DETECTION SYSTEMS, INC.
130 Perinton Parkway 716-223-4060
Fairport, New York 14450 Fax: 716-223-9180
July 29, 1998
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of
Shareholders of Detection Systems, Inc. to be held on August
27, 1998 at 130 Perinton Parkway, Fairport, New York,
commencing at 2 p.m., Eastern Time. Your Board of Directors
and management look forward to greeting personally those
shareholders able to attend.
This year, in addition to electing five directors and
ratifying the appointment of independent auditors, you are
being asked to approve an amendment to the Company's
Certificate of Incorporation to increase its authorized shares
of Common Stock. These matters are discussed in greater
detail in the accompanying proxy statement.
Your Board of Directors recommends a vote FOR the election of
directors, FOR the ratification of the appointment of
independent auditors and FOR the proposal to amend the
Company's Certificate of Incorporation.
Regardless of the number of shares you own or whether you plan
to attend, it is important that your shares are represented
and voted at the meeting. You are requested to sign, date and
mail the enclosed proxy promptly.
Your interest and participation in the affairs of the Company
are most appreciated.
Sincerely,
Karl H. Kostusiak
Chairman and CEO
DETECTION SYSTEMS, INC.
130 Perinton Parkway
Fairport, New York 14450
(716) 223-4060
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 27, 1998
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 27, 1998, at
2 PM for the following purposes:
1. To elect five directors;
2. To approve a proposal to amend the Company's Certificate of
Incorporation to increase its authorized shares of Common Stock;
3. To ratify the appointment of independent auditors for
fiscal year 1999; 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
20, 1998 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 29, 1998
Shareholders are cordially invited to attend the meeting in
person. Even if you plan to attend, please complete, sign and
date the enclosed proxy and return it promptly in the enclosed
return envelope.
DETECTION SYSTEMS, INC.
130 Perinton Parkway
Fairport, New York 14450
PROXY STATEMENT
First sent to Shareholders on July 29, 1998
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 27, 1998 at 2 p.m.,
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 20, 1998, at
which time the Company had outstanding 6,321,122 shares of
Common Stock. Shareholders are entitled to one vote for each
share owned.
Directors are elected by a plurality of votes cast. The
affirmative vote of a majority of the outstanding shares
entitled to vote is required to approve the proposal to amend
the Company's Certificate of Incorporation. A majority of the
votes cast is required to ratify the appointment of auditors.
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 direc
tors of the five nominees proposed by the Board of Directors,
for the ratification of the appointment of
PricewaterhouseCoopers LLP as independent auditors and for the
proposal to amend the Company's Certificate of Incorporation to
increase its authorized shares.
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 and delivering to the Secretary of the Company 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 has nominated the following
persons for election as directors: Donald R. Adair, MortimerEB.
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. 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 been President and
Executive Vice President of the Company since it was formed in
1968. Effective April 1, 1998, Mr. Lederer reduced his
employment to half time. In connection with this, Mr. Lederer's
title was changed to Vice President, Business Development. 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 rail
roads 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, 1998, the Board of
Directors held seventeen meetings. The Board of Directors has
an audit committee consisting of Messrs. Adair, Fuller and
McIrvine. This committee, which met nine times 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 six times during the last
fiscal year. Messrs. Adair, Fuller and McIrvine also serve on
the stock option committee. This committee, which met seven
times during the year, is responsible for granting options
pursuant to the Company's Stock Option Plans. There is no nomina
ting 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.
During fiscal 1998, Directors who are not employees of the
Company were paid an annual fee of $10,000 as well as $1,000
plus travel expenses, if any, for each day on which they
attended Board meetings. Directors received $500 for Board
meetings held by teleconference. There was no additional
compensation for attendance of committee meetings. A payment of
$30,000 was made to Dr. McIrvine for consideration of the extra
services he performed during fiscal 1998 as Chairman of the
Audit Committee. Effective fiscal 1999, Directors who are not
employees of the Company will be paid an annual fee of $12,000.
In addition, the Chairpersons of the Company's Audit and
Compensation Committees of the Board of Directors will each be
paid an annual fee of $8,000 for that service.
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 1999 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 July
3, 1998, or could be beneficially owned within 60 days of this
date, 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.
<TABLE>
Amount and
Nature of Percent
Name, Age, Principal Beneficial of
Occupation and Positions Ownership(1) Class Since
<S> <C> <C> <C>
Donald R. Adair (55) 1,549(2) * 1991
Director of the Company
and Principal of
Adair Law Firm
George E. Behlke (40) 43,753(3-4) * 1995
Vice President, Engineering
and Operations,
of the Company; Prior -
Vice President
Engineering and Engineering Manager
Mortimer B. Fuller, III (56) 3,645 * 1990
Director of the Company and
President, CEO and a Director of
Genesee and
Wyoming Industries, Inc.
Karl H. Kostusiak (59) 563,761(4) 8.7% 1968
Director, Chairman and
CEO of the Company
David B. Lederer (58) 321,002(4) 5.0% 1968
Director and Vice President,
Business Development
of the Company
Edward C. McIrvine (64) 5,025 * 1981
Director of the Company and
self-employed Research and
Development Management Consultant
Frank J. Ryan (44) 72,838(3-5) 1.2% 1982
Vice President, Secretary
and Treasurer
of the Company
Lawrence R. Tracy (51) 112,118(3-4) 1.8% 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) 1,123,691(2)-(5) 17.4%
</TABLE>
Footnotes to Management and Security Ownership Table:
* Percentage of Common Stock owned is less than 1%.
(1) For all shares listed, each person possess both sole voting
and investment power, except for those shares indicated in notes
(2) - (5) 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 6,860, 3,126, 55,510 and 65,496 shares which may
be acquired upon exercise of warrants and options held by
Messrs. Behlke, 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 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:
Amount and
Name and Address of Nature Percent
Title of Beneficial Owner of of
Class Beneficial Class
Ownership
Common Karl H. Kostusiak 563,761(1) 8.7%
Stock 130 Perinton Parkway
Fairport, NY 14450
Common Capital Research and Mgt. 353,200 5.6%
Stock Company
Smallcap World Fund, Inc.
333 South Hope Street
Los Angeles, CA 90071
Common Ultrak, Inc. 316,500 5.0%
Stock 1301 Waters Ridge Drive
Lewisville, TX 75057
Common David B. Lederer 321,002(1) 5.0%
Stock 130 Perinton Parkway
Fairport, NY 14450
Footnote to Beneficial Ownership Table:
(1) 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.
EXECUTIVE COMPENSATION
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, 1998, 1997
and 1996.
Summary Compensation Table:
<TABLE>
Long-Term
Annual Compensation Compensation
Other Securitie
Annual s All Other
Name and Compen Underlyin CompenD
Principal Fiscal Salary Bonus sation g sation
Position Year ($) ($) ($)(1) Options/ ($)(3)
----------- ----- ------- ------ ------- SAR's -------
(#)
-------
<S> <C> <C> <C> <C> <C> <C>
Karl H. 1998 240,504 0 27,064 20,000 2,640
Kostusiak
Chairman and 1997 212,100 403,333 --(2) 0 3,266
CEO 1996 205,926 1,419 26,186 0 2,542
David B. 1998 192,418 0 30,465 10,000 2,525
Lederer
Executive 1997 169,700 322,670 --(2) 0 3,364
Vice
President 1996 164,741 1,135 27,956 0 2,534
Lawrence R. 1998 184,322 0 --(2) 14,000 2,659
Tracy
President of 1997 148,470 282,377 --(2) 18,775 3,301
Detection 1996 144,148 31,648 --(2) 0 0
Systems
International
, Inc. and
Radionics,
Inc.
George E. 1998 114,324 0 --(2) 10,000 2,734
Behlke, Vice 1997 108,150 81,790 24,761 9,650 1,964
President,
Engineering 1996 89,363 723 --(2) 0 2,272
Frank J. Ryan 1998 113,788 0 13,874 5,000 2,616
Vice 1997 108,150 59,308 --(2) 2,190 1,973
President,
Secretary & 1996 105,000 723 --(2) 0 2,298
Treasurer
</TABLE>
Footnotes to Compensation Table:
(1) During fiscal 1998, a total of $17,997 and $15,553 were
paid toward life, disability and long term care insurance
premiums for the benefit of Messrs. Kostusiak and Lederer,
respectively. A total of $7,406 was paid to Mr. Ryan for
reimbursement of medical expenses not covered under the
Company's medical plans. A total of $10,198 was paid to Mr.
Lederer for reimbursement of automobile expenses
(2) Values are less than the minimum amount required to be
reported.
(3) Represents contributions by the Company to accounts of the
named executive officers under the Company's 401(k) retirement
savings plan.
Option/SAR Grants in Last Fiscal Year:
The following table sets forth information with respect to
stock options granted to the named executive officers during
fiscal 1998. Each grant was for incentive stock options to
purchase stock under the CompanyOs 1997 Stock Option Plan. All
options are exercisable 33-40% after one year, 60% after two
years, 80% after three years and 100% after four years.
Option/SAR Grant Table:
<TABLE>
Potential
Percent Realizable
Number of Value at
of Total Assumed
Securi- Options Annual Rates
ties /SAR's Exer- of Stock
Under- Granted cise Price
lying to or Appreciation
Option Employee Base Market Expira- for
/SAR's in Price Price tion Option Term
Name Granted Fiscal ($/Sh) ($/Sh) Date 5% ($) 10% ($)
(#) Year
<S> <C> <C> <C> <C> <C> <C> <C>
K.Kostusiak 20,000 18.2% $14.75 $14.75 11/17/02 $81,503 $180,100
D. Lederer 10,000 9.1% $14.75 $14.75 11/17/02 $40,752 $90,050
L. Tracy 14,000 12.7% $14.75 $14.75 11/17/02 $57,052 $126,070
G. Behlke 10,000 9.1% $14.75 $14.75 11/17/02 $40,752 $90,050
F. Ryan 5,000 4.6% $14.75 $14.75 11/17/02 $20,376 $45,025
</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 1998 and unexercised options held as of March
31, 1998. 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, 1998 was
$11.875 per share.
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options
Options at
Shares at March 31, 1998 ($)
(#) ($) March 31, 1998
Acquired Value (#)
on
Exer- Real- Exercisable / Exercisable/
Name cise ized Unexercisable Unexercisable
K. Kostusiak 0 0 0 / 20,000 0 / 0
D. Lederer 0 0 0 / 10,000 0 / 0
L. Tracy 0 0 55,510/ 37,265 $366,500/$97,250
G. Behlke 0 0 5,360 / 27,290 $15,063/$46,063
F. Ryan 0 0 2,676 / 6,764 $12,675/ $3,169
During fiscal year 1998, Messrs. Kostusiak, Lederer and Ryan
had stock option loans outstanding that totaled $169,896,
$123,365 and $60,498, respectively. The loans, which carried
interest rates ranging from 5.54% to 8.42%, were paid in full at
March 31, 1998.
PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION
TO INCREASE ITS AUTHORIZED COMMON STOCK
On July 14, 1998, the Company's Board of Directors approved,
subject to approval by the stockholders, a Certificate of
Amendment to the Company's Certificate of Incorporation
increasing its authorized shares of Common Stock from 12,000,000
to 24,000,000 shares. If the shareholders approve this
proposal, the first paragraph of Article Fourth of the Company's
Certificate of Incorporation will be amended to read in its
entirety as follows:
"FOURTH: The aggregate number of shares which the
Corporation shall have authority to issue is Twenty-four
Million (24,000,000) common shares, with par value of Five
Cents ($.05) per share."
As of June 30, 1998, the Company had issued and outstanding
6,321,122 shares of Common Stock (including 229,279 Treasury
shares). Of the remaining 5,678,878 shares, 883,910 have been
reserved for issuance of shares outstanding in connection with
the Company's stock option plans, deferred compensation plans
and stock warrants.
The additional shares for which authorization is sought would
be identical to the shares of Common Stock now authorized.
Adoption of the proposed amendment will not affect the rights of
holders of currently outstanding Common Stock, but future
issuances of the increased stock would have effects incidental
to increasing the number of shares of Common Stock outstanding.
Since holders of Common Stock do not have any preemptive or
similar rights to subscribe for or purchase any additional
shares of Common Stock that may be issued by the Company in the
future, future issuances of Common Stock may, depending on the
circumstances, have a dilutive effect on the earnings per share,
voting power and other interests of the existing shareholders.
If the proposed amendment is adopted, it will become effective
upon the filing of the proposed amendment with the New York
Secretary of State.
Purpose and Effect of the Proposed Amendment:
The Company does not now have any present plan, understanding
or agreement to issue additional shares of Common Stock.
However, the Board believes that the proposed increase in
authorized shares of Common Stock is desirable to enhance the
Company's flexibility in connection with possible future
actions, such as stock splits, corporate mergers and
acquisitions, public or private equity financings, acquisitions
of property, use in employee benefit plans, or other corporate
purposes. The Board will determine whether, when, and on what
terms shares of Common Stock will be issued.
The proposed amendment could also be used for "anti-takeover
effects." While the Board does not have any intention at this
time of using the additional shares for "anti-takeover"
purposes, they could potentially be used for such purposes. For
example, the additional shares might be issued under
circumstances which could make it more difficult for any person
or entity to acquire or gain control of the Company. The Board
is not, however, recommending the increase as part of any "anti-
takeover" strategy, and neither it nor the management of the
Company has knowledge of any pending or threatened effort to
acquire control of the Company.
The Board of Directors believes that this amendment to the
certificate of incorporation to increase the number of
authorized shares is in the best interest of the Company and its
shareholders and recommends that shareholders vote in favor of
this proposal. Proxies will be so voted unless shareholders
specify a contrary choice in their proxies.
RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has recommended that shareholders
ratify the appointment of PricewaterhouseCoopers LLP as the
independent auditors of the Company for the fiscal year ending
March 31, 1999. 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 ratification
of the appointment of PricewaterhouseCoopers LLP as the
independent auditors of the Company for the 1999 fiscal year.
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 pro
grams in which officers participate and (c) establishing the spe
cific 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 manage
ment 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 1998 and subsequently, three additional
factors have affected the Committee's determinations: (1) the
Company's continuing acquisition and other expansion activities
and a need to motivate new management personnel at various
places around the world, (2) a judgment that the executive bonus
plans should be simplified and revised to respond to the
Company's growth, 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.
Employment Agreements:
In 1988, the Company entered into five-year employment
agreements with Messrs. Kostusiak and Lederer. Each year
thereafter, the agreements have been re-examined, reviewed and
revised as appropriate and then re-executed for an new five-year
period. The Company also has an employment agreement with Mr.
Tracy which expires in February 1999. Besides the comments made
in this Committee report, a summary of the agreements is
contained under "Executive Agreements" below.
Tying Compensation to the Company's Financial Performance:
Among other goals, the employment agreements seek to create a
strong tie between the compensation of Messrs. Kostusiak and
Lederer and the Company's financial performance. The agreements
have accomplished this by providing for (a) an opportunity for
an annual cash bonus based on pre-tax profits and (b) up until
fiscal 1998, an opportunity for an annual stock bonus based on
growth of both sales and pre-tax profits. These two bonus
programs were also made available to other executive officers of
the Company with the goal of aligning their compensation to the
Company's financial performance.
In fiscal years 1997 and 1998, the payment of the cash bonus
was tied to the Company's achievement of a pre-defined annual
earnings-per-share ("EPS Goal") threshold, which was established
by the Board of Directors. The total dollar amount available
for bonuses, was established as the amount by which the
Company's pre-tax profits for the fiscal year exceeded $500,000,
with each executive receiving a pre-defined percentage. During
fiscal 1998, in response to the Company's growth, the pre-tax
profit threshold was raised to $2,000,000. No cash bonuses were
paid in fiscal 1998 because the established pre-tax profit and
EPS Goal requirements were not met.
The availability of stock bonuses in fiscal 1997 and 1998 was
also tied to performance requirements. Executives were eligible
for 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 were scaled
back for lower performance levels, so that they were zero shares
for zero sales growth and zero if pre-tax profit was 5% or less
of total sales. Sales growth for purposes of these plans was
defined as the greater of the actual sales growth or "equivalent
sales growth," which, in order to be responsive to Company
growth while still being a useful plan, was 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 was not more than the actual sales of
the year in question. During fiscal 1998, the Committee
eliminated the stock bonus plan and reverted to the use of stock
options. Thus, no stock bonuses were awarded in fiscal 1998
and, for the first time since 1987, a stock option was granted
to Mr. Kostusiak in November 1997 for the purchase of 20,000
shares of stock at a price of $14.75 per share.
For fiscal 1999, the executive cash bonus program has been
redesigned with a goal toward simplification. The EPS Goal has
been eliminated and the pre-tax profit threshold was raised to
4% of net sales. These changes were in response to the
complexity of the interplay between the EPS Goal and other plan
conditions and the need for a bonus plan that more naturally
accommodated further Company growth.
The executive officers also participate in the Company's
general profit sharing plan which is available to all domestic
employees. This plan, which was revised at the beginning of
fiscal 1999, provides a quarterly distribution of 4% of pre-tax
profits in excess of 4% of net sales. Previously, 4% of pre-tax
profits in excess of $500,000 were distributed if the Company
achieved the required EPS Goal. No bonuses were distributed in
fiscal 1998 from this plan.
The Company's bonus program is intended to provide incentives
for managing the Company's financial performance toward having
pre-tax profits significantly exceed 4% of sales. Although the
stock bonus program was eliminated, the Committee still believes
that a significant portion of the compensation of all executive
officers is tied to corporate performance. (See the table under
"Executive Compensation.")
The Committee believes that the bonus provisions of the
employment agreements generally functioned as intended during
the past three years. In particular, Mr. Kostusiak's bonus
compensation was as follows:
Fiscal Cash Stock Pre-Tax
Year Bonuses Bonus Sales Profit
1998 $0 Eliminated $126,343,000 $1,382,000
1997 $241,125 $162,208 101,251,000 5,250,000
1996 $1,419 0 41,858,000 (Loss)
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. Over the years since then other
officers have been granted opportunities to acquire stock
through stock options and bonus stock programs. Under the
Company's current stock option 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 and, as noted
above, in November 1997, a 20,000 share option was granted to
Mr. Kostusiak. 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 executive officers who own
substantial equity positions in the Company provides a
considerable incentive for them to pursue the Company's long-
term strategic objectives.
Additionally, in order to serve long-term objectives and build
a succession plan for senior management, the Company has made
commitments to Messrs. Kostusiak and Lederer to pay retirement
benefits (See Retirement Benefits). Also, the Committee
increased Mr. Kostusiak's base salary during fiscal 1998 and
recently secured an extended non-competition commitment from him
(See Executive Agreements).
As part of the continuing development of a long-term
succession plan, 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 such
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 continues to be appropriate
for achieving that objective. The Committee anticipates that,
from time to time, independent studies of the Company's overall
executive compensation and other investigations will be
conducted so as to test the Company's compensation approach
against compensation programs offered by others.
COMPENSATION COMMITTEE
Donald R. Adair, Chairperson
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 July 2003, and the agreement
with Mr. Tracy is through February 1999. Effective in April
1998, Mr. Lederer's employment commitment was reduced to half-
time.
The Executive Agreements provide for severance benefits under
certain circumstances. The terms "change in control," "cause"
and "disability" are used in the following description as
defined in the Executive Agreements. The Executive Agreements
terminate the executive's employment upon his death or permanent
disability and, in those cases, provide for disability income to
be paid during disability and a retirement wage benefit to be
paid during retirement years and to any surviving spouse (see
Retirement Benefits).
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. The Company thereafter will
pay non-competition fees as described below and retirement
benefits as described under Retirement Benefits. Mr. Tracy's
agreement provides that, in the case of a termination without
cause, 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.
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, plus non-competition fees and benefits,
retirement benefits, and possible disability benefits, 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.
Mr. Kostusiak's agreement now provides that he will not
compete with the Company so long as the Company either retains
his full-time services or pays him an annual non-competition fee
of $150,000 (to be increased annually based on the Consumer
Price Index) plus benefits to the date of his retirement (now
set for the January 1 after his 68th birthday) and then pays the
retirement benefit.
If, within six 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 cash compensation
(including base salary and bonuses) paid to him in any of the
Company's preceding three fiscal years, (c) an amount equal to
the total amounts that would be expended for benefits over the
next three years if he had continued as an employee, (d) an
acceleration of the right to exercise all rights or options he
then holds to acquire the Company's Common Stock and he may
either exercise the rights and options or elect to receive cash
for the aggregate spread between the exercise price and the then
market value for the stock, (e) assignment of all rights in life
insurance policies then held by the Company on his life, and (f)
reimbursement for any amount of excise taxes he might have to
pay on his receipt of items (a) through (e) sufficient so that
the Company will bear all direct and indirect costs of any such
excise taxes. The Agreements also provide that, upon a change
in control, the initial retirement wage commitment will become
60% of the base salary for the last year of full time employment
and the Company shall place in trust either cash or an annuity
policy that will sufficiently fund the retirement benefits
called for by the Agreement. No provision relating to a change
in control is included in Mr. Tracy's agreement.
RETIREMENT BENEFITS
In April 1996, the Company approved the addition of a
retirement benefit plan for Messrs. Kostusiak and Lederer (each,
an "Executive") in their Executive Agreements. Under the terms
of the current Executive Agreements, the Company will pay each
Executive retirement benefits for his lifetime and for his
spouse's lifetime, if his spouse survives him.
For Mr. Kostusiak, assuming he retires at the end of the
calendar year in which he turns 68 years of age, his benefits
would be as follows: (a) a retirement wage benefit initially
equal to 20% of his base salary for the last year of his full
time employment, increased each year thereafter by any increase
in the Consumer Price Index (except that the wage benefit for
his spouse 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, limited in individual benefit cost to 60% of the
maximum annual cost of such benefit in any year prior to
retirement, plus Consumer Price Index increases. Mr. Lederer
would be entitled to the same benefits except that his
retirement wage benefit would initially equal 12% of his base
salary for the last year of his full time employment, based on
the assumption that he would retire at 65 years of age,
Based on a 5% compounded annual increase in his base
compensation, and assuming he will retire at age 68, the
estimated initial annual benefit that would be payable to Mr.
Kostusiak under the pension plan provision in his Executive
Agreement would be $74,620. Assuming a retirement age of 65,
the estimated initial annual benefit that would be payable to
Mr. Lederer under the pension plan provision in his Executive
Agreement would be $32,490.
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.
The Committee anticipates eventually increasing the commitment
so that the retirement wage benefit would start at 60% of final
base wages from full time employment, 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.
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 paid $15,970 for legal services to
Adair Law Firm, of which Mr. Adair is the principal. In
addition to serving as the Chairperson for the Compensation
Committee, Mr. Adair serves on the Stock Option and Audit
Committees 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 $4,500, plus expenses, for
these services, and will also reimburse such record holders for
their expenses in forwarding proxies and proxy soliciting
material to the beneficial owners of the shares held by them.
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, 1993, and that all dividends were reinvested.
--- graph ---
Mar- Mar- Mar- Mar- Mar- Mar-
93 94 95 96 97 98
Detection Systems, 100 120 92 118 318 216
Inc.
The Nasdaq Index 100 108 120 163 181 275
Electronic Industry 100 121 159 209 366 419
Index
DEADLINE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
Shareholders may submit proposals on matters appropriate for
shareholder action at subsequent annual meetings of the Company
consistent with Rule 14a-8 promulgated under the Securities
Exchange Act of 1934, as amended. 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 by the Company not later than April 29,
1999. Management proxies will be authorized to exercise
discretionary voting authority with respect to any shareholder
proposal not approved for inclusion in the proxy materials
unless the Company receives notice thereof by June 14, 1999.
Such proposals should be directed to Detection Systems, Inc.,
Attention: Secretary, 130 Perinton Parkway, Fairport, NY 14450.
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, 1998 with the exception of the following: Mr.
Christopher P. Gerace filed a late Form 3 with respect to his
appointment as the Company's Chief Accounting Officer and two
late Form 4's for options received during the fiscal year.
In fiscal 1998, the Company paid premiums of $78,000 for
director and officer liability insurance. This policy, which
has been extended through July 31, 1998, provides protection for
the directors and officers of the Company and its subsidiaries.
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 29, 1998
