[GRAPHIC OMITTED] DETECTION SYSTEMS, INC.
130 Perinton Parkway 716-223-4060
Fairport, New York 14450 Fax: 716-223-9180
July 9, 1999
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Detection Systems, Inc. to be held on August 12, 1999 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 1997 Stock Option Plan to increase the number of shares authorized for
options under the Plan, to adopt the Company's Non-Employee Director Stock
Option Plan and ratify options granted pursuant to the Plan and to amend the
Company's Certificate of Incorporation to achieve consistency with recent
changes in New York Business Corporation Law concerning approval of loans to
directors. These matters are discussed in greater detail in the accompanying
proxy statement.
Your Board of Directors recommends a vote FOR the election of management's
nominees as directors, FOR the proposal to amend the Company's 1997 Stock Option
Plan, FOR the adoption of the Non-Employee Director Stock Option Plan and
ratification of options granted pursuant to the Plan, FOR the amendment to the
Company's Certificate of Incorporation and FOR the ratification of the
appointment of independent auditors.
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
<PAGE>
[GRAPHIC OMITTED] DETECTION SYSTEMS, INC.
130 Perinton Parkway 716-223-4060
Fairport, New York 14450 Fax: 716-223-9180
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 12, 1999
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 12, 1999, at 2 PM for the following purposes:
1. To elect five directors;
2. To vote upon a proposal to amend the Company's 1997 Stock Option Plan
to increase the number of shares authorized for options under the
Plan;
3. To vote upon a proposal to adopt the Company's Non-Employee Director
Stock Option Plan and ratify options granted pursuant to the Plan;
4. To vote upon a proposed amendment of the Company's Certificate of
Incorporation to achieve consistency with recent changes in New York
Business Corporation Law concerning approval of loans to directors;
5. To vote upon a proposal to ratify the appointment of independent
auditors for fiscal year 2000; and
6. To transact such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on June 30, 1999 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 9, 1999
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.
<PAGE>
- 13 -
[GRAPHIC OMITTED] DETECTION SYSTEMS, INC.
130 Perinton Parkway
Fairport, New York 14450
PROXY STATEMENT
First sent to Shareholders on July 9, 1999
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 12, 1999 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 June 30, 1999, at which time the
Company had outstanding 6,345,495 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
holders of a majority of outstanding shares is required to approve the amendment
to the Company's 1997 Stock Option Plan, to adopt the Non-Employee Director
Stock Option Plan and ratify options granted pursuant to this Plan and to amend
the 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
directors of the five nominees proposed by the Board of Directors, for the
proposal to amend the Company's 1997 Stock Option Plan and ratification of
options granted pursuant to this Plan, for the adoption of the Non-Employee
Director Stock Option Plan, for the amendment of the Company's Certificate of
Incorporation and for the ratification of the appointment of
PricewaterhouseCoopers LLP as independent auditors.
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 a shareholder's 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, 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. 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. Mr. Fuller is
Chairman and Chief Executive Officer 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, 1999, the Board of Directors held
ten meetings. The Board of Directors has an audit committee consisting of
Messrs. Adair, Fuller and McIrvine. This committee, which met six 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 auditors 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 seven times
during the year, is responsible for granting options pursuant to the Company's
Stock Option Plans. 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.
During fiscal 1999, Directors who are not employees of the Company were
paid an annual fee of $12,000 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. Messrs. Adair and McIrvine were each paid
an annual fee of $8,000 for their service as Chairpersons of the Company's
Compensation and Audit Committees of the Board of Directors. In addition, the
non-employee directors were each awarded a 2,000 share stock option under the
Company's Non-Employee Director Stock Option Plan, subject to adoption and
ratification by the shareholders at the August 12, 1999 annual meeting. [See
"Non-Employee Director Stock Option Plan."]. There was 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 2000
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 7, 1999, 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>
<CAPTION>
Amount and
Nature of
Name, Age, Principal Beneficial Percent
Occupation and Positions Ownership (1) of 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 (41)............................................. 53,683(3)(4) * 1995
Vice President, Operations, of the Company
Prior - Vice President Engineering and Engineering Manager
Mortimer B. Fuller, III (57)...................................... 3,645 * 1990
Director of the Company and Chairman and CEO
of Genesee and Wyoming Industries, Inc.
Karl H. Kostusiak (60)............................................ 571,761(3)(4) 8.8% 1968
Director, Chairman and CEO of the Company
David B. Lederer (59)............................................. 324,502 (3)(4) 5.0% 1968
Director and Vice President, Business Development
of the Company
Edward C. McIrvine (65)........................................... 7,500 * 1981
Director of the Company and self-employed
Research and Development Management Consultant
Frank J. Ryan (45)................................................ 75,276(3)(4)(5) 1.2% 1982
Vice President, Secretary and Treasurer of the Company
Lawrence R. Tracy (52)............................................ 133,473(3)(4) 2.1% 1995
Vice President and President of Detection Systems International,
Inc., a subsidiary of the Company;
Prior -- President of C&K Systems, Inc.
All Directors and Executive Officers as a Group (9 persons)..............1,175,640(2)-(5) 18.5%
</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 16,790, 8,000, 4,000, 5,564, 76,865 and 117,219 shares which may
be acquired upon exercise of warrants and options held by Messrs. Behlke,
Kostusiak, Lederer, 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 by them 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.
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, 1999, 1998 and 1997.
Summary Compensation Table:
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Other Securities
Annual Underlying All Other
Name and Compen- Options/ Compen-
Principal Fiscal Salary Bonus sation SAR's sation
Position Year ($) ($) ($)(1) (#) ($)(3)
-------------- ------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Karl H. Kostusiak ...................... 1999 325,714 89,740 --(2) 0 5,816
Chairman and CEO ....................... 1998 240,504 0 35,814 20,000 2,640
1997 212,100 403,333 --(2) 0 3,266
David B. Lederer ....................... 1999 124,352 474 29,603 0 3,100
Vice President, ........................ 1998 192,418 0 30,465 10,000 2,525
Business Development ................... 1997 169,700 322,670 --(2) 0 3,364
Lawrence R. Tracy ...................... 1999 228,000 62,818 --(2) 0 4,063
Vice President ......................... 1998 184,322 0 --(2) 14,000 2,659
1997 148,470 282,377 --(2) 18,775 3,301
George E. Behlke ....................... 1999 141,116 21,538 --(2) 15,000 2,554
Vice President, ........................ 1998 114,324 0 --(2) 10,000 2,734
Operations ............................. 1997 108,150 81,790 24,761 9,650 1,964
Frank J. Ryan .......................... 1999 130,701 14,358 --(2) 0 2,492
Vice President, ........................ 1998 113,788 0 13,874 5,000 2,616
Secretary & Treasurer .................. 1997 108,150 59,308 --(2) 2,190 1,973
</TABLE>
Footnotes to Compensation Table:
(1) During fiscal 1999, a total of $16,357 was paid toward life, disability and
long term care insurance premiums and a total of $8,923 was paid for
reimbursement of automobile expenses, both for the benefit of Mr. Lederer.
(2) Values are less than the minimum amount required to be reported.
(3) Represents contributions by the Company to accounts of the named executive
officers under the Company's 401(k) retirement savings plan.
Option/SAR Grants in Last Fiscal Year:
The following table sets forth information with respect to stock options
granted to the named executive officers during fiscal 1999. Each grant was for
incentive stock options to purchase stock under the Company's 1992 or 1997 Stock
Option Plans. Options are exercisable 40% after one year, 60% after two years,
80% after three years and 100% after four years.
<TABLE>
<CAPTION>
Option/SAR Grant Table:
Potential Realizable
Value at Assumed
Percent of Base Price Annual Rates of
Number of Total Exercise Stock Price
Securities Options/SAR's or Appreciation for
Underlying Granted to Base Option Term
Option/SAR's Employee in Price Market Expiration ------ ----
Name Granted (#) Fiscal Year ($/Sh) ($/Sh) Date 5% ($) 10% ($)
---- ----------- ----------- ------ ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
G. Behlke 10,000 6.12% $9.00 $9.00 6/25/03 $24,865 $54,946
G. Behlke 5,000 3.06% $9.69 $9.69 9/24/03 $13,383 $29,573
</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 1999
and unexercised options held as of March 31, 1999. 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, 1999 was
$8.00 per share.
<TABLE>
<CAPTION>
Shares (#) Number of Securities Value of Unexercised
Acquired ($) Underlying Unexercised In-the-Money Options at
on Value Options at March 31, 1999 (#) March 31, 1999 ($)
Name Exercise Realized Exercisable / Unexercisable Exercisable/Unexercisable
---- -------- -------- --------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
K. Kostusiak 0 0 8,000 / 12,000 0 / 0
D. Lederer 0 0 4,000 / 6,000 0 / 0
L. Tracy 0 0 76,865 / 15,910 $220,000 / 0
G. Behlke 0 0 12,790 / 24,860 $9,500 / 0
F. Ryan 0 0 5,564 / 3,876 $7,125 / 0
</TABLE>
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:
<TABLE>
Beneficial Ownership Table:
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent
Title of Class Beneficial Owner Ownership of Class
<S> <C> <C>
Common Stock Ultrak, Inc. 1,277,000 20.2%
1301 Waters Ridge Drive
Lewisville, TX 75057
Common Stock Karl H. Kostusiak 571,761(1) 8.8%
130 Perinton Parkway
Fairport, NY 14450
Common Stock David B. Lederer 324,502(1) 5.0%
130 Perinton Parkway
Fairport, NY 14450
</TABLE>
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 and 8,000 and 4,000 shares which may
be acquired from the exercise of stock options.
PROPOSAL TO AMEND THE COMPANY'S 1997 STOCK OPTION PLAN
On February 10, 1999, the Company's Board of Directors approved, subject to
approval by the stockholders, an amendment to the Company's 1997 Stock Option
Plan (the "Plan"), a copy of which is set forth as Exhibit A to this Proxy
Statement, to increase the number of shares authorized for options under the
Plan from 250,000 to 500,000 shares. The Plan, as amended, provides that stock
options for the purchase of up to 500,000 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. This Plan was originally adopted on August 20,
1997.
1997 Amended 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.
If the proposed amendment to the Plan is approved, a total of 500,000
shares of Common Stock of the Company, par value $.05 per share, will 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. Code Section 162(m) presently
imposes a limit on the grant of incentive options. In order to meet the
requirements of Code, which limits the Company's tax deduction for compensation
paid to certain officers to $1 million per year, a limit of 100,000 shares has
been placed in the aggregate number of options that may be awarded to any one
employee under the Plan. It imposes no limit on the grant of nonqualified
options.
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: (a) by payment in full for the shares being acquired, which 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) by a so-called "cashless exercise"
transaction at the discretion of the Committee, 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 Company's 1997 and 1992 Restated Stock
Option Plan in fiscal 1999.
<TABLE>
<CAPTION>
Number of Dollar Value of
Name and Position Options Granted* Options Granted
<S> <C> <C>
K. Kostusiak, Chairman and CEO 0 0
D. Lederer, Vice President, Business 0 0
Development
L. Tracy, Vice President 0 0
G. Behlke, Vice President, Operations 15,000 $138,438
F. Ryan, Vice President 0 0
Executive Group 25,000 $231,875
Non-Executive Director Group 0 0
Non-Executive Officer Employee Group 138,350 $1,360,188
</TABLE>
* Options were granted at prices ranging from $8.625 to $10.00 and with
expiration dates ranging from 6/1/03 and 2/9/04.
Under present law, the grant and exercise of stock options under the Plan
will be treated for federal tax purposes as follows: When an incentive option is
granted to an employee, there is no tax consequence to either the employee or
the Company. When an employee exercises an incentive option, there will be no
regular income tax consequences to either the employee or the Company, but the
spread between the option price and the common stock's fair market value on the
date of exercise is taken into consideration for purposes of determining the
employee's liability, if any, for the alternative minimum tax. When an employee
sells stock purchased by the exercise of a stock option, the tax on any gain
will be long-term capital gain if the employee holds the stock for more than one
year and if the sale occurs at least two years after the date the option was
granted. An earlier sale will result in the spread between the option price and
the fair market price value of the shares on the date of exercise being taxed at
ordinary income rates. Any additional gain above fair market value on the
exercise date will be taxed as short-term or long-term capital gain depending on
the holding period.
When a nonqualified option is granted to an employee, there is no tax
consequence to either the employee or the Company. When an employee exercises a
nonqualified option, the difference between the value of the stock on the date
of exercise and the option price will be ordinary income to the employee. When
the employee sells the stock purchased by the nonqualified option, the tax on
any gain will be long-term capital gain if the employee holds the stock for more
than one year. An earlier sale will cause any gain to be taxed as a short-term
capital gain. At the time an employee recognizes ordinary income, either through
the exercise of a nonqualified option or the disqualifying disposition of an
incentive option, the Company will be entitled to take a tax deduction equal to
the amount of income recognized by the employee.
At June 7, 1999, there were 242,600 outstanding options and 7,400 shares
available for grant under the 1997 Stock Option Plan and 374,075 outstanding
options and 925 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 $8.50, $8.375 and $8.50,
respectively.
The Board of Directors believes that an amendment to the 1997 Stock Option
Plan 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.
PROPOSAL TO ADOPT THE COMPANY'S NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
On September 4, 1998, the Company's Board of Directors adopted, subject to
approval by the stockholders, the Company's Non-Employee Director stock Option
Plan (the "Plan"), a copy of which is set forth as Exhibit B to this Proxy
Statement. The Plan provides that stock options for the purchase of up to 50,000
shares of common stock may be issued to non-employee directors of the Company
pursuant to the exercise of stock options.
Non-Employee Director Stock Option Plan:
The purpose of the Plan is to enable the Company's non-employee directors
of the Company 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 qualified directors for its Board.
A total of 50,000 shares of Common Stock of the Company, par value $.05 per
share, will 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. If an option expires, terminates or is canceled
without being exercised, new options may thereafter be granted covering the same
shares. Options awarded under the Plan are nonqualified options since they do
not meet the requirements as defined in Section 422 of the Internal Revenue
Code. No stock option may be granted more than ten years after the effective
date of the Plan.
The Plan is administered by the Company's Board of Directors (the "Board")
who shall, subject to the provisions of the Plan, grant options under 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 non-employee directors of
the Company. Options may not be granted to members of the Board or to directors
who are officers or employees of the Company. The Plan places no limitation on
the number of shares with respect to which options may be granted to any one
individual. The purchase price for each option may not be less than the fair
market value of the stock at the time the option is granted.
An option shall be exercised upon written notice to the Company accompanied
by: (i) cash, check or wire transfer payable in United States currency to the
order of the Company for an amount equal to the option price for the shares
being purchased, or (ii) shares of the Company's Common Stock owned by the
optionee duly endorsed to the order of the Company, the value of which will be
deemed equal to the closing market price of such shares on the date of exercise,
or (iii) any combination of the foregoing, together with such other instruments
or agreements duly signed by the optionee as in the opinion of counsel for the
Company may be necessary or advisable in order that the issuance of the shares
comply with applicable rules and regulations under the Securities Act of 1933,
any appropriate state securities laws or any applicable requirement of any
national stock exchange or quotation or market system on which the shares of
Common Stock may then be traded.
Options granted under the Plan shall have a term of up to ten years from
the date of grant, provided, however, that each option shall automatically
terminate at the close of business on the 210th day after the day on which the
non-employee director ceases to be a director of the Company and if that day is
not a regular business day at the Company's principal office, then at the close
of business of the next such regular business day. 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 Company's Non-Employee Director Stock Option
Plan in fiscal 1999 (subject to shareholder approval):
Number of Dollar Value of
Name and Position Options Granted* Options Granted
- ----------------- --------------- ---------------
D. Adair, Non-Employee Director 2,000 $17,375
M. Fuller, Non-Employee Director 2,000 $17,375
E. McIrvine, Non-Employee Director 2,000 $17,375
Executive Group 0 0
Non-Executive Director Group 6,000 $52,125
Non-Executive Officer Employee Group 0 0
* Options were granted at a price of $8.6875 per share with an expiration date
of 9/3/08.
Options awarded under this Plan are nonqualified options and are treated
for tax purposes as described above under the 1997 Amended Stock Option Plan
description. At June 7, 1999, there were 6,000 outstanding options and 44,000
shares available for grant under the Plan. The high, low and closing bids on
that date for the Company's Common Stock, as reported by The Nasdaq Stock
Market, were $8.50, $8.375 and $8.50, respectively.
The Board of Directors believes that the adoption of the Company's
Non-Employee Director stock Option Plan and the ratification of options granted
pursuant to the Plan are 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.
<PAGE>
PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION
On June 29, 1999, the Board of Directors approved, subject to shareholder
approval, an amendment of the Company's Certificate of Incorporation to achieve
consistency with recent changes in New York Business Corporation Law concerning
approval of loans to directors. Effective February 22, 1998, Section 714 of the
New York Business Corporation Law was amended so as to provide that, for
corporations formed thereafter, a corporation may lend money to or guarantee the
obligation of a director of the corporation, provided that the Board of
Directors "determines that the loan or guarantee benefits the corporation and
either approves the specific loan or guarantee or a general plan authorizing
loans and guarantees." Previously Section 714 provided that any loan to, or
guarantee of the debt of, a director would have to be approved by the
shareholders of the corporation, and that requirement continues to apply for New
York corporations formed prior to February 22, 1998 (including the Company)
unless the corporation's Certificate of Incorporation is amended to permit
approval of such loans by the Board of Directors. The amendment of the Company's
Certificate of Incorporation which the Company's Board of Directors has approved
authorizes the making of such loans or guarantees by the Board of Directors in
accordance with the new provisions of Section 714. A copy of the proposed
Certificate of Amendment is attached as Exhibit C to this Proxy Statement.
From time to time the Board of Directors has encountered situations in
which loans to officers and other key employees, including those who are also
directors, would be an appropriate way of assisting those persons in connection
with the achievement of various Company goals. Circumstances that might warrant
the extension of a loan include, but are not limited to, assistance with the
acquisition of Company stock under stock option or stock bonus plans, assistance
with related tax expenses, and assistance with significant moving expenses if an
executive is requested to relocate. If approved, the amendment would permit the
Board of Directors to authorize a loan to any director, provided that the Board
"determines that the loan or guarantee benefits the corporation and either
approves the specific loan or guarantee or a general plan authorizing loans and
guarantees." The ability to have the Board authorize such loans will facilitate
taking prompt action when necessary. The Board of Directors believes that it is
appropriate to amend the Company's Certificate of Incorporation as proposed, so
that the Company's required approval procedures for such loans or guarantees
will be consistent with the procedures now authorized by the New York
Legislature for all New York corporations formed since February 22, 1998.
The Board of Directors believes that the amendment of the Certificate of
Incorporation as proposed 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, 2000. 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 2000 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 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 1992 and 1997 Stock Option Plans.
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 1999 and subsequently, two additional factors have
affected the Committee's determinations: (1) the Company's continuing expansion
activities and a need to motivate management personnel at various places around
the world; and (2) 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 a new
five-year period. 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. Mr. Kostusiak's agreement pursues this goal by providing
for an opportunity for an annual cash bonus based on pre-tax profits. This bonus
program was also made available to other full time executive officers and key
personnel of the Company with the goal of aligning their compensation to the
Company's financial performance. Since his reduction to part-time status in
April 1998, Mr. Lederer is no longer eligible for payment under this program.
During fiscal 1998, in response to the Company's growth, the pre-tax profit
threshold was changed from a fixed dollar amount ($2,000,000) to 4% of net
sales. This bonus is intended to provide incentives for managing the Company's
financial performance toward having pre-tax profits significantly exceed 4% of
sales.
During fiscal 1998, the Committee eliminated a previously used stock bonus
plan for executives and reverted to the use of stock options. In that year, for
the first time since 1987, a stock option was granted to Mr. Kostusiak for the
purchase of 20,000 shares of stock at a price of $14.75 per share. No options
were granted to Mr. Kostusiak in fiscal 1999.
Executive officers who do not participate in the Company's annual cash
bonus program participate in the Company's general profit sharing plan, which is
available to most U.S. based 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. Mr. Lederer was the only executive officer
eligible for payment under the general profit sharing plan in fiscal 1999.
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
---- ------- ----- ----- ------
1999 $89,740 Eliminated $138,045,000 $7,307,000
1998 $0 Eliminated $126,343,000 $2,337,000
1997 $241,125 $162,208 $101,251,000 $5,250,000
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. 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, options are granted at exercise prices that equal
fair market value of the option shares on the date of grant, and the option
rights vest incrementally as per the terms of the grants. From time to time, the
Stock Option Committee grants options under the plan 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 1999 and
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 continues to consider 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 through July 2004 with two of its
executive officers, Messrs. Kostusiak and Lederer (the "Executive Agreements').
Effective 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 Executive Agreements, 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
continuation of compensation and benefits includes the executive's base salary
plus participation in all applicable executive incentive compensation plans and
fringe benefit packages. The Company thereafter will pay non-competition fees as
described below and retirement benefits as described under Retirement Benefits.
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.
Mr. Kostusiak's agreement 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 69th birthday) and then pays the retirement benefit.
If a "change in control" occurs, as defined in the Executive Agreements and
Mr. Kostusiak's or Mr. Lederer's employment is terminated by the Company or the
executive within six months after the Company or the executive has given notice
for the six-month period to start running, the executive 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 (after repayment by
the Company of any loans thereon taken by the Company), (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, and (g) that upon termination, the executive
becomes obligated to provide up to 8 days of consulting services per year to the
Company and not to compete with the Company, and the Company becomes obligated
to pay $150,000 per year and benefits to the executive for the consulting
services and non-competition until the executive's retirement date. 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.
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 each Executive, assuming he retires at the end of the calendar year in
which he turns 69 years of age, benefits would be as follows: (a) a retirement
wage benefit initially equal to 30% 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.
Based on a 5% compounded annual increase in the base compensation, and
assuming each Executive will retire at age 69, 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 $151,587 and $94,029,
respectively.
The Executive Agreements further provide that: (a) the payment of
retirement benefits may be terminated if a court determines that the 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 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. Also, if the Company terminates the consulting and
non-competition payments after a change in control, the provisions comparable to
those described in the first sentence of the last paragraph under "Executive
Agreements" above become applicable based on non-competition and minimum
consulting fees then being paid annually to the executive.
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 $5,000,
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.
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board of Directors are
Messrs. Adair, Fuller and McIrvine. None of these directors received
compensation from the Company except for their fees and stock options as a
director of the Company.
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, 1994, and that all
dividends were reinvested.
(GRAPH)
<TABLE>
<CAPTION>
Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99
<S> <C> <C> <C> <C> <C> <C>
Detection Systems, Inc. 100 77 99 266 180 122
The Nasdaq Index 100 111 151 168 254 342
Electronic Industry Index 100 131 172 302 345 506
</TABLE>
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 for next year's Annual Meeting,
shareholder proposals for presentation at that meeting must be received by the
Company no later than March 11, 2000. Management proxies will be authorized to
exercise discretionary voting authority with respect to any other matters unless
the Company receives notice thereof by May 25, 2000. 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, 1999.
In fiscal 1999, the Company paid premiums of $166,500 for director and
officer liability insurance which 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 9, 1999
<PAGE>
A-4
A-1
DETECTION SYSTEMS, INC.
1997 AMENDED 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 500,000 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 amended Plan is August 12, 1999, provided that
the amendment is approved by the shareholders of the Company on that date. The
original plan was adopted on August 20, 1997.
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.
<PAGE>
B-3
B-1
DETECTION SYSTEMS, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Adopted by the Board of Directors
September 4, 1998
This is a stock plan pursuant to which options to purchase the Common
Stock of Detection Systems, Inc., a New York corporation (the "Corporation"),
may be granted to non-employee directors of the Corporation as partial
compensation for their service as directors. This plan shall be known as the
Non-Employee Director Stock Option Plan (the "Plan"). The purpose of the Plan is
to obtain and retain the services of qualified persons who are not full-time
employees of the Corporation to serve as directors.
SECTION 1. Administration. The Plan shall be administered by the
Corporation's Board of Directors (the "Board"). The Board shall, subject to the
provisions of the Plan and Section 9 in particular, grant options under the Plan
and shall have the power to construe the Plan, to determine all questions
thereunder, and to adopt and amend such rules and regulations for the
administration of the Plan as it may deem desirable.
SECTION 2. Shares Available. The Board shall reserve for the purposes
of this Plan, out of the authorized but unissued shares of Common Stock of the
Corporation, or out of shares of Common Stock held in its Treasury, or partly
out of each, as shall be determined by the Board, a total of 50,000 shares of
the Common Stock (or the number and kind of shares of stock or other securities
which, in accordance with Section 7 of this Plan, shall be substituted for those
shares or to which those shares shall be adjusted). In the event that an option
granted under the Plan to any non-employee director expires or is terminated
unexercised as to any shares covered thereby, the shares not purchased under it
shall thereafter again be available for the purposes of this Plan.
SECTION 3. Eligibility. Each member of the Corporation's Board of
Directors who is not a full-time employee of the Corporation ("non-employee
director") shall be eligible to receive stock options under this Plan.
SECTION 4. Grants and Terms of Options; Option Agreements. The Board of
Directors may grant options from time to time under this Plan, provided that any
options granted prior to ratification of this Plan by the Corporation's
shareholders as provided in Section 8 below shall be subject to receipt of that
ratification. The number of shares purchasable under each option and all other
terms and conditions of the option shall be as determined by the Board of
Directors, provided that, unless this Plan is validly amended as provided in
Section 9 below, in the case of any inconsistency between this Plan and the
terms and conditions of any option, the provisions of this Plan shall prevail.
As soon as practicable after the grant of an option under the Plan, the
Corporation and the non-employee director shall enter into a Stock Option
Agreement evidencing the option so granted and its terms and conditions. That
agreement shall be in such form, consistent with the Plan, as the Board shall
deem appropriate.
SECTION 5. Exercise and Term of Options.
(a) Options granted under the Plan shall be exercisable as
provided in the terms of the option grant and the related Stock Option
Agreement.
(b) The option exercise price of the shares of Common Stock
subject to options shall be 100% of the market value of the shares on the day
the option is granted. The option price will be subject to adjustment in
accordance with the provisions of Section 7 of this Plan. For purposes of this
Plan, the market value of a share of Common Stock on any day shall be the
closing price of such a share on that day on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") or, if there is no such
price on that day, the closing price of such a share on NASDAQ on the last
preceding day on which there was such a price, except that, if the Board
determines that NASDAQ is not the principal trading market system for the
Corporation's Common Stock, then the market value shall be the reported closing
price of the Common Stock on such other market system or exchange as the Board
determines is then the principal trading market for shares of the Corporation's
Common Stock.
(c) Options granted under the Plan shall have a term of up to
ten years from the date of the granting thereof, provided, however, that each
option shall automatically terminate at the close of business on the 210th day
after the day on which the non-employee director ceases to be a director of the
Corporation and if that day is not a regular business day at the Corporation's
principal office, then at the close of business of the next such regular
business day.
(d) Options granted under this Plan shall not be transferable
by the non-employee director otherwise than by will, or if he or she dies
intestate, by the laws of descent and distribution of the state of domicile at
the time of death, and options shall be exercisable during the director's
lifetime only by the director.
SECTION 6. Manner of Exercise of Option. Options granted hereunder
shall be exercised by the director or the director's executor or administrator
("optionee") delivering to the Corporation, from time to time within the time
limits specified in Section 5 hereof, a written notice specifying the number of
shares the optionee then desires to purchase together with (i) cash, check or
wire transfer payable in United States currency to the order of the Corporation
for an amount equal to the option price for the shares being purchased, or (ii)
shares of the Corporation's Common Stock owned by the optionee duly endorsed to
the order of the Corporation, the value of which will be deemed equal to the
closing market price of such shares on the date of exercise, or (iii) any
combination of the foregoing, and such other instruments or agreements duly
signed by the optionee as in the opinion of counsel for the Corporation may be
necessary or advisable in order that the issuance of such number of shares
comply with applicable rules and regulations under the Securities Act of 1933,
any appropriate state securities laws or any applicable requirement of any
national stock exchange or quotation or market system on which the shares of
Common Stock may then be traded. As soon as practicable after any such exercise
of the option in whole or in part by the optionee, the Corporation will deliver
to the optionee at the principal offices of the Corporation, a certificate for
the number of shares with respect to which the option shall have been so
exercised, issued in the optionee's name. The stock certificate shall carry such
appropriate legend, and such written instructions shall be given to the
Corporation's transfer agent, as may be deemed necessary or advisable by counsel
to the Corporation in order to comply with the requirements of the Securities
Act of 1933 or any state securities laws.
SECTION 7. Adjustment of Number of Shares. If a dividend or stock split
shall hereinafter be declared upon the Common Stock of the Corporation payable
in shares of Common Stock of the Corporation, then the number of shares of
Common Stock then subject to any outstanding option under the Plan, the number
of shares reserved for issuance under those outstanding options, and the number
of shares reserved for issuance pursuant to the Plan but not yet covered by an
option shall be adjusted by adding to each such share the number of shares which
would be distributable thereon if the share had been outstanding on the date
fixed for determining the Shareholders entitled to receive the stock dividend or
stock split. If the outstanding shares of the Common Stock of the Corporation
shall be changed into or exchanged for a different number or kind of shares of
stock or other securities of the Corporation whether through reorganization,
recapitalization or reclassification, then there shall be substituted for each
share of Common Stock subject to any outstanding option under the Plan and for
each share of Common Stock reserved for issuance pursuant to the Plan but not
yet covered by an option, the number and kind of shares of stock or other
securities into which each outstanding share of Common Stock shall be so changed
or for which each such share shall be exchanged.
If, prior to the delivery by the Corporation of all the shares in
respect of which an option has been granted hereunder, a merger, consolidation,
or dissolution in which the Corporation is not the surviving corporation shall
occur or a transfer of substantially all the assets of the Corporation shall
occur:
(a) If provision has been made in writing in connection with
the transaction for the assumption and continuance of any such option granted,
or the substitution for such option of a new option covering the shares of the
successor corporation, with appropriate adjustment as to number and kind of
shares and prices, the option granted, or the new option substituted therefor,
as the case may be, shall continue in the manner and under the terms provided.
(b) If provision has not been made in the transaction for the
continuance and assumption of an option granted hereunder or for the
substitution of an option covering the shares of the successor corporation, then
the holder of an option granted hereunder shall be entitled, prior to the
effective date of any the transaction, to purchase the full number of shares
under the option, failing which purchase, any unexercised portion shall be
deemed canceled as of the effective transaction date.
If there is any change, other than as specified above in this
Section 7, in the number or kind of outstanding shares of Common Stock of the
Corporation or of any stock or other securities into which the Common Stock has
been changed or for which it has been exchanged, then appropriate adjustment
shall be made in the number and kind of shares subject to and reserved for
issuance pursuant to this Plan and as to which outstanding options or portions
then unexercised shall be exercisable, to the end that the proportionate
interest of the holder of an option and a prospective holder, with respect to
options theretofore granted and to be granted, shall be maintained as before the
occurrence of the change or exchange. In the case of any such substitution or
adjustment as provided for in this Section, the option price for each share
covered thereby prior to such substitution or adjustment will be the option
price for all shares of stock or other securities which shall have been
substituted for the share or to which the share has been adjusted pursuant to
this Section. No adjustment or substitution provided for in this Section 7 shall
require the Corporation to sell a fractional share, and the total substitution
or adjustment with respect to each option shall be limited accordingly.
SECTION 8. Effective Date and Duration of Stock Plan. The effective
date of the Plan shall be September 4, 1998, the date of its adoption by the
Board. The duration of the Plan shall be ten years from the effective date. The
Plan and all options granted hereunder prior to the Corporation's 1999 annual
meeting of shareholders shall be subject to ratification by shareholders at that
or any prior meeting.
SECTION 9. Amendment of the Plan. The Board shall have the right to
amend, suspend, or terminate this Plan at any time, except that shareholder
approval shall be required for any amendment which:
(a) increases the maximum number of shares subject to the Plan
(subject to Section 7 above);
(b) changes the provisions of the Plan regarding the determ-
ination of the option exercise price (subject to Section 7 above);
(c) changes the maximum period during which any options may be
granted or remain outstanding; or
(d) changes the requirements as to the class of persons
eligible to receive options.
Termination or suspension of the Plan or any amendment of it shall not, without
the consent of a holder of an outstanding option issued under the Plan, affect
the holder's rights under that option.
<PAGE>
C-1
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATION OF INCORPORATION
OF
DETECTION SYSTEMS, INC.
Under Section 805 of the New York Business Corporation Law
The undersigned, being the President and Secretary of Detection Systems,
Inc. (the "Corporation"), hereby certifies that:
1. The name of the Corporation is Detection Systems, Inc.
2. The Certificate of Incorporation was filed by the Department of
State of the State of New York on July 11, 1968.
3. The Certificate of Incorporation, as heretofore amended, is hereby
further amended to provide that the Corporation may not lend money to or
guarantee the obligation of a director of the Corporation unless the Board
determines that the loan or guarantee benefits the Corporation, and either
approves the specific loan or guarantee or a general plan authorizing loans and
guarantees.
4. To effect the foregoing, a new Article Seventh is added to the
Certificate of Incorporation of the Corporation to read in its entirety as
follows:
"Seventh: The Corporation may not lend money to or guarantee
the obligation of a director of the Corporation unless (1) the
particular loan or guarantee is approved by the shareholders in
accordance with the provisions of Section 714 of the Business
Corporation Law or (2) the Board of Directors determines that the loan
or guarantee benefits the Corporation and either approves the specific
loan or guarantee or a general plan authorizing loans and guarantees."
5. The amendment to the Certificate of Incorporation effected hereby
was authorized by the affirmative vote of the Corporation's Board of Directors
followed by the affirmative vote of the holders of a majority of all the
outstanding shares of stock of the Corporation entitled to vote thereon at a
meeting of the Corporation's shareholders.
IN WITNESS WHEREOF, we have signed this Certificate this _______
day of August, 1999 and hereby affirm the truth of the statements contained
herein under the penalties of perjury.
------------------------------------
Karl J. Kostusiak, President
------------------------------------
Frank J. Ryan, Secretary
<PAGE>
DETECTION SYSTEMS, INC.
ANNUAL MEETING OF SHAREHOLDERS
August 12, 1999
The undersigned hereby appoints Karl H. Kostusiak, David B. Lederer and Frank J.
Ryan, and each of them, with full powers of substitution, attorneys and proxies
to represent the undersigned at the Annual Meeting of Shareholders of the
Company to be held on August 12, 1999, and at any adjournment or adjournments
thereof, with all the power which the undersigned would possess if personally
present, and to vote as set forth on the reverse all shares of stock which the
undersigned may be entitled to vote at said meeting, hereby revoking any earlier
proxy for said meeting.
(continued and to be signed on the other side)
- -----------------------------------------------------------------------------
X Please mark your votes as in this example.
This proxy is solicited on behalf of the Board of Directors which recommends
that shareholders vote FOR items 1-5.
1. Election of Directors: ____ With authority to vote for all nominees
listed (except as marked to the contrary)
____ Without authority to vote for all nominees
listed
Nominees: D. Adair, M. Fuller, K. Kostusiak, D. Lederer, E. McIrvine
Instructions: To withhold authority to vote for any individual(s), write the
name of that nominee(s) in the space provided below:
- ----------------------------
2. Approval of an amendment to the Company's 1997 Stock Option Plan to increase
the number of shares authorized for options under the Plan.
____ For ____ Against ____ Abstain
3. Adoption of the Company's Non-Employee Directors Stock Option Plan and
Ratification of Options Granted Pursuant to the Plan.
____ For ____ Against ____ Abstain
4. Approval of an amendment to the Company's Certificate of Incorporation to
achieve consistency with recent changes in New York Business Corporate Law
concerning approval of loans to directors.
____ For ____ Against ____ Abstain
5. The ratification of the appointment of PricewaterhouseCoopers LLP as
independent auditors for fiscal 2000. ____ For ____ Against ____
Abstain
6. In accordance with their judgment in connection with the transaction of such
other business, if any, as may properly come before the meeting.
PLEASE COMPLETE, DATE, SIGN AND RETURN IN THE ENCLOSED ENVELOPE
*** YOUR PROXY VOTE IS IMPORTANT ***
No matter how many shares you own, please sign, date and mail your proxy now,
even if you plan to attend the meeting.
Signed: _______________________________________ Dated: _____________________
Note: Name of shareholder should be signed exactly as it appears on this proxy.
