DETECTION SYSTEMS, INC.
130 Perinton Parkway
Fairport, New York 14450
(716) 223-4060
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 20, 1997
TO THE SHAREHOLDERS:
The Annual Meeting of Shareholders of Detection Systems,
Inc. will be held at the Company's corporate headquarters located
at 130 Perinton Parkway, Fairport, New York, on August 20, 1997,
at 10AM for the following purposes:
1. To elect five directors;
2. To elect independent auditors for fiscal year 1998;
3. To approve the 1997 Stock Option Plan; and
4. To transact such other business as may properly come before
the meeting or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on
July 8, 1997 as the record date for the determination of
shareholders entitled to notice of and to vote at the meeting.
By Order of the Board of Directors
FRANK J. RYAN
Secretary
Fairport, New York
July 18, 1997
Shareholders are cordially invited to attend the meeting in
person. Even if you plan to attend, please complete, sign and
date the enclosed proxy and return it promptly in the enclosed
return envelope.
PROXY STATEMENT
First sent to Shareholders on July 18, 1997
The enclosed proxy is solicited by the Board of Directors of
Detection Systems, Inc. (the "Company") for use at the Annual
Meeting of Shareholders to be held August 20, 1997, and at any
adjournments thereof. The record date for the determination of
shareholders entitled to notice of and to vote at this meeting is
the close of business on July 8, 1997, at which time the Company
had outstanding 4,743,894 shares of Common Stock. Shareholders
are entitled to one vote for each share owned.
Directors are elected by a plurality of votes cast. A majority
of the votes cast is required to ratify the appointment of
auditors. The affirmative vote of a majority of outstanding
shares is required to approve the 1997 Stock Option Plan.
Abstentions, broker non-votes and withheld votes will be counted
in determining the number of shares represented at the meeting
but will not be considered to have been voted. All shares
represented by a proxy will be voted in accordance with the
specifications made thereon by the shareholder and, if no
specification is made, will be voted for the election as
directors of the five nominees proposed by the Board of
Directors, for the election of Price Waterhouse LLP as
independent auditors and for the approval of the Company's 1997
Stock Option Plan
Shareholders can ensure that their shares are voted at the
meeting by signing and dating the enclosed proxy and returning it
in the envelope provided. Sending in a signed proxy will not
affect the right to attend the meeting and vote in person. A
shareholder may revoke a proxy at any time before it is voted by
notifying the Company's Transfer Agent, American Stock Transfer &
Trust Co., 40 Wall Street, New York, NY 10005, in writing, or by
executing a subsequent proxy.
ELECTION OF DIRECTORS
At the annual meeting, five directors, constituting the entire
Board of Directors, are to be elected to hold office for the
ensuing year and until their successors are elected and
qualified. The Board of Directors proposes to nominate the
following persons for election as directors: Donald R. Adair,
Mortimer B. Fuller III, Karl H. Kostusiak, David B. Lederer and
Edward C. McIrvine. Each of them has consented to be named in
this Proxy Statement and to serve, if elected. The persons named
in the proxy will vote for the election of these nominees unless
a shareholder giving a proxy withholds authority to vote for one
or more of them. If for any reason any of these nominees become
unavailable for election, the proxies may exercise discretionary
authority to vote for substitutes proposed by the Board of
Directors.
Messrs. Kostusiak and Lederer have held the indicated positions
since they founded the Company in 1968. Mr. Adair is the
principal of Adair Law Firm in Rochester, New York. Previously,
Mr. Adair was a partner of the Adair and Stoner Law Firm in
Rochester. Mr. Fuller is Chairman, President and Chief Executive
Officer and a Director of Genesee and Wyoming Industries, Inc., a
holding company in Greenwich, Connecticut, which owns and
operates regional and short line freight railroads and provides
rail related services to railroads and shippers. Dr. McIrvine is
self-employed as a research and development management
consultant. Until 1991, he served as Dean of the College of
Graphic Arts and Photography at the Rochester Institute of
Technology.
During the fiscal year ended March 31, 1997, the Board of
Directors held five meetings. The Board of Directors has an
audit committee consisting of Messrs. Adair, Fuller and McIrvine.
This committee, which met once during the last fiscal year,
reviews reports of the Company's financial condition, financial
controls and accounting procedures. In addition, this Committee
approves and oversees services performed by the Company's
independent auditors and provides the independent accountants
direct access to the non-employee members of the Board of
Directors.
The Board of Directors also has a compensation committee
consisting of Messrs. Adair, Fuller and McIrvine. This
committee, which is responsible for establishing general
compensation policies, establishing and administering
compensation plans and programs in which officers participate and
establishing the specific compensation arrangements for the
Company's executive officers, met four times during the last
fiscal year. Messrs. Adair, Fuller and McIrvine also serve on
the stock option committee. This committee, which met five times
during the year, is responsible for granting options pursuant to
the Company's 1992 Restated Stock Option Plan. There is no
nominating committee of the Board of Directors. All of the
Directors attended more than 75% of the aggregate of all meetings
of the Board of Directors and the committees on which they served
during the fiscal year.
Directors who are not employees of the Company are paid an
annual fee of $10,000 as well as $1,000 plus travel expenses, if
any, for each day on which they attend Board meetings. Directors
receive $500 for Board meetings held by teleconference. There is
no additional compensation for attendance of committee meetings.
The Board of Directors recommends a vote FOR the election of
Messrs. Adair, Fuller, Kostusiak, Lederer and McIrvine as
Directors of the Company for the 1998 fiscal year. Proxies will
be so voted unless shareholders specify a contrary choice in
their proxies.
MANAGEMENT AND SECURITY OWNERSHIP
The following table lists the directors and executive officers
of the Company and reflects the number of shares of the Company's
common stock that were beneficially owned as of June 3, 1997 by
each director and executive officer named in the Summary
Compensation Table on page 4 of this Proxy Statement, and all
directors and executive officers as a group.
Amount and
Nature of
Name, Age, Principal Beneficial Percent
Occupation and Positions Ownership(1) of Class Since
Donald R. Adair (54) 1,549(2) 0.03% 1991
Director of the Company and
Principal of Adair Law Firm
George E. Behlke (39) 38,393(3)(4) 0.73% 1995
Vice President, Engineering,
of the Company
Prior - Engineering Manager
Mortimer B. Fuller, III (55) 5,670(5) 0.11% 1990
Director of the Company and
President,CEO and a Director
of Genesee and Wyoming
Industries, Inc.
Gary Holroyd (38) 4,725(3) 0.09% 1996
Vice President, Operations,
of the Company
Prior - Operations Vice President,
Radionics, and Operations Director,
Expanded Metal Co. Ltd.
Karl H. Kostusiak (58) 636,161(4) 12.13% 1968
Director, Chairman and CEO of the Company
David B. Lederer (57) 451,276(4) 8.61% 1968
Director and Executive Vice President
of the Company
Edward C. McIrvine (63) 25,325(6) 0.48% 1981
Director of the Company and self-employed
Research and Development Management
Consultant
Frank J. Ryan (43) 78,212(3)(4)(7) 1.56% 1982
Vice President, Secretary and Treasurer
of the Company
Lawrence R. Tracy (50) 100,008(3)(4) 1.91% 1995
President of Detection Systems International, Inc.
and Radionics, Inc., subsidiaries of the Company
Prior -- President of a competitive manufacturer of
electronic security equipment
All Directors and Executive Officers
as a Group (9 persons) 1,341,319(2)-(7) 25.58%
Footnotes to Management and Security Ownership Table:
(1) For all shares listed, each person possess both sole
voting and investment power, except for those shares indicated
in notes (2) - (7) below.
(2) Includes 1,173 shares held in custodianship for Mr.
Adair's children under the Uniform Gifts to Minors Act of New
York for which Mr. Adair disclaims beneficial ownership.
(3) Includes 1,500, 3,000, 1,800, 36,000 and 42,300 shares
which may be acquired upon exercise of warrants and options
held by Messrs. Behlke, Holroyd, Ryan, Tracy and all directors
and executive officers as a group, respectively.
(4) Includes 9,234, 179,840, 117,465, 8,492, 6,488 and
321,519 hypothetical shares credited to the accounts of
Messrs. Behlke, Kostusiak, Lederer, Ryan, Tracy and all
directors and executive officers as a group, respectively,
pursuant to the Company's deferred compensation plans, which
shares may be acquired upon retirement.
(5) Includes 2,025 shares held by Mr. Fuller's wife for which he
disclaims beneficial ownership.
(6) Includes 20,300 shares held by Dr. McIrvine's wife for which
he disclaims beneficial ownership.
(7) Includes 810 shares held in trust for Mr. Ryan's son under
the Uniform Gifts to Minors Act of New York for which Mr. Ryan
disclaims beneficial ownership.
PRINCIPAL HOLDERS OF COMMON STOCK
Based on reports filed with the Securities and Exchange
Commission, the following persons beneficially own more than 5%
of the Company's outstanding Common Stock:
Beneficial Ownership Table:
<TABLE>
<S> <S> <C> <C>
Amount and
Name and Address of Nature of Percent
Beneficial Owner Beneficial of
Title of Name and Address of Ownership Class
Class Beneficial Owner (1)(2)(3)
Common Karl H. Kostusiak 636,161 12.1%
Stock 130 Perinton Parkway
Fairport, NY 14450
Common David B. Lederer 451,276 8.6%
Stock 130 Perinton Parkway
Fairport, NY 14450
Common Dimensional Fund Advisors, Inc. 253,572 5.7%
Stock 1299 Ocean Ave., 11th Floor
Santa Monica, CA 90401
Common Palisade Capital Management, 234,100 7.8%
Stock L.L.C.
One Bridge Plaza, Suite 695
Fort Lee, NJ 07024
</TABLE>
Footnotes to Beneficial Ownership Table:
(1) Reflects shares held by Messrs. Kostusiak and Lederer as
of June 3, 1997. Messrs. Kostusiak and Lederer currently
possess both sole voting and investment power except with
respect to 179,840 and 117,465 shares respectively, which may
be acquired upon retirement pursuant to the Company's deferred
compensation plans.
(2) Reflects shares held by Dimensional Fund Advisors Inc.
("Dimensional") at December 31, 1996 as reported on Schedule
13G to the Securities and Exchange Commission. Shares are
held in portfolios of DFA Investment Dimensions Group Inc., in
series of the DFA Investment Trust Company, or the DFA Group
Trust and DFA Participation Group Trust, all of which
Dimensional serves as investment manager. Dimensional
disclaims beneficial ownership of all such shares.
(3) Reflects the number of shares and percent of class held
by Palisade Management Group at December 31, 1996 as reported
on Schedule 13G to the Securities and Exchange Commission.
EXECUTIVE COMPENSATION
Summary Compensation Table:
The following table sets forth information with respect to the
compensation of the Company's Chief Executive Officer and certain
other executive officers for services in all capacities to the
Company in its fiscal years ended March 31, 1997, 1996 and 1995.
<TABLE>
Long-Term
Annual Compensation Compensation
Other Securities
Name and Annual Underlying All Other
Principal Fiscal Salary Bonus Compensa- Options/ Compensation
Position Year ($) ($) tion ($) SAR's ($)(2)
<S> <C> <C> <C> <C> <C> <C>
Karl H. 1997 212,100 403,333 --(3) 0 3,266
Kostusiak 1996 205,926 1,419 26,186 0 2,542
Chairman and 1995 196,110 184,746 --(3) 0 2,625
CEO
David B. 1997 169,700 322,670 --(3) 0 3,364
Lederer 1996 164,741 1,135 27,956 0 2,534
Executive 1995 156,897 147,794 --(3) 0 2,625
Vice
President
Lawrence R. 1997 148,470 282,377 --(3) 18,775 3,301
Tracy 1996 144,148 31,648 --(3) 0 0
President of 1995 21,000 102,405 --(3) 60,000 0
Detection
Systems
International,
Inc. and
Radionics,
Inc.
George E. 1997 108,150 81,790 24,761(4) 9,650 1,964
Behlke 1996 89,363 723 --(3) 0 2,272
Vice 1995 N/A N/ N/A N/A N/A
President,
Engineering
Gary 1997 117,636 74,587 --(3) 1,460 238
Holroyd(1) 1996 N/A N/A N/A N/A N/A
Vice 1995 N/A N/A N/A N/A N/A
President,
Operations
Frank J. Ryan 1997 108,150 59,308 --(3) 2,190 1,973
Vice 1996 105,000 723 --(3) 0 2,298
President, 1995 100,000 35,017 --(3) 2,250 2,242
Secretary &
Treasurer
</TABLE>
Footnotes to Compensation Table:
(1) Mr. Holroyd became an officer of the Company on November 7, 1996.
(2) Represents contributions by the Company to accounts of the named
executive officers under the Company's 401(k)retirement savings plan.
(3) Values are less than the minimum amount required to be reported.
(4) Includes $21,000 representing the difference between the
market value and the purchase price for a nonqualified stock
option awarded during the fiscal year.
Option/SAR Grants in Last Fiscal Year:
The following table sets forth information with respect to
stock options granted to the named executive officers during
fiscal 1997. Each grant was for incentive or nonqualified stock
options to purchase stock under the Company's 1992 Restated Stock
Option Plan. All options are exercisable 40% after one year, 60%
after two years, 80% after three years and 100% after four years.
Options awarded prior to December 17, 1996 were adjusted to
reflect the three-for-two stock split distributed on that date.
<TABLE>
Potential
Realizable
Value at
Assumed
Annual Rates
Number of Percent of Stock
Number of of Total Price
Securities Options/SAR's Appreciation
Underlying Granted for Option
Option/ to Employee Exercise Expir- Term
SAR's in Fiscal or Base Market ation -------------
Name Granted(#) Year Price Price Date 5%($) 10%($)
($/Sh) ($/Sh)
<S> <C> <C> <C> <C> <C> <C> <C>
K. Kostusiak 0 -- -- -- -- -- --
D. Lederer 0 -- -- -- -- -- --
L. Tracy 6,000 37.5% $10.00 $13.50 11/6/06 $37,740 $95,640
12,775 $19.25 $19.25 1/21/02 $67,963 $150,106
G. Behlke 6,000 19.2% $10.00 $13.50 11/6/06 $37,740 $95,640
3,650 $19.25 $19.25 1/21/02 $19,418 $42,888
G. Holroyd 1,460 2.9% $19.25 $19.25 1/21/02 $7,767 $17,155
F. Ryan 2,190 4.4% $19.25 $19.25 1/21/02 $11,651 $25,733
</TABLE>
Option Exercises in Last Fiscal Year and Year-End Option Values:
The following table sets forth information with respect to the
named executive officers concerning the exercise of options
during fiscal year 1997 and unexercised options held as of March
31, 1997. The value of the underlying securities was determined
by taking the market value at year end minus the exercise price.
The market price of the Company's stock on March 31, 1997 was
$17.50 per share.
<TABLE>
Number of
Securities Value of
Underlying Unexercised
Shares(#) Unexercised Options In-the-Money
Acquired ($) at March 31, 1997 Options at
on Value (#) March 31, 1997 ($)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexer'able
<S> <C> <C> <C> <C> <C> <C>
K. Kostusiak 0 0 0 / 0 0 / 0
D. Lederer 0 0 0 / 0 0 / 0
L. Tracy 0 0 36,000 / 42,775 $474,000 / $338,644
G. Behlke 6,444 $101,465 1,500 / 11,150 $19,000 / $127,875
G. Holroyd 0 0 3,000 / 5,960 $41,000 / $58,945
F. Ryan 3,240 $19,408 1,800 / 2,640 $22,800 / $1,868
</TABLE
During fiscal year 1997, Messrs. Kostusiak, Lederer and Ryan
had stock option loans outstanding that totaled $182,910,
$134,117 and $66,999, respectively. As of June 6, 1996, the
outstanding balances were $167,285, $121,210 and $59,091,
respectively. The loans carry interest rates ranging from 5.54%
to 8.42%.
Pension Plans:
Effective April 1996, the Company approved the addition of a
pension plan for Messrs. Kostusiak and Lederer (each, an
"Executive") in their Executive Agreements, filed as Exhibit 10
of the Company's Annual Report on Form 10-K. Under the terms of
the Executive Agreements, the Company will pay each Executive
retirement benefits for his lifetime and for his spouse's
lifetime, if his spouse survives him, as follows: (a) a
retirement wage benefit initially equal to 12% of Executive's
base salary on the date of his retirement or death, increased
each year thereafter by any increase, less 0.5%, in the Consumer
Price Index (except that the wage benefit shall be 75% of that
amount after Executive's death); (b) continuation of Executive's
full health insurance or similar benefit for Executive and his
spouse; and (c) continuation of any other benefit programs that
provide continuation pursuant to their terms.
Based on a 5% compounded annual increase in their base
compensation, and assuming that they each retire at age 65, the
estimated initial annual benefit that would be payable to Messrs.
Kostusiak and Lederer under the pension plan provision in their
Executive Agreements would be $34,108 and $27,290, respectively.
The Executive Agreements further provide that: (a) the
payment of retirement benefits may be terminated if an Executive
has violated the non-competition provisions of his Executive
Agreement, and (b) the Company will purchase and maintain life
insurance sufficient to fund the estimated benefits for the
spouse (any excess policy proceeds to be available, if agreed,
to purchase shares of the Company's Common Stock held in
Executive's estate) and the policy or policies of such insurance
shall be held in a trust designed for this purpose.
ELECTION OF AUDITORS
The Board of Directors has recommended that Price Waterhouse
LLP be elected as the independent auditors of the Company for the
fiscal year ending March 31, 1998. They have served the Company
as independent auditors since 1968. Representatives of that firm
will be present at the meeting, will have an opportunity to make
a statement if they desire to do so and will be available to
respond to appropriate questions from shareholders.
The Board of Directors recommends a vote FOR the proposal to
elect Price Waterhouse LLP as the independent auditors of the
Company for the 1998 fiscal year. Proxies will be so voted
unless shareholders specify a contrary choice in their proxies.
PROPOSAL TO APPROVE THE 1997 STOCK OPTION PLAN
The Board of Directors has adopted, subject to approval by the
shareholders, the Detection Systems, Inc. 1997 Stock Option Plan
(the "Plan"), a copy of which is set forth as Exhibit A to this
Proxy Statement. The Plan provides that stock options for the
purchase of up to 250,000 shares of common stock may be issued to
key employees or nonemployees of the Company and its subsidiaries
pursuant to the exercise of stock options. Previously options
for the purchase of up to 375,000 shares had been authorized
under the Company's 1992 Restated Stock Option Plan, of which
373,800 shares were granted to employees over the past five
years.
1997 Stock Option Plan:
The purpose of the Plan is to enable eligible key employees and
nonemployees of the Company and its subsidiaries to purchase
shares of Common Stock of the Company by means of stock options.
Through the use of such options, the Company expects to be able
to attract and retain the best available talent and to encourage
the highest level of performance of its key personnel.
A total of 250,000 shares of Common Stock of the Company, par
value $.05 per share, shall be available for options under the
Plan (with an appropriate change in that number in the event of a
stock split, stock dividend or other change in the Company's
Common Stock). These shares may be either authorized and
unissued shares or treasury shares. Options may be either
incentive stock options, as defined in Section 422 of the
Internal Revenue Code ("the Code"), or options which do not meet
the requirements of that section (nonqualified options). If an
option expires, terminates or is canceled without being
exercised, new options may thereafter be granted covering the
same shares. No stock option may be granted more than ten years
after the effective date of the Plan.
The Plan is administered by the Stock Option Committee
("Committee"), consisting of not fewer than three members elected
from among the Board of Directors of the Company. The Committee
determines who shall be granted options under the Plan, the
number of shares to be awarded and the terms of each award, and
interprets the provisions of the Plan. The Board of Directors
may amend or terminate the Plan, without the approval of the
shareholders, except that it may not, without such approval,
materially increase the benefits accruing to participants under
the Plan, increase the number of shares subject to options,
change the minimum exercise price, change the class of employees
eligible to receive awards or extend the period during which
awards may be granted or exercised.
The Plan provides that options may be granted to key employees
or nonemployees of the Company and its subsidiaries. However,
options may not be granted to members of the Committee or to
directors who are not officers or employees of the Company or its
subsidiaries. The Plan places no limitation on the number of
shares with respect to which options may be granted to any such
individual, except that incentive options may not be granted in
excess of any limitations imposed by the Code. The Code
presently imposes a limit on the grant of incentive options. It
imposes no limit on the grant of nonqualified options. However,
in order to meet the requirements of Code Section 162(m), which
section limits the Company's tax deduction for compensation paid
to certain officers to $1 million per year, the Plan limits to
100,000 the aggregate number of options that may be awarded to
any one employee.
The purchase price for each incentive option may not be less
than the fair market value of the stock at the time the option is
granted. If an incentive option is granted to an employee who,
at the time of the grant, owns stock possessing more than 10% of
the voting power of all stock of the Company, the purchase price
must be at least 110% of the fair market value of the stock
subject to the option.
An option shall be exercised upon written notice to the Company
accompanied by: (a) payment in full for the shares being
acquired. The payment shall be made in cash, check or wire
transfer; (b) by delivery of shares of Common Stock of the
Company registered in the name of the optionee, endorsed in
blank, the value of which will be deemed equal to the closing
market price of such shares on the date of exercise; or (c) at
the discretion of the Committee, by a so-called "cashless
exercise" transaction that affords the optionee the opportunity
to sell immediately some or all of the shares underlying the
exercise portion of the option in order to generate sufficient
cash to pay the option exercise price and/or to satisfy
withholding tax obligations related to the option.
Each option will have a maximum term of ten years, or such
lesser period as the Committee specifies, except that an
incentive option granted to an employee who, at the time of the
grant, owns stock possessing more than 10% of the voting power of
all stock of the Company will have a term not in excess of five
years. Options are exercisable at such time or times and under
such conditions as may be imposed by the Committee and set forth
in an option agreement.
The benefits or amounts that will be received or allocated in
the future under the Plan are not determinable. The following
table provides information regarding options granted under the
1992 Restated Stock Option Plan in fiscal 1997.
Number of Dollar Value of
Name and Position Options Granted* Options Granted Gra nted*
K. Kostusiak, Chairman and CEO 0 0
D. Lederer, Executive Vice President 0 0
L. Tracy, President of Radionics 18,775 $305,919
and Detection Systems
International, Inc.
G. Behlke, Vice President, Engineering 9,650 $130,263
G. Holroyd, Vice President, Operations 1,460 $28,105
F. Ryan, Vice President 2,190 $42,158
Executive Group 32,075 $506,444
Non-Executive Director Group 0 0
Non-Executive Officer Employee Group 18,025 $222,038
*Options were granted at prices ranging from $10.00 to $22.75
and with expiration dates ranging from 6/3/01 and 11/6/06.
At June 3, 1997, there were 135,820 outstanding exercisable
options and 1,200 shares available for grant under the 1992
Restated Stock Option Plan. The high, low and closing bids on
that date for the Company's Common Stock, as reported by The
Nasdaq Stock Market, were $20.25, $17.00 and $17.50,
respectively.
The Board of Directors recommends a vote FOR the proposal to
approve the 1997 Stock Option Plan. Proxies will be so voted
unless shareholders specify a contrary choice in their proxies.
COMPENSATION COMMITTEE REPORT ON
EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is
responsible for (a) establishing general compensation policies,
(b) establishing and administering compensation plans and
programs in which officers participate and (c) establishing the
specific compensation arrangements for the Company's executive
officers. The members of this Committee also serve on the Stock
Option Committee under the Company's Stock Option Plan.
Committee Objectives Concerning Executive Officers:
The Compensation Committee has sought four key objectives for
the Company's executive compensation plans, programs and
arrangements. These are to (a) tie executive compensation to the
Company's financial performance, (b) encourage equity ownership
in the Company by all executives, (c) tie executive compensation
programs to the achievement of long-term company strategic
objectives, and (d) provide overall executive compensation that
will attract and retain an effective management team. The
Committee recognizes that different plans or arrangements will
serve one or more of those objectives in varying degrees, that
the relative significance of the stated objectives may shift from
time to time, and that new objectives may arise and become
important.
During fiscal year 1997 and subsequently, three additional
factors have affected the Committee's determinations: (1) the
significant increase in the market value of the Company's stock
during the year, (2) the Company's continuing acquisition and
other expansion activities and a need to motivate new management
personnel at various places around the world, and (3) the need to
continue working toward long-term succession of management.
Various changes have been made or proposed in compensation
arrangements during this period to respond to these issues.
Tying Compensation to the Company's Financial Performance:
In 1988, the Company entered into five-year employment
agreements with Messrs. Kostusiak and Lederer. Each year
thereafter, the agreements have been reexamined, reviewed and
revised as appropriate and then re-executed for a new five-year
period. Among other goals, the agreements seek to create a
strong tie between the compensation of Messrs. Kostusiak and
Lederer and the Company's financial performance. The agreements
have done this by providing for (a) an opportunity for an annual
cash bonus based on pre-tax profits and (b) an opportunity for an
annual stock bonus based on growth of both sales and pre-tax
profits. These two bonus programs have also been made available
to other executive officers of the Company.
The cash bonus for Mr. Kostusiak and the Company's executive
officers is a percentage of the amount by which the Company's pre-
tax profits for the fiscal year exceed $500,000. The stock
bonuses have been a maximum number of shares of the Company's
common stock if sales for the fiscal year increase at least 10%
over the previous year and if the Company's pre-tax profits are
at least equal to 10% of the total sales. The stock bonuses have
been scaled back for lower performance levels, so that they have
been zero shares for zero sales growth and they have been zero if
pre-tax profit is 5% or less of total sales. Sales growth for
purposes of these plans is defined as the greater of the actual
sales growth or "equivalent sales growth," which is defined as an
assumed 20% compounded annual sales growth beyond the actual
sales of the year prior to any year in which sales growth was
more than 20%, provided that the resulting assumed sales level
for the year in question is not more than the actual sales of the
year in question.
Both the cash bonus and the stock bonus have been subject to
the condition that the Company achieve an earnings-per-share goal
("EPS Goal") for the fiscal year which has been established by
the Board of Directors (or the bonuses may become earned on a
"carryforward" basis during the next five years, to the extent,
if any, that the Company exceeds the EPS Goals for those future
years). The EPS Goal for fiscal 1997 was $0.69 (adjusted for the
3-for-2 stock split distributed on December 17, 1996), and for
fiscal 1998 has been established at $1.14. The fiscal 1998 goal
represents a 50% increase over the $.76 earnings per share
achieved in fiscal 1997.
The executive officers also participate in the Company's
general profit sharing plan which is available to all domestic
employees in which 4% of pre-tax profits in excess of $500,000
are distributed to employees on an annual basis if the Company's
EPS Goal has been met.
The significant increase in the market value of the Company's
Common Stock during fiscal 1997 induced the Compensation
Committee to make a change in the stock bonus plan. Since shares
which were earned in the stock bonus plan were allocated on a per
share basis, the increase in the market value of those shares
during fiscal 1997 resulted in the dollar value of the potential
bonuses being very large. To deal with that, the Board added a
limitation to the plan to the effect that the aggregate fair
market value of the stock bonuses paid for fiscal 1997 could not
exceed 10% of the Company's pre-tax profit for the year
(allocating any reductions on a pro-rata basis among the
participants). As a result of this limitation, in fiscal 1997,
9,269 shares of stock were awarded to Mr. Kostusiak out of a
possible 30,000 shares.
The intention of these bonus programs is to provide strong
incentives for managing the Company's financial performance
toward three goals: (1) having pre-tax profits greater than 5%
of sales, (2) having sales increase significantly each year, and
(3) achieving an EPS Goal established early each year by the
Board of Directors. (Other aspects of these agreements are
described below under "Executive Agreements.") Since cash
bonuses are directly dependent on pre-tax profits, stock bonuses
have been directly dependent on growth in both sales and pre-tax
profits, and both bonuses have been dependent on after-tax
earnings-per-share, the Committee believes that a significant
portion of the compensation of all executive officers has been
tied to corporate performance. (See the table under "Executive
Compensation.")
The Committee believes that these provisions of the employment
agreements functioned as intended during the past three years.
In particular, Mr. Kostusiak's bonus compensation was as follows:
Fiscal Cash Stock Sales Pre-Tax
Year Bonuses Bonus Profit
1997 $241,125 $162,208 $101,251,000 $5,250,000
1996 1,419 0 41,858,000 (Loss)
1995 125,455 59,291 34,336,000 $2,592,000
Equity Ownership by Management:
Since the Company's founding in 1968, Messrs. Kostusiak and
Lederer have each owned a substantial number of shares of the
Company's common stock, and since his arrival, Mr. Tracy has
purchased substantial amounts of the stock, been granted stock
options, and been granted bonus stock. In addition, the Company
maintains a plan for granting stock options to key employees.
Under the plan, incentive options are granted at exercise prices
that equal or exceed the fair market value of the option shares
on the date of grant, and the option rights vest incrementally
over four years. From time to time, options are granted under
the plan by the Stock Option Committee to Company executives and
other key employees. The Committee believes that the options
themselves, even when unexercised, provide incentives for key
personnel to improve shareholder value, since only then will the
options become valuable.
Achievement of Long-Term Company Objectives:
The Committee believes that having officers who own substantial
equity positions in the Company, as discussed in the preceding
sections, provides a considerable incentive for executive
officers to pursue the Company's long-term strategic objectives.
Additionally, in order to serve long-term objectives, in
particular to help build a succession plan for senior management,
during fiscal year 1997 the Company has made commitments to
Messrs. Kostusiak and Lederer to pay retirement wage benefits
(see Pension Plans). The Committee anticipates eventually
increasing the commitment so that the retirement wage benefit
would start at 60% of final base wages, but future increases in
the commitment moving toward that goal probably will be made only
if and when the financial circumstances of the Company seem
appropriate.
As part of the continuing development of a long-term succession
plan, during and subsequent to fiscal 1997, the Committee has
been considering implementation of certain trusts for holding
Company assets that are intended to fund deferred compensation
obligations and other benefit commitments. While those assets
might continue to be subject to the claims of Company creditors,
the use of the trusts could become a helpful part of the overall
succession plan.
Attracting and Retaining Management:
The Committee believes that the Company is attracting and
retaining effective management personnel and that the Company's
approach to executive compensation is appropriate for achieving
that objective. The Committee anticipates that, from time to
time, independent studies of the Company's overall executive
compensation and other investigations will be conducted so as to
test the Company's compensation approach against compensation
programs offered by others.
Other Matters:
Recently, the Committee studied the potential effects of
Section 162(m) of the Internal Revenue Code on the Company's
executive compensation arrangements. That Section limits the
Company's annual deduction for an executive's compensation to $1
million, except for "performance based" compensation and deferred
compensation until it is paid. As shown in the Executive
Compensation Table on page 4 of this Proxy Statement, none of the
Company's officers has earned $1 million in any year. The
Company's Deferred Compensation Plan, however, does permit
deferral of bonuses until retirement, and as currently written,
there is a potential for payment of more than $1 million to an
officer in a year he receives both regular and deferred
compensation. The Committee anticipates recommending to the
Board of Directors that the Deferred Compensation Plan be amended
to limit the annual withdrawals from this plan so that the
Section 162(m) limit will not be exceeded in any year. In
addition, the Committee anticipates recommending that the bonus
plans and their administration be changed so that the bonuses
will satisfy the specific requirements under Section 162(m) for
"performance based" compensation.
Compensation Committee
Donald R. Adair, Chairman
Mortimer B. Fuller, III
Edward C. McIrvine
EXECUTIVE AGREEMENTS
The Company has employment agreements with three of its
executive officers, Messrs. Kostusiak, Lederer and Tracy (the
"Executive Agreements"). The Executive Agreements with Messrs.
Kostusiak and Lederer are through May 2002 and the agreement with
Mr. Tracy is through February 1999. The Executive Agreements
provide for severance benefits under certain circumstances. The
terms "change of control", "cause" and "disability" are used in
the following description as defined in the Executive Agreements.
The Executive Agreements terminate upon the executive's death or
permanent disability except as described under Pension Plans.
Under the agreements with Messrs. Kostusiak and Lederer, if the
Company terminates the executive's employment without cause, the
Company will continue compensation and benefits to the executive
for the then remaining balance of the term of employment or for a
period of three years from the date of termination, whichever is
longer. Under such circumstances, Mr. Tracy's agreement provides
that his compensation will continue for the then remaining
balance of the term of employment or for a period of one year
from the date of termination, whichever is longer. The
continuation of compensation and benefits includes the
executive's base salary plus participation in all applicable
executive incentive compensation plans and fringe benefit
packages. Further, if Mr. Kostusiak's or Mr. Lederer's
employment is terminated by the Company without cause after
expiration of the agreement but prior to the Company and the
executive reaching agreement with respect to the executive's
retirement benefits, the Company will also continue the
executive's compensation and benefits for a period of two years
from the date of termination.
If the Company terminates Mr. Kostusiak's or Mr. Lederer's
employment for cause, each will receive compensation and benefits
for the remaining balance of the term of employment or for a
period of three years from the date of termination, whichever is
longer, provided that this compensation is reduced by any
monetary damage suffered by the Company due to the cause. The
same applies for Mr. Tracy, except that compensation and benefits
will continue for the remaining balance of the term of employment
or for a period of one year from the date of termination,
whichever is longer.
If, within four months after a "change in control," as defined
in the Executive Agreements, Mr. Kostusiak's or Mr. Lederer's
employment is terminated by the Company or the executive, each
would be entitled to receive (a) the base salary through the
termination date, as in effect at the time of termination or at
the time the change in control occurs, whichever is higher, plus
any bonus which has been earned but not yet paid; (b) an amount
equal to three times the highest total base salary and bonus
compensation paid to him in any of the Company's preceding three
fiscal years; and (c) the continuation of fringe benefits for
three years after termination. No provision relating to a change
of control is included in Mr. Tracy's agreement.
All three agreements restrict the executives from competing
with the Company for various periods subsequent to termination of
employment, depending on the circumstances of the termination.
COMPARISON OF TOTAL SHAREHOLDER RETURN
The Company's common stock trades on The Nasdaq National Market
tier of The Nasdaq Stock Market under the symbol: DETC. The
following graph sets forth the Company's Total Shareholder Return
Index as compared to The Nasdaq Index and the Nasdaq Electronic
Component Stock Industry Index. The graph is based on the
assumption that $100 was invested in each entity on March 31,
1992, and that all dividends were reinvested.
[Graph titled: Comparison of five year cumulative total return
among Detection Systems, Inc., the Nasdaq Index and the Electronic
Industry Index]
Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97
Detection Systems, Inc. 100 147 176 136 173 467
The Nasdaq Index 100 115 124 138 187 208
Electronic Industry 100 165 200 261 344 603
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board of
Directors are Messrs. Adair, Fuller and McIrvine. In the last
fiscal year, the Company and its subsidiaries paid $15,825 for
legal services to Adair Law Firm, of which Mr. Adair is the
principal, and $8,400 to Mr. McIrvine for consultant services.
Messrs. Adair and McIrvine also serve on the Stock Option
Committee of the Board of Directors.
EXPENSES OF SOLICITATION
The cost of the solicitation of proxies will be borne by the
Company. In addition to solicitation by mail, employees of the
Company may, without extra remuneration, solicit proxies
personally, or by telephone or facsimile. The Company has
retained Kissel-Blake, Inc. to aid in the solicitation of proxies
for shares held of record by banks, brokers and other custodians,
nominees and fiduciaries. The Company will pay Kissel-Blake an
anticipated fee of $4,000, plus expenses, for these services, and
will also reimburse such record holders for their expenses in
forwarding proxies and proxy soliciting material to the
beneficial owners of the shares held by them.
OTHER MATTERS
The Board of Directors knows of no matters to be presented at
the meeting other than those described in this Proxy Statement.
However, if any other matters properly come before the meeting,
it is intended that the persons named in the enclosed proxy will
vote on such matters in accordance with their best judgment.
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's directors and executive officers and persons who
own more than 10% of a registered class of the Company's equity
securities, to file with the Securities and Exchange Commission
reports of ownership of common stock of the Company. Officers,
directors and greater than 10-percent shareholders are required
by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file. To the Company's knowledge, based
solely on review of the copies of such reports furnished to the
Company and written representations that no other reports are
required, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10-percent beneficial owners
were complied during the fiscal year ended March 31, 1997.
In fiscal 1996, the Company paid a premium of $115,324 for
director and officer liability insurance. This policy, which was
renewed through March 31, 1997, provides protection for the
directors and officers of the Company and its subsidiaries.
In order to be eligible for inclusion in the Company's proxy
materials for next year's Annual Meeting, shareholder proposals
for presentation at that meeting must be received at the
Company's principal executive offices by March 19, 1998.
Shareholders are urged to sign, date and return the enclosed
proxy in the enclosed return envelope. Prompt response is
helpful, and your cooperation will be appreciated.
Shareholders may obtain without charge a copy of the Company's
annual report on Form 10-K. Requests should be directed to:
Detection Systems, Inc.
Ella D. Gardner, Controller
130 Perinton Parkway
Fairport, New York 14450
Dated: July 18, 1997
APPENDIX A
DETECTION SYSTEMS, INC.
1997 STOCK OPTION PLAN
1. PURPOSE
The purpose of the Detection Systems, Inc. ("the Company")
1997 Stock Option Plan ("the Plan") is to enable eligible key
employees and nonemployees of the Company and its subsidiaries to
purchase shares of Common Stock of the Company by means of
incentive stock options and nonqualified stock options
(collectively referred to as "options"). Through the use of such
options, the Company expects to be able to attract and retain the
best available talent and to encourage the highest level of
performance of its key personnel.
2. ADMINISTRATION
The Plan shall be administered by a Stock Option Committee
(the "Committee") consisting of not fewer than three members
appointed by the Board of Directors of the Company, each of whom,
to the extent feasible, shall be a director meeting the
definition as a "non-employee director" and an "outside
director," respectively, under regulations promulgated under
Section 16(b) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"), or comparable provisions
as in effect from time to time. The Board shall fill any vacancy
on the Committee.
Subject to the provisions of the Plan, the Committee shall
possess the authority, in its discretion, (a) to determine from
among those persons who perform services to the Company to whom,
and the time or times at which, options will be awarded, the
number of shares included in the option and any other terms and
conditions that may apply to such option; (b) to determine
whether the options shall be incentive or nonqualified options;
(c) to interpret the Plan; (d) to make and amend rules and
regulations relating thereto; (e) to prescribe the form and
conditions of the option agreements; and (f) to make all other
determinations necessary or advisable for the administration of
the Plan. The Committee's determinations shall be conclusive and
binding upon the Company, the participants and all other persons.
3. ELIGIBILITY
Options may be awarded under the Plan only to key employees
and key nonemployees of the Company and its subsidiaries (which
shall include all corporations of which at least fifty percent of
the voting stock is owned by the Company directly or through one
or more corporations at least fifty percent of the voting stock
of which is so owned). Notwithstanding the foregoing, any
director who is not an officer or employee of the Company or one
of its subsidiaries shall not be eligible to participate in this
Plan.
4. SHARES AVAILABLE
An aggregate of 250,000 shares of the Common Stock (par value
$.05 per share) of the Company (subject to substitution or
adjustment as provided in Section 8 hereof) shall be available
for options under the Plan. Such shares may be authorized and
unissued shares or may be treasury shares. If an option expires,
terminates or is canceled without being exercised, new options
may be thereafter granted covering such shares. In order to meet
the requirements of Code Section 162(m), which section limits the
Company's tax deduction for compensation paid to certain officers
to $1 million per year, the Plan limits to 100,000 the aggregate
number of options that may be awarded to any one employee. No
stock option may be granted more than ten years after the
effective date of the Plan.
5. TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
Incentive stock options may be granted only to employees of
the Company and its subsidiaries. Each incentive stock option
granted under the Plan to an employee shall be designated as such
and shall be evidenced by an incentive stock option agreement in
such form as the Committee shall approve from time to time, which
agreement shall conform with this Plan and which shall contain
the following terms and conditions:
(a)Number of Shares. The option agreement shall specify the
number of shares to which it pertains.
(b)Purchase Price. The purchase price for each option shall
be not less than the fair market value of the stock at the
time such option is granted. The Committee shall determine
the purchase price. If an option is granted to an employee
who at the time of grant owns stock possessing more than ten
percent of the total combined voting power of all classes of
stock of the Company (a "10-percent Shareholder"), the
purchase price shall be at least 110% of the fair market
value of the stock subject to the option.
(c)Duration of Option. Each stock option by its terms shall
not be exercisable after the expiration of ten years from the
date such option is granted. In the case of an incentive
stock option granted to a 10-percent Shareholder, the option
by its terms shall not be exercisable after the expiration of
five years from the date such option is granted.
(d)Options Nontransferable. Each option by its terms shall
not be transferable by the optionee otherwise than by will or
the laws of descent and distribution, and shall be
exercisable during his lifetime, only by the optionee, the
optionee's guardian or the optionee's legal representative.
(e)Exercise Period. Subject to the restriction in Section
5(f), the exercise of each option shall be subject to such
conditions as may be imposed by the Committee and specified
in the option agreement. The Committee may, among other
things, specify a minimum length of employment and may
stagger the period of exercise by providing that only a
certain percentage of options may be exercised each year.
(f)Payment of Option Price. An option shall be exercised
upon written notice to the Company accompanied by payment in
full for the shares being acquired. The payment shall be made
in cash, check or wire transfer; by delivery of shares of
Common Stock of the Company registered in the name of the
optionee, endorsed in blank, the value of which will be
deemed equal to the closing market price of such shares on
the date of exercise; or, at the discretion of the Committee,
by a so-called "cashless exercise" transaction that affords
the optionee the opportunity to sell immediately some or all
of the shares underlying the exercise portion of the option
in order to generate sufficient cash to pay the option
exercise price and/or to satisfy withholding tax obligations
related to the option.
(g)Maximum Value of Shares. No incentive option shall be
granted to an employee under this Plan or any other incentive
stock option plan of the Company or its subsidiaries to
purchase shares as to which the aggregate fair market value
(determined as of the date of grant) of the Common Stock
which first become exercisable by the employee in any
calendar year exceeds $100,000.
(h)Rights as a Shareholder. The optionee shall have no
rights as a shareholder with respect to any shares for which
he is granted an option until the date of issuance to him of
a stock certificate for such shares and no adjustment shall
be made for any dividends or other rights the record date for
which is prior to the date such stock certificate is issued.
(i)General Restriction. Each option shall be subject to the
requirement that, if at any time the Board of Directors shall
determine, in its discretion, that the listing, registration
or qualification of the shares subject to such option upon
any securities exchange or under any state or federal law, or
the consent or approval of any governmental regulatory body,
is necessary or desirable as a condition of, or in connection
with, the granting of such option or the issuance or purchase
of shares thereunder, such option may not be exercised in
whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected
or obtained free of any conditions not acceptable to the
Board of Directors.
6. TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS
Options other than incentive stock options may be granted
under this Plan to both eligible employees and eligible
nonemployees. Each such nonqualified option shall be evidenced
by a nonqualified stock option agreement, shall be designated as
a "nonqualified stock option," and shall conform to the foregoing
provisions of Section 5 except the purchase price requirements of
Section 5(b), the 10-percent Shareholder restriction of Section
5(c), the prohibition on transferability of Section 5(d) to the
extent provided in the nonqualified stock option agreement, and
the maximum value of grants of Section 5(g). The Committee may
include, in its discretion, any terms or conditions in addition
to those specified in Section 5. To the extent an option exceeds
the limitations of Section 5(g), it shall be deemed a
nonqualified option and shall otherwise remain in full force and
effect. A nonqualified option may have a duration of 10 years
and one day from the date such option is granted.
7. TERMINATION OF EMPLOYMENT - EFFECT ON OPTIONS
If the employment of an optionee terminates for any reason
other than death or disability, an option may be exercised by him
at any time prior to the earlier of the expiration date of the
option or the expiration of three months after the date of
termination, but only if, and to the extent that, he was entitled
to exercise the option at the date of such termination.
Notwithstanding the foregoing, an option may not be exercised
after termination of employment if the Committee determines that
the termination of employment of such optionee resulted from
willful acts, or failure to act, by the optionee detrimental to
the Company or any of its subsidiaries. The Committee shall
determine whether an authorized leave of absence shall constitute
a termination of employment for purposes of this Plan.
If an optionee's employment terminates by reason of disability
(within the meaning of Section 105 (d)(4) of the Internal Revenue
Code) or death, his option may be exercised at any time prior to
the earlier of the expiration of the option or the expiration of
one year following the date employment terminated due to
disability or death.
If employment of the optionee terminates for any reason other
than disability, retirement or death, any unpaid balance
remaining on any promissory note used in the purchase of stock
shall become due and payable upon not less than three months'
notice from the Company, which notice may be given at any time
after such termination; provided, however, that such unpaid
balance on such promissory note shall become due and payable five
years from the date of such termination, unless the note has an
earlier due date. In the case of termination due to death, any
unpaid balance remaining on such note on the date of death shall
become due and payable one year from such date. "Retirement"
shall mean early or normal retirement as defined in the Company's
retirement plan or, in the event there is no such plan, age 65.
8. ADJUSTMENT OF SHARES
In the event of any change in the Common Stock of the Company
by reason of any stock dividend, recapitalization,
reorganization, merger, consolidation, split-up, combination, or
exchange of shares, or rights offering to purchase Common Stock
at a price substantially below fair market value, or of any
similar change affecting the Common Stock, the number and kind of
shares which thereafter may be optioned and sold under the Plan
and the number and kind of shares subject to option in
outstanding option agreements and the purchase price per share
thereof shall be appropriately adjusted consistent with such
change in such manner as the Committee may deem equitable to
prevent substantial dilution or enlargement of the rights granted
to, or available for, participants in the Plan.
9. NO EMPLOYMENT RIGHTS
Neither the Plan nor any options granted under it shall confer
upon any recipient any right with respect to continuance of
employment by the Company or any subsidiary, nor shall they
interfere in any way with the right of the Company or any
subsidiary by which a recipient is employed to terminate his
employment at any time.
10. WITHHOLDING TAXES
Whenever the Company proposes or is required to issue or
transfer shares of Common Stock under the Plan to an employee
pursuant to the exercise of a nonqualified stock option, the
Company shall have the right to require the recipient to remit to
the Company an amount sufficient to satisfy any federal, state or
local withholding tax requirements prior to the delivery of any
certificate or certificates for such shares. To the extent
provided in the nonqualified stock option agreement, the amount
of such withholding tax requirements may be satisfied by delivery
of shares of the Common Stock of the Company registered in the
name of the optionee, duly assigned to the Company. Any shares
so delivered shall be deemed to have a value equal to the fair
market value of the shares on such date.
11. CHANGE IN CONTROL
Upon acquisition of thirty percent or more of the Company's
outstanding shares of stock having general voting rights by an
unaffiliated person, entity or group, the Committee shall notify,
in writing, each holder of an outstanding option of such change
in control. Notwithstanding any other provision of this Plan or
any option agreement, all options shall become fully exercisable
on receipt of such notice.
12. AMENDMENT AND DISCONTINUANCE
This Plan may be amended, modified or terminated by the
shareholders of the Company or by the Board of Directors, except
that the Board may not, without approval of the shareholders,
materially increase the benefits accruing to participants under
the Plan, increase the maximum number of shares as to which
options may be granted under the Plan, change the minimum option
price, change the class of eligible employees, extend the period
for which options may be granted or exercised, or withdraw the
authority to administer the Plan from a Committee consisting of
directors not eligible to receive options under the Plan.
Notwithstanding the foregoing, to the extent permitted by law,
the Committee may amend the Plan without the approval of
shareholders, to the extent it deems necessary to cause options
granted under the Plan to be exempt from Section 16(b) of the
Exchange Act and deductible compensation under Section 16s(m) of
the Code. Except as required by law, no amendment, modification,
or termination of the Plan may, without the written consent of a
participant to whom any option shall theretofore have been
awarded, adversely affect the rights of such participant under
such option.
13. EFFECTIVE DATE
The effective date of this Plan is August 20, 1997, provided
that the Plan is adopted by the shareholders of the Company on
that date.
14. GOVERNING LAW
To the extent not inconsistent with the provisions of the
Internal Revenue Code that relate to incentive stock options and
nonqualified stock options, this Plan and any option agreement
adopted pursuant to it shall be construed under the laws of the
State of New York.
</TABLE>
