<PAGE>
DETECTION SYSTEMS, INC.
130 PERINTON PARKWAY
FAIRPORT, NEW YORK 14450
INFORMATION STATEMENT PURSUANT TO
SECTION 14(f) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED,
AND RULE 14f-1 THEREUNDER
----------------
NO VOTE OR OTHER ACTION OF THE COMPANY'S SHAREHOLDERS IS REQUIRED IN CONNECTION
WITH THIS INFORMATION STATEMENT. NO PROXIES ARE CURRENTLY BEING SOLICITED AND
YOU ARE REQUESTED NOT TO SEND THE COMPANY A PROXY.
This Information Statement (the "Information Statement") is being mailed
on or about January 17, 2001 to the holders of record of the shares of the
common stock, par value $.05 per share (the "Shares"), of Detection Systems,
Inc. (the "Company"). It is being furnished in connection with the appointment
of certain designees of Robert Bosch GmbH, a limited liability company
organized under the laws of Germany ("Parent") to the Board of Directors of the
Company (the "Designees").
The Company entered into an Agreement and Plan of Merger, as amended, (the
"Merger Agreement") dated as of December 10, 2000 with Parent, to which Bosch
Security Systems Corporation, a New York corporation and wholly owned
subsidiary of Parent ("Purchaser"), subsequently became a party. The Merger
Agreement was included as Exhibit 1 to the Solicitation/Recommendation
Statement on Schedule 14D-9 filed by the Company with the Securities and
Exchange Commission ("SEC") on December 20, 2000 and is incorporated herein by
reference.
Pursuant to the Merger Agreement, on December 20, 2000 Purchaser commenced
a tender offer (the "Offer") to purchase all of the outstanding Shares at a
price of $18 per Share, net to the seller in cash, and, after satisfaction of
certain conditions set forth in the Merger Agreement, Purchaser shall be merged
with and into the Company.
The Merger Agreement provides that promptly after the acquisition by
Purchaser or its affiliates of at least a majority of the outstanding Shares,
Parent shall be entitled to designate such number of directors, rounded up to
the next whole number, to the Company's Board of Directors (the "Board") as is
equal to the product of the total number of directors on the Board (giving
effect to the increase in the size of such Board by the Company in connection
with such designation) multiplied by the percentage that the number of Shares
beneficially owned by Purchaser bears to the total number of Shares then
outstanding. In furtherance thereof, the Company shall, upon request of Parent,
promptly either (at the election of the Company) increase the size of the Board
or use its best efforts to secure the resignations of such number of its
incumbent directors, or both, as is necessary to enable the Designees to be
elected to the Board and the Company shall take all actions available to the
Company to cause such Designees to be so elected or appointed. At such time,
the Company shall also take all action necessary to cause Persons designated by
Parent to constitute at least the same percentage (rounded up to the next whole
number) as is on the Board of (i) each committee of the Board, (ii) each board
of directors (or similar body) of each subsidiary of the Company and (iii) each
committee (or similar body) of each such subsidiary board.
No action is required by the shareholders of the Company in connection
with the appointment of the Designees to the Board. Under Section 14(f) and
Rule 14f-1 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Company must mail to its shareholders the information contained in
this Information Statement prior to a change in a majority of the Company's
directors because such change in control shall not occur at a shareholder
meeting.
<PAGE>
The principal executive office of the Company is located at 130 Perinton
Parkway, Fairport, New York 14450. As of January 10, 2001 there were 6,738,515
Shares outstanding. Shareholders are entitled to one vote for each share owned.
DESIGNATION
The Board is currently composed of five (5) directors. If Purchaser or an
affiliate thereof acquires a majority of the outstanding Shares in connection
with the Offer, the Company intends to expand or decrease the size of the Board
in accordance with the Merger Agreement such that Parent can designate such
proportion of directors described above. Under New York law and the Company's
By-Laws, as amended by the Board on February 21, 2000, the size of the Board
may be increased or decreased from time to time by the Board, and any newly
created position resulting from such increase may be filled by a majority vote
of the Board.
Upon acquisition of such majority by Purchaser, Parent intends to
designate and has agreed to designate from among the following Designees an
appropriate number of persons to the Board. Such election shall result in a
change of control of the Company. If Purchaser does not acquire such majority
of the Shares, no change in control will occur.
The Designees may take office at any time following their election, but
not less than ten (10) days after the Company files this Information Statement
with the Securities and Exchange Commission and transmits it to its
shareholders of record who would be entitled to vote at a meeting for election
of directors.
The following table sets forth the full name, age and 5 year business
experience of each Designee. Parent has informed the Company that, to the best
of its knowledge, none of the persons listed below has been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors) or
has been a party to any judicial or administrative proceeding (except for
matters that were dismissed without sanction or settlement) that resulted in a
judgment, decree or final order enjoining the person from future violations of,
or prohibiting activities subject to, federal or state securities laws, or a
finding of any violation of federal or state securities laws.
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE
------------------------ ------------------------------------------------------------------------
<S> <C>
Diethelm Harenberg, 58 Member of the Board of Management of Bosch Telecom GmbH since
1995.
Uwe Glock, 42 President of Bosch Telecom GmbH's Security Systems product division
since July 1998. Sales Director of Bosch Telecom GmbH's Security
Systems product division prior to July 1998.
Peter Ribinski, 45 Technical Director of Bosch Telecom GmbH's Security Systems product
division since 1995.
Christoph Ziegler, 42 Commercial Director of Bosch Telecom GmbH's Security Systems
product division since August 1999. Manager with sales responsibilities
of Signalbau Huber AG from May 1998 to February 1999. Manager of
Signalbau Huber AG from February 1998 to May 1998. Commercial
Director of Radiocom AG, Switzerland, prior to February 1998.
Bernd Riedemann, 47 Director of the German Sales Office of Bosch Telecom GmbH's Security
Systems product division since 1998. Employed in the Domestic Sales
Integrated Supply Product Division of Bosch Telecom's Security Systems
Division until 1998.
Peter Nippraschk, 59 Director of the German Sales Office of Bosch Telecom GmbH's Security
Systems product division since 1995.
Walter Brenninger, 59 Director of the German Sales Office of Bosch Telecom GmbH's Security
Systems product division since 1995.
Detlef Geis, 48 Director of the German Sales Office of Bosch Telecom GmbH's Security
Systems product division since 1995.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE
-------------------------- --------------------------------------------------------------------------
<S> <C>
Bernd Seibt, 56 Director of the German Sales Office of Bosch Telecom GmbH's Security
Systems product division since 1995.
Wolfgang Mohr, 51 Director of the German Sales Office of Bosch Telecom GmbH's Security
Systems product division since 1995.
Volker Schleenbecker, 46 Director of the German Sales Office of Bosch Telecom GmbH's Security
Systems product division since 1995.
Boris Gleissner, 38 Member of Mergers and Acquisitions Group of Parent since
September 2000. Corporate Controller of Parent from September 1998
to September 2000. Financial Director of Robert Bosch (France) SA
until September 1998.
Dr. Heiko Carrie, 38 Senior Legal Counsel in the Corporate Legal Department of Parent
since March 1998. Partner at the law firm of Illert, Bernstorff & Zapp in
Munich, Germany from February 1995 to February 1998.
Gary Saunders, 57 Director, President and Treasurer of Purchaser since December 2000.
Executive Vice President of Robert Bosch Corporation since 1991.
Luke Baer, 50 Director, Vice President and Secretary of Purchaser since
December 2000. Vice President since 1995 and General Counsel and
Secretary since 1992 of Robert Bosch Corporation.
</TABLE>
CURRENT DIRECTORS AND EXECUTIVE OFFICERS
OF THE COMPANY
Pursuant to the provisions of the Company's By-Laws, as amended and
restated by the Board on February 21, 2000, each officer shall hold office for
one year and until such officer's successor has been elected and qualified and
each director shall hold office until the next annual meeting and until the
director's successor has been elected and qualified.
Following are the names, ages and business experience during the past 5
years of the Company's current directors and executive officers.
Donald R. Adair, age 56, has been a director of the Company since 1991.
Mr. Adair serves on the Audit, Compensation and Stock Option Committees of the
Board. He is a principal of Adair Law Firm, which was established in 1988 and
focuses on serving businesses in Rochester, New York. Mr. Adair is also a
director of Stone Construction Equipment, Inc., in Honeoye, New York, and
Victor Insulators, Inc. in Victor, New York.
Mortimer B. Fuller III, age 58, has served as director of the Company
since 1990. Mr. Fuller serves on the Audit, Compensation and Stock Option
Committees of the Board. Since 1977, Mr. Fuller, has been Chairman and CEO of
Genessee & Wyoming, Inc., which owns and operates shortline railroads and
provides related services to railroads and shippers.
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.
David B. Lederer, age 60, 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.
Edward C. McIrvine, age 66, has been a director of the Company since 1981.
Dr. McIrvine serves on the Audit, Compensation and Stock Option Committees of
the Board. 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.
3
<PAGE>
George E. Behlke, age 43, has been the Company's Vice President of
Operations since April 1998 and also assumed responsibilities as the Company's
General Manager, Asia in May 2000. Mr. Behlke was also Vice President of
Engineering from May 1995 to June 1999 and Engineering Manager from 1984 to
April 1995.
Christopher P. Gerace, age 33, has been the Company's Chief Accounting
Officer since 1997, and was also promoted to Vice President in 1999. Mr. Gerace
was employed by the accounting firm of Price Waterhouse, LLP from 1989 to 1997.
Frank J. Ryan, age 46, has been the Company's Vice President, Secretary
and Treasurer since 1988.
Jeffrey M. Swan, age 35, has been Vice President of Engineering since June
1999. Mr. Swan has been employed by the Company in various engineering
positions since 1992.
Other than as set forth herein, there are no agreements or understandings
for the Company's officers or directors to resign at the request of another
person, and the Company's officers and directors are not acting on behalf of or
will act at the discretion of any other person.
MANAGEMENT SECURITY OWNERSHIP
The following table shows: (i) the names and principal business addresses
of the Company's directors and executive officers provided herein (ii) the
number of Shares that such persons beneficially owned or had the right to
acquire beneficial ownership of as of, or within sixty days of, January 10,
2001; 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. The Designees do
not beneficially own any Shares, except that certain of the Designees may be
deemed to beneficially own Shares held by Parent and Purchaser, as listed under
"Principal Shareholders."
4
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER OWNERSHIP(1) SHARES
-------------------------------------- ------------------------- -----------
<S> <C> <C>
Donald R. Adair 3,549(2) *
Adair Law Firm
30 Corporate Woods,
Suite 280
Rochester, NY 14623
George E. Behlke 76,824(3)(4) 1.1%
Mortimer B. Fuller, III 5,645 *
Chairman & CEO
Genesee & Wyoming, Inc.
66 Field Point Road
Greenwich, CT 06830
Christopher P. Gerace 18,000(3) *
Karl H. Kostusiak 579,561(3)-(5) 8.4%
David B. Lederer 298,502(4)-(6) 4.4%
Edward C. McIrvine 6,000(3) *
1213 Forest Hill Drive
Hendersonville, NC 28791
Frank J. Ryan 78,202(3),(4),(7) 1.2%
All Directors and Executive 1,077,133(2)-(7) 16.6%
Officers as a Group (9 persons)
</TABLE>
FOOTNOTES:
* Percentage of Shares owned is less than 1%.
(1) Owner possesses both sole voting and investment powers for all Shares
listed, except as indicated in notes (2)-(7) below.
(2) Includes 1,173 Shares held in custodianship for Mr. Adair's children
under the Uniform Gifts to Minors Act of New York, for which Mr. Adair
disclaims beneficial ownership.
(3) Includes 38,650, 18,000, 16,000, 2,000, 6,990 and 90,240 Shares which may
be acquired upon exercise of warrants and options held by Messrs. Behlke,
Gerace, Kostusiak, 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.
(5) Messrs. Kostusiak and Lederer have entered into a Voting and Option
Agreement dated December 10, 2000, with Parent (the "Voting and Option
Agreement") with respect to 383,721 and 203,037 Shares directly held by
them. A complete copy of the Voting and Option Agreement was included as
an exhibit to the Amended Schedule 13D filed by Mr. Kostusiak with the
SEC on December 13, 2000. On January 16, 2001, Mr. Lederer donated 30,000
of such Shares to the Rochester Area Community Foundation (the "RACF").
(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.
5
<PAGE>
As a result of the Voting and Option Agreement and the subsequent transfer of
Shares by Mr. Lederer to RACF, Messrs. Kostusiak and Lederer, Parent, Purchaser
and RACF may be deemed to have formed a "group" within the meaning of Section
13(d) of the Exchange Act. Under Exchange Act Rule 13d-5(b)(1), each member of
such group would be deemed to beneficially own all Shares owned by each other
member of such group. Thus, each of Messrs. Kostusiak and Lederer, Parent,
Purchaser and RACF may be deemed to own 2,831,317 Shares, constituting 32.7% of
the outstanding Shares. Messrs. Kostusiak and Lederer and RACF expressly
declare that the filing of this Information Statement shall not be construed as
an admission, for the purposes of Sections 13(d) and (g) of the Exchange Act,
that any such person is the beneficial owner of any securities owned by any
other person.
6
<PAGE>
PRINCIPAL SHAREHOLDERS
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 Shares as of January 10, 2001. The share
ownership information for Mr. Kostusiak is given under "Management Security
Ownership."
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND ADDRESS NATURE OF SHARES PERCENT
OF BENEFICIAL OWNER BENEFICIALLY OWNED OF SHARES
------------------------------------------ -------------------- ----------
<S> <C> <C>
Ultrak, Inc. and Security Warranty, Inc. 1,335,100(1) 19.8%
301 Waters Ridge Drive
Lewisville, TX 75057
Robert Bosch GmbH 1,923,254(2) 22.2%
Robert Bosch Platz 1
70839 Gerlingen Schillerhoehe
Germany
and
Bosch Security Systems Corporation
c/o Coudert Brothers
1114 Avenue of the Americas,
New York, New York 10036
Dimensional Fund Advisors, Inc. 388,872(3) 5.8%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
USGM Securities, Inc. 357,456(4) 5.3%
51 East Market Street
Corning, NY 14830
</TABLE>
FOOTNOTES:
(1) Ultrak's and Security Warranty's share holdings are as reported on the
amended Schedule 13D jointly filed on December 11, 2000. Security
Warranty directly owns 1,335,000 Shares and Ultrak, its parent, directly
owns 100 Shares.
(2) Parent's and Purchaser's Share holdings are as reported in the Schedule
13D jointly filed on December 20, 2000. Parent directly owns 197,900 of
such Shares. In addition, Purchaser has the option to acquire 1,138,526
and 586,758 Shares pursuant to the Stock Option Agreement, dated December
10, 2000, between Parent and the Company (the "Stock Option Agreement")
and the Voting and Option Agreement respectively. Parent subsequently
assigned all of its rights and obligations under such agreements to
Purchaser.
(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 Shares) 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.
As a result of the Voting and Option Agreement and the subsequent transfer
of Shares by Mr. Lederer to RACF, Messrs. Kostusiak and Lederer, Parent,
Purchaser and RACF may be deemed to have formed a "group" within the meaning of
Section 13(d) of the Exchange Act. Under Exchange Act Rule 13d-5(b)(1), each
member of such group would be deemed to beneficially own all Shares owned by
each other member of such group. Thus, each of Messrs. Kostusiak and Lederer,
Parent, Purchaser and RACF may be deemed to own 2,831,317 Shares, constituting
32.7% of the outstanding Shares. Messrs. Kostusiak, Lederer and RACF expressly
declare that the filing of this Information Statement shall not be construed as
an admission, for the purposes of Sections 13(d) and (g) of the Exchange Act,
that any such person is the beneficial owner of any securities owned by any
other person. RACF's address is 500 East End Avenue, Rochester, NY 14607-1912.
7
<PAGE>
On June 30, 2000, Ultrak, Inc. 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 and the Company as a nominal
defendant. On October 25, 2000 Ultrak voluntarily dismissed lawsuit, with the
approval of the court on the ground that it was moot. Ultrak has filed a motion
seeking to recover from the Company approximately $350,000 in attorney's fees
and expenses related to the action. The Company intends to contest any claim by
Ultrak for an award of its fees and expenses.
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 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.
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 $8,000 for their service as Chairmen of the Company's
Compensation and Audit Committees of the Board of Directors. No fees were paid
to Mr. Adair for his services as Chairman of the Stock Option Committee. In
addition, the non-employee directors were each awarded a 2,000 share stock
option under the Company's Non-Employee Director Stock Option Plan. Except as
described in this paragraph, no director received any compensation for
attending any Board or committee meeting.
COMPLIANCE WITH EXCHANGE ACT SECTION 16(a)
To the Company's knowledge, based solely on review of Forms 3, 4 and 5
filed under Section 16(a) of the Securities Exchange Act of 1934, as amended,
and amendments thereto, all Section 16(a) filing requirements applicable to the
officers, directors and other principal shareholders of the Company were
complied with during fiscal 2000.
8
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the
compensation of the Company's Chief Executive Officer and four other most
highly compensated executive officers serving at the end of fiscal 2000 for
services in all capacities to the Company for the fiscal years 1998, 1999 and
2000.
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
----------------------------------------------------- -----------------------------
OTHER ANNUAL SECURITIES ALL OTHER
FISCAL SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) OPTIONS (#) ($)(3)
------------------------------- ------------- --------- -------- -------------- ------------- -------------
<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 Manager, 1998 114,324 0 -- (2) 10,000 2,734
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 $13,254
for car and gas expenses.
(2) Values are less than the minimum amount required to be reported.
(3) Represents contributions by the Company to accounts of the named
executive officers under the Company's 401(k) retirement savings plan.
(4) Mr. Gerace was hired by the Company on September 1, 1997 and thus was
only employed for part of fiscal 1998.
9
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information regarding stock options granted
to named executive officers during the fiscal year 2000. Each grant was for
incentive stock options to purchase Shares under the Company's 1992 or 1997
Stock Option Plans. These options are exercisable 40% after one year, 60% after
two years, 80% after three years and 100% after four years, and each is subject
to full vesting upon a change in ownership of the Company. The Company did not
grant any stock appreciation rights during fiscal 2000.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE OR FOR OPTION TERM
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION -----------------------
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 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 Shares on March 31, 2000 was $9.688 per Share. The
Company has not granted any stock appreciation rights.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT MARCH 31, 2000 ON MARCH 31, 2000
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE (#) EXERCISABLE/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>
10
<PAGE>
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.
11
<PAGE>
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. 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.
12
<PAGE>
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
13
<PAGE>
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 Shares, 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 benefits(1) (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.
If the Board determines that there is a "potential change in control," the
Company must transfer to an escrow account a 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 Lederer, respectively. For example,
assuming the Company's market capitalization is equal to its market
capitalization of $120,659,850 as of January 10, 2001, on the date of transfer,
the Company would be required to transfer to an escrow account $3,342,278 and
$2,690,715 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 occurs, the Company or the executive(2) 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.
----------
1 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.
2 Mr. Lederer may only give such notice or terminate his employment following
similar action by Mr. Kostusiak.
14
<PAGE>
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.
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 Shares 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
there is a potential change in control, 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).
15
<PAGE>
COMPARISON OF TOTAL SHAREHOLDER RETURN
The Company's Shares trade 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]
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG DETECTION SYSTEMS, INC., RUSSELL 2000, NASDAQ
AND THE ELECTRONIC INDUSTRY
<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.
16
<PAGE>
CERTAIN OTHER IMPORTANT INFORMATION
Further information regarding the Offer and the Merger is contained in the
Schedule 14D-9 filed by the Company with the SEC on December 20, 2000.
In connection with the Merger Agreement, Parent and the Company entered
into the Stock Option Agreement, pursuant to which, among other things, the
Company granted Parent an irrevocable option to purchase, subject to certain
conditions, up to 1,138,596 newly issued Shares on a fully diluted basis
(including shares issuable upon exercise of such option and all options
outstanding under the Company's stock option plans) at a price of $18.00 per
share in cash. Such agreement was included as Exhibit 10-b to the Current
Report on Form 8-K filed by the Company with the SEC on December 12, 2000 and
is incorporated herein by reference.
Parent also entered into the Voting and Option Agreement with Karl H.
Kostusiak, Chairman and Chief Executive Officer of the Company, and David B.
Lederer, Executive Vice President of the Company, pursuant to which, among
other things, such officers have agreed to validly tender (and not withdraw)
all Shares held by them pursuant to the Offer and have granted Parent an option
to purchase all such Shares at a price of $18.00 per Share in cash upon the
occurrence of certain events. Such agreement was included as Exhibit A to the
Amended Schedule 13D filed by Mr. Kostusiak with the SEC on December 13, 2000
and is incorporated herein by reference.
Parent subsequently assigned all of its rights and obligations under the
Stock Option Agreement and the Voting and Option Agreement to Purchaser.
On January 16, 2001, Mr. Lederer donated 30,000 of such Shares to RACF,
pursuant to an agreement between Mr. Lederer, RACF and Purchaser. The agreement
provides that RACF will assume all of Mr. Lederer's rights and obligations
under the Voting and Option Agreement with respect to such Shares. A copy of
this agreement was included as Exhibit A to the Schedule 13D filed by Mr.
Lederer with the SEC on January 17, 2001.
The share ownership of Parent and Purchaser is listed under "Principal
Shareholders." To the best of knowledge of the Company, after reasonable
inquiry, and based entirely on information provided by Parent and Purchaser:
1. None of Parent, Purchaser, any of the Designees or any associate or
majority-owned subsidiary of Parent or the Purchaser or any of the Designees
beneficially owns or has any right to acquire, directly or indirectly, any
Shares.
2. Except as provided herein or in the Merger Agreement, the Stock Option
Agreement and the Voting and Option Agreement, or as otherwise described
herein, none of Parent, the Purchaser nor, to the best knowledge of Parent and
the Purchaser, any of the Designees, has any contract, arrangement,
understanding or relationship with any other person with respect to any
securities of the Company, including, but not limited to, any contract,
arrangement, understanding or relationship concerning the transfer or voting of
such securities, finder's fees, joint ventures, loan or option arrangements,
puts or calls, guarantees of loans, guarantees against loss, guarantees of
profits, division of profits or loss or the giving or withholding of proxies.
3. Except as set forth herein, none of Parent, the Purchaser nor any of
the Designees, has had any business relationship or transaction with the
Company or any of its executive officers, directors or affiliates that is
required to be reported under the rules and regulations of the SEC applicable
to the Offer.
Information in this Information Statement regarding Parent, Purchaser, any
of the Designees or their affiliates was provided by Parent or Purchaser, and
the Company assumes no responsibility for such information.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DETECTION SYSTEMS, INC.
By: /s/ Frank J. Ryan
Frank J. Ryan
Vice President, Secretary and
Treasurer
Dated: January 17, 2001
18
