; (b) Executive has obtained a material personal profit from any illegal Company transaction with a third party; (c) Executive has obtained a material personal profit from the use of the Company's trade secrets other than on its behalf; or (d) The Company has suffered material financial harm from knowingly illegal action by Executive other than on the Company's behalf or for its benefit. If Executive's consulting services are terminated by the Company for Cause, he shall continue to be paid compensation and benefits for his non-competition in accordance with the provisions of Section 3 above and retirement benefits in accordance with Section 9 and, if elected, Section 10 below, provided that his cash compensation (including retirement benefit payments to be provided under this Agreement) shall be reduced by the amount of any monetary damage suffered by the Company due to the Cause, as determined by a court of competent jurisdiction, prorated over the actuarially determined term of all such payments beginning on such determination. 8. Resignation. Executive may voluntarily resign from his consulting services with the Company by giving written notice thereof to the Company's President or Secretary, but no resignation shall affect Executive's obligation to provide the minimum consulting services provided for in the second sentence of Section 4 above. 9. Retirement. The Company hereby agrees that, if not ended sooner, the Term of Service as used in the Employment Agreement shall end at the close of business on December 31 of the year in which Executive attains the age of 69, and beginning on the opening of business on January 1 of the next year (and regardless whether the Term of Service ended prior to that December 31), the Company will pay Executive retirement benefits for his lifetime and for his spouse's lifetime, if his spouse survives him, as follows: (a) a retirement wage benefit initially equal to 30% of the base salary rate being paid to Executive at the end of his full time employment with the Company, increased for each year after the end of his full time employment by any increase in the CPI (as defined below), except that the retirement wage benefit shall be equal to 60% of that base salary rate at the end of Executive's full time employment with the Company, plus CPI increases, effective for any retirement year after a Change in Control and after either Executive is no longer a full time employee of the Company or Executive or the Company has given the notice provided for in Section 20(b)(ii) below, and except that the retirement wage benefit for his spouse shall be 75% of the amount thus calculated for each year after the year of Executive's death; (b) continuation of Executive's participation (for himself and his spouse) in the health program in effect on the date of this Agreement (including for dental and eye care coverage, an annual physical examination, and similar benefits); and (c) continuation of all other benefits provided at time of retirement, such continuation limited in individual benefit cost to 60% of the maximum annual cost of such benefit in any year prior to retirement, plus CPI increases, For these purposes: (1) unless otherwise agreed or directed by law or a court, "spouse" shall mean the person to whom Executive is married at the time any benefit is to be paid, or, after Executive's death, the person to whom Executive was married at the time of his death; (2) "CPI" shall mean the Consumer Price Index, all Urban Wage Earners as determined by the United States Department of Labor, Bureau of Labor Statistics, or any successor governmental agency or, lacking any such successor, any other authoritative source designated in good faith by the Board of Directors; and the wage benefit shall be increased as of January 1 each year by multiplying the wage benefit paid during the previous year by any fraction greater than one calculated by dividing the CPI most recently computed and available at the end of that previous year by the CPI most recently computed and available at the end of the year previous to that; the CPI shall not be used to decrease the wage benefit. The parties agree: (x) that the foregoing retirement benefits are in addition to any other retirement benefits that may be available to Executive (such as the Company's 401(k) savings plan), (y) that payment of these retirement benefits may be terminated if a court of law determines that Executive has violated the provisions of Section 2 above, and (z) that the Company will purchase and maintain life insurance sufficient to fund the estimated benefits for Executive's spouse (estimated no later than Executive's retirement date; any excess policy proceeds to be available, if agreed, to purchase shares of the Company's Common Stock held in Executive's estate) and the policy or policies of such insurance shall be held in trust designated for this purpose. (d) The retirement benefits provided under this Section 9 (and, if applicable, Section 10) shall be paid as provided herein regardless whether the Company has any claims against Executive for default under this Agreement or for any other breach of duty or otherwise, and, except as otherwise provided in Section 7 above, the Company shall pay those retirement benefits as provided and must pursue remedies for any such default or other breach of duty or other claim separately and independently. 10. Early Retirement Benefits. The parties agree that, in the circumstances expressly provided in this Agreement, Executive and/or Executive's spouse shall be paid early retirement benefits in accordance with the following: (a) The provisions of Section 9 shall apply to Executive's and the spouse's retirement benefits as provided therein, except as expressly modified by this Section 10, and shall be paid beginning at the time payment of the early retirement benefits actually commences as provided in this Agreement; (b) The initial retirement wage benefit shall not be the amount set forth in Section 9(a) above, but shall be calculated as follows: multiply the initial retirement wage benefit (calculated in accordance with Section 9(a) above) by the actuarially determined number of years it would be paid during Executive's then actuarially determined remaining lifespan as if Executive's 69th birthday had just occurred; then divide that amount by the number of years then actuarially determined to be Executive's actual expected remaining lifespan based on his actual age at that time. The amount thus calculated shall be the initial annual retirement wage benefit for purposes of Section 9(a) above. 11. Disability. If Executive is determined to be permanently disabled in accordance with the provisions of Section 4 above or the provisions of Section 1 of the Employment Agreement, Executive shall be paid disability benefits from that date through December 31 of the year in which Executive attains the age of 69, which disability benefits shall be equal to the non-competition compensation and benefits and the minimum consulting fees that would have been paid to Executive pursuant to Sections 3 and 4 above if he had not become disabled, provided that, to the extent the disability wage benefits are not taxable income to Executive under the U.S. Internal Revenue Code of 1986, as amended, the disability benefit amount shall equal 60% of the compensation and fees that would have been paid pursuant to Sections 3 and 4 above. 12. Stock Transfers by Executive and Executive's Estate and Heirs. So long as this Agreement is in effect, Executive shall not sell any shares of Company Common Stock except (a) in transactions approved in advance by the Company's Board of Directors or (b) pursuant to all the conditions of Rule 144 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (or any rule thus promulgated which is a successor to Rule 144); provided, however, that no such sales shall be made in any block trade or when there is any tender offer pending with respect to any securities issued by the Company or there is any program announced by any person other than the Company to acquire shares of the Company's Common Stock. Executive agrees that restrictive legends referring to the provisions of this Section 12 shall be placed upon all certificates representing shares to which this Section 12 applies. The provisions of this Section 12 shall terminate upon any Change in Control or Executive's death, whichever may first occur and shall not apply thereafter. 13. Expenses and Interest. If the Company is found by a court of competent jurisdiction to have breached this Agreement, the Company shall pay the costs and expenses (including reasonable attorneys fees and related expenses) incurred by Executive in any litigation seeking damages in respect of such breach or to enforce the performance of this Agreement by Company, together with interest on each installment of wages or benefits paid late by the Company calculated to the date of actual payment at an annual rate equal to 3% over the highest rate then paid by the Company under its short term borrowing arrangements with an independent institutional lender (and if there is no such lender, then 4% above the prevailing prime rate as reported in the Wall Street Journal). 14. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be delivered personally or given by prepaid, certified, return receipt requested, first class mail addressed: (a) if to the Company, to at least two members of the Board of Directors, c/o the Company's Secretary at the address of the Company's principal office; (b) if to Executive, at his home mailing address on file with the Company; and (c) to such other address as the party to which such notice is to be given shall have notified (in accordance with the provisions of this Section 14) as its substitute address for the purpose of this Agreement. Any notice given as aforesaid shall be deemed conclusively to have been received on the fifth business day after such mailing. 15. Amendment. It is agreed that no change or modification of this Agreement shall be made except in a writing signed by both parties. 16. Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal, or unenforceable in any respect, the validity, legality, and enforceability of the remaining provisions shall not be affected thereby. 17. Law Governing. The validity, interpretation, and effect of this Agreement shall be governed by the laws of the State of New York. 18. Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the consulting services of Executive by the Company during the Term of Consulting Service and with respect to non-competition and disability and retirement benefits (but does not affect pension and other benefit plans and arrangements in which Executive participates). There are no restrictions, agreements, promises, warranties, covenants, or undertakings other than those expressly set forth herein with respect to the Term of Consulting Service. Upon the occurrence of one of the contingencies set forth in Section 19 below, as of the Commencement Date this Agreement supersedes all prior agreements, arrangements, and understandings between the parties, whether oral or written, with respect to employment or consulting services of Executive on and after the Commencement Date. Thus, whenever this Agreement becomes effective, the provisions of the Employment Agreement shall no longer be effective except for any claims that may have accrued thereunder. 19. Contingencies. (a) This Agreement shall be effective immediately upon the occurrence of any one of the following: (a) Upon the end of the five year Term of Service as provided in Section 1 of the Employment Agreement; (b) Upon Executive's death as provided in Section 1 of the Employment Agreement; (c) Upon Executive's permanent disability as provided in Section 1 of the Employment Agreement; (d) At the end of the period specified in Section 4 of the Employment Agreement after termination of Executive's employment without Cause; (e) At the end of the period specified in Section 5 of the Employment Agreement after termination of Executive's employment for Cause; (f) Upon any voluntary resignation by Executive from full time employment with the Company prior to a Change in Control as provided in Section 6 of the Employment Agreement; (g) Upon the effectiveness of any termination of Executive's employment after a Change in Control as provided in Section 7 of the Employment Agreement; (h) Upon Executive's retirement as provided in Section 8 of the Employment Agreement; or (i) Upon any change of Executive's employment status to that of independent consultant as provided in Section 9 of the Employment Agreement. 20. Change in Control. (a) A "Change in Control" of the Company shall be deemed to have occurred if: (1) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company or any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (2) there is elected 35% or more of the members of the Board of Directors of the Company without the approval of the nomination of such members by a majority of the Board serving prior to such election; (3) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent more than 75% of the combined voting power of the voting securities of the Company, or such surviving entity, outstanding immediately after such merger or consolidation; or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as defined above) acquires more than 25% of the combined voting power of the Company's then-outstanding securities; or (4) The shareholders of the Company approve an agreement for the sale or disposition by the Company and all or substantially all of the Company's assets. (b) If: (i) any Change in Control of the Company occurs while this Agreement is effective, and (ii) Executive gives notice to the Company or the Company (acting upon a determination of its Board of Directors) gives notice to Executive, in either case to the effect that the six month period called for by this Section 20(b) shall begin to run, and (iii) Executive's consulting services are terminated by Executive or by the Company (other than for Executive's death or disability) within six months after the date the notice provided for in (ii) above is received (in Executive's case the termination being effected by Executive giving notice within that six month period, effective within 30 days after the notice is given, that his consulting services are terminated to the extent permitted under Section 4 above), regardless the reason, if any, and regardless which party gave the notice provided for in (ii) above, then the Company shall, upon receipt of said notice, immediately pay, transfer, and provide to Executive the following amounts, benefits, and assets: (1) The Company shall pay to Executive the sum of Executive's full non-competition compensation and minimum consulting fees through the effective date of termination of his consulting services at the rate in effect at the time of termination or at the time the Change in Control occurs, whichever is higher, and an amount equal to the amount of any bonus which has been earned by him but not yet paid to him. These two amounts shall be paid to Executive in a lump sum within five days following the effective date of termination, or in the case of a bonus which is not readily calculable at that time, within five days after the bonus can be calculated. (2) The Company shall pay to Executive an amount equal to three times the highest total cash compensation (including any base salary, non-competition compensation, bonuses, and consulting fees) paid Executive in any of the Company's last three fiscal years completed prior to such termination. This amount shall be paid to Executive as provided in the last sentence of subsection (1) above. (3) The Company shall pay to Executive an amount equal to the total amounts that would be expended for the benefits to be provided Executive under Section 3 above on the assumption that Executive will continue to be compensated for non-competition for three years after the termination. This amount shall be paid to Executive as provided in the last sentence of subsection (1) above either in cash or in the form of an annuity contract issued by an independent insurance company licensed to do business in New York that will provide payment of all such total amounts. (4) All options and other rights that Executive may hold to purchase or otherwise acquire Common Stock of the Company shall immediately become exercisable in full for the total number of shares that are or might become purchasable thereunder, in each case without further condition or limitation except the giving of notice of exercise and the payment of the purchase price thereunder (but without amendment of the plan under which they were issued). At his discretion, Executive may elect to surrender to the Company his rights in any such options and rights held by him and, upon that surrender, the Company shall pay him an amount in cash equal to the aggregate spread between the exercise prices of all those options and rights and the value of the Common Stock purchasable thereunder (or of any other security into which the Common Stock has been exchanged or converted) as of the date of the termination of consulting services, the value to be determined by the reported last sale price of the Common Stock or that other security (or the mean between the reported last bid and asked prices) on that date on NASDAQ (or, if it is not NASDAQ, on whatever may then be the principal exchange or quotation system on which the Company's Common Stock or that other security is traded at that time). (5) The Company shall repay any policy loans previously taken on the life insurance policies on Executive's life listed on Exhibit A attached to the Employment Agreement (provided that the directors of the Company were given written notice promptly after the making of any such loans which were made while Executive was the chief executive officer of the Company), and then shall transfer to Executive any and all of its right, title, and interest in and to those policies (and upon that transfer, Executive shall be deemed to have released the Company from any and all obligations it then owes to him to maintain and pay premiums on those policies, all other provisions of any agreements under which those policies were agreed to be maintained, however, to remain in effect). (6) In addition to the amounts specified in clauses (1) through (5) of this paragraph (b), the Company shall pay to Executive, at the same time as those amounts are paid, an additional amount which, after taking into account all federal, state, and local income and excise taxes that Executive is required to pay with respect to receipt of the additional amount under this clause (6), will render the net after-tax payment to Executive under this clause (6) equal to the sum of: (A) all federal, state, and local excise taxes that Executive is required to pay with respect to the payments made pursuant to clauses (1) through (5) above; and (B) all federal, state, and local income and excise taxes that Executive is required to pay with respect to the payment made pursuant to this clause (6). The foregoing amounts of federal, state, and local income and excise taxes shall be determined initially by a nationally recognized firm of independent public accountants retained by Executive at his expense or, at Executive's option, by independent public accountants at the Company's expense, and such determination and the basis therefor shall be furnished in writing to Executive and the Company. Payment shall be made by the Company in accordance with that initial determination regardless whether there is a dispute over the accuracy thereof. If either party disputes that initial determination the matter shall promptly be referred to a nationally recognized firm of independent public accountants selected by the Executive (which firm shall not have been involved in the initial determination), and Executive and the Company shall promptly furnish to that firm such information as it reasonably requests. The Company shall make such additional payment to Executive or Executive shall refund to the Company, as the case may be, in accordance with the latter firm's determination. The fees and expenses of that firm shall be borne by the Company. (c) The Company may withhold from any payments due to Executive under paragraph (b) such amounts as its independent public accountants may determine are required to be withheld under applicable federal, state, and local tax laws. (d) If applicable, the provisions of this Section 20 shall control over the provisions of Section 7. In the event that Executive's consulting services are not terminated by the Company or the Executive within the six month period specified in Section 20(b), the provisions of Section 7 once again shall be applicable thereafter. (e) In addition, if any Change in Control of the Company occurs while this Agreement is effective, the Company shall purchase and fully pay for an annuity policy sufficient to pay the retirement benefits called for by Section 9 of this Agreement and shall transfer ownership thereof to a "rabbi" trust for the benefit of Executive (but subject to the claims of Company creditors to the extent required under applicable tax laws so that the transfer to the trust will not itself be an event upon which Executive recognizes income for federal or state income tax purposes). In lieu of purchasing the annuity policy, the Company may deposit cash into such a trust sufficient to provide, based on assumptions believed reasonable in the written opinion of a nationally recognized employee benefits organization, for assuring payment of those retirement benefits to Executive and his spouse. (f) Payment of the amounts called for by this Section 20 shall not affect the Company's obligation to pay non-competition compensation and benefits under Section 3 above or retirement benefits under Section 9 and, if elected by Executive, Section 10 above. 21. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the heirs, legatees, administrators, successors, and assigns of the respective parties. IN WITNESS WHEREOF, Executive for himself, and the undersigned director of the Company, acting on behalf of the Company by authority of its Board of Directors, have executed this Agreement as of the day and year first above written. /s/ Karl H. Kostusiak Karl H. Kostusiak, Executive DETECTION SYSTEMS, INC. By: /s/ Donald R. Adair Donald R. Adair, Chairman of the Compensation Committee of the Board of Directors EX-10 3 EXHIBIT 10J PART-TIME EMPLOYMENT, NON-COMPETITION, DISABILITY, AND RETIREMENT AGREEMENT AGREEMENT made as of the 1st day of June, 1999, 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. Effectiveness and Terms. This Agreement shall be binding on the parties as of its date set forth above (the "Commencement Date" herein). "Term of Employment" as used herein shall mean the period commencing on the Commencement Date and continuing thereafter through December 31 of the year in which Executive's 69th birthday occurs, 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 services may be earlier terminated as hereinafter expressly set forth or as may be agreed between Executive and the Company, in which event the Term of Employment shall mean the period from the Commencement Date through the date of such earlier termination (but such a termination shall not affect Executive's obligation to provide minimum consulting services as provided in Section 5 below). 2. Non-Competition. During any period (a) in which Executive is being paid currently for employment services as provided in Section 4 below, (b) in which Executive is being paid currently the compensation called for by Section 3 below, (c) in which Executive is being paid currently for disability benefits as provided under Section 11 below, or (d) in which Executive is being paid currently for retirement benefits as provided under Section 9 or 10 below, Executive shall not, without the prior written consent of the Board of Directors of the Company, engage, as an employee, partner, consultant, venturer, entrepreneur, or otherwise, in the development or sale of any product or service which is competitive with any product or service sold or under active development by the Company during the Term of Employment. 3. Compensation for Non-Competition. After the Term of Employment has ended, in consideration for Executive's non-competition as provided in Section 2 above, the Company shall pay and provide to Executive the following compensation and benefits through December 31 of the year in which Executive attains the age of 69: (a) An annual non-competition fee equal to or greater than $123,600, that fee to be increased each year if and to the extent the CPI (defined below) has increased during the preceding year (and any fees earned as a director of the Company shall be credited to that fee), which fee shall be paid in full on January 2 of each year; (b) The Executive will not participate in any of the Company's executive incentive compensation plans except for any such plan or plans which expressly refer to this Agreement; (c) Grants of options under any Company stock option plan that permits such options, in such amounts as are determined by the Board of Directors or the Committee of the Board administering the plan; (d) Participation in Company pension, deferred compensation, insurance, health and welfare and other benefit plans in effect on the date of this Agreement; and (e) Continuation of all plans in which the Executive participates, including existing fringe benefits and executive perquisites to which Executive is entitled as of the date immediately prior to the Commencement Date under this Agreement. Beginning on the January 1 after the year in which Executive attains the age of 69, the retirement benefits set forth in Sections 9 and 10 below shall be the full consideration to be paid to Executive for his non-competition. 4. Employment. The Company hereby employs Executive in the capacity of Vice President, Business Development for the Term of Employment commencing on the Commencement Date. The Company agrees to provide Executive with such offices and such operational and administrative support as is consistent with his position and responsibilities under this Agreement. The compensation and benefits which the Company shall provide Executive for his services during the Term of Employment shall include, but not be limited to, (a) base salary equal to or greater than $134,195 (including directors fees, if applicable) and (b) the benefits listed in clauses (b), (c), (d), and (e) of Section 3 above. Executive agrees that he will devote approximately half time and his best efforts during reasonable business hours to performance of the duties and responsibilities of his office during the Term of Employment. Executive also agrees not to disclose trade secrets of the Company, or to engage in any other activity which is detrimental to the interests of the Company, during the Term of Employment. Notwithstanding any of the other provisions of this Agreement, the Term of Employment will automatically terminate upon Executive's death and thereupon all payments and non-vested benefits payable hereunder and under Section 3 above shall cease, except for any death benefits and any survivor benefits for his spouse which are provided under the Company's employee plans and except for the retirement benefits set forth in Section 9 for any surviving spouse. Those retirement benefits shall be paid pursuant to Section 9 commencing after Executive's 69th birthday would have occurred, except that the surviving spouse may elect, by written notice given to the Company's President or Secretary, to receive early retirement benefits as provided in Section 10 below, in which case the provisions of Section 9 below shall apply, except that the initial retirement wage benefit shall be calculated as provided in Section 10. The Company may terminate Executive's services due to Executive's permanent disability, as determined by the Board of Directors in good faith based on the certification of an independent M.D., and thereupon all payments and non-vested benefits under this Section 4 and under Section 3 shall cease except that the disability and retirement benefits shall be paid in accordance with the provisions of Sections 9, 10, and 11 below. 5. Minimum Consulting Services. After a termination of Executive's services pursuant to Section 7, 8, or 9 below, the Company shall nevertheless have the right to call upon Executive, so long as Executive is able, for up to 8 days of consulting services per year to provide information concerning matters that occurred, were developed, or were determined while Executive was a full-time or part-time employee of the Company. Unless otherwise agreed, these consulting services shall be rendered at a place and time mutually agreed (but within 25 miles of Executive's residence at the time) and shall be paid at the rate of $1,200 per day (or up to 100 hours of consulting services per year at an hourly rate to be agreed upon). Any other consulting services shall be provided if, as, and when the parties may agree. 6. Executive's Acceptance. Executive agrees to provide the employment and the consulting services described in this Agreement. 7. Termination for Cause. The Company may terminate Executive's services immediately and without prior notice to Executive for "Cause" as defined below. The existence of Cause shall be determined by the Company's Board of Directors (other than Executive) acting in good faith. "Cause" is defined, and shall be limited to, a good faith determination by the Board of Directors that any of the following has occurred: (a) Executive has knowingly misappropriated for his benefit a material amount of funds or property of the Company; (b) Executive has obtained a material personal profit from any illegal Company transaction with a third party; (c) Executive has obtained a material personal profit from the use of the Company's trade secrets other than on its behalf; or (d) The Company has suffered material financial harm from knowingly illegal action by Executive other than on the Company's behalf or for its benefit. If Executive's services are terminated by the Company for Cause, he shall continue to be paid compensation and benefits for his non-competition in accordance with the provisions of Section 3 above, for any minimum consulting services provided pursuant to Section 5 above, and retirement benefits in accordance with Section 9 and, if elected, Section 10 below, provided that his cash compensation (including retirement benefit payments to be provided under this Agreement) shall be reduced by the amount of any monetary damage suffered by the Company due to the Cause, as determined by a court of competent jurisdiction, prorated over the actuarially determined term of all such payments beginning on such determination. 8. Resignation. If, at any time prior to Executive's retirement as provided in Section 9 below, Karl H. Kostusiak is no longer employed as the full time senior executive officer of the Company, Executive shall have the option of resigning from his employment obligations under Section 4 of this Agreement by giving written notice thereof to the Company's President or Secretary, but no resignation shall affect Executive's obligation to provide the minimum consulting services provided for in Section 5 above. 9. Retirement. The Company hereby agrees that, if not ended sooner, the Term of Employment as used in this Agreement shall end at the close of business on December 31 of the year in which Executive attains the age of 69, and beginning on the opening of business on January 1 of the next year (and regardless whether the Term of Employment ended prior to that December 31), the Company will pay Executive retirement benefits for his lifetime and for his spouse's lifetime, if his spouse survives him, as follows: (a) a retirement wage benefit initially equal to 30% of the base salary rate being paid to Executive at the end of his full time employment with the Company, increased for each year after the end of his full time employment by any increase in the CPI (as defined below), except that the retirement wage benefit shall be equal to 60% of that base salary rate at the end of Executive's full time employment with the Company, plus CPI increases, effective for any retirement year after a Change in Control and after the conditions described in Section 20(b)(ii) below have occurred which would allow Executive to give the notice described there (disregarding his retirement, if any), and except that the retirement wage benefit for his spouse shall be 75% of the amount thus calculated for each year after the year of Executive's death; (b) continuation of Executive's participation (for himself and his spouse) in the health program in effect on the date of this Agreement (including for dental and eye care coverage, an annual physical examination, and similar benefits); and (c) continuation of all other benefits provided at time of retirement, such continuation limited in individual benefit cost to 60% of the maximum annual cost of such benefit in any year prior to retirement, plus CPI increases, For these purposes: (1) unless otherwise agreed or directed by law or a court, "spouse" shall mean the person to whom Executive is married at the time any benefit is to be paid, or, after Executive's death, the person to whom Executive was married at the time of his death; (2) "CPI" shall mean the Consumer Price Index, all Urban Wage Earners as determined by the United States Department of Labor, Bureau of Labor Statistics, or any successor governmental agency or, lacking any such successor, any other authoritative source designated in good faith by the Board of Directors; and the wage benefit shall be increased as of January 1 each year by multiplying the wage benefit paid during the previous year by any fraction greater than one calculated by dividing the CPI most recently computed and available at the end of that previous year by the CPI most recently computed and available at the end of the year previous to that; the CPI shall not be used to decrease the wage benefit. The parties agree: (x) that the foregoing retirement benefits are in addition to any other retirement benefits that may be available to Executive (such as the Company's 401(k) savings plan), (y) that payment of these retirement benefits may be terminated if a court of law determines that Executive has violated the provisions of Section 2 above, and (z) that the Company will purchase and maintain life insurance sufficient to fund the estimated benefits for Executive's spouse (estimated no later than Executive's retirement date; any excess policy proceeds to be available, if agreed, to purchase shares of the Company's Common Stock held in Executive's estate) and the policy or policies of such insurance shall be held in trust designated for this purpose. (d) The retirement benefits provided under this Section 9 (and, if applicable, Section 10) shall be paid as provided herein regardless whether the Company has any claims against Executive for default under this Agreement or for any other breach of duty or otherwise, and, except as otherwise provided in Section 7 above, the Company shall pay those retirement benefits as provided and must pursue remedies for any such default or other breach of duty or other claim separately and independently. 10. Early Retirement Benefits. The parties agree that, in the circumstances expressly provided in this Agreement, Executive and/or Executive's spouse shall be paid early retirement benefits in accordance with the following: (a) The provisions of Section 9 shall apply to Executive's and the spouse's retirement benefits as provided therein, except as expressly modified by this Section 10, and shall be paid beginning at the time payment of the early retirement benefits actually commences as provided in this Agreement; (b) The initial retirement wage benefit shall not be the amount set forth in Section 9(a) above, but shall be calculated as follows: multiply the initial retirement wage benefit (calculated in accordance with Section 9(a) above) by the actuarially determined number of years it would be paid during Executive's then actuarially determined remaining lifespan as if Executive's 69th birthday had just occurred; then divide that amount by the number of years then actuarially determined to be Executive's actual expected remaining lifespan based on his actual age at that time. The amount thus calculated shall be the initial annual retirement wage benefit for purposes of Section 9(a) above. 11. Disability. If Executive is determined to be permanently disabled in accordance with the provisions of Section 4 above, Executive shall be paid disability benefits from that date through December 31 of the year in which Executive attains the age of 69, which disability benefits shall be equal to the non-competition compensation and benefits and the salary that would have been paid to Executive pursuant to Sections 3 and 4 above if he had not become disabled, provided that, to the extent the disability wage benefits are not taxable income to Executive under the U.S. Internal Revenue Code of 1986, as amended, the disability benefit amount shall equal 60% of the compensation and salary that would have been paid pursuant to Sections 3 and 4 above. 12. Stock Transfers by Executive and Executive's Estate and Heirs. So long as this Agreement is in effect, Executive shall not sell any shares of Company Common Stock except (a) in transactions approved in advance by the Company's Board of Directors or (b) pursuant to all the conditions of Rule 144 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (or any rule thus promulgated which is a successor to Rule 144); provided, however, that no such sales shall be made in any block trade or when there is any plan, program, or tender offer announced by any person other than the Company to acquire shares of the Company's Common Stock and that person was required to file a statement, schedule, or other report with respect thereto with the U.S. Securities and Exchange Commission under Section 13 or 14 of the Securities Exchange Act of 1934, as amended, or the rules and regulations thereunder. Executive agrees that restrictive legends referring to the provisions of this Section 12 shall be placed upon all certificates representing shares to which this Section 12 applies. The provisions of this Section 12 shall terminate upon any Change in Control or Executive's death, whichever may first occur and shall not apply thereafter. 13. Expenses and Interest. If the Company is found by a court of competent jurisdiction to have breached this Agreement, the Company shall pay the costs and expenses (including reasonable attorneys fees and related expenses) incurred by Executive in any litigation seeking damages in respect of such breach or to enforce the performance of this Agreement by Company, together with interest on each installment of wages or benefits paid late by the Company calculated to the date of actual payment at an annual rate equal to 3% over the highest rate then paid by the Company under its short term borrowing arrangements with an independent institutional lender (and if there is no such lender, then 4% above the prevailing prime rate as reported in the Wall Street Journal). 14. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be delivered personally or given by prepaid, certified, return receipt requested, first class mail addressed: (a) if to the Company, to at least two members of the Board of Directors, c/o the Company's Secretary at the address of the Company's principal office; (b) if to Executive, at his home mailing address on file with the Company; and (c) to such other address as the party to which such notice is to be given shall have notified (in accordance with the provisions of this Section 14) as its substitute address for the purpose of this Agreement. Any notice given as aforesaid shall be deemed conclusively to have been received on the fifth business day after such mailing. 15. Amendment. It is agreed that no change or modification of this Agreement shall be made except in a writing signed by both parties. 16. Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal, or unenforceable in any respect, the validity, legality, and enforceability of the remaining provisions shall not be affected thereby. 17. Law Governing. The validity, interpretation, and effect of this Agreement shall be governed by the laws of the State of New York. 18. Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the employment of Executive by the Company during the Term of Employment and with respect to non-competition, minimum consulting, and disability and retirement benefits (but does not affect pension and other benefit plans and arrangements in which Executive participates). There are no restrictions, agreements, promises, warranties, covenants, or undertakings other than those expressly set forth herein with respect to the Term of Employment. As of the Commencement Date this Agreement supersedes all prior agreements, arrangements, and understandings between the parties, whether oral or written, with respect to employment or consulting services of Executive on and after the Commencement Date. 19. [Intentionally left blank] 20. Change in Control. (a) A "Change in Control" of the Company shall be deemed to have occurred if: (1) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company or any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (2) there is elected 35% or more of the members of the Board of Directors of the Company without the approval of the nomination of such members by a majority of the Board serving prior to such election; (3) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent more than 75% of the combined voting power of the voting securities of the Company, or such surviving entity, outstanding immediately after such merger or consolidation; or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as defined above) acquires more than 25% of the combined voting power of the Company's then-outstanding securities; or (4) The shareholders of the Company approve an agreement for the sale or disposition by the Company and all or substantially all of the Company's assets. (b) If: (i) any Change in Control of the Company occurs while this Agreement is effective, and (ii) Executive gives notice to the Company or the Company (acting upon a determination of its Board of Directors) gives notice to Executive, in either case to the effect that the six month period called for by this subsection 20(b) shall begin to run (provided that Executive shall not have the right to give that notice unless Karl H. Kostusiak is no longer employed as the full time senior executive officer of the Company at the time or he either has consented in writing to the giving of that notice or has given a similar such notice for himself under his applicable agreement with the Company), and (iii) Executive's employment is terminated by Executive or by the Company (other than for Executive's death or disability) within six months after the date the notice provided for in (ii) above is received (in Executive's case the termination being effected by Executive giving notice within that six month period, effective within 30 days after the notice is given, that his employment is terminated to the extent permitted under Section 8 above), regardless the reason, if any, and regardless which party gave the notice provided for in (ii) above, then the Company shall, upon receipt of said notice, immediately pay, transfer, and provide to Executive the following amounts, benefits, and assets: (1) The Company shall pay to Executive the sum of Executive's full non-competition compensation and salary through the effective date of termination of his employment at the rate in effect at the time of termination or at the time the Change in Control occurs, whichever is higher, and an amount equal to the amount of any bonus which has been earned by him but not yet paid to him. These two amounts shall be paid to Executive in a lump sum within five days following the effective date of termination, or in the case of a bonus which is not readily calculable at that time, within five days after the bonus can be calculated. (2) The Company shall pay to Executive an amount equal to three times the highest total cash compensation (including any base salary, non-competition compensation, bonuses, and consulting fees) paid Executive in any of the Company's last three fiscal years completed prior to such termination. This amount shall be paid to Executive as provided in the last sentence of subsection (1) above. (3) The Company shall pay to Executive an amount equal to the total amounts that would be expended for the benefits to be provided Executive under Section 3 above on the assumption that Executive will continue to be compensated for non-competition for three years after the termination. This amount shall be paid to Executive as provided in the last sentence of subsection (1) above either in cash or in the form of an annuity contract issued by an independent insurance company licensed to do business in New York that will provide payment of all such total amounts. (4) All options and other rights that Executive may hold to purchase or otherwise acquire Common Stock of the Company shall immediately become exercisable in full for the total number of shares that are or might become purchasable thereunder, in each case without further condition or limitation except the giving of notice of exercise and the payment of the purchase price thereunder (but without amendment of the plan under which they were issued). At his discretion, Executive may elect to surrender to the Company his rights in any such options and rights held by him and, upon that surrender, the Company shall pay him an amount in cash equal to the aggregate spread between the exercise prices of all those options and rights and the value of the Common Stock purchasable thereunder (or of any other security into which the Common Stock has been exchanged or converted) as of the date of the termination of employment, the value to be determined by the reported last sale price of the Common Stock or that other security (or the mean between the reported last bid and asked prices) on that date on NASDAQ (or, if it is not NASDAQ, on whatever may then be the principal exchange or quotation system on which the Company's Common Stock or that other security is traded at that time). (5) The Company shall repay any policy loans previously taken on the Company's life insurance policies on Executive's life (provided that the directors of the Company were given written notice promptly after the making of any such loans which were made while Executive was an officer of the Company), and then shall transfer to Executive any and all of its right, title, and interest in and to all Company life insurance policies on Executive's life (and upon that transfer, Executive shall be deemed to have released the Company from any and all obligations it then owes to him to maintain and pay premiums on those policies, all other provisions of any agreements under which those policies were agreed to be maintained, however, to remain in effect). (6) In addition to the amounts specified in clauses (1) through (5) of this paragraph (b), the Company shall pay to Executive, at the same time as those amounts are paid, an additional amount which, after taking into account all federal, state, and local income and excise taxes that Executive is required to pay with respect to receipt of the additional amount under this clause (6), will render the net after-tax payment to Executive under this clause (6) equal to the sum of: (A) all federal, state, and local excise taxes that Executive is required to pay with respect to the payments made pursuant to clauses (1) through (5) above; and (B) all federal, state, and local income and excise taxes that Executive is required to pay with respect to the payment made pursuant to this clause (6). The foregoing amounts of federal, state, and local income and excise taxes shall be determined initially by a nationally recognized firm of independent public accountants retained by Executive at his expense or, at Executive's option, by independent public accountants at the Company's expense, and such determination and the basis therefor shall be furnished in writing to Executive and the Company. Payment shall be made by the Company in accordance with that initial determination regardless whether there is a dispute over the accuracy thereof. If either party disputes that initial determination the matter shall promptly be referred to a nationally recognized firm of independent public accountants selected by the Executive (which firm shall not have been involved in the initial determination), and Executive and the Company shall promptly furnish to that firm such information as it reasonably requests. The Company shall make such additional payment to Executive or Executive shall refund to the Company, as the case may be, in accordance with the latter firm's determination. The fees and expenses of that firm shall be borne by the Company. (c) The Company may withhold from any payments due to Executive under paragraph (b) such amounts as its independent public accountants may determine are required to be withheld under applicable federal, state, and local tax laws. (d) If applicable, the provisions of this Section 20 shall control over the provisions of Section 7. In the event that Executive's employment is not terminated by the Company or the Executive within the six month period specified in Section 20(b), the provisions of Section 7 once again shall be applicable thereafter. (e) In addition, if any Change in Control of the Company occurs while this Agreement is effective, the Company shall purchase and fully pay for an annuity policy sufficient to pay the retirement benefits called for by Section 9 of this Agreement and shall transfer ownership thereof to a "rabbi" trust for the benefit of Executive (but subject to the claims of Company creditors to the extent required under applicable tax laws so that the transfer to the trust will not itself be an event upon which Executive recognizes income for federal or state income tax purposes). In lieu of purchasing the annuity policy, the Company may deposit cash into such a trust sufficient to provide, based on assumptions believed reasonable in the written opinion of a nationally recognized employee benefits organization, for assuring payment of those retirement benefits to Executive and his spouse. (f) Payment of the amounts called for by this Section 20 shall not affect the Company's obligation to pay non-competition compensation and benefits under Section 3 above or retirement benefits under Section 9 and, if elected by Executive, Section 10 above. 21. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the heirs, legatees, administrators, successors, and assigns of the respective parties. IN WITNESS WHEREOF, Executive for himself, and the undersigned director of the Company, acting on behalf of the Company by authority of its Board of Directors, have executed this Agreement as of the day and year first above written. /s/ David B. Lederer David B. Lederer, Executive DETECTION SYSTEMS, INC. By: /s/ Donald R. Adair Donald R. Adair, Chairman of the Compensation Committee of the Board of Directors EX-11 4 COMPUTATION OF PER SHARE EARNINGS Exhibit 11 DETECTION SYSTEMS, INC. COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share data) Quarter Ended June 30, 1999 1998 ---- ---- Net income $1,421 $ 832 ===== ===== Weighted average number of shares 6,336 6,291 ===== ===== Basic earnings per share $0.22 $0.13 ===== ===== Shares attributable to deferred compensation plans and stock options and warrants 482 524 ==== ==== Diluted earnings per share: $0.21 $0.12 ==== ==== EX-27 5 FDS --
5 1,000 3-MOS MAR-31-2000 APR-01-1999 JUN-30-1999 7,510 0 23,804 (1,023) 33,669 67,253 33,229 (20,679) 94,208 17,998 0 0 0 329 56,771 94,208 34,766 34,766 20,964 32,316 180 0 238 2,270 849 1,421 0 0 0 1,421 0.22 0.21
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