PRELIMINARY PROXY STATEMENT
SUBJECT TO COMPLETION
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant /x/
Filed by a Party other than the Registrant / /
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/x/ Preliminary Proxy Statement / / Confidential, for Use of the
Commission Only (as permitted
/ / Definitive Proxy Statement by Rule 14a-6(e)(2))
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to section 240.14a-12
DETECTION SYSTEMS, INC.
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(Name of Registrant as Specified In Its Charter)
N/A
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0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
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/ / Fee paid previously with preliminary materials.
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Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: ________________________________________
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As filed with the Commission on November 14, 2000
IMPORTANT
Your vote is important. Please take a moment to sign, date and promptly mail
your WHITE proxy card in the postage-paid envelope provided. If your shares are
registered in the name of a broker, only your broker can execute a proxy and
vote your shares and only after receiving your specific instructions. Please
contact the person responsible for your account and direct him or her to execute
a proxy on your behalf today. Your Board urges you NOT to sign or return any
BLUE proxy card sent to you by Ultrak. If you have any questions or need
assistance in voting your shares, please contact our proxy solicitor:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, New York 10010
[email protected]
(212) 929-5500 (call collect)
or
Toll-Free (800) 322-2885.
DETECTION SYSTEMS, INC.
130 Perinton Parkway
Fairport, New York 14450
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 19, 2000
To Our Shareholders:
The Annual Meeting of shareholders of Detection Systems, Inc. will be
held on December 19, 2000, at 2:00 p.m., Eastern Time, at Company's offices,
located at 130 Perinton Parkway, Fairport, New York 14450, for the following
purposes:
1. To elect five directors;
2. To ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent auditors for the fiscal year 2001; and
3. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
Only shareholders of record at the close of business on December 1,
2000 are entitled to notice of and to vote at the meeting and any adjournments
or postponements thereof.
This Annual Meeting is of particular importance to all shareholders of
the Company because of Ultrak's attempt to take over your Board.
Your Board urges you to sign and mail the enclosed WHITE proxy card in
the envelope provided. Please do not sign any BLUE proxy cards sent to you by
Ultrak. You can revoke any Ultrak proxy card you have previously signed by
signing, dating and mailing the enclosed WHITE proxy card in the envelope
provided.
By Order of the Board of Directors
FRANK J. RYAN
Secretary
Fairport, New York
November __, 2000
DETECTION SYSTEMS, INC.
130 Perinton Parkway
Fairport, New York 14450
PROXY STATEMENT
First sent to shareholders on or about November __, 2000
This proxy statement (the "Proxy Statement") and the enclosed
form of proxy are furnished by the Board of Directors of Detection Systems,
Inc., a New York corporation (the "Company"), for use at its Annual Meeting
of shareholders (the "Annual Meeting"), to be held on December 19, 2000, at
2:00 p.m. Eastern Time, at the Company's offices, located at 130 Perinton
Parkway, Fairport, New York 14450, and at any adjournments or postponements
thereof. Only holders of the Company's common stock, par value $.05 per
share ("Common Stock"), of record at the close of business on December 1,
2000 are entitled to notice of and to vote at the meeting and any
adjournments or postponements thereof. For additional voting information,
see the section entitled "Voting and Revocability of Proxies" on page 33.
THE PROXY CONTEST
As you may know, Ultrak, Inc. ("Ultrak"), led by George Broady
("Broady"), is seeking to take control of your Company's Board of Directors
to pursue a sale of the Company or "any alternative that might produce even
greater shareholder value."
In connection with the Company's longstanding objective of
enhancing value for all shareholders, the Company has entered into
discussions with a limited number of parties regarding their strategic
interest in the Company, which may include a joint venture arrangement,
leveraged buyout, licensing agreement, minority investment or potential
sale of the Company. Neither Ultrak's nominees nor your Board can guarantee
that they will be able to effect a strategic transaction or enhance
shareholder value. However, we believe your Board and management are better
qualified, due to their significant knowledge and experience and other
factors described below.
Your Board is soliciting votes on the WHITE proxy card FOR the
election of the Company's nominees. We unanimously oppose Ultrak's
solicitation and urge you NOT to sign any BLUE proxy card sent to you by
Ultrak.
o Your Board and management are, in our view, in the best position
to enhance shareholder value, because they have first-hand working
knowledge of the Company's strategy, operations and technology. Your Board
and management also have significant investment in the Company (which gives
them a personal stake in enhancing shareholder value) and a positive
financial track record. Your management led the Company to quadruple its
sales, nearly triple its operating income and double its book value per
share from fiscal 1995 to fiscal 2000. During this period, the Common Stock
price also rose 51% from $6.17 per share to $9.69 per share (as of March
31, 2000).
o We have developed cutting-edge technology due to our significant
investments. The Company has a long-term strategy to invest in product
development and expand its customer base. As a result of these investments,
we have developed award-winning new technology and received new commitments
from major customers. Your Board wants to give you an opportunity to
participate in the increased value of the Company due to these investments,
and expects to focus on its bright future in its efforts to enhance
shareholder value.
o From March 1998 until right before it commenced this proxy
contest, Ultrak regularly and repeatedly expressed interest in acquiring
your Company and its technology. Ultrak also tried to hire at least three
of the Company's executives and interfered in our relationship with a
prestigious end-user during this period. Although Ultrak says that it wants
to sell the Company immediately, Ultrak's proxy materials have been
carefully-crafted so that its nominees would not be legally required to
sell the Company, and could instead approve a technology exchange with
Ultrak, or after November 2, 2003, a merger between Ultrak and the Company!
o Ultrak's nominees have no industry experience or investment in
the Company. These nominees were hand-picked by Ultrak, and Ultrak's proxy
materials do not state that they have any industry experience. Although we
recognize that, if elected, these nominees would have fiduciary obligations
to all shareholders, we believe that, due to their inexperience, they may
give significant consideration to Ultrak's opinions and advice.
o If Ultrak wins the proxy contest and its nominees do not sell the
Company immediately, the Company stands to lose a significant number of
customers and employees. At least six customers, which represented $4.9
million of the Company's sales in fiscal 2000, have informed us that, based
upon their business dealings with Ultrak and industry experience, they do
not trust Broady and Ultrak. Because Ultrak's nominees may place
significant emphasis on Ultrak's opinions (as described above), these
customers may immediately seek alternative suppliers or even remove some or
all of their business if Ultrak's nominees are elected. Most of our
management team and many of our employees, at all levels, have also
expressed concern. Also, if elected, Ultrak's nominees could change the
Company's strategy in a manner that is advantageous to Ultrak. For example,
Ultrak could use its influence on its nominees to unwittingly steer the
Company away from profitable ventures which would compete with or take
profits away from Ultrak.
o Ultrak needs cash immediately. Ultrak's available cash has
decreased 70% in its last two fiscal years! Even though these nominees
would have fiduciary duties to all shareholders, we believe they may be
expected to give significant weight to Ultrak's opinions (as described
above). If Ultrak's nominees seek advice from Ultrak in connection with a
sale of the Company, due to its cash needs, we believe that Ultrak may
guide its nominees to accept a price which does not reflect the full and
fair value of the Company.
Background - Who is Ultrak?
Ultrak is a competitor of the Company that designs, manufactures,
markets, sells and services electronic security and surveillance products
and systems. In the past two years, Ultrak has become Detection Systems'
largest shareholder, currently owning 21% of the Company's outstanding
shares.
Broady, Ultrak's Chairman and CEO, is its largest shareholder,
owning 16% of Ultrak's common stock and 100% of Ultrak's preferred stock.
As Ultrak's only preferred stockholder, Broady receives $117,000 in annual
preferential dividends, and also receives 16.667 votes for each share of
preferred stock. Altogether, he controls approximately 31% of Ultrak's
voting power.
Broady has long considered Detection Systems to be an attractive
company. In December 1985, he was Chairman and CEO of Network Security
Corporation, which then owned 4.1% of Detection Systems' stock. We believe
that like Ultrak, Network Security experienced financial troubles under
Broady's direction. That time, a supplier asked Network Security to
transfer its Detection Systems shares to pay a trade debt, since it was
concerned that Network Security would not have the financial resources to
settle its obligation.
By 1998, Broady had again decided to invest in Detection Systems,
this time through Ultrak. On March 20, 1998, Ultrak disclosed that it had
acquired 5% of the Company's shares. Ultrak quickly amassed additional
shares, and by November 2, 1998, it had acquired 20% of the Company's
outstanding stock.
At the time of its initial 5% acquisition, Ultrak represented
that its shares were not acquired for the purpose of influencing the
control of the Company. However, soon afterward, Broady began to take an
active interest in the Company. From March 1998 until the commencement of
the proxy contest, Broady contacted Karl H. Kostusiak, the Company's
Chairman and Chief Executive Officer on almost a weekly basis. Their
conversations covered a broad range of topics, regularly including: (i) the
Company's initiatives, direction and expenditures and Broady's suggestions
thereon; (ii) Ultrak's interest in the Company's technology; (iii) Ultrak's
interest in a business combination transaction involving Ultrak and the
Company, through a third party acquisition or otherwise; (iv) Ultrak's
financial situation and cash needs; and (v) Ultrak's desire to sell the
Company.
Broady not only regularly expressed his interest in a business
combination between Ultrak and the Company to Mr. Kostusiak, but also
mentioned such a transaction the first time he met one of the Company's
outside directors. Under New York law, a merger or other business
combination between Ultrak and Detection Systems is possible after November
2, 2003. A merger before that date is prohibited, because Ultrak's initial
20% stock acquisition was made without the prior approval of your Board.
Although Ultrak's proxy materials state that it is not interested
in acquiring your Company, Ultrak has carefully crafted its language such
that there is no legal obligation for its nominees to sell the Company. If
Ultrak's nominees decide not to sell the Company immediately, or are unable
to do so, we believe the Company would soon begin to lose customers and
employees. (See "Ultrak's Ulterior Motives-Competitive Interests" below).
On May 12, 2000, Ultrak formally notified the Company of its
intention to commence the proxy contest.
Your Board and Management Are Highly Qualified
Your Company's Board and management have significant industry and
Company experience, first-hand knowledge of the Company's operations and
technology and a proven history of delivering solid financial results. In
contrast, Ultrak's nominees do not appear to have any experience in the
security industry, and Ultrak's management is responsible for Ultrak's
negative financial results.
Compare your management's financial results in the past six
fiscal years to those of Ultrak's management. As the graphs below
illustrate, in the last six fiscal years, your Company's net income rose
129% from $1.514 million to $3.468 million and the Common Stock price
increased 51% from $6.17 per share to $9.69 per share (as of March 31,
2000). In Ultrak's last six fiscal years, its net income fell 78% from
$2.600 million to $565 thousand and its stock price barely rose from $7.44
per share to $7.75 per share.(1) Furthermore, Ultrak's 1999 net income was
significantly boosted because it included $1.9 million of Detection
Systems' net income as its own, due to its ownership of Detection Systems
stock!
Net Income
Last Six Fiscal Years
(dollars in thousands)
Detection Systems Ultrak
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Your Board and management are also responsible for adopting a
long-term investment strategy, which has led to cutting-edge, award-winning
technology and new customer commitments. (See "Significant Investments and
New Business Opportunities" below). We have first-hand working knowledge of
the Company's strategy, operations and technology. Neither Ultrak's
nominees nor your Board can guarantee that they will be able to effect a
transaction to enhance shareholder value; however, because of their
significant knowledge and experience and proven track record, we believe
your Board and management are better qualified to pursue such a transaction
and to enhance value.
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1 Stock prices for Ultrak and Detection Systems are the closing prices on the
first and last trading days of the respective six fiscal year periods,
based upon publicly available information. Information for Ultrak is from
fiscal 1994 to fiscal 1999, because Ultrak has not yet completed its fiscal
year 2000. All financial information regarding Ultrak contained in this
proxy statement (other than stock price) is based upon information filed by
Ultrak with the Securities and Exchange Commission ("SEC") in annual
reports on Form 10-K. Copies of these reports may be obtained from the
SEC's website, www.sec.gov.
Your Board and management want to act in the best interest of all
shareholders and take your concerns very seriously. We have been meeting
with and talking to shareholders to discuss their concerns and hear their
suggestions regarding enhancing shareholder value.
Your Independent and Qualified Board
Your Board currently consists of a majority of independent
outside directors. Mr. Adair has been a director of the Company for ten
years. Dr. McIrvine has been a director for twenty years, and also served a
prior directorship term of six years. Mr. Bidlack, a new nominee, is a
shareholder of the Company and has extensive sales, management and
manufacturing experience in the United States and abroad. The management
representatives on the Board are Mr. Kostusiak and David B. Lederer, who
founded the Company together in 1968, and have served as its two top
officers ever since. (For further information about the Company's nominees,
see "Proposal No. 1--Election of Directors" on page 17.)
If the Board of Directors' five nominees are elected at the
Annual Meeting, the Company intends to increase the size of its Board by
one director, and appoint C. Duncan Soukup to become a director of the
Company. Mr. Soukup is President and Chief Executive Officer of Lionheart
Group, Inc., which owns 5.2% of the Common Stock. The Board believes that
Mr. Soukup can make a significant contribution to the efforts to enhance
shareholder value, due to his valuable business experience and his interest
as a significant shareholder of the Company.
Your Experienced Management Team Has Delivered Solid Financial Results
We believe our experienced senior management team is one of our
most valuable resources. The team consists of highly-qualified individuals
who have extensive hands-on knowledge of every aspect of the Company and
its strategic, operational and financial opportunities and challenges. This
six member team has an aggregate of 120 years of experience with the
Company.
Led by its senior management, the Company nearly tripled its
operating income from $2.6 million in fiscal 1995 to $7.2 million in fiscal
2000. As illustrated by the following graphs, the Company also quadrupled
its net sales from $34.336 million to $141.918 million and doubled its book
value per share from $4.57 to $9.13 during this period.
Detection Systems Net Sales Detection Systems
(dollars in thousands) Book Value Per Share
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
We believe this growth is a result of: (i) the significant
industry and Company experience of our Board and management, as described
above; and (ii) our major investments in new technology and market
development, as described on pages 8 through 10. We expect that the
Company's growth record, together with the foundation it has laid for
future growth, will be fundamental in our efforts to enhance shareholder
value.
Ultrak's Nominees have No Industry Experience
Ultrak's nominees to the Board consist of two lawyers and an
investment banker. We believe these nominees have no industry experience,
because Ultrak's proxy materials do not provide any information regarding
such experience. As explained below, we further believe Ultrak has its own
agenda for the Company because it is our competitor and it has expressed
interest in our technology. We recognize that Ultrak's nominees, if
elected, would owe fiduciary duties to all shareholders. However, we
believe these nominees may be expected to give significant consideration to
Ultrak's opinions because they have no experience and were hand-picked by
Ultrak. In addition, Ultrak's nominees would have the power to fire the
Company's experienced management team and replace it with Ultrak's
management! Because of Ultrak's position as a competitor of the Company,
its need for cash and its poor record of performance, we believe that
Ultrak's opinions may not serve the shareholders as well as the views of
the Company's current Board and management team.
Neither Ultrak's nominees nor your Board can guarantee that they
can effect a transaction to enhance shareholder value. However, your Board
believes that Ultrak's nominees do not have the industry background
necessary to effectively pursue such a transaction enhancing value for all
shareholders; as explained above, your Board is significantly more
qualified.
Ultrak's Management is not Qualified to Advise or Lead Your Company or its Board
--------------------------------------------------------------------------------
As explained earlier, we believe that Ultrak's nominees will give
significant weight to Ultrak's opinions regarding the Company's strategic
alternatives, or could even fire the Company's management and replace it
with Ultrak's management. We believe Ultrak's management is not qualified
to advise Ultrak's nominees regarding a sale of the Company or, if a sale
does not occur, the management of the Company because: (i) it has been
unable to produce financial results for Ultrak (see "Ultrak's Ulterior
Motives--Financial Issues" page 14) and (ii) we believe Ultrak's market
practices would be harmful to the Company.
Our customers share our concerns about Ultrak's management. We
have received letters from two customers informing us that, based upon
their industry experience and dealings with both the Company and Ultrak,
they believe that the financial results of "Detection Systems as compared
to [the financial results of] Ultrak speak for themselves on who is the
most qualified to lead" the Company, and that Ultrak's nominees will focus
on "short sighted goals" instead of "long term planning." Ironically, one
of these customers suggested that "Broady should step aside and allow [Mr.
Kostusiak] to run [Ultrak] and bring it to a level of profitability. These
customers constituted approximately $400,000 of the Company's sales in
fiscal 2000.
At least six customers, which constituted $4.9 million of the
Company's net sales in fiscal 2000, have expressed concern about the proxy
contest and indicated that they may remove some or all of their business if
Ultrak wins the proxy contest. Such customers have told us that, based upon
their experiences with Broady and Ultrak, they believe that if Ultrak's
nominees are elected, it "would adversely affect the quality of service"
and that the "products and company that [customers] have depended upon
would disappear." Customers have also informed us that they would
immediately seek "alternatives and contingencies to [the Company's]
products" or even remove their business if Ultrak wins the proxy contest.
Most of our management team and many of our employees, at all levels, have
also expressed concern about Ultrak.2
In addition, we believe that Ultrak's approach to the electronic
security market conflicts with the practices of established security system
installers and service companies and is inappropriate for the Company. Most
security systems manufacturers directly solicit business from end-users.
However, manufacturers generally refer the end-user to an authorized dealer
or installer to negotiate price and terms. In contrast, Ultrak at times
negotiates prices with end-users and then informs the dealers or installers
that end-users are willing to purchase at a particular price. Certain
important dealers and installers have told us they find this approach
unfair and do not want any dealings with Ultrak. Therefore, if Ultrak's
nominees are elected and the Company is not immediately sold, the Company
believes its relationships with these dealers and installers would be
damaged.
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2 Consent to reprint the material quoted in this section was neither sought
nor obtained.
Significant Investments and New Business Opportunities
We expect that our investments in new technology and our new
business opportunities will translate into increased revenues and income
for the Company. We hope to translate this opportunity into enhanced value
for all shareholders.
Long-Term Investment Strategy
Five years ago, the Company set its sights on becoming a
worldwide, full-catalog supplier of electronic protection equipment to
professional installation and service companies. With these goals in mind,
we adopted a strategy to: (1) expand our product catalog, (2) expand our
market reach, (3) increase our manufacturing capacity and (4) improve our
overall cost structure. We are continuing to make great progress toward
these goals and increasingly providing dealers and customers throughout the
world with a comprehensive line of high quality, technologically-advanced
products.
The Company has invested considerable financial, managerial and
other resources in connection with this strategy. In fiscal 2000, the
Company invested $10.5 million in product research and development,
representing a 24% increase from the $8.5 million spent in fiscal 1999. The
Company expects to spend $11.4 million in research and development in
fiscal 2001.
In fiscal 2000, the Company also hired 11 new employees in the
research and development area, and 50 new employees in sales, marketing and
customer support. In addition, in connection with the opening of new
international operations, the Company has spent $775,000 in direct selling,
marketing, general and administrative expenses.
Our significant investments in research and development allow us
to continue to develop exciting new products that demonstrate our
leadership in the industry. For example, our D6600 NetCom communications
solution provides the first end-to-end solution for reporting alarm events
through a local-area or wide-area network that can fully integrate with
existing equipment in the field. Our PC9000 Enterprise Conductor provides
intelligent integration, control and management of several security systems
within a multi-site business enterprise through a single graphical user
interface. Our new line of security detectors offer improved catch
performance, lower probability of false alarm and less stringent
installation requirements. Other exciting initiatives include in-building
wireless systems, closed circuit television products and commercial fire
products.
Already, three of our latest products have received Product
Achievement Awards from the Security Industry Association at the
International Security Conference held in August 2000:
o The DS835i PIR/Microwave Intrusion Detector received this award for
false alarm reduction. This product provides rapid detection of human
targets and significantly reduced false alarms.
o The D6600 NetCom communications solution, sold under our Radionics
label, received this honor in the monitoring category.
o The PC9000 Enterprise Conductor, another Radionics product, received
this award in the integrated systems category. The PC9000 also
received the Innovation Award for Best of Show, awarded to the most
innovative product in the security industry.
We also recently formed a strategic partnership with Seaguard
Electronics to take advantage of Seaguard's high-speed security monitoring,
routing and notification services in the United States and Canada.
Seaguard's system provides wireless alarm capabilities that alert users by
telephone, voice messaging and the internet. This breakthrough technology
offers a lower-cost alternative for users who require high levels of
security protection.
In addition to our investments in new technology, we are
continuing to develop our global manufacturing and distribution
infrastructure. We recently increased the size of two manufacturing
facilities to meet current and anticipated demand, and we continue to
refine production methods to reduce costs. As a result, our gross margins
reached a nine year high of nearly 40% in fiscal 2000.
In fiscal 2000, we opened new sales offices in Spain and
Argentina and purchased a fire technology company in Italy. To expand our
domestic market, we recently signed an agreement with Timarron Partners, a
well-established sales organization, to sell our products in ten Central
and Southwestern U.S. states.
As a result of our investment strategy, we have already received
new commitments from ADT Security Services (a unit of Tyco International
Ltd.), SecurityLink (a unit of SBC Communications, Inc.) and Motorola to
market our leading technologies. Our products are also available through
many other dealers, including AFA Protection, Checkpoint Security, Diebold,
Greater Alarm, Honeywell, Simplex, Vector Security and members of Security
Network of America.
The promise shown through commitments to purchase our products is
not limited to the U.S. market. We see similar potential with major
companies in international markets, where we are steadily increasing our
sales and sales presence. The Company's sales to customers outside the
United States increased from $3.9 million (11% of the Company's revenues)
in fiscal 1995 to $59.0 million (41% of the Company's revenues) in fiscal
2000. The Company has also expanded its international sales presence from
two countries in 1995 to twelve countries in 2000. These opportunities give
us added confidence that we are a leader in developing
technologically-advanced products that are effective, reliable and easy to
use.
We Want to Enhance Value for all Shareholders
We Are Exploring a Strategic Transaction to Enhance Shareholder Value
In response to current market conditions (including a sustained
reduction in the Common Stock price) and shareholder concerns, in July
2000, the Company retained the investment banking firm of Fleet Securities,
Inc. ("Fleet") to study strategic alternatives for enhancing value for all
shareholders.
In connection with this objective, the Company has entered into
discussions with a limited number of parties regarding their strategic
interest in the Company, which may include a joint venture arrangement,
leveraged buyout, licensing agreement, minority investment or potential
sale of the Company. We hope to provide you with further information about
the status of these discussions in the coming weeks.
The Board's decision to explore a strategic transaction was based
upon a number of factors, including: (i) current market conditions; (ii) a
review of Fleet's analysis; and (iii) the Company's meetings and
conversations with shareholders. Like Ultrak, the Company cannot guarantee
that its nominees will be able to sell the Company or enhance shareholder
value. However, we believe our nominees are best qualified to enhance value
for shareholders.
We Will Engage in a Transaction if the Terms are Attractive to ALL Shareholders
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Our recent discussions with Bosch Telecom, GmbH ("Bosch"), a
subsidiary of the large German conglomerate Robert Bosch, GmbH, demonstrate
our willingness to sell part or all of the Company at the right price.
Since 1997, the Company has had intermittent discussions with Bosch
regarding various potential business transactions, arrangements and
combinations. At Broady's suggestion, Bosch again approached the Company in
late 1999 to express its interest in an acquisition. Recognizing its
fiduciary duties to shareholders, the Board authorized management to pursue
discussions with Bosch regarding a partial or total acquisition of the
Company by Bosch.
In connection with such potential transactions, Bosch and the
Company met approximately four times between February and May 2000. Bosch's
representatives twice visited the Company's offices for presentations
regarding the Company's technology. Broady was present during one of these
presentations. Senior Detection Systems executives also met with Bosch and
its investment banker in New York City on one occasion. In addition, the
Company arranged for Bosch to visit its manufacturing facility in Zhuhai,
China. Several ongoing discussions between Bosch and the Company ensued
from these meetings and presentations. These discussions were primarily
focused on technology and product synergies. No proposals or agreements
were made as a result of these discussions, which the parties terminated in
approximately May 2000.
In a letter to the Company's Board of Directors dated September
23, 2000, Bosch formally proposed to acquire Detection Systems for $14 per
share in cash, subject to certain conditions. In reviewing Bosch's offer,
the Board consulted Fleet, and considered the Company's prospects as a
stand-alone entity, based upon the Company's track record of solid
financial results and its growth potential due to its significant
investments described above. After careful consideration of the Company's
prospects, Fleet's analysis of the Company's value described below and
other factors, the Board determined that $14 per share did not represent a
fair value for the Company and was not in the best interest of all
shareholders. In making this determination, the Board noted that the Bosch
offer was below the implied value per share range calculated with respect
to a sale of the Company as indicated by the precedent transaction analysis
performed by Fleet. Bosch's offer also fell below or towards the low end of
the implied value per share ranges calculated in the analyses performed by
Fleet with respect to other strategic alternatives, including remaining an
independent Company, a share repurchase and the payment of special
dividends by the Company. However, the Board noted that Bosch's offer
exceeded the implied value per share range calculated with respect to a
minority investment in the Company by a third party. On October 13, 2000,
the Company rejected Bosch's offer.
On August 30, 2000, at a meeting of the Company's Board, Fleet
reviewed certain analyses and valuations it had performed relating to the
Company's efforts to deliver value to shareholders. In connection with the
preparation of these analyses, Fleet, among other things: (i) reviewed
certain publicly-available financial statements and other business and
financial information of the Company; (ii) discussed with senior management
of the Company the strategy and future prospects of the Company; and (iii)
reviewed certain financial forecasts and other forward looking information
for the Company prepared by management, which involved both a base case
scenario as well as an upside scenario.
In its review and analyses, Fleet assumed and relied on the
accuracy and completeness of all of the financial and other information
provided to it (including financial projections and other information
furnished to it by the Company's management) or publicly available. Fleet
did not attempt to verify or assume responsibility for verifying any of
this information. Fleet did not obtain or make, or assume any
responsibility for obtaining or making, any independent evaluation or
appraisal of the properties, assets or liabilities of the Company, and
Fleet was not furnished with any such evaluation or appraisal.
With respect to the Company's forecasted financial performance
and projections and the assumptions and bases underlying this information
that Fleet reviewed, Fleet assumed that these forecasts and projections:
(i) had been prepared reasonably and in good faith on the basis of
reasonable assumptions; (ii) reflected the best available estimates and
judgments as to the future financial condition and performance of the
Company; and (iii) will be realized in the amounts and in the time periods
estimated.
The following summarizes the analyses presented by Fleet.
Comparable Companies Analysis
Using publicly-available information, Fleet analyzed certain
financial, trading and valuation statistics for certain publicly-traded
companies that were deemed by Fleet to have business and operating profiles
and characteristics similar to those of the Company. These statistics were
the aggregate debt and equity values as a multiple of earnings before
interest and taxes and as a multiple of earnings before interest, taxes,
depreciation and amortization for the most recent twelve months, and equity
values as a multiple of earnings per share for the most recent twelve
months and calendar year 2000. These comparable companies were comprised of
ACCESS, Inc., Checkpoint Systems, Inc., Cohu, Inc., CompuDyne Corporation,
Interlogix, Inc., Lifeline Systems, Inc., Lo-Jack Corporation, Napco
Security Systems, Inc., Sensormatic Electronics Corporation, Silent Witness
Enterprises, Ltd., Ultrak and Vicon Industries, Inc. Fleet then derived
potential values for the Company by applying these multiples to the
historical results and the projections provided by the Company's
management.
Precedent Transaction Analysis
Using publicly-available information, Fleet analyzed the implied
cash flow multiples paid in prior acquisition transactions involving
companies deemed by Fleet to have business and operating profiles similar
to those of the Company. In analyzing these precedent transactions, Fleet
evaluated the consideration paid in such transactions as a multiple of the
preceding twelve months' earnings before interest, taxes, depreciation and
amortization and the preceding twelve months' earnings before interest and
taxes. Fleet then derived potential values for the Company by applying
these multiples to Company results.
Discounted Cash Flow
Fleet reviewed the after-tax free cash flows of the Company as
projected for fiscal years 2001 through 2006. Fleet derived potential
values for the Company by discounting these cash flows to present values
and adding the present value of future cash flows thereafter assuming
either a sale of the business at the end of 2006 or continued operation of
business in perpetuity, based upon certain assumptions regarding discount
rates, revenue and expense growth.
Strategic Alternatives Analysis
Fleet also analyzed the financial implications to the Company as
well as the potential valuations that might be realized upon certain
strategic alternatives, including a leveraged buyout of the Company, a
share repurchase, the payment of special dividends by the Company, a
minority investment in the Company by a third party and a business
combination involving the Company. As part of this analysis, Fleet examined
the potential debt capacity of the Company and estimated theoretical values
that may be paid for the Common Stock in a business combination where such
combination would not be dilutive to a strategic acquirer's earnings in
calendar year 2001. Fleet reflected certain assumptions concerning
potential cost savings resulting from such business combination as provided
by management of the Company. These potential cost savings include
economies of scale, increased purchasing power, consolidation of
manufacturing and corporate functions and increased sales through new
distribution channels.
These analyses were presented to the Company's Board of Directors
on August 30, 2000 in connection with its general efforts to enhance
shareholder value, and were not presented with respect to any particular
offer or proposal that the Company had received. At the October 5, 2000
meeting of the Board of Directors, Fleet confirmed the methodologies
employed in these analyses and stated that, in their opinion, market
developments since August 30, 2000 did not materially affect the potential
valuations reflected in the analyses presented at that August 30, 2000
meeting.
Fleet did not express any opinion with respect to the prices that
shares of the Common Stock may be traded at any future time. Fleet provided
these analyses to the Company's Board of Directors for their consideration.
Fleet made no recommendation as to any particular strategic alternative or
third-party proposal, including remaining as an independent entity, nor as
to how the Company's Board of Directors or any shareholders should vote
with respect to any potential alternative or proposal. No limitations were
imposed by the Company's Board of Directors on Fleet with respect to the
investigations made or procedures followed by it in preparing its analyses.
Like Ultrak, the Company cannot guarantee that the Common Stock
price will increase or that the Company will be sold at $14 or a higher
price if its nominees are elected; however, the Company firmly believes
that its nominees are in a better position to enhance value for all
shareholders than Ultrak's nominees. As explained above, the Company's
nominees have significant industry and Company experience; Ultrak's
nominees apparently have none. Additionally, although Ultrak's nominees
would have fiduciary obligations to all shareholders, due to their
inexperience, we believe they would seek advice from Ultrak and be
influenced by Ultrak's ulterior motives (explained below).
Ultrak's Ulterior Motives
The Company believes that Ultrak is motivated by interests that
are not aligned with those of the Company's other shareholders. First,
because Ultrak is a competitor, its interests are different than those of
the Company and its shareholders. Secondly, Ultrak has suffered from
financial setbacks in the past several years and a sale of the Company
could provide Ultrak with much-needed cash and an interest rate reduction.
Competitive Interests
We believe that Ultrak is motivated by its interests as a
competitor of the Company. Ultrak competes with the Company in the access
control and closed-circuit television segments of the security industry,
which constituted approximately 7.6% and 6.2%, respectively, of the
Company's sales in fiscal 2000. Ultrak also competes with the Company in
the area of enterprise systems, in which multiple product systems (i.e.
security and fire alarms, access control systems and CCTV systems) are used
to provide a comprehensive security solution to customers. Based upon
customer feedback, the Company believes that there will be significant
future growth in this segment of the industry. As described on page 8, the
Company has spent significant resources developing new integrated systems
products, such as the award-winning NetCom communications solution and
PC9000 Enterprise Conductor products. Although Ultrak does not manufacture
many of the products required for enterprise systems, it competes in this
market by offering its own products combined with those of other companies.
Although Ultrak claims that it is not interested in acquiring
your Company, Ultrak has carefully crafted its proxy statement to leave
open this possibility. Ultrak merely promises that its nominees will pursue
a sale of the Company, not that a sale will be completed. If for any reason
Ultrak's nominees determine that the Company should not be sold (or are
unable to sell the Company), they would have the power to approve an
exchange of technologies with Ultrak, or, after November 2, 2003, a
business combination between the Company and Ultrak! This would be
consistent with Broady's repeated statements to Mr. Kostusiak that he is
eager for such a technology exchange or business combination. We believe
that any such transaction with Ultrak is against the best interests of
Detection Systems and its other shareholders, because of Ultrak's history
of poor performance (described above).
Alternatively, if elected, Ultrak's nominees could change the
Company's strategy in a manner that is advantageous to Ultrak. For example,
Ultrak could use its influence on its nominees, who have no industry
experience, to unwittingly steer the Company away from profitable ventures
which would compete with or take profits away from Ultrak.
In addition, Ultrak has continued to interfere with the Company's
operations and relationships with customers and employees. Ultrak and
Broady, personally, have tried to recruit at least three of the Company's
executives. We also believe Ultrak has targeted our customers for its own
competitive interests.
The proxy contest itself is also putting the Company at a competitive
disadvantage because it requires the Company's resources, such as time and
money, which are necessary for, and would otherwise have been spent on, its
operations and the development of its business. In addition, Ultrak has stated
that it will seek to recover its attorneys' fees and expenses related to
litigation against the Company that has been voluntarily dismissed as moot (see
"Ultrak's Litigation" on page 16), and that, if it is successful in the proxy
contest, it will seek to recover all of its related costs and expenses from the
Company.
As described above, the Company's customers, management and employees,
at all levels, have expressed concern about the proxy contest. A large potential
customer who has expressed strong interest in our new products has deferred
making a purchasing commitment due to the uncertainty created by the proxy
contest. For the same reason, a prestigious new customer has been reluctant to
train its employees on our new products.
Financial Issues
The Company believes that Ultrak is facing increased pressure to
generate cash due to poor financial results. Ultrak's financial challenges and
need for cash have been personally expressed to Mr. Kostusiak by Broady and are
supported by Ultrak's public financial statements.
Ultrak has experienced cash flow problems for the past several years.
Ultrak's operating activities did not generate a positive cash flow during the
five year period from 1994 to 1998. Cash used by operations during this time
period averaged nearly $3.3 million annually. Although Ultrak was able to
generate a positive cash flow in 1999, this result was obtained by delaying
payment of payables and reducing inventories and accounts receivable.
As illustrated by the graph on page 4, Ultrak's net income decreased
78% from fiscal 1994 to fiscal 1999. Additionally, Ultrak's net income in 1999
would have been far lower if it had not been able to report $1.9 million in
Detection Systems' income due to its 20% ownership of Detection Systems stock.
From fiscal 1997 to fiscal 1999, Ultrak's available cash decreased 70%
from $18.1 million to $5.4 million. In the same period, Ultrak's debt increased
from zero to $37 million.
Ultrak's Cash Ultrak's Debt
(in thousands) (in thousands)
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Ultrak's current credit agreement (which has been amended five times
since August 1999) provides that if Ultrak sells its Detection Systems Common
Stock and uses the proceeds to pay down its outstanding debt, it could almost
immediately receive a 0.25% decrease in its interest rate if certain other
conditions are met.
The Board believes that Ultrak may be seeking to liquidate its
investment in the Company, due to these declining financial results. The Board
also believes that Ultrak may be unable to sell its Detection Systems shares
because: (i) it owns such a large amount of stock; (ii) the market for the
Common Stock is illiquid; and (iii) Broady told us he wants a premium over the
market price. In view of its apparent cash needs, we believe that Ultrak might
be willing to accept a price for the Company which does not fully reflect the
Company's expected future growth. (See "Significant Investments and New Business
Opportunities" beginning on page 8.) As explained above, although we recognize
that Ultrak's nominees would owe fiduciary duties to all shareholders, we
believe their lack of experience in the industry may make them susceptible to
Ultrak's views as to value. We are thus concerned that Ultrak's nominees may
accept a price which does not provide shareholders with the full and fair value
for their shares.
Ultrak Is Trying to Distract You from the Real Issue
We believe that Ultrak's proxy statement presents selective
information in an attempt to justify the proxy contest and draw attention away
from Ultrak's own financial issues and other ulterior motives.
Our Executive Agreements are Fair and Reasonable
As part of its strategy in the proxy contest, Ultrak has tried to make
an issue of the Company's longstanding executive contracts with Messrs.
Kostusiak and Lederer. Ultrak even brought a lawsuit against the Company related
to these contracts. (See "Ultrak's Litigation" below.) In fact, these contracts
existed long before Ultrak became a shareholder in 1998.
These agreements were modeled after contracts frequently used by other
companies to retain management, and were approved by the Compensation Committee
of the Company's Board of Directors, which is composed entirely of outside
directors. The purpose of this type of contract is to permit executives to carry
out their duties and consider potential takeovers free of the concern that they
may lose their jobs. The change in control provisions in the contracts seek to
remove this concern, making the executives more impartial to takeover attempts.
Since their adoption in 1988, these agreements have been amended annually based
upon recommendations of the Committee.
The Company believes the contracts have always been fair and
reasonable. However, the Committee hired Watson Wyatt & Company ("Watson
Wyatt"), a nationally-recognized, independent employee benefits consultant, to
assist in this year's review because: (i) of current market conditions,
including a sustained reduction in the Common Stock price; (ii) of concerns
expressed by some shareholders; and (iii) Ultrak made the contracts a primary
issue in the proxy contest, which the Company believes was distracting
shareholders from more important issues, such as the respective qualifications
of the nominees and Ultrak's ulterior motives.
Based upon its review and advice from Watson Wyatt, the Committee
recommended certain amendments to the agreements, which were approved by the
Board. These amendments include: (i) a cap on the aggregate change in control
amounts payable under the two contracts equal to 5% of the Company's market
capitalization (2.77% for Mr. Kostusiak and 2.23% for Mr. Lederer); (ii) the
reduction of non-compete fees from $154,500 annually through age 69 to a
lump-sum equal to twice the executive's highest total cash compensation during
the three fiscal years prior to payment; (iii) following a change in control,
the transfer to each executive of certain insurance policies upon his life and
the elimination of the Company's obligation to maintain these life insurance
policies; (iv) a requirement that, in the event of a potential change in
control, the Company transfer to an escrow account an amount sufficient to fund
the required payments; (v) the expansion of the term "change in control" to
include a change in control of the Board due to the settlement of a proxy
contest; (vi) the elimination of a retirement benefit increase upon a change in
control and the increase of the retirement wage benefit from 30% to 60% of the
executive's base salary at retirement, which increase is consistent with Watson
Wyatt's recommendation that a competitive retirement plan provide a benefit of
2% of salary for each year of employment (which, in the case of Messrs.
Kostusiak and Lederer, is 32 years); and (vii) the reduction of the normal
retirement age of each executive from 69 to 68. Provisions of the amended
agreements are described in greater detail in the sections below entitled
"Executive Agreements" and "Retirement Benefits." Additionally, the Company's
Form 8-K filed with the SEC on September 27, 2000 includes complete copies of
the amended agreements.
Although Messrs. Kostusiak and Lederer had no legal obligation to
agree to the amendments, they believed it was in the best interests of the
Company and its shareholders to do so. The agreements were amended on September
27, 2000. On the same date, Watson Wyatt issued an opinion to the Committee that
the amended agreements are competitive with industry norms and fair and
reasonable to Detection Systems.3
In its proxy materials, Ultrak has tried to take credit for our
contract amendments, but failed to inform you that it intends to seek
reimbursement from your Company for its attorneys fees and expenses related to
the lawsuit!
Ultrak's Litigation
On June 30, 2000, Ultrak filed a purported shareholder derivative
action in federal district court in Rochester, New York against all five members
of the Company's Board of Directors (the "Directors") and the Company as a
nominal defendant. The Ultrak action included allegations that: (i) the
executive agreements in place prior to the September amendments described above
were excessive; (ii) the Directors had breached their fiduciary duties in
approving such agreements; and (iii) the agreements should be set aside.
The Company and the Directors moved to dismiss Ultrak's action on the
ground that Ultrak was not a proper derivative plaintiff, since among other
things, Ultrak was motivated in bringing the action by its proxy contest, and
Ultrak's interests were potentially in conflict with those of other
shareholders. On September 27, 2000, the Company notified the Court that the
executive agreements had been amended and asserted that Ultrak's lawsuit had
become moot. On October 25, 2000 the Court issued an order dismissing the
lawsuit on the ground that it was moot. Ultrak has indicated that it may seek to
recover from the Company its attorneys fees and expenses related to the action.
The Company intends to vigorously contest any claim by Ultrak for an award of
its fees and expenses.
---------------
3 Watson Wyatt has consented to the use of its name and description of its
opinion in this section of the Proxy Statement.
By-Law Amendments
In February 2000, the Board of Directors amended the Company's By-Laws
to require that all shareholder proposals may only be made at the annual meeting
or at a special meeting called by the Company. In addition, the By-Laws were
amended to require that shareholder proposals and nominations for the Board be
presented to the Company within 90 to 120 days of the anniversary of the
previous year's annual meeting. Ultrak charges that the Board adopted these
By-Law amendments to insulate itself from accountability to shareholders. On the
contrary, this proxy contest should be sufficient proof that these amendments do
not protect the Board! These amendments enable the directors to better protect
the rights of all shareholders by providing them sufficient time to thoughtfully
consider matters and nominations, as required by their fiduciary duties to
shareholders. The Board continues to believe that the By-Law amendments are a
reasonable response to these concerns.
Proposal No. 1
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 or until
their respective successors are elected and qualified. Mortimer B. Fuller III,
who has served as director of the Company since 1990, is not seeking to be
re-elected due to the increasing demands of his business. Since 1977, Mr.
Fuller, age 58, has been Chairman and Chief Executive Officer of Genesee &
Wyoming, Inc., which owns and operates shortline railroads and provides related
services to railroads and shippers. The persons nominated for election as
directors at this year's Annual Meeting are listed below. Each nominee has
consented to serve as a member of the Board of Directors if elected. If for any
reason a nominee becomes unavailable for election, the proxies may exercise
discretionary authority to vote for substitutes proposed by the Board.
Donald R. Adair, age 57, has been a director of the Company since 1991
and also serves on the Board's Audit, Compensation, and Stock Option Committees.
He is a principal of Adair Law Firm, which was established in 1988 and focuses
on serving businesses in Rochester, New York. He is a graduate of Harvard
College and Cornell Law School. Mr. Adair is also a director of Stone
Construction Equipment, Inc., in Honeoye, New York, NetLink Transaction
Services, LLC, in Victor, New York, and Victor Insulators, Inc. in Victor, New
York.
Jerald D. Bidlack, age 64, is a first time nominee for
director. Once elected, Mr. Bidlack is expected to serve on the Board's
Audit, Compensation and Stock Option Committees. He has been the President
of Griffin Automation, Inc., a designer and manufacturer of special
automation machinery and systems since 1992. Mr. Bidlack is also the
Chairman of Graham Corporation, in Batavia, New York, a leading designer
and builder of vacuum and heat transfer equipment for process industries
worldwide. From 1963 to 1991 Mr. Bidlack was employed by Moog, Inc., a
designer and manufacturer of electrohydraulic and electromechanical
servocontrol components and systems for industrial and defense markets,
located in East Aurora, New York. He served as a director and President of
Moog's International Group from 1973 to 1991, and also served as Vice
Chairman from 1988 to 1991. Mr. Bidlack is currently a director of Graham
Corporation, Bush Industries, Inc. in Jamestown, New York, and Erdle
Perforating Company in Rochester, New York, and a trustee of Keuka College,
Keuka Park, New York. He received a Bachelor of Science degree in
Mechanical Engineering from Tri-State University in Angola, Indiana. He
also completed graduate work at Wayne State University in Detroit,
Michigan. Mr. Bidlack is a licensed Professional Engineer in New York
State.
Karl H. Kostusiak, age 61, is a founder of the Company and has
served as the Chief Executive Officer and President of the Company since
its establishment in 1968. He has been a director of the Company since 1968
and also serves as Chairman of the Board. He received a Bachelor of Science
degree in Electrical Engineering from the State University of New York at
Buffalo and a Master of Science degree in Electrical Engineering from the
University of Rochester.
David B. Lederer, age 61, is also a founder of the Company, and
served as the Company's Executive Vice President from 1968 until April
1998. In April 1998, he reduced his employment to half-time and served as
Vice President, Business Development until April 2000, when he returned to
his prior full-time position as Executive Vice President. Mr. Lederer
received Bachelor and Master of Science degrees in Electrical Engineering
from the University of Nebraska.
Edward C. McIrvine, age 66, has been a director of the Company
since 1981 and also serves on the Board's Audit, Compensation, and Stock
Option Committees. Dr. McIrvine also served as a director of the Company
from September 1973 to July 1979. Since 1987, he has been a self-employed
research and development management consultant and, from 1987 through 1991,
he served as Dean of the College of Graphic Arts and Photography at the
Rochester Institute of Technology in Rochester, New York. He received a
Bachelor of Science degree from the University of Minnesota and a Ph.D. in
Theoretical Physics from Cornell University.
BOARD OF DIRECTORS AND COMMITTEES
The Company's Board of Directors has Audit, Compensation and Stock
Option Committees. The Board does not have a Nominating Committee.
The Audit Committee was composed of Messrs. Adair, Fuller and McIrvine
for the fiscal year 2000, with Dr. McIrvine serving as Chairman. The Committee
members are "independent directors," as such term is defined in Rule 4200(a)(14)
of the National Association of Securities Dealers Manual. The Audit Committee
reviews reports of the Company's financial condition, financial controls and
accounting procedures. The Committee also approves and oversees services
performed by, and serves as an interface between, the Company and its
independent auditors. This Committee met four times during the last fiscal year.
A copy of the Audit Committee's written charter is attached hereto as Appendix
C.
The Compensation Committee was composed of Messrs. Adair, Fuller and
McIrvine for fiscal 2000, with Mr. Adair serving as Chairman. This Committee is
responsible for developing general compensation policies, establishing and
administering compensation plans and programs in which officers participate and
determining specific compensation arrangements for the Company's executive
officers. In addition to numerous informal communications, the Committee had two
formal meetings during fiscal 2000.
The Stock Option Committee was composed of Messrs. Adair, Fuller and
McIrvine for fiscal 2000, with Mr. Adair serving as Chairman. The Committee is
responsible for granting options pursuant to the Company's Employee Stock Option
Plans. The Committee met four times during the past fiscal year.
During fiscal 2000, the Board of Directors held four regular meetings
and six special meetings. Each director attended at least 75% of the aggregate
of all meetings of the Board of Directors and of each committee on which he
served during the fiscal year.
Directors who are not employees of the Company were each 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. These directors received $500 for
Board meetings held by teleconference. Messrs. Adair and McIrvine were each paid
annual fees of $8,000 for their service as Chairmen of the Company's
Compensation and Audit Committees of the Board of Directors. No fees were paid
to Mr. Adair for his services as Chairman of the Stock Option Committee. 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. Except as
described in this paragraph, no director received any compensation for attending
any Board or committee meeting.
The Board of Directors recommends a vote FOR the election of Messrs.
Adair, Bidlack, Kostusiak, Lederer and McIrvine as directors of the Company.
Proxies will be so voted unless shareholders specify a contrary choice in their
proxies.
If the Board of Directors' five nominees are elected at the Annual
Meeting, the Company intends to increase the size of its Board by one director,
and appoint C. Duncan Soukup, President and Chief Executive Officer of Lionheart
Group, Inc., to become a director of the Company. Lionheart Group, which owns
5.2% of the Common Stock, is a U.S. financial services holding company founded
by Mr. Soukup in 1994. Subsidiaries of Lionheart Group manage or advise a number
of hedge funds and U.S. pension funds. Since January 2000, Mr. Soukup has also
been the Managing Director of Acquisitor plc, a public company incorporated in
England and Wales, which invests in companies it considers to be fundamentally
undervalued. From 1988 to 1994, Mr. Soukup served as a managing director of
Bear, Stearns & Co. Inc., and established and led that company's foreign Equity
Research and Sales department. Mr. Soukup has more than 20 years of experience
of making investments in public and private companies and was, until recently, a
director of Sage Laboratories, Inc., a U.S. public company that was acquired by
Filtronic plc of the United Kingdom.
Your Board and management believe that Mr. Soukup can make a
significant contribution to the Company due to his valuable business experience
and interest as a significant shareholder.
MANAGEMENT SECURITY OWNERSHIP
The following table shows: (i) the names and principal business
addresses of the Company's directors and executive officers for whom
compensation information is provided on page 23; (ii) the number of shares of
Common Stock that such persons beneficially owned or had the right to acquire
beneficial ownership of as of, or within sixty days of, November 10, 2000; and
(iii) the percentage of the Company's outstanding shares that such ownership
constitutes. The principal business address of Messrs. Behlke, Gerace,
Kostusiak, Lederer and Ryan is that of the Company.
Name and Address of Amount and Percent of
Beneficial Owner Nature of Common Stock
Beneficial
Ownership(1)
Donald R. Adair 3,549(2)(3) *
Adair Law Firm
30 Corporate Woods,
Suite 280
Rochester, NY 14623
George E. Behlke 66,094(3)(4) 1.0%
Jerald D. Bidlack 7,200(5) *
Griffin Automation, Inc.
240 Westminster Road
West Seneca, NY 14224
Mortimer B. Fuller, III 5,645(3) *
Chairman & CEO
Genesee & Wyoming, Inc.
66 Field Point Road
Greenwich, CT 06830
Christopher P. Gerace 17,000(3) *
Karl H. Kostusiak 579,561(3)(4) 8.9%
David B. Lederer 328,502(3),(4),(6) 5.1%
Edward C. McIrvine 6,000(3) *
1213 Forest Hill Drive
Hendersonville, NC 28791
Frank J. Ryan 78,514(3),(4),(7) 1.2%
All Directors and Executive 1,092,066(2)-(7) 17.3%
Officers As a GrouP (10 persons)
Footnotes:
* Percentage of Common Stock owned is less than 1%.
(1) Owner possess both sole voting and investment powers for all shares listed
except as indicated in notes (2)-(6) 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 2,000, 27,920, 2,000, 17,000, 16,000, 8,000, 2,000, 6,552 and
81,472 shares which may be acquired upon exercise of warrants and options
held by Messrs. Adair, Behlke, Fuller, Gerace, Kostusiak, Lederer,
McIrvine, Ryan and all directors and executive officers as a group,
respectively.
(4) Includes 9,234, 179,840, 117,465, 8,492 and 315,031 hypothetical shares
credited to the accounts of Messrs. Behlke, Kostusiak, Lederer and Ryan 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 or resignation.
(5) Includes 4,000 shares owned by Griffin Automation, Inc., a corporation of
which Mr. Bidlack is the President.
(6) Includes 40,000 shares owned by the Lederer Family Limited Partnership, in
which Mr. Lederer and his spouse share equal voting and investment powers,
and 20,000 shares owned by Mr. Lederer's spouse, who owns sole voting and
investment power over such shares.
(7) Includes 810 shares held in trust for Mr. Ryan's son under the Uniform
Gifts to Minors Act of New York, for which Mr. Ryan disclaims beneficial
ownership.
PRINCIPAL HOLDERS OF COMMON STOCK
The following table lists all persons or groups of persons who, to the Company's
knowledge based on reports filed with the SEC, beneficially own more than 5% of
the Company's outstanding Common Stock as of November 10, 2000. The address of
Messrs. Lederer and Kostusiak is that of the Company.
Name and Address Amount and Percent of
of Beneficial Owner Nature of Shares Common Stock
Beneficially Owned
Ultrak, Inc. 1,335,100(1) 21.0%
301 Waters Ridge Drive
Lewisville, TX 75057
Karl H. Kostusiak 579,561(2) 8.9%
Dimensional Fund Advisors, Inc. 388,872(3) 6.1%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
USGM Securities, Inc. 357,456(4) 5.7%
51 East Market Street
Corning, NY 14830
Lionheart Group, Inc. 330,200(5) 5.2%
230 Park Avenue, Suite 51b
New York, NY 10169
David B. Lederer 328,502(2)(6) 5.1%
Footnotes:
* Percentage of Common Stock owned is less than 1%.
(1) Ultrak's share holdings are as reported on the amended Schedule 13D it
filed on June 19, 2000.
(2) 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 or resignation pursuant
to the Company's deferred compensation plans, and 16,000 and 8,000 shares,
respectively, which may be acquired from the exercise of stock options.
(3) Dimensional Fund Advisors' share holdings are as reported on the Schedule
13G it filed on February 3, 2000.
(4) Includes 13,085 shares (representing less than 1% of the Common Stock)
owned by USGM Securities' parent, John G. Ullman & Associates, Inc., P.O.
Box 1424, Corning, NY 14830. Such holdings are as reported in a Schedule
13G filed jointly by those companies on February 8, 2000.
(5) Lionheart's share holdings are as reported on the Schedule 13D it filed on
November 1, 2000.
(6) Includes 40,000 shares owned by the Lederer Family Limited Partnership, in
which Mr. Lederer and his spouse share equal voting and investment powers,
and 20,000 shares owned by Mr. Lederer's spouse, who owns sole voting and
investment power with respect to such shares.
COMPLIANCE WITH EXCHANGE ACT SECTION 16(a)
To the Company's knowledge, based solely on review of Forms 3, 4 and 5
filed under Section 16(a) of the Securities Exchange Act of 1934, as amended,
and amendments thereto, all Section 16(a) filing requirements applicable to the
officers, directors and other principal shareholders of the Company were
complied with during fiscal 2000.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information with respect to the
compensation of the Company's Chief Executive Officer and four other most highly
compensated executive officers serving at the end of fiscal 2000 for services in
all capacities to the Company for the fiscal years 1998, 1999 and 2000.
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
Name and Fiscal Salary Bonus Other Securities All Other
Principal Year ($) ($) Annual Underlying Compensation
Position Compensation Options (#) ($)(3)
($)(1)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Karl H. Kostusiak 2000 333,795 0 68,138 0 4,859
Chairman and CEO 1999 325,714 89,740 --(2) 0 5,816
1998 240,504 0 35,814 20,000 2,640
George E. Behlke 2000 146,393 0 --(2) 5,000 2,686
Vice President, 1999 141,116 21,538 --(2) 15,000 2,554
Operations & General 1998 114,324 0 --(2) 10,000 2,734
Manager, Asia
David B. Lederer 2000 133,522 0 33,824 0 3,011
Executive Vice President 1999 124,352 474 32,003 0 3,100
1998 192,418 0 32,865 10,000 2,525
Frank J. Ryan 2000 130,702 0 --(2) 2,000 2,386
Vice President, 1999 130,701 14,358 --(2) 0 2,492
Secretary & Treasurer 1998 113,788 0 13,874 5,000 2,616
Christopher P. Gerace 2000 102,403 0 --(2) 10,000 1,913
Vice President & Chief 1999 88,615 7,179 --(2) 10,000 1,586
Accounting Officer 1998(4) 44,034 0 --(2) 10,000 333
</TABLE>
Footnotes:
(1) During fiscal 2000, $43,051 and $15,487 were paid toward life, disability
and long term care insurance premiums for the benefit of Messrs. Kostusiak
and Lederer, respectively. Mr. Lederer was reimbursed $13,254 for car and
gas expenses.
(2) Values are less than the minimum amount required to be reported.
(3) Represents contributions by the Company to accounts of the named executive
officers under the Company's 401(k) retirement savings plan.
(4) Mr. Gerace was hired by the Company on September 1, 1997 and thus was only
employed for part of fiscal 1998.
Option Grants in Last Fiscal Year
The following table provides information regarding stock options
granted to named executive officers during the fiscal year 2000. Each grant was
for incentive stock options to purchase stock under the Company's 1992 or 1997
Stock Option Plans. These options are exercisable 40% after one year, 60% after
two years, 80% after three years and 100% after four years, and each is subject
to full vesting upon a change in ownership of the Company. The Company did not
grant any stock appreciation rights during fiscal 2000.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Number of Percent of Total Stock Price Appreciation for
Securities Options Granted Exercise or Expiration Option Term
Underlying Options to Employees Base Price Date
Name Granted (#) in Fiscal Year ($/Sh) 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
K. Kostusiak 0 0 0 N/A N/A N/A
G. Behlke 5,000 5.74% $9.75 8/11/04 $13,469 $29,762
D. Lederer 0 0 0 N/A N/A N/A
F. Ryan 2,000 2.30% $9.75 8/11/04 $5,387 $11,905
C. Gerace 10,000 11.48% $9.75 8/11/04 $26,937 $59,525
</TABLE>
Exercised Options and Fiscal Year-End Option Values
The following table sets forth the options exercised during the fiscal
year 2000 and the unexercised options held as of March 31, 2000 by the Company's
named executive officers. The value of the underlying securities was determined
by subtracting the exercise price from the market value at year end. The market
price of the Common Stock on March 31, 2000 was $9.688 per share. The Company
has not granted any stock appreciation rights.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options on
Acquired Value Options at March 31, 2000 March 31, 2000
on Realized Exercisable / Exercisable/
Name Exercise (#) ($) Unexercisable(#) Unexercisable($)
<S> <C> <C> <C> <C>
K. Kostusiak 0 0 12,000/8,000 N/A
G. Behlke 3,000 $10,815 19,720/19,930 $2,753/$4,130
D. Lederer 0 0 6,000/4,000 N/A
F. Ryan 2,250 $6,845 4,752/4,438 N/A
C. Gerace 0 0 10,000/20,000 $2,001/$3,002
</TABLE>
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.
Since fiscal 1999, 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.
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. From April 1998 to April 2000, Mr. Lederer was
not eligible for payment under this program due to his part-time employment. Mr.
Lederer again became eligible for the program in April 2000, when he resumed
full-time employment. 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, with no bonus for profits below 4% of 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, stock options were granted to Messrs.
Kostusiak and Lederer for the purchase of 20,000 and 10,000 shares,
respectively, of stock at a price of $14.75 per share. No options were granted
to Mr. Kostusiak in fiscal 1999 or in fiscal 2000.
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. No executive officers were eligible for
payment under this general profit sharing plan in fiscal 2000.
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:
<TABLE>
<CAPTION>
Fiscal Year Cash Bonuses Sales 4% of Sales Pre-Tax Profit
<S> <C> <C> <C> <C>
2000 $0 $141,918,000 $5,676,720 $5,585,000
1999 $89,740 $138,045,000 $5,521,800 $7,307,000
1998 $0 $126,343,000 $5,053,720 $2,337,000
</TABLE>
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, 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 over a span of four years. 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 fiscal 1998, 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 providing executive officers an opportunity to
own substantial equity positions in the Company provides a considerable
incentive for them to pursue the Company's long-term strategic objectives. The
Committee further believes that the Company's longstanding employment contracts
with Messrs. Kostusiak and Lederer provide additional such incentives. These
contracts were initially entered into in 1988 and are the product of lengthy
negotiations between the Compensation Committee and such executives.
In 1996, retirement provisions were added to these employment
contracts, which require the Company to pay retirement benefits to such
executives, beginning at a specified age. In addition to providing incentives to
pursue the Company's long-term objectives, these retirement provisions help
provide for an orderly transition plan for the Company's senior management.
In addition, the Committee increased Mr. Kostusiak's base salary by 3%
during fiscal 2000 and continued the extended non-competition commitment from
him which was first implemented in fiscal 1999. The Committee determined that
any pay increase above the modestly increased base pay should be derived from
the cash bonus plan, which is based on pre-tax profits as described above.
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 retirement and management transition plan.
For a description of the current executive agreements, see "Executive
Agreements" and "Retirement Benefits" below.
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
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 any
compensation from the Company other than their fees and stock options as
directors of the Company.
EXECUTIVE AGREEMENTS
On September 27, 2000, the Company amended its employment agreements
with Messrs. Kostusiak and Lederer (the "Executive Agreements"). The Company's
Form 8-K filed with the Securities and Exchange Commission on September 27, 2000
includes complete copies of the amended agreements.
The current Executive Agreements terminate in July 2005. Mr. Lederer's
employment commitment was reduced to half-time in April 1998. Mr. Lederer
resumed full-time employment as the Company's Executive Vice President in April
2000, and his Executive Agreement was amended accordingly.
The Executive Agreements provide for severance benefits under certain
circumstances. The terms "change in control," "cause," "disability" and
"potential change in control" are used in this section with the meanings set
forth in the Executive Agreements. The Executive Agreements terminate the
executive's employment upon his death or permanent disability and provide that
disability income will be paid during disability, until retirement (normally the
January 1 after the executive's 68th birthday) and then a retirement wage
benefit will be paid for the executive's life and to any surviving spouse for
life (see "Retirement Benefits" below).
Under the Executive Agreements, if the Company terminates the
executive's employment without cause, the Company must continue compensation and
benefits to the executive for the then remaining balance of the five year 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 must 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, the terminated executive will receive the same compensation and
benefits for the remaining balance of the five year 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. This compensation and benefits will be reduced by any monetary damage
suffered by the Company due to the cause.
The Executive Agreements provide that each executive may not compete
with the Company during the term of his full-time employment and thereafter. In
exchange for the executive's agreement not to compete with the Company following
the term of employment, the executive is entitled to receive a one time
non-competition fee equal to twice the highest annual cash compensation
(including base salary and cash bonus) he received during the three-year period
immediately preceding the date his employment is terminated and, beginning on
the retirement date, the retirement wage benefit described below.
If a majority of the Company's outside Directors determines that a
"potential change in control" has occurred, the Company must transfer to an
escrow account an amount in cash sufficient to fund (or an amount in cash
sufficient to purchase an annuity to fund) the following payments and benefits:
(a) the executive's 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, and any bonus earned by the executive but not yet paid; (b) an amount
equal to three times the highest total cash compensation (including base salary
and bonuses) paid to the executive in any of the Company's preceding three
fiscal years; (c) an amount equal to the total amounts that would have been
expended for benefits over the next three years if the executive 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, upon which he may
either (x) exercise the rights and options or (y) elect to receive cash for the
aggregate spread between the exercise price and the then market value for the
stock; (e) assignment to the executive of all rights in certain life insurance
policies then held by the Company on the executive's life; (f) reimbursement for
any amount of excise taxes he might have to pay on his receipt of items (a)
through (e), such that the Company bears all direct and indirect costs of any
such excise taxes; (g) the executive's non-competition fees; and (h) the
executive's retirement payments and benefits4 (as described more fully below).
The aggregate amount of the payments described in (a) through (g) above may not
exceed 2.77% and 2.23% for Messrs. Kostusiak and Lederer, respectively, of the
Company's market capitalization at the time they are transferred to the escrow
account.
---------------
4 The Company maintains a life insurance policy for each executive. If there
is a "potential change in control," the Company must contribute to the
escrow account those policies and a cash amount sufficient to fund the
executives' retirement benefits.
The election of all three (but not less than three) of Ultrak's
nominees would constitute a change in control under each of Mr. Kostusiak and
Mr. Lederer's agreements. If the Board determines that there is a "potential
change in control" prior to the election, the Company must transfer to an escrow
account an cash amount sufficient to fund the executives' change in control
payments. The value of such payments would be equal to 2.77% and 2.23% of the
market capitalization of the Company at the time of transfer for Messrs.
Kostusiak and Mr. Lederer, respectively. For example, assuming the Company's
market capitalization is equal to its market capitalization of $76,000,896 as of
November 1, 2000, on the date of transfer, the Company would be required to
transfer to an escrow account $2,105,224 and $1,694,819 to fund change in
control payments for Messrs. Kostusiak and Lederer, respectively. The actual
amounts to be transferred to the escrow account may be significantly different
than these amounts, because they would depend upon the Company's market
capitalization at the time of transfer.
If a change in control (such as the election of all three Ultrak
nominees) occurs, the Company or the executive5 may give notice to start running
a six month termination period. If the executive's employment is terminated by
the Company or the executive during that six month period, the executive would
be entitled to receive the amounts then held in the escrow account. Such amount
paid to the executive will be subject to the market capitalization percentage
limitations described above, based upon the Company's market capitalization
immediately prior to the change in control (and thus may be different than the
amounts in the escrow account, which were based on the Company's market
capitalization at the time of the potential change in control). If no change in
control occurs after a potential change in control or the notice period
described above expires, the amounts held in the escrow account will be returned
to the Company.
Upon termination of employment, the executive becomes obligated to
provide up to 8 days of consulting services per year to the Company. Messrs.
Kostusiak and Lederer will be paid $1,500 and $1,200 per day, respectively,
for consulting services.
The Company also maintains a longstanding severance policy with
respect to its corporate officers, which provides that if a corporate officer is
terminated other than for "cause," or the officer terminates employment
following certain relocations, reductions in compensation or diminutions in
responsibility, the officer will receive continued salary and medical benefits
for a non-compete period which is negotiated individually with each officer. The
Company has entered into letter agreements with Messrs. Behlke, Gerace and Ryan
confirming such policy for non-compete periods of 21, 6 and 19 months,
respectively.
In addition, on July 25, 2000, the Company entered into an employment
agreement with Mr. Behlke, under which Mr. Behlke will receive (i) an annual
salary of $156,000; (ii) health and other benefits; and (iii) an annual bonus
equal (subject to a sales growth modifier) to the higher of: (x) 1.2% of the
Company's pretax profit above 4% of the Company's net sales or (y) 2.4% of the
increase in pretax profit or reduction in pretax loss of the Company's Asian
operations. Mr. Behlke will receive a living allowance of $50 per day while
working in Asia, and the Company will reimburse him for certain tax liabilities
arising from his work in Asia. If Mr. Behlke's employment is terminated for any
reason, or if Mr. Behlke resigns because the Company effectively terminates his
employment by diminishing his responsibilities, the Company must pay him: (i)
all unpaid salary, benefits and bonus within 15 days; and (ii) any reimbursement
for tax liabilities owed to him (described above). Mr. Behlke may not compete
with the Company for any period in which he receives payment under the
agreement. The agreement terminates on June 30, 2002. A copy of this agreement
was filed with the SEC as an exhibit to the Company's quarterly report on Form
10-Q on November 14, 2000.
---------------
5 Mr. Lederer may only give such notice or terminate his employment following
similar action by Mr. Kostusiak.
RETIREMENT BENEFITS
The current Executive Agreements require the Company to pay retirement
benefits to each executive for his lifetime and for his spouse's lifetime, if
she survives him.
Assuming each executive retires at the end of the calendar year in
which he reaches age 68, his benefits would be as follows: (a) a retirement wage
benefit initially equal to 60% of his base salary for the last year of his full
time employment, increased each year thereafter by the annual increase in the
Consumer Price Index (although the wage benefit for his spouse shall be 75% of
that amount after executive's death); (b) continuation of full health insurance
or similar benefit for him and his spouse; and (c) continuation of any other
benefit programs that provide for continuation pursuant to their terms. The
amount of the benefit paid under (c) will be limited to 60% of the maximum
annual cost of this benefit in any year prior to retirement, increased annually
by the Consumer Price Index.
Assuming a 5% compounded annual increase in the base compensation, and
assuming each executive will retire at age 68, 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 $277,842 and $233,388
respectively.
The Executive Agreements further provide that: (a) the Company may
terminate payment of retirement benefits if a court determines that the
executive has violated the non-competition provisions of his Executive Agreement
and (b) the Company must purchase and maintain life insurance sufficient to fund
the estimated spousal benefits (any excess policy proceeds to be available, if
agreed, to purchase shares of the Company's Common Stock held in the executive's
estate). Upon a potential change in control, the Company must place these
insurance policies in a trust designated for this purpose. Thus, if all three
Ultrak nominees are elected, the Company must transfer $2,745,000 and $2,049,000
to an escrow account to fund the retirement payments and benefits for Messrs.
Kostusiak and Lederer, respectively. These amounts would be used to fund the
ordinary retirement payments and benefits that each executive is entitled to
receive (and would have received even if there was no change in control).
AUDIT COMMITTEE REPORT
The Audit Committee of the Company's Board of Directors met four times
during fiscal 2000. The Committee's primary purpose is to monitor: (1) the
integrity of the Company's financial statements; (2) the Company's compliance
with legal and regulatory requirements; and (3) the independence and performance
of the Company's internal auditing function and external auditors.
Representatives from the Company's independent auditors,
PricewaterhouseCoopers ("PwC"), were present at each of the Committee's four
meetings. The Committee discussed with PwC the Company's financial management
and financial structure and the matters relating to the conduct of the audit
required to be discussed by Statement on Auditing Standards 61.
The Committee and PwC also discussed PwC's independence. PwC reported
to the Committee that its recent internal independence audit confirmed that its
independence has been maintained. On June 1, 2000, the Committee received from
PwC the written disclosures and the letter regarding PwC's independence required
by Independence Standards Board Standard No. 1.
In addition, the Committee reviewed and discussed with the Company's
management the Company's audited financial statements relating to fiscal 2000.
Based upon the review and discussions described above, the Committee
recommended to the Company's Board of Directors that the Company's audited
financial statements prepared by PwC be included in the Company's 2000 Annual
Report on Form 10-K.
AUDIT COMMITTEE
Edward C. McIrvine, Chairperson
Donald R. Adair,
Mortimer B. Fuller, III
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 Total
Return Index for the Nasdaq Stock Market (U.S.), the Russell 2000 Index and the
Total Return Index for Nasdaq Electronic Components Stocks. The Russell 2000
Index consists of 2000 small market capitalization companies and is widely
accepted and used. The Company believes that the Russell 2000 Index represents
the Company's market capitalization better than the Total Return Index for
Nasdaq Electronic Components Stocks, which includes larger companies. The
Company will not include the latter index in future graphs comparing shareholder
return.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00
<S> <C> <C> <C> <C> <C> <C>
Detection Systems 100 128 344 235 157 191
Russell 2000 100 127 131 184 152 204
Nasdaq Stock Market (U.S.) 100 136 151 229 309 574
Nasdaq Electronic Components Stocks 100 132 231 265 386 1141
</TABLE>
Footnote:
(1) Assumes $100 was invested in each entity on March 31, 1995, and that all
dividends were reinvested.
Proposal No. 2
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, 2001.
PricewaterhouseCoopers has served as the Company's independent auditors
since 1968. Representatives of the firm will be present at the Annual
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 that the shareholders vote FOR
the ratification of the appointment of PricewaterhouseCoopers LLP as the
independent auditors of the Company for the fiscal year 2001. Proxies will
be so voted unless shareholders specify a contrary choice in their proxies.
SHAREHOLDER PROPOSALS FOR 2001 ANNUAL MEETING
Under the Company's By-Laws, the Company's Secretary must receive
notice of shareholder nominations to the Board of Directors and all other
shareholder proposals between August 21, 2001 and September 20, 2001.
Shareholder proposals intended to be presented at the 2001 annual meeting
pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended, must be received by the Company's secretary no later than August
21, 2001 in order to be considered for inclusion in the 2001 proxy
statement. In order for shareholder proposals made outside of Rule 14a-8 to
be considered timely within the meaning of Rule 14a-4(c) under the
Exchange Act, such proposals must be received by the Secretary of the
Company no later than _______, 2001.
VOTING AND REVOCABILITY OF PROXIES
The record date for determining shareholders entitled to notice
of and to vote at the Annual Meeting is the close of business on December
1, 2000. Shareholders are entitled to one vote for each share owned. As of
the date hereof, there are 6,333,408 outstanding shares of Common Stock. On
or prior to December 1, 2000, the Company intends to issue to a trustee on
behalf of participants in the Company's deferred compensation plans 370,058
additional shares of Common Stock, all of which are currently allocated to
such participants under such plans.
The Company's 2000 Annual Report was mailed during the week of
September 11, 2000 to shareholders of record. Along with the mailing of
this Proxy Statement and the proxy card on November __, 2000, the Company
mailed the Annual Report to all shareholders of record on such date who
were not previously sent the Annual Report.
The Company scheduled its 2000 annual meeting of shareholders on
December 19, 2000 and set a record date of December 1, 2000 to allow Fleet
and the Board adequate time to consider the Company's strategic
alternatives and to communicate with shareholders. To allow sufficient time
for solicitation of proxies prior to the meeting, the Company first mailed
this Proxy Statement and the enclosed proxy card to shareholders prior to
the record date. The Company is aware that certain persons may become
shareholders of record between November __, 2000 and December 1, 2000. The
Company believes that all such persons will already be aware of the proxy
contest and familiar with the issues. The Company will closely monitor
purchases of its stock during this period, and will mail this Proxy
Statement, the proxy card and the Annual Report to such persons as soon as
possible.
All proxies in the enclosed form that are properly executed and
received by the Company prior to or at the Annual Meeting and not revoked will
be voted at the Annual Meeting in accordance with the instructions thereon. All
properly executed and received proxies dated prior to December 1, 2000 shall be
considered valid if the executing person is a shareholder of record as of
December 1, 2000. If no instructions are given with respect to any properly
executed and received proxy, such proxy shall be voted FOR approval of the
election of each of the Company's proposed nominees for director, as described
in this Proxy Statement and FOR approval and ratification of the selection of
PricewaterhouseCoopers LLP as the independent auditors for the Company and its
subsidiaries for the fiscal year 2001.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. A shareholder may revoke any
proxy (whether such proxy was solicited by the Company or Ultrak) at any time
prior to its exercise by submitting to the Company or Ultrak a written
revocation or duly executed proxy bearing a later date or by attendance at the
Annual Meting and voting in person. Attendance at the Annual Meeting will not in
and of itself constitute a revocation of a proxy. Accordingly, any later-dated
proxy would have the effect of revoking any earlier-dated proxy, whether such
proxy was delivered to the Company or Ultrak. Only your latest-dated proxy will
count at the Annual Meeting; thus, you will not be able to give an effective
proxy at the same time to both the Company and Ultrak.
Under New York law and the Company's By-Laws, the presence of a
quorum, represented in person or by proxy by a majority of the total outstanding
shares of Common Stock entitled to vote, is required at the Annual Meeting.
Shares represented by proxies that are marked "abstain" will be counted as
shares present for purposes of determining the presence of a quorum on all
matters. Proxies relating to "street name" shares that are voted by brokers on
some but not all of the matters will be treated as shares present for purposes
of determining the presence of a quorum on all matters, but will not be treated
as shares entitled to vote at the Annual Meeting on those matters as to which
authority to vote is withheld by the broker (the "Broker Non-Votes").
Directors of the Company are elected by a plurality vote. The five
nominees receiving the highest vote totals will be elected as directors of the
Company. With respect to the election of directors, votes may be cast in favor
of nominees or withheld. Broker Non-Votes will not affect the outcome of the
election of directors. The affirmative vote of the holders of a majority of the
votes cast at the Annual Meeting by the shareholders entitled to vote thereon
will be required to approve and ratify the appointment of PricewaterhouseCoopers
LLP as the independent auditors for the Company. Broker Non-Votes and
abstentions will not be counted as votes cast for the appointment of
PricewaterhouseCoopers LLP as the Company's independent auditors, and,
therefore, will not have any effect on the outcome of such vote.
METHOD AND COST OF PROXY SOLICITATION
Proxies may be solicited without additional compensation by all
directors and such officers of the Company listed in Appendix B by e-mail, the
internet, telephone, facsimile, telegram, in person or otherwise. Appendix B
sets forth certain information relating to such persons who will be soliciting
proxies on the Company's behalf (the "Participants").
The Company will bear all costs related to the solicitation of
proxies pursuant to this Proxy Statement, including the preparation,
printing and mailing of proxy materials. The Company has spent
approximately $115,000 thus far in connection with the solicitation of
proxies and estimates that it will spend a total of $382,000 beyond what it
would normally spend for the solicitation of proxies in connection with an
annual meeting.
The Company has retained MacKenzie Partners, Inc. to assist in
soliciting proxies. MacKenzie Partners will employ approximately 35 people
in connection with the solicitation, at an approximate cost of $125,000.
The Company requests that banks, brokers and other custodians,
nominees and fiduciaries forward proxy materials to the beneficial owners
of the Company's stock and obtain their voting instructions. The Company
will reimburse those firms for their expenses in accordance with SEC rules.
YOUR VOTE AT THIS YEAR'S ANNUAL MEETING IS ESPECIALLY IMPORTANT. PLEASE SIGN AND
DATE THE ENCLOSED WHITE PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE
PROMPTLY.
WE URGE YOU NOT TO SIGN OR RETURN ANY PROXY CARD THAT MAY BE SENT TO
YOU BY ULTRAK, EVEN AS A PROTEST VOTE AGAINST ULTRAK. If you previously voted on
an Ultrak BLUE proxy card, you have every legal right to change your vote. You
can do so simply by signing, dating and returning the enclosed WHITE proxy card.
A person giving any proxy has the power to revoke it (whether such proxy was
solicited by the Board of Directors or by Ultrak) at any time before the voting
by submitting to the Company or to Ultrak a written revocation or duly executed
proxy card bearing a later date. ONLY YOUR LATEST DATED PROXY CARD WILL COUNT.
Please refer to "Voting and Revocability of Proxies" on page 33 for a discussion
of how to revoke your proxy.
FORWARD LOOKING STATEMENTS
Statements made by the Company in this Proxy Statement that are not
strictly historical facts are "forward looking" statements that are based on
current expectations about the markets in which the Company does business and
assumptions made by management. Such statements should be considered as subject
to risks and uncertainties that exist in the Company's operations and business
environment and could render actual outcomes and results materially different
than predicted. For a description of some of the factors and uncertainties which
could cause actual results to differ, reference is made to the section entitled
"Risk Factors" in the Company's 2000 Annual Report on Form 10-K, as amended.
OTHER MATTERS
The Board of Directors knows of no matters to be presented at the
Annual Meeting other than those described in this Proxy Statement. However, if
any other matters properly come before the Annual Meeting, it is intended that
the persons named in the enclosed proxy will vote on such matters in accordance
with their best judgment.
Shareholders are urged to sign, date and return the enclosed WHITE
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 for the fiscal year ended March 31, 2000. Requests should be
directed to Detection Systems, Inc., 130 Perinton Parkway, Fairport, New York
14450, Attn: Shareholder Relations or:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, New York 10010
[email protected]
(212) 929-5500 (call collect)
or
Toll-Free (800) 322-2885.
Dated: November __, 2000
IMPORTANT
If your shares of Common Stock are held in the name of a brokerage
firm, bank, nominee or other institution, only it can sign a WHITE proxy card
with respect to your shares and only upon specific instructions from you. Please
contact the person responsible for your account and give instructions for a
WHITE proxy card to be signed representing your shares of the Company's stock.
We urge you to confirm in writing your instructions to the person responsible
for your account and to provide a copy of such instructions to the Company's
proxy solicitor, MacKenzie Partners, Inc., at the address indicated below so
that MacKenzie Partners can attempt to ensure that your instructions are
followed.
If you have any questions about executing your proxy or require
assistance, please contact:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, New York 10010
[email protected]
(212) 929-5500 (call collect)
or
Toll-Free (800) 322-2885
Banks and brokerage firms please call collect: (212) 929-5500.
APPENDIX A
INFORMATION CONCERNING
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names, ages, principal occupations
and business experience for the past five years of the Company's executive
officers (other than Messrs. Kostusiak and Lederer whose information is given on
page 18). The principal business address of each person listed is that of the
Company.
<TABLE>
<CAPTION>
Business Experience of Officers
Name (Age) Principal Occupation and Business Experience
<S> <C>
George E. Behlke (42) Vice President, Operations, and General Manager, Asia, of the Company (since May 2000)
Vice President, Operations of the Company (June 1999 - April 2000)
Vice President, Engineering and Operations of the Company (April 1998 - May 1999)
Vice President, Engineering of the Company (June 1995 - April 1998)
Various engineering and engineering management positions with the Company (October 1977 - May 1995)
Christopher P. Gerace (33) Vice President & Chief Accounting Officer of the Company (since June 1999)
Chief Accounting Officer of the Company (September 1997 - May 1999)
Senior Manager, Price Waterhouse LLP (April - August 1997)
Manager, Price Waterhouse LLP (April 1994 - March 1997)
Various accounting and accounting supervisory positions, Price Waterhouse LLP (September 1989 -
March 1994)
Frank J. Ryan (46) Vice President, Secretary and Treasurer of the Company (since June 1988)
Secretary and Treasurer of the Company (June 1986 - June 1988)
Controller of the Company (July 1982 - May 1986)
Various accounting and accounting supervisory positions with the Company (April 1980 - June 1982)
Jeffrey M. Swan (35) Vice President of Engineering of the Company (since June 1999)
Various engineering and engineering supervisory positions with the Company (1992 - May 1999)
Various engineering and engineering supervisory positions, Smith Corona Corporation (1987 - 1991)
</TABLE>
APPENDIX B
INFORMATION REGARDING PARTICIPANTS IN THE SOLICITATION
The following table sets forth the purchases and sales of the
Company's equity securities by the Participants during the past two years.
Unless otherwise indicated, all transactions took place in the open market.
<TABLE>
<CAPTION>
Number of
Shares
Acquired
Name or Sold Date Price of Acquisition/Sale
<S> <C> <C> <C>
Donald R. Adair 0 N/A N/A
Jerald D. Bidlack(1) 1000 8/22/00 $9,375 (Purchased)
1000 8/23/00 $9,250 (Purchased)
1000 8/25/00 $9,250 (Purchased)
1000 8/31/00 $9,250 (Purchased)
Mortimer B. Fuller III 0 N/A N/A
Christopher P. Gerace 0 N/A N/A
Karl H. Kostusiak 200 5/5/00 $1,950 (Gifted)
200 6/2/98 $2,000 (Gifted)
David Lederer 500 6/1/99 $4,375 (Gifted)
20,000 9/29/98 $205,000 (Transferred)(2)
20,000 9/29/98 $205,000 (Transferred)(3)
Edward McIrvine 1,500 2/17/00 $14,288 (Sold)
2,000 2/16/00 $18,812 (Sold)
2,000 11/6/98 $23,125 (Sold)
5,806 9/8/98 (Acquired)(4)
1,331 11/16/98 (Transferred)(5)
Frank J. Ryan 2,250 6/14/99 $10,875 (Purchased/Exercised Option)
C. Duncan Soukup(6) 4,000 8/24/98 $9.07 (Purchased)
9,600 9/18/98 $8.75 (Purchased)
200 9/28/98 $9.63 (Purchased)
900 11/30/98 $9.59 (Purchased)
500 12/7/98 $9.16 (Purchased)
100 12/22/98 $9.63 (Purchased)
7,000 12/30/98 $9.06 (Purchased)
2,900 12/31/98 $9.10 (Purchased)
6,000 1/6/99 $8.91 (Purchased)
3,000 1/13/99 $9.45 (Purchased)
6,500 2/23/99 $9.32 (Purchased)
6,000 2/25/99 $8.88 (Purchased)
1,100 2/26/99 $9.27 (Purchased)
5,000 3/19/99 $8.93 (Purchased)
6,300 3/30/99 $8.19 (Purchased)
9,700 3/31/99 $8.16 (Purchased)
7,200 4/13/99 $7.28 (Purchased)
2,800 4/30/99 $9.05 (Purchased)
1,000 6/30/99 $8.46 (Purchased)
5,000 9/22/99 $10.63 (Purchased)
C. Duncan Soukup(6) 1,000 9/30/99 $10.21 (Purchased)
6,200 10/27/99 $9.47 (Sold)
9,400 11/10/99 $9.56 (Purchased)
1,000 11/30/99 $9.00 (Purchased)
2,500 12/6/99 $9.13 (Sold)
7,000 12/7/99 $9.35 (Purchased)
6,000 12/9/99 $9.19 (Purchased)
5,000 12/10/99 $9.17 (Purchased)
6,200 12/14/99 $9.19 (Purchased)
4,000 12/15/99 $9.19 (Purchased)
5,000 12/16/99 $9.19 (Purchased)
1,500 12/17/99 $9.19 (Purchased)
1,500 12/20/99 $9.31 (Purchased)
6,000 12/22/99 $9.44 (Purchased)
700 12/23/99 $9.44 (Purchased)
6,500 12/27/99 $9.44 (Purchased)
500 12/31/99 $9.56 (Purchased)
10,000 1/12/00 $9.75 (Purchased)
5,500 1/1400 $10.03 (Purchased)
9,800 2/18/00 $10.50 (Purchased)
5,000 2/2900 $10.16 (Purchased)
4,000 3/6/00 $10.75 (Sold)
40,000 3/13/00 $12.84 (Sold)
1,700 3/14/00 $12.00 (Purchased)
3,000 3/28/00 $10.19 (Purchased)
20,000 3/31/00 $9.91 (Purchased)
5,000 4/17/00 $8.88 (Purchased)
6,400 5/12/00 $8.98 (Purchased)
1,400 5/24/00 S9.75 (Purchased)
3,000 5/25/00 $9.56 (Purchased)
4,500 5/26/00 $9.85 (Purchased)
2,000 5/30/00 $9.69 (Purchased)
1,000 5/31/00 $9.88 (Purchased)
9,000 6/20/00 $9.60 (Purchased)
700 6/30/00 $9.56 (Purchased)
1,300 7/17/00 $10.63 (Sold)
800 7/27/00 $9.56 (Purchased)
9,000 8/24/00 $9.50 (Purchased)
500 8/31/00 $9.25 (Purchased)
1,400 9/13/00 $8.63 (Purchased)
2,100 9/14/00 $8.81 (Purchased)
6,200 9/18/00 $8.52 (Purchased)
5,000 9/20/00 $8.69 (Purchased)
2,500 9/21/00 $9.03 (Purchased)
7,500 9/26/00 $9.06 (Purchased)
1,500 9/29/00 $9.31 (Purchased)
6,400 10/4/00 $9.00 (Purchased)
1,000 10/5/00 $9.00 (Purchased)
16,000 10/6/00 $9.06 (Purchased)
5,000 10/9/00 $8.88 (Purchased)
6,600 10/10/00 $9.06 (Purchased)
2,500 10/11/00 $8.94 (Purchased)
6,500 10/12/00 $8.94 (Purchased)
2,000 10/17/00 $10.63 (Purchased)
2,500 10/20/00 $11.00 (Purchased)
6,000 10/23/00 $11.05 (Purchased)
12,000 10/24/00 $10.58 (Purchased)
2,500 10/25/00 $10.56 (Purchased)
</TABLE>
Footnotes:
(1) Shares were purchased by Griffin Automation, Inc., a company of which Mr.
Bidlack is President.
(2) Transferred to spouse, and transferred by spouse to Lederer Family Limited
Partnership.
(3) Transferred to Lederer Family Limited Partnership.
(4) Shares acquired from former spouse in connection with divorce settlement.
(5) Shares transferred to AFSC Charitable Remainder Unitrust for life income
benefit of former spouse in connection with divorce settlement.
(6) Represents shares purchased by Lionheart Group, Inc., a company of which
Mr. Soukup is the President and Chief Executive Officer.
Fleet Securities
Certain employees of Fleet, the Company's financial advisor, may also
assist the Company in the solicitation of proxies, including by communicating in
person, by telephone, by e-mail or otherwise with a limited number of
institutions, brokers or other persons who are shareholders of the Company.
Fleet will not receive any separate fee for such solicitation activities. Fleet
does not admit that it or any of its directors, officers, employees or
affiliates are a "participant," as defined in Schedule 14A promulgated under the
Securities Exchange Act of 1934 by the SEC, or that such Schedule 14A requires
the disclosure of certain information concerning Fleet.
The following officers and employees of Fleet may assist in the
solicitation of proxies: George J. Holder (Managing Director); Michael A. Papile
(Director); Kristine Sullivan (Vice President); Michael A. Flynn (Senior
Associate); and Rebecca E. Tarby (Analyst). No such person owns any shares of
Common Stock or has engaged in any transaction involving Common Stock during the
past two years. The principal business address of each such person is Fleet
Securities, Inc., 100 Federal Street, 11th Floor, Mail Stop: MA DE 10011H,
Boston, Massachusetts 02110.
Brighton Securities
Brighton Securities Corp. ("Brighton Securities"), an advisor
retained by the Company in connection with the proxy contest, and its
employees and officers George Conboy and Joseph Ryan, may be deemed to be
participants in the Company's solicitation of proxies. No such person owns
any shares of Common Stock or has engaged in any transaction involving
Common Stock during the past two years. Notwithstanding the foregoing,
Brighton Securities has purchased and sold shares of Common Stock in the
course of its market making activities on behalf of its clients, and will
continue to engage in such activities from time to time. Brighton
Securities does not admit that it, Messrs. Conboy or Ryan, or any of its
other directors, officers, employees or affiliates are "participants," as
defined in Schedule 14A promulgated under the Securities Exchange Act of
1934 by the SEC, or that such Schedule 14A requires the disclosure of
certain information concerning Brighton Securities. The principal business
address of each such person is 1703 Monroe Avenue, Rochester, New York
14618-1487.
Miscellaneous Information Concerning Participants
Except as otherwise described in this Proxy Statement (including
the Appendices hereto), none of the participants nor any of their
respective affiliates or associates (together, the "Participant
Affiliates"), (i) directly or indirectly beneficially owns any shares of
Common Stock of the Company or any securities of any subsidiary of the
Company or (ii) has had any relationship with the Company in any capacity
other than as a shareholder, employee, officer and/or director.
Furthermore, except as otherwise described in the Proxy Statement, no
Participant Affiliate is either a party to any transaction or series of
transactions in the fiscal year 2000, or has knowledge of any currently
proposed transaction or series of transactions, (i) to which the Company or
any of its subsidiaries was or is to be a party, (ii) in which the amount
involved exceeds $60,000, and (iii) in which any Participant Affiliate had,
or will have, a direct or indirect material interest.
Except as otherwise described in the Proxy Statement, no
Participant or Participant Affiliate has entered into any agreement or
understanding with any person respecting any future employment by the
Company or its affiliates or any future transactions to which the Company
or any of its affiliates will or may be a party. Except as otherwise
described in the Proxy Statement, there are no contracts, arrangements or
understandings by any Participant or Participant Affiliate within the last
fiscal year with any person with respect to the Company's securities.
APPENDIX C
CHARTER
Audit Committee of the Board of Directors
of Detection Systems, Inc.
Adopted by the Board of Directors on June 2, 2000
The Audit Committee is appointed by the Board of Directors to
assist the Board in monitoring (1) the integrity of the financial
statements of the Company, (2) the compliance by the Company with legal and
regulatory requirements and (3) the independence and performance of the
Company's internal auditing function and external auditors.
The members of the Audit Committee shall meet the independence and
experience requirements of the Nasdaq Stock Market, Inc. The members of the
Audit Committee shall be appointed by the Board.
The Audit Committee shall have the authority to retain special
legal, accounting or other consultants to advise the Committee. The Audit
Committee may request any officer or employee of the Company or the
Company's outside counsel or independent auditor to attend a meeting of the
Committee or to meet with any members of, or consultants to, the Committee.
The Audit Committee shall make regular reports to the Board.
The Audit Committee shall:
1. Review and reassess the adequacy of this Charter annually and
recommend any proposed changes to the Board for approval.
2. Review the annual audited financial statements with management,
including major issues regarding accounting and auditing
principles and practices as well as the adequacy of internal
controls that could significantly affect the Company's financial
statements.
3. Review an analysis prepared by management and the independent
auditor of significant financial reporting issues and judgments
made in connection with the preparation of the Company's
financial statements.
4. Review with management and the independent auditor the Company's
quarterly financial statements prior to the filing of its Form
10-Q.
5. Meet periodically with management to review the Company's major
financial risk exposures and the steps management has taken to
monitor and control such exposures.
6. Review major changes to the Company's auditing and accounting
principles and practices as suggested by the independent auditor
or management.
7. Recommend to the Board the appointment of the independent
auditing firm, which firm is ultimately accountable to the Audit
Committee and the Board.
8. Approve the fees to be paid to the independent auditor.
9. Receive periodic reports from the independent auditor regarding
the auditor's independence consistent with Independence Standards
Board Standard 1, discuss such reports with the auditor, and if
so determined by the Audit Committee, take or recommend that the
full Board take appropriate action to oversee the independence of
the auditor.
10. Evaluate together with the Board the performance of the
independent auditor and, if so determined by the Audit Committee,
recommend that the Board replace the independent auditor.
11. Review any significant reports to management, and management's
responses, regarding accounting and control procedures or
personnel.
12. Meet with the independent auditor prior to the audit to review
the planning and staffing of the audit.
13. Obtain from the independent auditor assurance that Section 10A of
the Securities Exchange Act of 1934 has not been implicated.
14. Obtain reports from management and the independent auditor that
the Company's subsidiary/foreign affiliated entities are in
conformity with applicable legal requirements and the Company's
Business and Ethics Code of Conduct.
15. Discuss with the independent auditor the matters required to be
discussed by Statement on Auditing Standards No. 61 relating to
the conduct of the audit.
16. Review with the independent auditor any problems or difficulties
the auditor may have encountered and any management letter
provided by the auditor and the Company's response to that
letter. Such review should include:
a. Any difficulties encountered in the course of the audit
work, including any restrictions on the scope of activities
or access to required information.
b. Any changes required in the planned scope of the audit.
17. Prepare the report required by the rules of the Securities and
Exchange Commission to be included in the Company's annual proxy
statement.
18. Advise the Board with respect to the Company's policies and
procedures regarding compliance with applicable laws and
regulations and with the Company's Business Ethics and Code of
Conduct.
19. Review with the Company's legal counsel legal matters that may
have a material impact on the financial statements, the Company's
compliance policies and any material reports or inquiries
received from regulators or governmental agencies.
20. Meet at least annually with the chief financial officer and the
independent auditor in separate executive sessions.
While the Audit Committee has the responsibilities and powers set
forth in this Charter, it is not the duty of the Audit Committee to plan or
conduct audits or to determine whether or not the Company's financial statements
are complete and accurate and are in accordance with generally accepted
accounting principles. This is the responsibility of management and the
independent auditor. Nor is it the duty of the Audit Committee to conduct
investigations, to resolve disagreements, if any, between management and the
independent auditor or to assure compliance with laws and regulations and the
Company's Business Ethics and Code of Conduct.
APPENDIX D
FORM OF PROXY
DETECTION SYSTEMS, INC.
ANNUAL MEETING OF SHAREHOLDERS
DECEMBER 19, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF DETECTION
SYSTEMS, INC. (THE "COMPANY") FOR USE AT THE ANNUAL MEETING OF SHAREHOLDERS TO
BE HELD ON DECEMBER 19, 2000.
The undersigned hereby appoints Karl H. Kostusiak, David B. Lederer and Frank J.
Ryan, and each of them, with full powers of substitution, as attorneys and
proxies to represent the undersigned at the Annual Meeting of shareholders of
the Company to be held on December 19, 2000, and at any adjournment or
postponement thereof, according to the number of votes that the undersigned
would be entitled to cast if personally present. Unless indicated to the
contrary, the undersigned hereby revokes any and all proxies which the
undersigned may have given to Ultrak, Inc. in its proxy solicitation.
PROPERLY EXECUTED PROXIES WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE
UNDERSIGNED. IF NO SUCH DIRECTIONS ARE GIVEN, SUCH PROXIES WILL BE VOTED FOR ALL
NOMINEES REFERRED TO IN PROPOSAL 1 AND FOR THE PROPOSAL REFERRED TO IN PROPOSAL
2.
(continued and to be signed on the other side)
[X] Please mark your votes as in this example.
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1 AND 2
--------------------------------------------------------------------------------
1. To elect the following nominees as directors to serve until the next Annual
Meeting of shareholders and until their successors are elected and
qualified: D. Adair, J. Bidlack, K. Kostusiak, D. Lederer and E. McIrvine.
FOR all nominees listed above [ ] WITHHOLD AUTHORITY [ ]
(except as indicated to the
contrary below):
----------------------------------------------
2. The ratification of the appointment of PricewaterhouseCoopers LLP as the
Company's independent auditors for the fiscal year 2001.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. To consider and take action upon such other matters as may properly come
before the meeting, or any adjournment or postponement thereof.
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.
The undersigned revokes any prior proxies with respect to the shares
covered by this proxy.
Date: _______________________________________________________, 2000
--------------------------------------------------------------------
Signature
--------------------------------------------------------------------
Signature
--------------------------------------------------------------------
Title(s)
(This Proxy should be dated and signed by each shareholder exactly as
his or her name appears hereon and returned promptly in the enclosed
envelope. Persons signing in a fiduciary capacity should so indicate.
If shares are held by joint tenants or as community property, both
should sign.) PLEASE SIGN, DATE AND RETURN THIS PROXY PROMPTLY.
