UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C
.
SCHEDULE
14A
Proxy
Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment
No. __)
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by the Registrant [ ]
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by a Party other than the Registrant [ ]
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the appropriate box:
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Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
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Definitive Proxy Statement
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Definitive Additional Materials
[ ]
Soliciting Material Pursuant to Rule 14a-12
Digital
Ally, Inc.
(Name
of Registrant as Specified in Its Charter)
(Name
of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment
of filing fee: (Check the appropriate box):
[X]
No fee required
[ ]
Fee computed on table below per Exchange Act Rule 14a-6(i)(1) and 0-11.
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Digital
Ally, Inc.
9705
Loiret Boulevard
Lenexa,
Kansas 66219
April
10, 2017
To
our Stockholders:
I
am pleased to invite you to attend the annual meeting of stockholders of Digital Ally, Inc. (“Digital”) to be held
on Wednesday, May 31, 2017 at 10:00 a.m., CDT, at our Company facility at 9705 Loiret Boulevard, Lenexa, Kansas 66219. Details
regarding admission to the annual meeting and the business to be conducted are more fully described in the accompanying notice
of annual meeting and proxy statement.
We
have elected to take advantage of Securities and Exchange Commission rules that allow issuers to furnish proxy materials to their
stockholders on the Internet. We believe that the rules will allow us to provide our stockholders with the information they need,
while lowering the costs of delivery and reducing the environmental impact of our annual meeting.
Your
vote is important. I hope that you will vote as soon as possible whether or not you plan to attend the annual meeting. Please
review the instructions on each of your voting options described in the proxy statement and the notice of annual meeting you received
in the mail.
Thank
you for your ongoing support of, and continued interest in, Digital Ally.
Sincerely,
Stanton
E. Ross
President,
Chief Executive Officer and
Chairman
of the Board
Admission
to the annual meeting will be limited to stockholders. Please note that an admission ticket and picture identification will be
required to enter the annual meeting. For stockholders of record, an admission ticket is printed on the back cover of these proxy
materials and on the notice of annual meeting. An individual arriving without an admission ticket will not be admitted unless
it can be verified that the individual was a Digital stockholder as of the record date. Backpacks, cameras, cell phones with cameras,
recording equipment and other electronic recording devices will not be permitted at the annual meeting. Digital reserves the right
to inspect any persons or items prior to their admission to the annual meeting. Failure to follow the meeting rules or permit
inspection will be grounds for exclusion from the meeting.
Table
of Contents
Digital
Ally, Inc.
9705
Loiret Blvd
Lenexa,
Kansas 66219
(913)
814-7774
NOTICE
OF ANNUAL MEETING OF STOCKHOLDERS
To
Be Held on Wednesday, May 31, 2017
The
2017 Annual Meeting of the Stockholders of Digital Ally, Inc., a Nevada corporation (“Digital,” the “Company,”
“we,” “ours” and “us”), will be held at the corporate facility located at 9705 Loiret Boulevard,
Lenexa, Kansas, 66219 on Wednesday, May 31, 2017 at 10:00 a.m., CDT, for the following purposes:
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1.
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To
elect four directors;
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2.
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To
approve an amendment to the 2015 Digital Ally, Inc. Stock Option and Restricted Stock Plan to increase the number of shares
reserved for issuance under such Plan by 500,000;
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3.
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To
ratify the appointment of RSM US LLP as our independent registered public accounting firm; and
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4.
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To
act upon such other business as may properly come before the annual meeting.
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The
foregoing items of business are more fully described in the proxy statement accompanying this notice. Only stockholders of record
at the close of business on April 3, 2017 will be entitled to vote at the annual meeting or any adjournment or postponement thereof.
You are cordially invited to attend the annual meeting. Whether or not you plan to attend the annual meeting, please sign, date
and return your proxy to us promptly. Your cooperation in signing and returning the proxy will help avoid further solicitation
expense.
Pursuant
to rules promulgated by the Securities and Exchange Commission, or the SEC, we have elected to provide access to our proxy materials
both by sending you this full set of proxy materials, including a notice of annual meeting, proxy statement, and 2016 Annual Report
to Stockholders, and by notifying you of the availability of our proxy materials on the Internet. Copies of our notice of annual
meeting, proxy statement and 2016 Annual Report to Stockholders are available at
www.digitalallyinc.com
.
By
order of the Board of Directors
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Stanton
E. Ross
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Chairman
of the Board, President and
Chief Executive Officer
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April
10, 2017
Lenexa,
Kansas
YOUR
VOTE IS IMPORTANT
WHETHER
OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, WE URGE YOU TO VOTE AND SUBMIT YOUR PROXY AS PROMPTLY AS POSSIBLE TO ENSURE THE
PRESENCE OF A QUORUM. TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE SIGN AND DATE THE ENCLOSED PROXY EXACTLY AS YOUR NAME
APPEARS ON IT AND RETURN IMMEDIATELY IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES, OR VOTE
BY PROXY ON THE INTERNET OR BY TELEPHONE.
DIGITAL
ALLY, INC.
PROXY
STATEMENT
FOR
THE 2017 ANNUAL MEETING OF STOCKHOLDERS
INFORMATION
CONCERNING SOLICITATION AND VOTING
General
The
enclosed proxy is solicited on behalf of the Board of Directors of Digital Ally, Inc., a Nevada corporation, for use at the 2016
Annual Meeting of Stockholders to be held Wednesday, May 31, 2017 at 10:00 a.m., CDT, or at any adjournment or postponement thereof,
for the purposes set forth herein and in the accompanying notice of annual meeting of stockholders. The annual meeting will be
held at our corporate facility, located at 9705 Loiret Boulevard, Lenexa, Kansas, 66219. The telephone number at that location
is (913) 814-7774.
These
proxy solicitation materials were first mailed on or about April 10, 2017 to all stockholders entitled to vote at the meeting.
Record
Date and Voting Securities
Stockholders
of record at the close of business on April 3, 2017 are entitled to notice of and to vote at the meeting. At the record date,
5,552,449 shares of our common stock were issued and outstanding and held of record by 89 stockholders.
Stockholder
of Record: Shares Registered in Your Name.
If on April 3, 2017, your shares were registered directly in your name with our
transfer agent, Action Stock Transfer Corporation, then you are a stockholder of record. As a stockholder of record, you may vote
in person at the annual meeting or vote by proxy. Whether or not you plan to attend the annual meeting, we urge you to complete
and return the enclosed proxy card or vote by proxy via telephone or the Internet as instructed on your proxy card to ensure your
vote is counted.
Beneficial
Owner: Shares Registered in the Name of a Broker or Bank.
If on April 3, 2017, your shares were held in an account at a brokerage
firm, bank, dealer, or other similar organization, then you are the beneficial owner of shares held in “street name”
and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered
the stockholder of record for purposes of voting at the annual meeting.
As
a beneficial owner, you have the right to direct your broker or other agent how to vote the shares in your account. If you do
not provide instructions for voting the shares that you beneficially own, the organization holding your shares
cannot
vote
them for you for Proposals 1 and 2, as follows: Proposal 1, the election of directors; and Proposal 2, to approve an amendment
to the 2015 Digital Ally, Inc. Stock Option and Restricted Stock Plan to increase the number of shares reserved under such Plan
by 500,000.
We
encourage you to provide voting instructions to the brokerage firm, bank, dealer, or other similar organization that is the record
holder of your shares. A number of brokers and banks enable beneficial holders to give voting instructions via telephone or the
internet. Please refer to the voting instructions provided by your bank or broker. You are also invited to attend the annual meeting.
However, since you are not the stockholder of record, you may not vote your shares in person at the annual meeting unless you
provide a valid proxy from your broker, bank or other custodian.
Revocability
of Proxies
You
may revoke your proxy at any time before it is voted at the annual meeting. To do this, you may either:
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sign
and return another proxy bearing a later date;
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provide
written notice of the revocation to Thomas J. Heckman, our Secretary, prior to the time we take the vote at the annual meeting;
or
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attend
the annual meeting and vote in person.
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Quorum
Requirement
A
quorum, which is a majority of our outstanding shares of common stock as of the record date, must be present or represented by
proxy to hold the annual meeting and to conduct business. Your shares will be counted as being present at the annual meeting if
you attend the meeting in person or if you submit a properly executed proxy card.
Voting
You
are entitled to one vote for each share of common stock that you hold on the record date.
Stockholder
of Record: Shares Registered in Your Name
.
If you are a stockholder of record, you may vote by proxy using the enclosed
proxy card, vote by proxy on the internet or by telephone, or vote in person at the annual meeting. Whether or not you plan to
attend the annual meeting, we urge you to vote by proxy to ensure your vote is counted. You may still attend the annual meeting
and vote in person if you have already voted by proxy.
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To
vote using the proxy card, simply complete, sign and date the enclosed proxy card and return it promptly in the envelope provided.
If you return your signed proxy card to us before the annual meeting, we will vote your shares as you direct.
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To
vote on the internet, please follow the instructions provided on your proxy card.
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To
vote by telephone, please follow the instructions provided on your proxy card.
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To
vote in person, come to the annual meeting and we will give you a ballot when you arrive.
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If
you hold your shares in your own name as a holder of record, you may instruct the proxy holders how to vote your common stock
by signing, dating and mailing the proxy card in the postage paid reply envelope that we have provided, or vote by proxy on the
internet or by telephone vote by proxy on the internet or by telephone, as noted above. Of course, you may also choose to come
to the annual meeting and vote your shares in person. The proxy holders will vote your shares in accordance with those instructions.
If you sign and return a proxy card without giving specific voting instructions, your shares will be voted as recommended by our
Board of Directors.
We
provide internet proxy voting to allow you to vote your shares online, with procedures designed to ensure the authenticity and
correctness of your proxy vote instructions. However, please be aware that you must bear any costs associated with your internet
access, such as usage charges from your internet provider.
Beneficial
Owner: Shares Registered in the Name of Broker or Bank.
If you are a beneficial owner of shares registered in the name of
your broker, bank, or other agent, you should have received instructions for granting proxies with these proxy materials from
that organization rather than from us. A number of brokers and banks enable beneficial holders to give voting instructions via
telephone or the internet. Please refer to the voting instructions provided by your bank or broker. To vote in person at the annual
meeting, you must provide a valid proxy from your broker, bank, or other custodian. Follow the instructions from your broker or
bank included with these proxy materials, or contact your broker or bank to request a proxy form.
If
you return a signed and dated proxy card without marking any voting selections, your shares will only be voted
for
Proposal
3, and
not
for Proposals 1 or 2. Thus, if you are not a record holder and hold your shares through a bank or broker,
you must provide voting instructions to the record holder of the shares in accordance with its requirements in order for your
shares to be properly voted for the following proposals: Proposal 1, the election of directors; and Proposal 2, to approve an
amendment to the 2015 Digital Ally, Inc. Stock Option and Restricted Stock Plan to increase the number of shares reserved for
issuance under such Plan by 500,000. If any other matter is properly presented at the meeting, your proxy (one of the individuals
named on your proxy card) will vote your shares using his or her best judgment.
If
you beneficially own your shares in street name and you do not instruct your bank or broker how to vote on Proposals 1 and 2,
no votes will be cast on your behalf at the annual meeting as to these proposals. Your bank or broker will, however, have discretion
to vote any uninstructed shares on Proposal 3.
Abstentions
and Broker Non-Votes
If
you return a proxy card that indicates an abstention from voting on all matters, the shares represented will be counted as present
for the purpose of determining a quorum, but they will not be voted on any matter at the annual meeting. Consequently, if you
abstain from voting on Proposals 1 through 3, your abstention will have no effect on the outcome of the vote with respect to these
proposals.
If
your shares are held by your broker as your nominee (that is, in “street name”), you will need to obtain a proxy form
from the institution that holds your shares and follow the instructions included on that form regarding how to instruct your broker
to vote your shares. If you do not give instructions to your broker, your broker can vote your shares with respect to “discretionary”
items, but not with respect to “non-discretionary” items. Discretionary items are proposals considered routine under
the rules of the New York Stock Exchange (“NYSE”) on which your broker may vote shares held in street name without
your voting instructions. On non-discretionary items for which you do not give your broker instructions, the shares will be treated
as broker non-votes. Under NYSE rules, any election of a member of the Board of Directors, whether contested or uncontested, is
considered “non-discretionary” and therefore brokers are not permitted to vote your shares held in street name for
the election of directors in the absence of instructions from you. Proposals 1 and 2 are “non-discretionary.” Therefore,
if you hold your shares through a broker, nominee, fiduciary or other custodian, your shares will not be voted on those proposals
unless you provide voting instructions to the record holder.
A
“broker non-vote” occurs when a broker expressly instructs on a proxy card that it is not voting on a matter, whether
routine or non-routine. Broker non-votes are counted for the purpose of determining the presence or absence of a quorum, but are
not counted for determining the number of votes cast for or against a proposal. Your broker will have discretionary authority
to vote your shares on Proposal 3 only.
Stockholder
List
The
stockholder list as of the record date will be available for examination by any stockholder at our corporate office, 9705 Loiret
Boulevard, Lenexa, Kansas 66219, beginning May 16, 2017, which is at least ten business days prior to the date of the annual meeting
and the stockholder list will be available at the annual meeting.
Proxy
Solicitation Costs
This
solicitation of proxies is made by our Board of Directors, and we will bear all related costs. None of our directors intends to
oppose any action for which stockholder approval is being solicited. In addition, we may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding solicitation materials to such beneficial owners. Proxies
may also be solicited by certain of our directors, officers and regular employees, without additional compensation, personally
or by telephone or facsimile.
Our
Voting Recommendations
Our
Board of Directors recommends that you vote:
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FOR
the four nominees to the Board of Directors;
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FOR
an amendment to the 2015 Digital Ally, Inc. Stock Option and Restricted Stock Plan to increase the number of shares reserved
for issuance under such Plan by 500,000;
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FOR
ratification of the appointment of RSM US LLP as our independent registered public accounting firm; and
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On
such other matters that may properly come before the annual meeting in accordance with the best judgment of the individual
proxies named in the proxy.
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Voting
Results
The
preliminary voting results will be announced at the annual meeting. The final voting results will be calculated by our Inspector
of Elections and published in our report on Form 8-K within four business days of the meeting.
Stockholders
Sharing the Same Address
We
have adopted a procedure called “householding,” which has been approved by the Securities and Exchange Commission.
Under this procedure, we are delivering only one copy of the annual report and proxy statement to multiple stockholders who share
the same address, unless we have received contrary instructions from an affected stockholder. This procedure reduces our printing
and mailing costs and fees. Stockholders who participate in householding will continue to receive separate proxy cards.
We
will deliver, promptly upon written or oral request, a separate copy of the annual report and the proxy statement to any stockholder
at a shared address to which a single copy of either of those documents was delivered. To receive a separate copy of the annual
report or proxy statement, you may write or call our Investor Relations Department at 9705 Loiret Boulevard, Lenexa, Kansas 66219,
telephone (913) 814-7774. Any stockholders of record who share the same address and currently receive multiple copies of our annual
report and proxy statement and who wish to receive only one copy of these materials per household in the future should contact
our Investor Relations Department at the address or telephone number listed above to participate in the householding program.
A
number of brokerage firms have instituted householding. If you hold your shares in “street name,” please contact your
bank, broker, or other holder of record to request information about householding.
Deadline
for Receipt of Stockholder Proposals for 2018 Annual Meeting of Stockholders
As
a stockholder, you may be entitled to present proposals for action at an upcoming meeting if you comply with the requirements
of the proxy rules established by the Securities and Exchange Commission and our bylaws. Stockholders wishing to present a proposal
at our 2018 annual meeting of stockholders must submit such proposal to us by November 15, 2017, if they wish it to be eligible
for inclusion in the proxy statement and form of proxy relating to that meeting. In connection with our 2018 annual meeting of
stockholders, we intend to solicit proxies granting discretionary authority to the proxyholders to vote on any matters submitted
by stockholders by November 15, 2017. In addition, under our bylaws, a stockholder wishing to make a proposal at the 2018 annual
meeting of stockholders must submit such a proposal to us by November 15, 2017. Any such proposals should be in compliance with
our bylaws and should be submitted to Digital Ally, Inc., 9705 Loiret Boulevard, Lenexa, Kansas 66219, Attention: Thomas J. Heckman,
Secretary.
Other
Matters
Other
than the proposals listed above, our Board of Directors does not intend to present any other matters to be voted on at the meeting.
Our Board of Directors is not currently aware of any other matters that will be presented by others for action at the meeting.
However, if other matters are properly presented at the meeting and you have signed and returned your proxy card, the proxy holders
will have discretion to vote your shares on these matters to the extent authorized under the Securities Exchange Act of 1934,
as amended.
IMPORTANT
NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2017 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 31, 2017:
Copies
of our notice of annual meeting, proxy statement and 2016 Annual Report to Stockholders are available online at
www.digitalallyinc.com.
PROPOSAL
ONE
ELECTION
OF DIRECTORS
Nominees
A
Board of four directors is to be elected at the 2017 Annual Meeting of Stockholders. Unless otherwise instructed, the proxy holders
will vote the proxies received by them for the four nominees named below, all of which are presently directors of Digital.
If
any nominee is unable or declines to serve as a director at the time of the annual meeting, the proxies will be voted for any
nominee who shall be designated by the present Board of Directors to fill the vacancy. We are not aware of any nominee who will
be unable or will decline to serve as a director. The term of office for each person elected as a director will continue until
the next annual meeting of stockholders or until a successor has been elected and qualified. The names of the nominees and certain
information about them as of the date of this proxy statement are set forth below:
Name
of Nominee
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Principal
Occupation
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Age
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Director
Since
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Stanton
E. Ross
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Chairman,
President and Chief Executive Officer
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55
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2005
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Leroy
C. Richie (1)(2)(3)
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Lead
Outside Director, Chairman of the Nominating and Governance Committee and Compensation Committee and attorney
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75
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2005
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Daniel
F. Hutchins (1)
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Certified
Public Accountant; Chairman of Audit Committee
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61
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2007
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Michael
J. Caulfield (1)(2)(3)
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Investment
banking-retired
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61
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2016
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(1)
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Member
of Audit Committee
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(2)
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Member
of Compensation Committee
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(3)
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Member
of Nominating and Governance Committee and Compensation Committee
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Stanton
E. Ross
has served as Chairman, President and Chief Executive Officer since September 2005. From March 1992 to June 2005,
Mr. Ross was the Chairman and President of Infinity Energy Resources, Inc., a publicly held oil and gas exploration and development
company (“Infinity”), and served as an officer and director of each of Infinity’s subsidiaries. He resigned
all his positions with Infinity in June 2005, except Chairman, but was reappointed President in October 2006. Mr. Ross served
on the board of directors of Studio One Media, Inc., a publicly held company, from January 2013 to March 2013. From 1991 until
March 1992, he founded and served as President of Midwest Financial, a financial services corporation involved in mergers, acquisitions
and financing for corporations in the Midwest. From 1990 to 1991, Mr. Ross was employed by Duggan Securities, Inc., an investment
banking firm in Lenexa, Kansas, where he primarily worked in corporate finance. From 1989 to 1990, he was employed by Stifel,
Nicolaus & Co., a member of the New York Stock Exchange, where he was an investment executive. From 1987 to 1989, Mr. Ross
was self-employed as a business consultant. From 1985 to 1987, Mr. Ross was President and founder of Kansas Microwave, Inc., which
developed a radar detector product. From 1981 to 1985, he was employed by Birdview Satellite Communications, Inc., which manufactured
and marketed home satellite television systems, initially as a salesman and later as National Sales Manager. Mr. Ross estimates
he devoted most of his time to Digital Ally and the balance to Infinity in 2016. In late 2007, Infinity sold a substantial portion
of its operating assets and has not required a substantial amount of his time since such point. Mr. Ross holds no public company
directorships other than with the Company and Infinity and has not held any others during the previous five years, except for
Studio One Media, Inc. The Company believes that Mr. Ross’s broad entrepreneurial, financial and business expertise and
his experience with micro-cap public companies and his role as President and Chief Executive Officer give him the qualifications
and skills to serve as a Director.
Leroy
C. Richie
has been the Lead Outside Director of Digital Ally since September 2005. He is also the Chairman of the Compensation
Committee and Nominating and Governance Committee and a member of the Audit Committee. Since June 1, 1999 Mr. Richie has been
a director of Infinity Energy Resources, Inc., a publicly held oil and gas exploration and development company. Additionally,
since 2008, Mr. Richie served as a member of the boards of directors of Columbia Mutual Funds, (or mutual fund companies acquired
by or merged with Columbia Mutual Funds), a family of investment companies managed by Ameriprise Financial, Inc. From 2004 to
2015, he was of counsel to the Detroit law firm of Lewis & Munday, P.C. He holds no other public directorships and has not
held any others during the previous five years, except for OGE Energy Corp. (2007-2014) and Kerr-McGee Corporation (1998-2005).
Mr. Richie serves as a member of the Board of Trustees and Chairman of the Henry Ford Health System, in Detroit. Mr. Richie was
formerly Vice President of Chrysler Corporation and General Counsel for automotive legal affairs, where he directed all legal
affairs for its automotive operations from 1986 until his retirement in 1997. Before joining Chrysler, he was an associate with
the New York law firm of White & Case (1973-1978), and served as director of the New York office of the Federal Trade Commission
(1978-1983). Mr. Richie received a B.A. from City College of New York, where he was valedictorian, and a J.D. from the New York
University School of Law, where he was awarded an Arthur Garfield Hays Civil Liberties Fellowship. The Company believes that Mr.
Richie’s extensive experience as a lawyer and as an officer or director of public companies gives him the qualifications
and skills to serve as a Director.
Daniel
F. Hutchins
was elected a Director in December 2007. He serves as Chairman of the Audit Committee and is the Board’s
financial expert. Mr. Hutchins, a Certified Public Accountant, is a Principal with the accounting firm of Hutchins & Haake,
LLC and currently serves as a director and the Chief Financial Officer of Infinity Energy Resources, Inc., a publicly held oil
and gas exploration and development company, of which Stanton E. Ross is the Chairman and President. Mr. Hutchins has served as
an instructor for the Becker CPA exam with the Keller Graduate School of Management and has over 17 years of teaching experience
preparing CPA candidates for the CPA exam. He has 39 years of public accounting experience, including five years with Deloitte
& Touche, LLP. He has served on the boards of various non-profit groups and is a member of the American Institute of Certified
Public Accountants. Mr. Hutchins earned his Bachelor of Business Administration degree in Accounting at Washburn University in
Topeka, Kansas. Mr. Hutchins holds no other public company directorships and has not held any others during the previous five
years. The Company believes that Mr. Hutchins’ significant experience in finance and accounting gives him the qualifications
and skills to serve as a Director.
Michael
J. Caulfield
was elected a Director in May 2016. He is a member of the Audit Committee, Compensation Committee and Nominating
and Governance Committee. He served as Vice President – Strategic Development of the Company from June 1 2009 to January
11, 2012. Mr. Caulfield was most recently (2012-2016) a Vice-Chairman at Teneo Holdings, LLC, a global advisory firm where he
was responsible for the firm’s investment banking relationships with a broad range of industrial companies. From 2006 to
2009, Mr. Caulfield served as a Managing Director at Banc of America Securities (“BAS”), where he was responsible
for the merger, acquisition, divestiture and restructuring advisory services for a number of large public and private companies.
He was also in charge of BAS’s global investment banking activities involving the Safety, Security, Engineering and Construction
Industries. Prior to joining BAS, Mr. Caulfield spent six years (2000-2006) as a Managing Director with Morgan Stanley in New
York City, leading that global investment banking firm’s efforts in the Aerospace and Defense Industries. He was also responsible
for the investment banking relationships with a number of Morgan Stanley’s largest clients. From 1989 to 2000, he worked
at General Electric Capital Corp., where he served as a Managing Director and head of the Corporate Finance Group. In this capacity,
he advised GE Capital and the industrial divisions of General Electric on such issues as capital structuring, mergers and acquisitions,
and private equity transactions. Mr. Caulfield received an MBA from the Wharton School of the University of Pennsylvania and a
B.S. Degree from the University of Minnesota.
Our
Directors are elected annually and hold office until the next annual meeting of our stockholders or until their successors are
elected and qualified. Officers are elected annually and serve at the discretion of the Board of Directors. There is no family
relationship between any of our directors, director nominees and executive officers. Board vacancies are filled by a majority
vote of the Board.
Vote
Required and Board Recommendation
If
a quorum is present and voting, the four nominees receiving the greatest number of votes will be elected to the Board of Directors.
Votes withheld from any nominee will be counted for purposes of determining the presence or absence of a quorum for transaction
of business at the meeting, but will have no other legal effect upon the election of directors under Nevada law.
OUR
BOARD OF DIRECTORS RECOMMENDS THAT OUR STOCKHOLDERS VOTE FOR EACH OF THE FOUR NOMINEES NAMED ABOVE.
Board
of Directors and Committee Meetings
Our
Board of Directors held eight meetings and acted a number of times by unanimous consent resolutions during the fiscal year ended
December 31, 2016. Each of our directors attended at least 75% of the meetings of the Board of Directors and the committees on
which he served in the fiscal year ended December 31, 2016. Our directors are expected, absent exceptional circumstances, to attend
all Board meetings and meetings of committees on which they serve, and are also expected to attend our annual meeting of stockholders.
All directors then in office attended the 2016 annual meeting of stockholders.
Committees
of the Board of Directors
Our
Board of Directors currently has three committees: an Audit Committee, a Compensation Committee and a Nominating and Governance
Committee. Each committee has a written charter approved by the Board of Directors outlining the principal responsibilities of
the committee. These charters are also available on the Investor Relations page of our website. All our directors, other than
our Chairman and Chief Executive Officer, have met in executive sessions without management present on a regular basis in 2016
and 2017.
Audit
Committee
Our
Audit Committee appoints the Company’s independent auditors, reviews audit reports and plans, accounting policies, financial
statements, internal controls, audit fees, and certain other expenses and oversees our accounting and financial reporting process.
Specific responsibilities include selecting, hiring and terminating our independent auditors; evaluating the qualifications, independence
and performance of our independent auditors; approving the audit and non-audit services to be performed by our auditors; reviewing
the design, implementation, adequacy and effectiveness of our internal controls and critical accounting policies; overseeing and
monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate
to financial statements or accounting matters; reviewing any earnings announcements and other public announcements regarding our
results of operations in conjunction with management and our public auditors; conferring with management and the independent auditors
regarding the effectiveness of internal controls, financial reporting processes and disclosure controls; consulting with management
and the independent auditors regarding Company policies governing financial risk management; reviewing and discussing reports
from the independent auditors on critical accounting policies used by the Company; establishing procedures, as required under
applicable law, for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal
accounting controls or auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable
accounting or auditing matters; reviewing and approving related-person transactions in accordance with the Company’s policies
and procedures with respect to related-person transactions and applicable rules; reviewing the financial statements to be included
in our annual report on Form 10-K; discussing with management and the independent auditors the results of the annual audit and
the results of quarterly reviews and any significant changes in our accounting principles; and preparing the report that the Securities
and Exchange Commission requires in our annual proxy statement. The report of the Audit Committee for the year-ended December
31, 2016 is included in this proxy statement.
The
Audit Committee is comprised of three Directors, each of whom is independent, as defined by the rules and regulations of the Securities
and Exchange Commission. The Audit Committee held four meetings during the year-ended December 31, 2016. On September 22, 2005,
the Company created the Audit Committee and adopted a written charter for it. The members of our Audit Committee are Daniel F.
Hutchins, Leroy C. Richie and Michael J. Caulfield. The Board of Directors determined that Mr. Hutchins qualifies as an “audit
committee financial expert,” as defined under the rules and regulations of the Securities and Exchange Commission, and is
independent as noted above.
Under
the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by the Company’s independent accountants must
be approved in advance by the Audit Committee to assure that such services do not impair the accountants’ independence from
the Company. Accordingly, the Audit Committee has adopted an Audit and Non-Audit Services Pre-Approval Policy (the “Policy”)
that sets forth the procedures and the conditions pursuant to which services to be performed by the independent accountants are
to be pre-approved. Pursuant to the Policy, certain services described in detail in the Policy may be pre-approved on an annual
basis together with pre-approved maximum fee levels for such services. The services eligible for annual pre-approval consist of
services that would be included under the categories of Audit Fees, Audit-Related Fees and Tax Fees in the table, as well as services
for limited review of actuarial reports and calculations. If not pre-approved on an annual basis, proposed services must otherwise
be separately approved prior to being performed by the independent accountants. In addition, any services that receive annual
pre-approval but exceed the pre-approved maximum fee level also will require separate approval by the Audit Committee prior to
being performed. The Audit Committee may delegate authority to pre-approve audit and non-audit services to any member of the Audit
Committee, but may not delegate such authority to management.
Compensation
Committee
Our
Compensation Committee assists our Board of Directors in determining the development plans and compensation of our officers, directors
and employees. Specific responsibilities include approving the compensation and benefits of our executive officers; reviewing
the performance objectives and actual performance of our officers; administering our stock option and other equity compensation
plans; and reviewing and discussing with management the compensation discussion and analysis that the Securities and Exchange
Commission requires in our future Form 10-Ks and proxy statements.
Our
Compensation Committee is comprised of two Directors, whom the Board considers to be independent under the rules of the Securities
and Exchange Commission. The members of our Compensation Committee are Leroy C. Richie, Chairman, and Michael J. Caulfield. The
Compensation Committee held two meetings and acted a number of times by unanimous written consent resolutions during the year-ended
December 31, 2016. Mr. Ross, our Chief Executive Officer, does not participate in the determination of his own compensation or
the compensation of directors. However, he makes recommendations to the Compensation Committee regarding the amount and form of
the compensation of the other executive officers and key employees, and he often participates in the Compensation Committee’s
deliberations about such persons’ compensation. Thomas J. Heckman, our Chief Financial Officer, also assists the Compensation
Committee in its deliberations regarding executive officer, director and employee compensation. No other executive officers participate
in the determination of the amount or the form of the compensation of executive officers or directors. The Compensation Committee
does not utilize the services of an independent compensation consultant to assist in its oversight of executive and director compensation.
On September 22, 2007, the Board of Directors adopted a written charter for the Compensation Committee
Nominating
and Governance Committee
Our
Nominating and Governance Committee assists our Board of Directors by identifying and recommending individuals qualified to become
members of our Board of Directors, reviewing correspondence from our stockholders, and establishing, evaluating and overseeing
our corporate governance guidelines. Specific responsibilities include the following: evaluating the composition, size and governance
of our Board of Directors and its committees and making recommendations regarding future planning and appointing directors to
our committees; establishing a policy for considering stockholder nominees for election to our Board of Directors; and evaluating
and recommending candidates for election to our Board of Directors.
Our
Nominating and Governance Committee strives for a Board composed of individuals who bring a variety of complementary skills, expertise
or background and who, as a group, will possess the appropriate skills and experience to oversee our business. The diversity of
the members of the Board relates to the selection of its nominees. While the Committee considers diversity and variety of experiences
and viewpoints to be important factors, it does not believe that a director nominee should be chosen or excluded solely or largely
because of race, color, gender, national origin or sexual orientation or identity. In selecting a director nominee for recommendation
to our Board, our Nominating and Governance Committee focuses on skills, expertise or background that would complement the existing
members on the Board. Accordingly, although diversity may be a consideration in the Committee’s process, the Committee and
the Board of Directors do not have a formal policy regarding the consideration of diversity in identifying director nominees.
When
the Nominating and Governance Committee has either identified a prospective nominee or determined that an additional or replacement
director is required, the Nominating and Governance Committee may take such measures as it considers appropriate in connection
with its evaluation of a director candidate, including candidate interviews, inquiry of the person or persons making the recommendation
or nomination, engagement of an outside search firm to gather additional information, or reliance on the knowledge of the members
of the Board of Directors or management. In its evaluation of director candidates, including the members of the Board eligible
for re-election, the Nominating and Governance Committee considers a number of factors, including: the current size and composition
of the Board of Directors, the needs of the Board of Directors and the respective committees of the Board, and such factors as
judgment, independence, character and integrity, age, area of expertise, diversity of experience, length of service and potential
conflicts of interest.
The
Nominating and Governance Committee of the Board selects director nominees and recommends them to the full Board of Directors.
In relation to such nomination process, the Committee:
●
|
determines
the criteria for the selection of prospective directors and committee members;
|
|
|
●
|
reviews
the composition and size of the Board and its committees to ensure proper expertise and diversity among its members;
|
|
|
●
|
evaluates
the performance and contributions of directors eligible for re-election;
|
|
|
●
|
determines
the desired qualifications for individual directors and desired skills and characteristics for the Board;
|
|
|
●
|
identifies
persons who can provide needed skills and characteristics;
|
|
|
●
|
screens
possible candidates for Board membership;
|
|
|
●
|
reviews
any potential conflicts of interests between such candidates and the Company’s interests; and
|
|
|
●
|
shares
information concerning the candidates with the Board, and solicit input from other directors.
|
The
Nominating and Governance Committee has specified the following minimum qualifications that it believes must be met by a nominee
for a position on the Board: the highest personal and professional ethics and integrity; proven achievement and competence in
the nominee’s field and the ability to exercise sound business judgment; skills that are complementary to those of the existing
Board; the ability to assist and support management and make significant contributions to our success; the ability to work well
with the other directors; the extent of the person’s familiarity with the issues affecting our business; an understanding
of the fiduciary responsibilities that are required of a member of the Board of Directors; and the commitment of time and energy
necessary to diligently carry out those responsibilities. A candidate for director must agree to abide by our Code of Ethics and
Conduct.
After
completing its evaluation, the Nominating and Governance Committee makes a recommendation to the full Board of Directors as to
the persons who should be nominated to the Board, and the Board of Directors determines the nominees after considering the recommendation
and report of the Committee.
Our
Nominating and Governance Committee is comprised of three Directors, whom the Board considers to be independent under the rules
of the Securities and Exchange Commission. The Nominating and Governance Committee held one meeting during the year ended December
31, 2016. The members of our Nominating and Governance Committee are Leroy C. Richie, who serves as Chairman, and Michael J. Caulfield.
The Committee was created by our Board of Directors on December 27, 2007, when the Board of Directors adopted a written charter,
which was amended in February 2010.
Compensation
Committee Interlocks and Insider Participation
The
Compensation Committee is made up of two independent, non-employee directors, Messrs. Richie and Caulfield. No interlocking relationship
exists between the members of our Compensation Committee and the board of directors or compensation committee of any other company.
Board
of Directors’ Role in the Oversight of Risk Management
We
face a variety of risks, including credit, liquidity, and operational risks. In fulfilling its risk oversight role, our Board
of Directors focuses on the adequacy of our risk management process and overall risk management system. Our Board of Directors
believes that an effective risk management system will (i) adequately identify the material risks that we face in a timely manner;
(ii) implement appropriate risk management strategies that are responsive to our risk profile and specific material risk exposures;
(iii) integrate consideration of risk and risk management into our business decision-making; and (iv) include policies and procedures
that adequately transmit necessary information regarding material risks to senior executives and, as appropriate, to the Board
or relevant committee.
The
Board of Directors has designated the Audit Committee to take the lead in overseeing risk management at the Board of Directors
level. Accordingly, the Audit Committee schedules time for periodic review of risk management, in addition to its other duties.
In this role, the Audit Committee receives reports from management, certified public accountants, outside legal counsel, and other
advisors, and strives to generate serious and thoughtful attention to our risk management process and system, the nature of the
material risks we face, and the adequacy of our policies and procedures designed to respond to and mitigate these risks.
Although
the Board of Directors has assigned the primary risk oversight to the Audit Committee, it also periodically receives information
about our risk management system and the most significant risks that we face. This is principally accomplished through Audit Committee
reports to the Board of Directors and summary versions of the briefings provided by management and advisors to the Audit Committee.
In
addition to the formal compliance program, our Board of Directors and the Audit Committee encourage management to promote a corporate
culture that understands risk management and incorporates it into our overall corporate strategy and day-to-day business operations.
Our risk management structure also includes an ongoing effort to assess and analyze the most likely areas of future risk for us.
As a result, the Board of Directors and the Audit Committee periodically ask our executives to discuss the most likely sources
of material future risks and how we are addressing any significant potential vulnerability.
Board
Leadership Structure
Our
Board of Directors does not have a policy on whether the roles of Chief Executive Officer and Chairman of the Board of Directors
should be separate and, if they are to be separate, whether the Chairman of the Board should be selected from the non-employee
directors or be an employee. Our Board of Directors believes that it should be free to make a choice from time to time in any
manner that is in the best interest of us and our stockholders. The Board of Directors believes that Mr. Ross’s service
as both Chief Executive Officer and Chairman of the Board is in the best interest of us and our stockholders. Mr. Ross possesses
detailed and in-depth knowledge of the issues, opportunities and challenges we face and is thus best positioned to develop agendas,
with the input of Mr. Richie, the lead director, to ensure that the Board’s time and attention are focused on the most critical
matters. His combined role enables decisive leadership, ensures clear accountability, and enhances our ability to communicate
our message and strategy clearly and consistently to our stockholders, employees, customers and suppliers, particularly during
times of turbulent economic and industry conditions.
Our
Board of Directors also believes that a lead director is part of an effective Board leadership structure. To this end, the Board
has appointed Mr. Richie as the lead director. The independent directors meet regularly in executive sessions at which only they
are present, and the lead director chairs those sessions. As the lead director, Mr. Richie calls meetings of the independent directors
as needed; sets the agenda for meetings of the independent directors; presides at meetings of the independent directors; is the
principal liaison on Board issues between the independent directors and the Chairman and between the independent directors and
management; provides feedback to the Chairman and management on the quality, quantity and timeliness of information sent to the
Board; is a member of the Compensation Committee that evaluates the CEO’s performance; and oversees the directors’
evaluation of the Board’s overall performance. The Nominating and Governance Committee and the Board believe that its leadership
structure, which includes the appointment of an independent lead director, is appropriate because it, among other things, provides
for an independent director who gives board member leadership and each of the directors, other than Mr. Ross, is independent.
Our Board of Directors believes that the independent directors provide effective oversight of management.
Stockholder
Communications with the Board of Directors
Stockholders
may communicate with the Board of Directors by writing to us as follows: Digital Ally, Inc., attention: Corporate Secretary, 9705
Loiret Boulevard, Lenexa, Kansas 66219. Stockholders who would like their submission directed to a member of the Board of Directors
may so specify and the communication will be forwarded as appropriate.
Policy
for Director Recommendations and Nominations
Our
Nominating and Governance Committee will consider candidates for Board membership suggested by Board members, management and our
stockholders. The policy of our Nominating and Governance Committee is to consider recommendations for candidates to the Board
of Directors from any stockholder of record in accordance with our bylaws. A director candidate recommended by our stockholders
will be considered in the same manner as a nominee recommended by a Board member, management or other sources. In addition, a
stockholder may nominate a person directly for election to the Board of Directors at an annual meeting of stockholders, provided
the stockholder meets the requirements set forth in our bylaws. We do not pay a fee to any third party to identify or evaluate
or assist in identifying or evaluation potential nominees.
Stockholder
Recommendations for Director Nominations
.
Stockholder recommendations for director nominations may be submitted
to the Company at the following address: Digital Ally, Inc., Attention: Corporate Secretary, 9705 Loiret Boulevard, Lenexa, Kansas
66219. Such recommendations will be forwarded to the Nominating Committee for consideration, provided that they are accompanied
by sufficient information to permit the Board to evaluate the qualifications and experience of the nominees, and they are in time
for the Nominating and Governance Committee to do an adequate evaluation of the candidate before the annual meeting of stockholders.
The submission must be accompanied by a written consent of the individual to stand for election if nominated by the Board of Directors
and to serve if elected and to cooperate with a background check.
Stockholder
Nominations of Directors.
Our bylaws provide that in order for a stockholder to nominate a director at an annual meeting,
the stockholder must give timely written notice to our Secretary and such notice must be received at our principal executive offices
not less than 120 days before the date of our release of the proxy statement to stockholders in connection with our previous year’s
annual meeting of stockholders. Such stockholder’s notice shall include, with respect to each person whom the stockholder
proposes to nominate for election as a director, all information relating to such nominee, including such person’s written
consent to being named in the proxy statement as a nominee, serving as a director, that is required under the Securities Exchange
Act of 1934, as amended, and cooperating with a background investigation. In addition, the stockholder must include in such notice
his name and address, as they appear on our records, of the stockholder proposing the nomination of such person, and the name
and address of the beneficial owner, if any, on whose behalf the nomination is made, the class and number of shares of our capital
stock that are owned beneficially and of record by such stockholder of record and by the beneficial owner, if any, on whose behalf
the nomination is made, and any material interest or relationship that such stockholder of record and/or the beneficial owner,
if any, on whose behalf the nomination is made may respectively have in such business or with such nominee. At the request of
the Board of Directors, any person nominated for election as a director shall furnish to our Secretary the information required
to be set forth in a stockholder’s notice of nomination that pertains to the nominee.
To
be timely in the case of a special meeting or if the date of the annual meeting is changed by more than thirty (30) days from
such anniversary date, a stockholder’s notice must be received at our principal executive offices no later than the close
of business on the tenth (10
th
) day following the earlier of the day on which notice of the meeting date was mailed
or public disclosure of the meeting date was made.
Code
of Ethics and Conduct
Our
Board of Directors has adopted a
Code of Ethics and Conduct
that is applicable to all our employees, officers and directors.
Our
Code of Ethics and Conduct
is intended to ensure that our employees act in accordance with the highest ethical standards.
The
Code of Ethics and Conduct
is available on the Investor Relations page of our website at
http://www.digitalally.com.
and the
Code of Ethics and Conduct
was filed as an exhibit to our annual report on Form 10-K filed March 4, 2008.
Director
Compensation
Our
non-employee directors received the restricted stock grants noted in the section below entitled “Director Compensation”
for their service on the Board of Directors in 2016, including on the Audit, Nominating and Governance and Compensation Committees.
Effective
September 2, 2011, our Board of Directors terminated cash compensation to all non-employee Board members as part of the Company’s
cost reduction program. The non-employee directors who attended Board meetings and meetings as members of various committees of
the Board were reimbursed for their out-of-pocket costs in attending the meetings of the Board of Directors.
During
2015 and 2016, our Board of Directors reinstituted the payment of cash compensation to our non-employee Board members as noted
in the section below entitled “Director Compensation” for their service on the Board of Directors in 2016, including
on the Audit, Nominating and Governance and Compensation Committees. Neither the chairmen of each committee of the Board nor any
members of any committee received any additional cash compensation for their service on such committees in 2016.
In
May 2016, we granted to Messrs. Richie, Kaplan, Caulfield and Hutchins each options to acquire 10,000 shares of common stock at
an exercise price of $3.92 per share for their service on the Board until the next annual meeting of stockholders with vesting
to occur on May 1, 2017 provided each person has remained a director at such dates. Mr. Kaplan resigned from the board of directors
effective September 9, 2016 for health reasons. In connection with his resignation and in recognition of his many years of service,
we accelerated the vesting of the stock options awarded to him in May 2016 as a director, paid him the $45,000 balance of his
cash compensation as a director for 2016/2017, vested any other unvested stock options and restricted stock awards and extended
the termination date of his stock options to May 1, 2018. Further, the Board of Directors gave him the honorary title of “Director
Emeritus” until the next annual meeting of stockholders.
Director
compensation for the year ended December 31, 2016 was as follows:
Director
Compensation
Name
|
|
Fees
earned or paid in cash ($)
|
|
|
Stock
awards
($) (2)
|
|
|
Option
awards
($) (2)
|
|
|
Total
($)
|
|
Stanton E. Ross, Chairman of the Board
(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Leroy C. Richie
|
|
$
|
50,000
|
|
|
$
|
—
|
|
|
$
|
32,478
|
|
|
$
|
82,478
|
|
Elliot M. Kaplan (3)
|
|
$
|
85,000
|
|
|
$
|
—
|
|
|
$
|
32,478
|
|
|
$
|
117,478
|
|
Daniel F. Hutchins
|
|
$
|
50,000
|
|
|
$
|
—
|
|
|
$
|
32,478
|
|
|
$
|
82,478
|
|
Michael J. Caulfield (4)
|
|
$
|
15,000
|
|
|
$
|
—
|
|
|
$
|
32,478
|
|
|
$
|
47,478
|
|
(1)
|
Mr.
Ross’s compensation and option awards are provided in the Executive Compensation table because he did not receive compensation
or stock options for his services as a director.
|
|
|
(2)
|
Represents
aggregate grant date fair value pursuant to ASC Topic 718 for the respective year for stock options and restricted stock granted.
Please refer to Note 13 to the consolidated financial statements for further description of the awards and the underlying
assumptions utilized to determine the amount of grant date fair value related to such grants.
|
|
|
(3)
|
Mr.
Kaplan resigned from the board of directors effective September 9, 2016. In connection with his resignation and in recognition
of his many years of service, we accelerated the vesting of the stock options awarded to him in May 2016 as a director, paid
him the $45,000 balance of his cash compensation as a director for 2016/2017, vested any other unvested stock options and
restricted stock awards and extended the termination date of his stock options to May 1, 2018.
|
|
|
(4)
|
Mr.
Caulfield became a member of the board of directors effective May 12, 2016 upon his election at the 2016 Annual Shareholders
Meeting.
|
Stock
Option and Restricted Stock Grants to Directors
Name
of Individual
|
|
Number
of Restricted Shares of Common Stock Granted
|
|
|
Number
of Options Granted
|
|
|
Average
per Share Exercise Price
|
|
Stanton E. Ross (1)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Leroy C. Richie (2)
|
|
|
—
|
|
|
|
10,000
|
|
|
$
|
3.92
|
|
Elliot M. Kaplan (3)
|
|
|
—
|
|
|
|
10,000
|
|
|
$
|
3.92
|
|
Daniel F. Hutchins (2)
|
|
|
—
|
|
|
|
10,000
|
|
|
$
|
3.92
|
|
Michael J. Caulfield (2)
|
|
|
—
|
|
|
|
10,000
|
|
|
$
|
3.92
|
|
(1)
|
Mr.
Ross’s compensation and option awards are noted in the Executive Compensation table because he did not receive compensation
or stock options for his services as a director.
|
|
|
(2)
|
The
stock option grants were issued on May 12, 2016 with vesting to occur on May 1, 2017.
|
|
|
(3)
|
Mr.
Kaplan resigned from the board of directors effective September 9, 2016 and in connection with such resignation we immediately
vested all outstanding unvested stock options and restricted stock and extended the exercise period of his stock options to
May 1, 2018.
|
PROPOSAL
TWO
TO
AMEND THE 2015 STOCK OPTION AND RESTRICTED STOCK PLAN TO INCREASE THE NUMBER OF SHARES RESERVED FOR ISSUANCE UNDER THE PLAN BY
500,000.
We
are seeking stockholder approval to amend the 2015 Stock Option and Restricted Stock Plan (the “2015 Plan”) to increase
the number of shares reserved for issuance under the 2015 Plan from 750,000 to 1,250,000. At April 3, 2017, there were 741,850
shares subject to restricted stock awards or stock options issued under the 2015 Plan since its adoption in 2015. We made such
grants generally in lieu of cash bonuses and compensation, which helped to conserve cash in the 2015 and 2016 and plan to do the
same in 2017. As a result of our past grants, we have 8,150 shares remaining available for awards as of April 3, 2017 under the
2015 Plan.
The
purpose of the 2015 Plan is to offer all our employees, directors, and key consultants an opportunity to acquire a proprietary
interest in our success, and remain in service to the Company and to attract new employees, directors and consultants. The 2015
Plan provides both for the direct award of shares, for the grant of options to purchase shares, as well as for the grant of Stock
Appreciation Rights (SARs). Options granted under the 2015 Plan may include non-statutory options as well as incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code.
The
Company has a policy of issuing new shares upon the exercise of stock options, awarding significant amounts of stock options or
restricted stock grants to new employees and regularly awarding such to employees on an annual basis. Stock options are generally
granted at the market price on the date of grant. Stock options and restricted stock grants have generally vested over one or
more years for officers and employees and one year for directors. Stock options generally can be exercised within seven to ten
years.
The
aggregate number of shares of common stock that may be issued under the 2015 Plan was originally set at 300,000 shares. In order
to continue, as well as enhance, the effectiveness of the Plan, the Board of Directors approved an amendment to increase the number
of shares of Common Stock reserved for issuance under the Plan by 450,000, for a total of 750,000 shares on February 25, 2016,
which amendment was approved at the 2016 Annual Meeting of Shareholders. Further, on February 24, 2017 the Board of Directors
approved a new amendment to increase the number of shares of Common Stock reserved for issuance under the Plan by 500,000, for
a total of 1,250,000 shares, which amendment is subject to approval at the 2017 Annual Meeting of Shareholders.
The
Board believes the approval of the amendment is necessary in order to make shares available for future awards, in part, due to
the following.
(i)
We anticipate that in order to meet the objectives and requirements of the 2015 Plan, we will likely utilize all the shares presently
available for awards under the 2015 Plan in 2017; and
(ii)
There are relatively few shares available for grant under our existing stock option plans. Due a number of factors, including
the decline in the price of our common stock, the exercise prices of a large number of the options granted in prior years remain
well above the current market price. Further, previous long-term restricted stock awards have, in large part, become fully vested.
We face increasing competition from industry to retain our talented and experienced staff and add staff as appropriate. We believe
that new equity awards that vest over longer periods are effective for retention and incentive compensation.
In
view of the limited number of shares remaining for grants under the 2015 Plan and earlier stock option plans, the continued need
to attract and maintain individuals of the highest caliber to positions on the Board, management and employment, the Board of
Directors has concluded that the maximum number of shares of common stock that may be issued under the 2015 Plan should be increased
by 500,000.
The
Board of Directors approved the increase in shares reserved under and required amendment to the 2015 Plan on February 24, 2017,
subject to stockholder approval at the annual meeting. If our stockholders approve the amendment to the 2015 Plan, 500,000 additional
shares will be available for future grants.
The
Board of Directors believes that it is in the best interests of us and our stockholders to approve the increase in shares reserved
under the 2015 Plan. The Board believes that equity awards assist in retaining, motivating and rewarding employees, executives
and consultants by giving them an opportunity to obtain long-term equity participation in us. In addition, equity awards are an
important contributor to aligning the incentives of our employees with the interests of our stockholders.
The
Board also believes equity awards are essential to attracting new employees and retaining current employees. Further, the granting
of options to new and existing employees frequently permits us to pay lower salaries than otherwise might be the case. The Board
of Directors believes that to remain competitive with other technology companies in our long-term incentive plans, we must continue
to provide employees with the opportunity to obtain equity in us and that an inability to offer equity incentives to new and current
employees would put us at a competitive disadvantage in attracting and retaining qualified personnel. Our named executive officers
and directors have an interest in this proposal because they are expected to receive awards under the 2015 Plan if the amendment
is approved at the annual meeting.
The
full text of the proposed amendment to increase the number of shares under the 2015 Plan is attached to this proxy statement as
Appendix A
.
Vote
Required and Recommendation
The
affirmative vote of a majority of the votes cast will be required to approve the amendment to the 2015 Plan.
OUR
BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE TO AMEND THE 2015 STOCK OPTION AND RESTRICTED STOCK PLAN TO INCREASE THE
NUMBER OF SHARES RESERVED FOR ISSUANCE UNDER THE PLAN BY 500,000 SHARES.
Summary
of the 2015 Stock Option and Restricted Stock Plan
The
2015 Plan, as amended authorizes us to issue 750,000 shares of common stock upon exercise of options and grant of restricted stock
awards. The 2015 Plan authorizes us to grant (i) to the key employees incentive stock options to purchase shares of common stock
and non-qualified stock options to purchase shares of common stock and restricted stock awards and (ii) to nonemployee directors
and consultants’ non-qualified stock options and restricted stock. As of April 3, 2017, approximately 154 employees, two
executive officers, and three non-employee directors were eligible to participate in the 2015 Plan.
The
following paragraphs provide a summary of the principal features of the 2015 Plan and its operation. In addition, we have included
the material change reflecting the proposed amendment to increase the number of shares reserved under the 2015 Plan. All references
to the 2015 Plan in this summary will include the proposed amendment, unless the context requires otherwise. The summary is subject
to the terms of the 2015 Plan and capitalized terms used herein shall have the meanings assigned to them in the 2015 Plan, unless
the context otherwise requires. We will provide, upon request, a copy of the full text of the 2015 Plan to each person to whom
a copy of this proxy statement is delivered. All written requests should be addressed as follows: Digital Ally, Inc., 9705 Loiret
Blvd., Lenexa, KS 66219, Attention: Secretary.
Objectives
.
The objective of the 2015 Plan is to provide incentives to our key employees, officers, directors and consultants to achieve
financial results aimed at increasing stockholder value and attracting talented individuals to us. Persons eligible to be granted
stock options or restricted stock under the 2015 Plan will be those persons whose performance, in the judgment of the Compensation
Committee of our Board of Directors, can have significant impact on our success.
Oversight
.
Our Board administers the 2015 Plan by making determinations regarding the persons to whom options or restricted stock should
be granted and the amount, terms, conditions and restrictions of the awards. The Board also has the authority to interpret the
provisions of the 2015 Plan and to establish and amend rules for its administration subject to the 2015 Plan’s limitations.
In addition, under the 2015 Plan, our Board is authorized to re-price any Option granted under the Plan by lowering its exercise
price after it is granted, canceling an Option at a time when its exercise price exceeds the Fair Market Value of the stock underlying
the Option, in exchange for another Option or Award, as well as any other action that is treated as a re-pricing under generally
accepted accounting principles.
Number
of Shares of Common Stock Available Under the 2015 Plan
.
If our stockholders approve the increase in the number
of shares reserved under the 2015 Plan by 500,000, a total of 1,250,000 shares of our common stock will be reserved for issuance
under the 2015 Plan. As of April 3, 2017, the 2015 Plan had 741,850 shares issued or reserved for issuance.
Outstanding
Stock Options Held by Directors and Officers.
The
following table presents information concerning the outstanding equity awards for the Directors and Officers as of December 31,
2016:
Outstanding
Equity Awards at Fiscal Year-End
Name
|
|
Number
of securities underlying unexercised options (#) exercisable
|
|
|
Number
of securities underlying unexercised options (#) unexercisable
|
|
|
Equity
incentive plan awards: Numbe of securities underlying unexercised unearned Options (#)
|
|
|
Option
exercise price ($)
|
|
|
Option
expiration date
|
Stanton E. Ross
Chairman,
CEO and President
|
|
|
15,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
4.80
|
|
|
1/12/2022
|
|
|
|
18,750
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
13.20
|
|
|
1/10/2021
|
|
|
|
3,750
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
14.24
|
|
|
5/5/2019
|
|
|
|
37,500
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
54.40
|
|
|
1/2/2018
|
|
|
|
21,875
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
32.40
|
|
|
10/15/2017
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
12.80
|
|
|
3/3/2017
|
Leroy C. Richie
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lead Outside Director
|
|
|
10,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
3.92
|
|
|
5/11/2026
|
|
|
|
1,250
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
13.20
|
|
|
1/10/2021
|
|
|
|
625
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
14.24
|
|
|
5/5/2019
|
|
|
|
6,250
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
54.40
|
|
|
1/2/2018
|
|
|
|
13,805
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
12.80
|
|
|
3/3/2017
|
Elliot M. Kaplan
Former Director
(Resigned effective September 9, 2016)
|
|
|
10,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
3.92
|
|
|
5/11/2026
|
|
|
|
7,250
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
3.52
|
|
|
5/25/2022
|
|
|
|
1,250
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
9.52
|
|
|
6/3/2021
|
|
|
|
1,250
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
13.20
|
|
|
1/10/2021
|
|
|
|
625
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
14.24
|
|
|
5/5/2019
|
|
|
|
6,250
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
54.40
|
|
|
1/2/2018
|
|
|
|
7,950
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
12.80
|
|
|
3/3/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel F. Hutchins
Director
|
|
|
10,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
3.92
|
|
|
5/11/2026
|
|
|
|
8,750
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
3.52
|
|
|
5/25/2022
|
|
|
|
1,250
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
9.52
|
|
|
6/3/2021
|
|
|
|
1,250
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
13.20
|
|
|
1/10/2021
|
|
|
|
625
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
14.24
|
|
|
5/5/2019
|
|
|
|
3,125
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
12.72
|
|
|
5/5/2019
|
|
|
|
6,250
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
54.40
|
|
|
1/2/2018
|
|
|
|
1,250
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
32.00
|
|
|
10/1/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Caulfield
Director
|
|
|
10,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
3.92
|
|
|
5/11/2026
|
Thomas J. Heckman
CFO, Treasurer
and Secretary
|
|
|
12,500
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
13.20
|
|
|
1/10/2021
|
|
|
|
3,750
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
24.80
|
|
|
7/30/2019
|
|
|
|
3,750
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
14.24
|
|
|
5/5/2019
|
|
|
|
2,500
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
12.72
|
|
|
3/30/2019
|
|
|
|
12,500
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
54.40
|
|
|
1/2/2018
|
|
|
|
2,500
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
32.40
|
|
|
10/15/2017
|
Types
of Grants
.
The 2015 Plan allows for the grant of incentive stock options, non-qualified stock options and restricted
stock awards. The 2015 Plan does not specify what portion of the awards may be in the form of incentive stock options, non-statutory
options or restricted stock. Incentive stock options awarded to our employees are qualified stock options under the Internal Revenue
Code.
Statutory
Conditions on Stock Option—Exercise Price
.
Incentive stock options granted under the 2015 Plan must have
an exercise price at least equal to 100% of the fair market value of the common stock as of the date of grant. Incentive stock
options granted to any person who owns, immediately after the grant, stock possessing more than 10% of the combined voting power
of all classes of our stock, or of any parent or subsidiary corporation, must have an exercise price at least equal to 110% of
the fair market value of the common stock on the date of grant. Non-statutory stock options may have an exercise price at least
equal to 100% of the fair market value of the common stock as of the date of the grant.
-
Dollar limit
.
The aggregate fair market value, determined as of the time an incentive stock option is granted,
of the common stock with respect to which incentive stock options are exercisable by an employee for the first time during any
calendar year cannot exceed $100,000. However, there is no aggregate dollar limitation on the amount of non-statutory stock options
that may be exercisable for the first time during any calendar year.
-
Expiration date
. Any option granted under the 2015 Plan will expire at the time fixed by our Board of Directors, which
cannot be more than ten years after the date it is granted or, in the case of any person who owns more than 10% of the combined
voting power of all classes of our stock or of any subsidiary corporation, not more than five years after the date of grant.
-
Exercisability
.
Our Board may also specify when all or part of an option becomes exercisable, but in the absence
of such specification, the option will ordinarily be exercisable in whole or in part at any time during its term. However, the
board of directors may accelerate the exercisability of any option at its discretion.
-
Assignability
.
Options granted under the 2015 Plan are not assignable. Incentive stock options may be exercised
only while we employ the optionee or within twelve months after termination by reason of death or disabilities or within three
months after termination for any other reason.
Payment
upon Exercise of Options
.
Payment of the exercise price for any option may be in cash, or with our consent, by
withheld shares which, upon exercise, have a fair market value at the time the option is exercised equal to the option price (plus
applicable withholding tax) or in the form of shares of common stock, subject to restrictions.
Restricted
Stock
.
Our Board is authorized to grant restricted stock awards. A restricted stock grant is a grant of shares
of our common stock, which is subject to restrictions on transferability, risk of forfeiture and other restrictions and which
may be forfeited in the event of certain terminations of employment or service prior to the end of a restricted period specified
by the Board of Directors. A participant granted restricted stock generally has all of the rights of a stockholder, unless otherwise
determined by the Compensation Committee.
Merger
or Sale of Assets
. If we merge with or into another corporation, or sell all or substantially all our assets, any unvested
Awards will vest immediately prior to closing of the event resulting in the change of control, and the Board shall have the power
and discretion to provide for each award holder’s election alternatives regarding the terms and conditions for the exercise
of such awards. The alternative may provide that each outstanding stock option and restricted stock award will be assumed or substituted
for by the successor corporation (or a parent or subsidiary or such successor corporation). If there is no assumption or substitution
of outstanding awards, the administrator will provide notice to the recipient of his alternatives regarding his right to exercise
the stock option as to all the shares subject to the stock option.
Amendment
and Termination of the 2015 Plan
.
The administrator has the authority to amend, alter, suspend, or terminate the
2015 Plan, except that stockholder approval will be required for any amendment to the 2015 Plan to the extent required by any
applicable law, regulation, or Nasdaq or stock exchange rule. Any amendment, alteration, suspension, or termination will not,
without the consent of the participant, materially adversely affect any rights or obligations under any stock option or restricted
stock award previously granted. The 2015 Plan has a term of ten (10) years beginning June 19, 2015, unless terminated earlier
by the administrator.
Recent
Stock Option and Restricted Stock Award Grants to Employees, Consultants, and Directors
As
of December 31, 2015, we had adopted seven separate stock option and restricted stock plans: (i) the 2005 Stock Option and Restricted
Stock Plan (the “2005 Plan”), (ii) the 2006 Stock Option and Restricted Stock Plan (the “2006 Plan”),
(iii) the 2007 Stock Option and Restricted Stock Plan (the “2007 Plan”), (iv) the 2008 Stock Option and Restricted
Stock Plan (the “2008 Plan”), (v) the 2011 Stock Option and Restricted Stock Plan (the “2011 Plan”), (vi)
the 2013 Stock Option and Restricted Stock Plan (the “2013 Plan”) and (vii) the 2015 Stock Option and Restricted Stock
Plan (the “2015 Plan”). The 2005 Plan, 2006 Plan, 2007 Plan, 2008 Plan, 2011 Plan, 2013 Plan and 2015 Plan are referred
to as the “Plans.” These Plans permit the grant of stock options or restricted stock to its employees, non-employee
directors and others for up to a total of 1,925,000 shares of common stock. The 2005 Plan terminated during 2015 with 28 shares
not awarded or underlying options, which shares are now unavailable for issuance. Stock options granted under the 2005 Plan that
remain unexercised and outstanding as of December 31, 2016 total 26,813. The 2006 Plan terminated during 2016 with 30 shares not
awarded or underlying options, which shares are now unavailable for issuance. Stock options granted under the 2006 Plan that remain
unexercised and outstanding as of December 31, 2016 total 64,955. We believe that such awards better align the interests of our
employees with those of our stockholders. Option awards have been granted with an exercise price equal to the market price of
our stock at the date of grant with such option awards generally vesting based on the completion of continuous service and having
ten-year contractual terms. Restricted stock awards have also been made under the Plans. A restricted stock award is a grant of
shares of the common stock that is subject to restrictions on transferability, risk of forfeiture and other restrictions and that
may be forfeited in the event of certain terminations of employment or service prior to the end of a restricted period specified
by the Compensation Committee. These option and restricted stock awards typically provide for accelerated vesting if there is
a change in control (as defined in the Plans). We have registered all shares of common stock that are issuable under our Plans
with the SEC. A total of 200,772 shares remained available for awards under the various Plans as of December 31, 2016.
The
number of stock options and restricted stock awards that an employee, director, or consultant may receive under our Plans is in
the discretion of the administrator and therefore cannot be determined in advance, although the Board of Directors’ policy
for 2016 was to grant directors stock options that vest over a one-year period and to grant officers restricted shares that vest
over a two-year period.
The
following table sets forth (a) the aggregate number of shares subject to options and restricted stock granted under the Plans
during the year-ended December 31, 2016 and (b) the average per share exercise price of such options.
Stock
Option and Restricted Stock Grants
Name
of Individual or Group
|
|
Number
of Restricted Shares of Common Stock Granted
|
|
|
Number
of Options Granted
|
|
|
Average
per Share Exercise
|
|
Stanton E. Ross, Chairman
of the Board, CEO & President
|
|
|
100,000
|
|
|
|
—
|
|
|
$
|
—
|
|
Leroy C. Richie, Director
|
|
|
—
|
|
|
|
10,000
|
|
|
$
|
3.92
|
|
Elliot M. Kaplan, Former Director (Resigned
effective September 9, 2016)
|
|
|
—
|
|
|
|
10,000
|
|
|
$
|
3.92
|
|
Daniel F. Hutchins, Director
|
|
|
—
|
|
|
|
10,000
|
|
|
$
|
3.92
|
|
Michael J. Caulfield, Director
|
|
|
—
|
|
|
|
10,000
|
|
|
$
|
3.92
|
|
Thomas J. Heckman, Vice President, CFO,
Treasurer & Secretary
|
|
|
100,000
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All executive officers, as a group
|
|
|
200,000
|
|
|
|
—
|
|
|
$
|
—
|
|
All directors who are not executive
officers, as a group
|
|
|
—
|
|
|
|
40,000
|
|
|
$
|
3.92
|
|
All employees who are not executive
officers, as a group
|
|
|
90,000
|
|
|
|
—
|
|
|
$
|
—
|
|
Federal
Tax Aspects
The
following summary is a brief discussion of certain federal income tax consequences to U.S. taxpayers and to the Company of stock
option and restricted stock awards granted under the 2015 Plan. This summary is not intended to be a complete discussion of all
the federal income tax consequences of the 2015 Plan or of all the requirements that must be met in order to qualify for the tax
treatment described below. The following summary is based upon the provisions of U.S. federal tax law in effect on the date hereof,
which is subject to change (perhaps with retroactive effect), and does not constitute tax advice. In addition, because tax consequences
may vary, and certain exceptions to the general rules discussed in this summary may be applicable, depending upon the personal
circumstances of individual recipients and each recipient should consider his or her personal situation and consult with his or
her own tax advisor with respect to the specific tax consequences applicable to him or her. The following assumes stock options
have been granted at an exercise price per share at least equal to 100% of the fair market value of the Company’s common
stock on the date of grant.
Tax
consequences of nonqualified stock options
. In general, an employee, director or consultant will not recognize income
at the time of the grant of nonqualified options under the 2015 Plan. When an optionee exercises a nonqualified stock option,
he or she generally will recognize ordinary income equal to the excess, if any, of the fair market value (determined on the day
of exercise) of the shares of the common stock received over the option exercise price. The tax basis of such shares to the optionee
will be equal to the exercise price paid plus the amount of ordinary income includible in his or her gross income at the time
of the exercise. Upon a subsequent sale or exchange of shares acquired pursuant to the exercise of a nonqualified stock option,
the optionee will have taxable capital gain or loss, measured by the difference between the amount realized on the sale or exchange
and the tax basis of the shares. The capital gain or loss will be short-term or long-term depending on holding period of the shares
sold.
Tax
consequences of incentive stock options
. In general, an employee will not recognize income on the grant of incentive stock
options under the 2015 Plan. Except with respect to the alternative minimum tax, an optionee will not recognize income on the
exercise of an incentive stock option unless the option exercise price is paid with stock acquired on the exercise of an incentive
stock option and the following holding period for such stock has not been satisfied. For purposes of the alternative minimum tax,
however, an optionee will be required to treat an amount equal to the difference between the fair market value (determined on
the day of exercise) of our shares of the common stock received and the exercise price as an item of adjustment in computing the
optionee’s alternative minimum taxable income.
An
optionee will recognize long-term capital gain or loss on a sale of the shares acquired on exercise, provided the shares acquired
are not sold or otherwise disposed of before the earlier of: (i) two years from the date of grant of the option, or (ii) one year
from the date of exercise of the option. In general, the amount of gain or loss will equal the difference, if any, between the
sale price of such shares and the exercise price. If the stock is not held for the required period of time, the optionee will
recognize ordinary income to the extent the fair market value (determined on the day of exercise) of the stock exceeds the option
price, but limited to the gain recognized on sale. The balance of any such gain will be a short-term or long-term capital gain
(depending on the applicable holding period).
For
the exercise of a stock option to qualify for the foregoing incentive stock option tax treatment, an optionee generally must be
our employee continuously from the date of the grant until any termination of employment, and in the event of a termination of
employment, the stock option must be exercised within three months after the termination.
Tax
consequences of restricted stock awards
. In general, the recipient of a stock award that is not subject to restrictions
will recognize ordinary income at the time the shares are received equal to the excess, if any, of the fair market value of the
shares received over the amount, if any, the recipient paid in exchange for the shares. If, however, the shares are subject to
vesting or other restrictions (that is, they are nontransferable and subject to a substantial risk of forfeiture) when the shares
are granted (for example, if the employee is required to work for a period of time in order to have the right to sell the stock),
the recipient generally will not recognize income until the shares becomes vested or the restrictions otherwise lapse, at which
time the recipient will recognize ordinary income equal to the excess, if any, of the fair market value of the shares on the date
of vesting (or the date of the lapse of a restriction) less the amount, if any, the recipient paid in exchange for the shares.
If the shares are forfeited under the terms of the restricted stock award, the recipient will not recognize income and will not
be allowed an income tax deduction with respect to the forfeiture.
A
recipient may file an election under Section 83(b) of the Internal Revenue Code with the Internal Revenue Service within thirty
(30) days of his or her receipt of a restricted stock award to recognize ordinary income, as of the award date, equal to the excess,
if any, of the fair market value of the shares on the award date less the amount, if any, the recipient paid in exchange for the
shares. If a recipient makes a Section 83(b) election, then the recipient will not otherwise be taxed in the year the vesting
or restriction lapses, and, if the stock award is forfeited, he or she will not be allowed an income tax deduction. If the recipient
does not make a Section 83(b) election, dividends paid to the recipient on the shares prior to the date the vesting or restrictions
lapse will be treated as compensation income.
The
recipient’s tax basis for the determination of gain or loss upon the subsequent disposition of shares acquired as stock
awards will be the amount paid for such shares plus the amount includible in his or her gross income as compensation in respect
of such shares.
Withholding
and other consequences
. Any compensation includible in the gross income of a recipient will be subject to appropriate
federal and state income tax withholding.
Tax
effect for the Company
. We are generally entitled to an income tax deduction in connection with a stock option or restricted
stock award granted under the 2015 Plan in an amount equal to the ordinary income realized by a recipient at the time the recipient
recognizes such income (for example, the exercise of a nonqualified stock option). Special rules may limit the deductibility of
compensation paid to our Chief Executive Officer and to each of our four most highly compensated executive officers under Section
162(m) of the Internal Revenue Code to the extent that annual compensation paid to any of the foregoing individuals exceeds $1,000,000.
THE
FOREGOING IS ONLY A BRIEF SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION UPON PARTICIPANTS AND THE COMPANY WITH RESPECT TO THE
GRANT AND EXERCISE OF STOCK OPTIONS, STOCK APPRECIATION RIGHTS, AND RESTRICTED STOCK AWARDS UNDER THE 2015 PLAN. IT DOES NOT PURPORT
TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF A RECIPIENT’S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS
OF ANY MUNICIPALITY STATE OR FOREIGN COUNTRY IN WHICH THE RECIPIENT MAY RESIDE. THE FOREGOING SUMMARY IS NOT INTENDED OR WRITTEN
TO BE USED, AND IT CANNOT BE USED BY ANY TAXPAYER, TO AVOID PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER.
PROPOSAL
THREE
RATIFICATION
OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Audit Committee of the Board of Directors has appointed RSM US LLP as the independent registered public accounting firm to audit
our financial statements for the year ending December 31, 2017 and recommends that stockholders vote for ratification of such
appointment. Although we are not required to seek stockholder approval of this appointment, the Board believes it to be sound
corporate governance to do so. Notwithstanding the selection by the Audit Committee of RSM US LLP, the Audit Committee may direct
the appointment of a new independent registered public accounting firm at any time during the year if the Board of Directors determines
that such a change would be in our best interest and in that of our stockholders. If the appointment is not ratified, the Audit
Committee will investigate the reasons for stockholder rejection and will reconsider the appointment.
The
Audit Committee believes that RSM US LLP is well suited to provide the services that we require in 2017 and beyond. Representatives
of RSM US LLP are expected to attend the annual meeting, where they will be available to respond to questions and, if they desire,
to make a statement.
Audit
and Related Fees
The
following table is a summary of the fees billed to us by RSM US
LLP for the fiscal years ended
December 31, 2016 and 2015
:
Fee
Category
|
|
Fiscal
2016 fees
|
|
|
Fiscal
2015 fees
|
|
Audit fees
|
|
$
|
156,600
|
|
|
$
|
150,000
|
|
Audit-related fees
|
|
|
—
|
|
|
|
—
|
|
Tax fees
|
|
|
—
|
|
|
|
19,500
|
|
All other fees
|
|
|
15,627
|
|
|
|
146,817
|
|
Total fees
|
|
$
|
172,227
|
|
|
$
|
316,317
|
|
Audit
Fees
.
Such amount consists of fees billed for professional services rendered in connection with the audit of our
annual financial statements and review of the interim financial statements included in our quarterly reports. It also includes
services that are normally provided by our independent registered public accounting firms in connection with statutory and regulatory
filings or engagements.
Audit-Related
Fees
.
Consists of fees billed for assurance and related services that are reasonably related to the performance
of the audit or review of our financial statements and are not reported under “Audit Fees.” These services include
employee benefit plan audits, consents issued for certain filings with the SEC, accounting consultations in connection with acquisitions,
attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting
standards.
Tax
Fees
.
Tax fees consist of fees billed for professional services related to tax compliance, tax advice and tax planning.
These services include assistance regarding federal, state and international tax compliance, tax audit defense, customs and duties,
mergers and acquisitions, and international tax planning.
All
Other Fees
.
Consists of fees for products and services other than the services reported above. In fiscal 2016,
such fees were related primarily to server hardware and telephone system maintenance and upgrades. In fiscal 2015, such fees were
related primarily to server hardware and telephone system upgrades.
The
Audit Committee’s practice is to consider and approve in advance all proposed audit and non-audit services to be provided
by our independent registered public accounting firm. All the fees shown above were pre-approved by the Audit Committee.
The
audit report of RSM US LLP on our consolidated financial statements for the year ended December 31, 2016 did not contain an adverse
opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles.
During
our fiscal year ended December 31, 2016, there were no disagreements with RSM US LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to RSM US LLP’s
satisfaction would have caused it to make reference to the subject matter of such disagreements in connection with its reports
on the financial statements for such periods.
During
our fiscal years ended December 31, 2016, there were no reportable events (as described in Item 304(a)(1)(v) of Regulation S-K).
Vote
Required and Board Recommendation
If
a quorum is present, the affirmative vote of a majority of the shares present and entitled to vote at the annual meeting will
be required to ratify the appointment of RSM US LLP as our independent registered public accounting firm. Abstentions will have
the effect of a vote against this proposal, and broker non-votes will have no effect on the outcome of the vote with respect to
this proposal.
OUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE RATIFICATION OF THE APPOINTMENT OF MCGLADREY LLP AS THE
INDEPENDENT REGISTERED ACCOUNTING FIRM OF DIGITAL ALLY, INC. FOR THE YEAR ENDING DECEMBER 31, 2017.
Notwithstanding
anything to the contrary set forth in any of our previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings, including this proxy statement, in whole or in part,
the Audit Committee Report shall not be incorporated by reference into any such filings.
REPORT
OF THE AUDIT COMMITTEE
Below
is the report of the Audit Committee with respect to our audited consolidated financial statements for the fiscal year ended December
31, 2016, which includes our consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements
of operations, stockholders’ equity and cash flows for each of the fiscal years ended December 31, 2016 and December 31,
2015 and the notes thereto.
In
accordance with the written charter adopted by the Board of Directors, the Audit Committee of the Board of Directors has the primary
responsibility for overseeing our financial reporting, accounting principles and system of internal accounting controls, and reporting
its observations and activities to the Board of Directors. It also approves the appointment of our independent registered public
accounting firm and approves in advance the services performed by such firm.
Review
and Discussion with Management
The
Audit Committee has reviewed and discussed with management our audited consolidated financial statements for the fiscal year ended
December 31, 2016, the process designed to achieve compliance with Section 404 of the Sarbanes-Oxley Act of 2002, our assessment
of internal control over financial reporting and the report by our independent registered public accounting firm thereon.
Review
and Discussions with Independent Registered Public Accounting Firm
In the performance of its oversight function and in
accordance with its responsibilities under its charter, the Audit Committee has reviewed and discussed with management and the
independent registered public accounting firm the Company’s audited financial statements as of and for the fiscal year ended
December 31, 2016. The Audit Committee also discussed with our independent registered public accounting firm the matters required
to be discussed by Public Company Accounting Oversight Board Auditing Standard No. 16 “Communications with Audit Committee.”
Finally, the Audit Committee received the written disclosures and the letter from our independent registered public accounting
firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered
public accounting firm’s communications with the Audit Committee concerning independence, and discussed with our independent
registered public accounting firm its independence.
Conclusion
Based
on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that our audited consolidated
financial statements for the fiscal year ended December 31, 2016 be included in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2016 for filing with the Securities and Exchange Commission.
|
Respectfully
submitted by:
|
|
|
|
|
THE
AUDIT COMMITTEE OF THE BOARD OF
DIRECTORS OF DIGITAL ALLY, INC.
|
|
|
|
|
|
Daniel
F. Hutchins, Chairman
|
|
|
Leroy
C. Richie
|
|
|
Michael
J. Caulfield
|
EXECUTIVE
COMPENSATION
The
following table presents information concerning the total compensation of the Company’s Chief Executive Officer and Chief
Financial Officer (the “Named Executive Officers”) for services rendered to the Company in all capacities for the
years ended December 31, 2016 and 2015:
Summary
Compensation Table
Name
and principal position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
awards ($) (1)(3)(4)
|
|
|
Option
awards ($) (1)
|
|
|
All
other compensation ($) (2)
|
|
|
Total
($)
|
|
Stanton E. Ross
|
|
|
2016
|
|
|
$
|
220,000
|
|
|
$
|
985,000
|
|
|
$
|
462,700
|
|
|
$
|
—
|
|
|
$
|
15,030
|
|
|
$
|
1,682,730
|
|
Chairman, CEO and President
|
|
|
2015
|
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
|
$
|
892,200
|
|
|
$
|
—
|
|
|
$
|
14,064
|
|
|
$
|
1,256,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas J. Heckman
|
|
|
2016
|
|
|
$
|
220,000
|
|
|
$
|
—
|
|
|
$
|
462,700
|
|
|
$
|
—
|
|
|
$
|
19,658
|
|
|
$
|
702,358
|
|
Vice President, Chief Financial Officer,
Treasurer and Secretary
|
|
|
2015
|
|
|
$
|
175,000
|
|
|
$
|
85,000
|
|
|
$
|
892,200
|
|
|
$
|
—
|
|
|
$
|
18,126
|
|
|
$
|
1,170,326
|
|
(1)
|
Represents
aggregate grant date fair value pursuant to ASC Topic 718 for the respective year for stock options granted. Please refer
to Note 13 to the consolidated financial statements for further description of the awards and the underlying assumptions utilized
to determine the amount of grant date fair value related to such grants.
|
|
|
(2)
|
Amounts
included in all other compensation include the following items: the employer contribution to the Company’s 401(k) Retirement
Savings Plan (the “401(k) Plan”) on behalf of the named executive. We are required to provide a 100% matching
contribution for all who elect to contribute up to 3% of their compensation to the plan and a 50% matching contribution for
all employees’ elective deferral between 4% and 5%. The employee is (i) 100% vested at all times in the employee contributions
and employer matching contributions; (ii) Company paid healthcare insurance; (iii) Company paid contributions to health savings
accounts; and (iv) Company paid life, accident and disability insurance. See “All Other Compensation Table” below.
|
|
|
(3)
|
Stock
awards include the following restricted stock granted to each person during 2016: (i) 35,000 shares at $5.94 per share that
vest ratably over the two-year period ending January 3, 2018; and (ii) 65,000 shares at $3.92 per share that vest ratably
over the two-year period ending May 11, 2018.
|
|
|
(4)
|
Stock
awards include the following restricted stock granted to each person during 2015: (i) 30,000 shares at $11.50 per share that
vested ratably over the two-year period ending February 13, 2017; (ii) 20,000 shares at $13.11 per share that vested on January
9, 2016; and (iii) 50,000 shares at $5.70 per share that vest as follows: (a) 5,000 shares on October 30, 2016; (b) 10,000
shares on October 30, 2017; (c) 15,000 shares on October 30, 2018; and (d) 20,000 shares on October 30, 2019.
|
All
Other Compensation Table
Name
|
|
Year
|
|
|
401(k)
Plan contribution by Company
|
|
|
Company
paid healthcare insurance
|
|
|
Flexible
& health savings account contributions by Company
|
|
|
Company
paid life, accident & disability insurance
|
|
|
Other
Contractual payments
|
|
|
Total
|
|
Stanton E. Ross
|
|
|
2016
|
|
|
$
|
3,992
|
|
|
$
|
10,512
|
|
|
$
|
—
|
|
|
$
|
526
|
|
|
$
|
—
|
|
|
$
|
15,030
|
|
Chairman, CEO
and President
|
|
|
2015
|
|
|
$
|
4,038
|
|
|
$
|
9,564
|
|
|
$
|
—
|
|
|
$
|
462
|
|
|
$
|
—
|
|
|
$
|
14,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas J. Heckman
|
|
|
2016
|
|
|
$
|
9,070
|
|
|
$
|
9,262
|
|
|
$
|
800
|
|
|
$
|
526
|
|
|
$
|
—
|
|
|
$
|
19,658
|
|
Vice President, Chief
Financial
Officer, Treasurer
and Secretary
|
|
|
2015
|
|
|
$
|
7,000
|
|
|
$
|
9,564
|
|
|
$
|
1,100
|
|
|
$
|
462
|
|
|
$
|
—
|
|
|
$
|
18,126
|
|
Compensation
Policy
. Our executive compensation plan is based on attracting and retaining qualified professionals who possess theskills
and leadership necessary to enable us to achieve earnings and profitability growth to satisfy its stockholders. We must, therefore,
create incentives for these executives to achieve both our and individual performance objectives using performance-based compensation
programs. No one component is considered by itself, but all forms of the compensation package are considered in total. Wherever
possible, objective measurements will be utilized to quantify performance, but many subjective factors still come into play when
determining performance.
Compensation
Components
. The main elements of its compensation package consist of base salary, stock options or restricted stock awards
and bonus.
Base
Salary
. The base salary for each executive officer is reviewed and compared to the prior year, with considerations given
for increase or decrease. The review is generally on an annual basis, but may take place more often in the discretion of the Compensation
Committee.
For
fiscal year 2017
, the Compensation Committee
of the Board of Directors (the “Committee”) set the annual base salaries of Stanton E. Ross, President and Chief Executive
Officer, and Thomas J. Heckman, Chief Financial Officer, Treasurer and Secretary, at $220,000 each. This represents no increase
or decrease from the previous year.
For
fiscal year 2016
, the Compensation Committee
of the Board of Directors (the “Committee”) set the annual base salaries of Stanton E. Ross, President and Chief Executive
Officer, and Thomas J. Heckman, Chief Financial Officer, Treasurer and Secretary, at $220,000 each. This represents an increase
from the $175,000 annual base salary for each individual during the four previous years.
The
Committee plans to review the base salaries for possible adjustments on an annual basis. Base salary adjustments will be based
on both individual and our performance and will include both objective and subjective criteria specific to each executive’s
role and responsibility with us.
Stock
Options and Restricted Stock Awards.
The Compensation Committee determined stock option and restricted stock awards based
on numerous factors, some of which include responsibilities incumbent with the role of each executive with us, tenure with us,
as well as our performance. The vesting period of options and restricted stock is also tied, in some instances, to our performance
directly related to certain executive’s responsibilities with us. The Committee determined that Messrs. Ross and Heckman
were eligible for awards of stock options or restricted stock in 2016 based on their performance. Refer to grant of Plan-Based
Awards table below for restricted stock awards made in 2016. The Committee also determined that Messrs. Ross and Heckman would
be eligible in 2017 for awards of restricted stock or stock options exercisable to purchase up to 125,000 shares for Mr. Ross
and 75,000 shares for Mr. Heckman based on their performance during 2017 and made awards of such shares of restricted stock to
each person effective January 23, 2017, which shares vest on January 22, 2019, provided each person is employed with us at such
point.
Bonuses
.
The Compensation Committee determined to award bonuses to each of the executive officers in 2016, as set forth in the foregoing
table. The Compensation Committee has also determined that each of the executive officers will be eligible for the following bonuses
in 2017 based on their individual performance throughout the year: Stanton E. Ross - $700,000 and Thomas J. Heckman - $100,000.
The Compensation Committee reviews each executive officer’s performance on a quarterly basis and determines what, if any,
portion of the bonus he has earned and will be paid as of such point. It has awarded Mr. Ross a bonus of $25,000 to date in 2017.
Refer to the section entitled “Executive Compensation” for the bonuses paid to Messrs. Ross and Heckman in 2016 and
2015.
Other
.
In July 2008, we amended and restated our 401(k) retirement savings plan (the “401(k) Plan”). The amended plan requires
us to provide a 100% matching contribution for employees who elect to contribute up to 3% of their compensation to the plan and
a 50% matching contribution for employee’s elective deferrals between 4% and 5%. We have made matching contributions for
executives who elected to contribute to the 401(k) Plan during 2010. Each participant is 100% vested at all times in employee
and employer matching contributions. As of December 31, 2016, a total of 76,040 shares of our common stock were held in the 401(k)
Plan. Mr. Heckman, as trustee of the 401(k) Plan, holds the voting power as to the shares of our common stock held in the 401(k)
Plan. We have no profit sharing plan in place for our employees. However, we may consider adding such a plan to provide yet another
level of compensation to our compensation plan.
The
following table presents information concerning the grants of Plan-based awards to the Named Executive Officers during the year
ended December 31, 2016:
Grants
of Plan-Based Awards
Name
|
|
Grant
date
|
|
Date
approved by
Compensation
Committee
|
|
All
Other stock awards: Number of shares of stock or units:
(#) (1)
|
|
Exercise
or base price of option awards
($/Share)
|
|
|
Grant
date
fair value of stock awards
($) (2)
|
|
Stanton
E. Ross
Chairman, CEO and President
|
|
1/4/2016
|
|
1/4/2016
|
|
35,000
(1)
|
|
$
|
—
|
|
|
$
|
207,900
|
|
|
|
5/12/2016
|
|
5/12/2016
|
|
65,000 (2)
|
|
$
|
—
|
|
|
$
|
254,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas J. Heckman
Vice President CFO, Treasurer and Secretary
|
|
1/4/2016
|
|
1/4/2016
|
|
35,000 (1)
|
|
$
|
—
|
|
|
$
|
207,900
|
|
|
|
5/12/2016
|
|
5/12/2016
|
|
65,000 (2)
|
|
$
|
—
|
|
|
$
|
254,800
|
|
(1)
|
These
restricted stock awards were made under the Digital Ally, Inc. Stock Option and Restricted Stock Plans and vest over a two-year
period (50% on January 3, 2017 and 50% on January 3, 2018) contingent upon whether the individual is still employed by us
at that point.
|
|
|
(2)
|
These
restricted stock awards were made under the Digital Ally, Inc. Stock Option and Restricted Stock Plans and vest over a two-year
period (50% on May 11, 2017 and 50% on May 11, 2018) contingent upon whether the individual is still employed by us at that
point.
|
|
|
(3)
|
Stock
awards noted represent the aggregate amount of grant date fair value as determined under ASC Topic 718. Please refer to Note
13 to the consolidated financial statements for further description of the awards and the underlying assumptions utilized
to determine the amount of grant date fair value related to such grants.
|
The
following table presents information concerning the outstanding equity awards for the Named Executive Officers as of December
31, 2016:
Outstanding
Equity Awards at Fiscal Year-End
Name
|
|
Number
of
securities
underlying
unexercised
options
(#)exercisable
|
|
|
Number
of securities
underlying
unexercised
options
(#)unexercisable
|
|
|
Equity
incentive plan awards: Number of securities underlying unexercised unearned options (#)
|
|
|
Option
exercise
price
($)
|
|
|
Option
expiration
date
|
Stanton E. Ross
Chairman,
CEO and President
|
|
|
15,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
4.80
|
|
|
1/12/2022
|
|
|
|
18,750
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
13.20
|
|
|
1/10/2021
|
|
|
|
3,750
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
14.24
|
|
|
5/5/2019
|
|
|
|
37,500
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
54.40
|
|
|
1/2/2018
|
|
|
|
21,875
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
32.40
|
|
|
10/15/2017
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
12.80
|
|
|
3/3/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas J. Heckman
CFO, Treasurer
and Secretary
|
|
|
12,500
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
13.20
|
|
|
1/10/2021
|
|
|
|
3,750
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
24.80
|
|
|
7/30/2019
|
|
|
|
3,750
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
14.24
|
|
|
5/5/2019
|
|
|
|
2,500
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
12.72
|
|
|
3/30/2019
|
|
|
|
12,500
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
54.40
|
|
|
1/2/2018
|
|
|
|
2,500
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
32.40
|
|
|
10/15/2017
|
(1)
|
These
stock option awards were made under the Digital Ally, Inc. Stock Option and Restricted
Stock Plans and vest over the prescribed period contingent upon whether the individual
is still employed by the Company at that point.
|
The
following table presents information concerning the stock options exercised and the vesting of restricted stock awards during
2016 for the Named Executive Officers for the year ending December 31, 2016:
|
|
Option
Exercises and Restricted Stock Vested
|
|
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
|
|
Number
of Shares acquired realized on exercise (#)
|
|
|
Value
realized
on exercise ($)
|
|
|
Number
of Shares acquired on vesting (#)
|
|
|
Value
on vesting ($)
|
|
Stanton E. Ross
Chairman,
CEO & President
|
|
|
—
|
|
|
$
|
—
|
|
|
|
55,000
|
|
|
$
|
299,500
(1)
|
|
Thomas J. Heckman
CFO, Treasurer
and Secretary
|
|
|
—
|
|
|
$
|
—
|
|
|
|
55,000
|
|
|
$
|
299,500
(1)
|
|
(1)
|
Based
on the closing market price of our common stock of $5.64 on January 11, 2016, the date
of vesting for 20,000 shares, $5.07 on February 12, 2016, the date of vesting for 15,000
shares, $5.51 on February 19, 2016, the date of vesting for 15,000 shares, and $5.60
on October 30, 2016 the date of vesting for 5,000 shares.
|
Stock
Option Plans
Securities
Authorized for Issuance under Equity Compensation Plans
As
of December 31, 2016, the Company had adopted seven separate stock option and restricted stock plans: (i) the 2005 Stock Option
and Restricted Stock Plan (the “2005 Plan”), (ii) the 2006 Stock Option and Restricted Stock Plan (the “2006
Plan”), (iii) the 2007 Stock Option and Restricted Stock Plan (the “2007 Plan”), (iv) the 2008 Stock Option
and Restricted Stock Plan (the “2008 Plan”), (v) the 2011 Stock Option and Restricted Stock Plan (the “2011
Plan”), (vi) the 2013 Stock Option and Restricted Stock Plan (the “2013 Plan”) and (vii) the 2015 Stock Option
and Restricted Stock Plan (the “2015 Plan”), which was amended in May 2016. These Plans permit the grant of stock
options or restricted stock to its employees, non-employee directors and others totaling 1,925,000 shares of common stock. The
2005 Plan expired during 2015 with 28 shares reserved for awards but unissued which are now unavailable for issuance and the 2006
Plan expired in 2016 with 30 shares reserved for awards but unissued which are now unavailable for issuance. The Company believes
that such awards better align the interests of its employees with those of its shareholders. Option awards have been granted with
an exercise price equal to the market price of the Company’s stock at the date of grant with such option awards generally
vesting based on the completion of continuous service and having ten-year contractual terms. These option awards provide for accelerated
vesting if there is a change in control (as defined in the Plans) or the death or disability of the holder. The Company has registered
all shares of common stock that are issuable under its Plans with the SEC. A total of 200,772 shares remained available for grant
under the various Plans as of December 31, 2016.
The
Plans authorize us to grant (i) to the key employees incentive stock options (except for the 2007 Plan) to purchase shares of
common stock and nonqualified stock options to purchase shares of common stock and restricted stock awards, and (ii) to non-employee
directors and consultants non-qualified stock options and restricted stock. The Compensation Committee of our Board of Directors
administers the Plans by making recommendations to the Board of Directors or determinations regarding the persons to whom options
or restricted stock should be granted and the amount, terms, conditions and restrictions of the awards.
The
Plans allow for the grant of incentive stock options (except for the 2007 Plan), non-qualified stock options and restricted stock
awards. Incentive stock options granted under the Plans must have an exercise price at least equal to 100% of the fair market
value of the common stock as of the date of grant. Incentive stock options granted to any person who owns, immediately after the
grant, stock possessing more than 10% of the combined voting power of all classes of our stock, or of any parent or subsidiary
corporation, must have an exercise price at least equal to 110% of the fair market value of the common stock on the date of grant.
Non-statutory stock options may have exercise prices as determined by our Compensation Committee.
The
Compensation Committee is also authorized to grant restricted stock awards under the Plans and has done so. A restricted stock
award is a grant of shares of the common stock that is subject to restrictions on transferability, risk of forfeiture and other
restrictions and that may be forfeited in the event of certain terminations of employment or service prior to the end of a restricted
period specified by the Compensation Committee. We have filed registration statements on Form S-8 and amendments to a previously
filed Form S-8 with the SEC which registered all restricted shares granted and all shares to be issued upon exercise of the stock
options underlying the 2005 Plan, 2006 Plan, 2007 Plan, 2008 Plan, 2011 Plan, 2013 Plan and 2015 Plan.
Equity
Compensation Plan Information as of December 31, 2016
Plan
category
|
|
Number
of securities to be
issued
upon exercise of
outstanding
options, warrants and rights (a)
|
|
|
Weighted
average exercise price of outstanding options, warrants and rights (b)
|
|
|
Number
of securities remaining available for future issuance under equity
compensation
plans
(excluding securities reflected in column (a) (c)
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans
approved by stockholders
|
|
|
272,081
|
|
|
$
|
18.26
|
|
|
|
200,763
|
|
Equity compensation
plans not approved by stockholders
|
|
|
90,359
|
|
|
$
|
19.05
|
|
|
|
9
|
|
Total all plans
|
|
|
362,440
|
|
|
$
|
18.46
|
|
|
|
200,772
|
|
The
number of stock options and restricted stock awards that an employee, director, or consultant may receive under our Plans is in
the discretion of the administrator and therefore cannot be determined in advance, although the Board of Directors’ policy
in 2016 was to grant officers an award of 100,000 restricted shares each and each non-employee director an award of options to
purchase 10,000 shares, all subject to vesting requirements.
The
following table sets forth (a) the aggregate number of shares subject to options granted under the Plans during the year-ended
December 31, 2016 and (b) the average per share exercise price of such options.
Stock
Option and Restricted Stock Grants
Name
of Individual or Group
|
|
Number
of Restricted Shares of Common Stock Granted
|
|
|
Number
of Options Granted
|
|
|
Average
per Share Exercise Price
|
|
Stanton E. Ross, Chairman
of the Board,
CEO & President
|
|
|
100,000
|
|
|
|
—
|
|
|
$
|
—
|
|
Leroy C. Richie, Director
|
|
|
—
|
|
|
|
10,000
|
|
|
$
|
3.92
|
|
Elliot M. Kaplan, Former Director, resigned
effective September 9, 2016
|
|
|
—
|
|
|
|
10,000
|
|
|
$
|
3.92
|
|
Daniel F. Hutchins, Director
|
|
|
—
|
|
|
|
10,000
|
|
|
$
|
3.92
|
|
Michael J. Caulfield, Director
|
|
|
—
|
|
|
|
10,000
|
|
|
$
|
3.92
|
|
Thomas J. Heckman, Vice President, CFO,
Treasurer & Secretary
|
|
|
100,000
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All executive officers, as a group
|
|
|
200,000
|
|
|
|
—
|
|
|
$
|
—
|
|
All directors who are not executive
officers, as a group
|
|
|
—
|
|
|
|
40,000
|
|
|
$
|
3.92
|
|
All employees who are not executive
officers, as a group
|
|
|
90,000
|
|
|
|
—
|
|
|
$
|
—
|
|
Employment
Contracts; Termination of Employment and Change-in-Control Arrangements
We
do not have any employment agreements with any of our executive officers. However, on December 23, 2008, we entered into retention
agreements with the following executive officers: Stanton E. Ross and Thomas J. Heckman.
Retention
Agreements - Potential Payments upon Termination or Change of Control
The
following table sets forth for each named executive officer potential post-employment payments and payments on a change in control
and assumes that the triggering event took place on January 1, 2017.
Retention
Agreement Compensation
Name
|
|
Change
in control payment due based upon successful completion of transaction
|
|
|
Severance
payment due based on termination after Change of
Control
occurs
|
|
|
Total
|
|
Stanton
E. Ross
|
|
$
|
73,333
|
|
|
$
|
220,000
|
|
|
$
|
293,333
|
|
Thomas J. Heckman
|
|
$
|
73,333
|
|
|
$
|
220,000
|
|
|
$
|
293,333
|
|
Total
|
|
$
|
146,666
|
|
|
$
|
440,000
|
|
|
$
|
586,666
|
|
The
retention agreements guarantee the executive officers specific payments and benefits upon a Change in Control of the Company.
The retention agreements also provide for specified severance benefits if, after a Change in Control of the Company occurs, the
executive officer voluntarily terminates employment for “Good Reason” or is involuntarily terminated without “Cause.”
Under
the retention agreements, a “Change in Control” means (i) one party alone, or acting with others, has acquired or
gained control over more than 50% of the voting shares of the Company; (ii) the Company merges or consolidates with or into another
entity or completes any other corporate reorganization, if more than 50% of the combined voting power of the surviving entity’s
securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not stockholders
of the Company immediately prior to such merger, consolidation or other reorganization; (iii) a majority of the Company’s
Board of Directors is replaced and/or dismissed by the stockholders of the Company without the recommendation of or nomination
by the Company’s current Board of Directors; (iv) the Company’s Chief Executive Officer (the “CEO”) is
replaced and/or dismissed by stockholders without the approval of the Company’s Board of Directors; or (v) the Company sells,
transfers or otherwise disposes of all or substantially all of the consolidated assets of the Company and the Company does not
own stock in the purchaser or purchasers having more than 50% of the voting power of the entity owning all or substantially all
of the consolidated assets of the Company after such purchase.
“Good
Reason” means either (i) a material adverse change in the executive’s status as an executive or other key employee
of the Company, including without limitation, a material adverse change in the executive’s position, authority, or aggregate
duties or responsibilities; (ii) any adverse change in the executive’s base salary, target bonus or benefits; or (iii) a
request by the Company to materially change the executive’s geographic work location.
“Cause”
means (i) the executive has acted in bad faith and to the detriment of the Company; (ii) the executive has refused or failed to
act in accordance with any specific lawful and material direction or order of his or her supervisor; (iii) the executive has exhibited,
in regard to employment, unfitness or unavailability for service, misconduct, dishonesty, habitual neglect, incompetence, or has
committed an act of embezzlement, fraud or theft with respect to the property of the Company; (iv) the executive has abused alcohol
or drugs on the job or in a manner that affects the executive’s job performance; and/or (v) the executive has been found
guilty of or has plead
nolo contendere
to the commission of a crime involving dishonesty, breach of trust, or physical
or emotional harm to any person. Prior to termination for Cause, the Company shall give the executive written notice of the reason
for such potential termination and provide the executive a 30-day period to cure such conduct or act or omission alleged to provide
grounds for such termination.
If
any Change in Control occurs and the executive continues to be employed as of the completion of such Change in Control, upon completion
of such Change in Control, as payment for the executive’s additional efforts during such Change in Control, the Company
shall pay the executive a Change in Control benefit payment equal to three months of the his base salary at the rate in effect
immediately prior to the Change in Control completion date, payable in a lump sum net of required tax withholdings. If any Change
in Control occurs, and if, during the one-year period following the Change in Control, the Company terminates the executive’s
employment without Cause or the executive submits a resignation for Good Reason (the effective date of such termination or resignation,
the “Termination Date”), then:
(a)
The Company shall pay the executive severance pay equal to 12 months of his base salary at the higher of the rate in effect immediately
prior to the Termination Date or the rate in effect immediately prior to the occurrence of the event or events constituting Good
Reason, payable on the Termination Date in a lump sum net of required tax withholdings, plus all other amounts then payable by
the Company to the executive less any amounts then due and owing from the executive to the Company;
(b)
The Company shall provide continuation of the executive’s health benefits at the Company’s expense for 18 months following
the Termination Date; and
(c)
The executive’s outstanding employee stock options shall fully vest and be exercisable for a 90-day period following the
Termination Date.
The
executive is not entitled to the above severance benefits for a termination based on death or disability, resignation without
Good Reason or termination for Cause. Following the Termination Date, the Company shall also pay the executive all reimbursements
for expenses in accordance with the Company’s policies, within ten days of submission of appropriate evidence thereof by
the executive.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth, as of April 3, 2017, the number and percentage of outstanding shares of common stock beneficially
owned by each person known by us to beneficially own more than five percent of such stock. We have no other class of capital stock
outstanding.
The
following table sets forth, as of April 3, 2017, the number and percentage of outstanding shares of common stock beneficially
owned by each person known by us to beneficially own more than five percent of such stock. We have no other class of capital stock
outstanding:
Security
Ownership of Certain Beneficial Owners
The
following table sets forth information regarding ownership of our common stock by:
|
●
|
each
person or group of affiliated persons known by us to be the beneficial owner of more than 5% of our outstanding common
stock;
|
|
●
|
each
of our directors and nominees for director;
|
|
●
|
each
of our named executive officers; and
|
|
●
|
all
directors and executive officers as a group.
|
The
amounts for our named executive officers and directors as a group and our significant stockholders are as of April 3, 2017, the
Record Date, unless otherwise indicated in a footnote below. Beneficial ownership in this table is determined in accordance with
the rules of the SEC, and does not necessarily indicate beneficial ownership for any other purpose. Under these rules, the number
of shares of common stock deemed outstanding includes all shares of restricted stock and those shares issuable upon exercise of
options held by the respective person or group that may be exercised within 60 days after April 3, 2017. For purposes of calculating
each person’s or group’s percentage ownership, unvested stock options exercisable within 60 days and all shares of
restricted stock are included for that person or group, but not for any other person or group. Percentage of beneficial ownership
is based on the shares of common stock outstanding as of April 3, 2017.
Name
and address of beneficial owner
|
|
Amount
and nature of beneficial
|
|
Percent
of
class
|
5%
Stockholders (excluding executive officers and directors):
|
|
|
|
|
None (1)(2)(3)
|
|
|
|
|
|
(1)
Based solely on a review of Schedules 13G filed as of February 28, 2016.
(2)
Hudson Bay Master Fund, Ltd. owns warrants exercisable to purchase a total of 769,795 shares of common stock at a price
of $13.43 per share and 412,200 shares at a price of $5.00 per share. The warrants contain provisions that limit the number
of shares issuable upon their exercise to 4.99% beneficial ownership of our common stock, or 9.99% beneficial ownership
if the holder gives us written notice, which it has not. An increase in the ownership limit to 9.9% would amount to beneficial
ownership of 574,969 shares if the holder exercised that portion of its warrants.
|
|
|
|
(3)
CVI Investments, Inc. owns warrants exercisable to purchase a total of 749,795 shares of common
stock at a price of $13.43 per share and 400,000 shares at a price of $5.00 per share. The
warrants contain provisions that limit the number of shares issuable upon their exercise to
4.99% beneficial ownership of our common stock, or 9.99% if the holder gives us written notice,
which it has not. An increase of the ownership limit to 9.9% would amount to beneficial ownership
of 574,969 shares if the holder exercised that portion of its warrants.
|
The
following table sets forth, as of April 3, 2017, the number and percentage of outstanding shares of common stock beneficially
owned by each director of the Company, each named officer of the Company, and all our directors and executive officers as a group.
We have no other class of capital stock outstanding.
Security
Ownership of Executive Officers and Directors
Name
and address of beneficial owner
|
|
Amount
and nature of beneficial ownership
|
|
|
Percent
of
class
|
|
Executive Officers
& Directors: (1)
|
|
|
|
|
|
|
Stanton E. Ross (2)
|
|
|
533,387
|
|
|
|
9.0
|
%
|
Leroy C. Richie (3)
|
|
|
72,398
|
|
|
|
1.2
|
%
|
Daniel F. Hutchins (4)
|
|
|
66,450
|
|
|
|
1.1
|
%
|
Michael J. Caulfield (5)
|
|
|
10,000
|
|
|
|
0.2
|
%
|
Thomas J. Heckman
(6)
|
|
|
468,823
|
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
|
All officers
and directors as a group (five individuals)
|
|
|
1,151,058
|
|
|
|
19.5
|
%
|
(1)
|
The
address of these persons is c/o Digital Ally, Inc. 9705 Loiret Blvd, Lenexa, KS 66219.
|
(2)
|
Mr.
Ross’s total shares include: (i) 252,500 restricted shares that are subject to forfeiture to us and (ii) vested options
exercisable to purchase 121,875 shares of common stock. Mr. Ross has pledged 200,525 common shares and options exercisable
to purchase 121,875 shares of common stock at $8.00 per share to the lenders as collateral for personal loans.
|
(3)
|
Mr.
Richie’s total shares include: (i) 9,000 restricted shares of common stock that are subject to forfeiture to us, (ii)
vested options exercisable to purchase 23,180 shares of common stock and (ii) 10,000 shares of common stock underlying stock
option awards that vest within 60 days.
|
(4)
|
Mr.
Hutchin’s total shares include: (i) 9,000 restricted shares of common stock that are subject to forfeiture to us, (ii)
vested options exercisable to purchase 22,500 shares of common stock and (ii) 10,000 shares of common stock underlying stock
option awards that vest within 60 days.
|
(5)
|
Mr.
Caulfield’s total shares include 10,000 shares of common stock underlying stock option awards that vest within 60 days.
|
(6)
|
Mr.
Heckman’s total shares include (i) 202,500 restricted shares that are subject to forfeiture to us; (ii) vested options
exercisable to purchase 37,500 shares of common stock; and (iii) 76,040 shares of common stock held in the Company’s
401(k) Plan (on December 31, 2016) as to which Mr. Heckman has voting power as trustee of the 401(k) Plan. Mr. Heckman has
pledged 135,283 common shares to financial institutions as collateral for personal loans.
|
SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities Act of 1934, as amended, requires our executive officers and directors, and persons who own more than
ten percent of our common stock, to file with the Securities and Exchange Commission reports of ownership of, and transactions
in, our securities and to provide us with copies of those filings. To our knowledge, based solely on our review of the copies
of such forms received by us, or written representations from certain reporting persons, we believe that during the year ended
December 31, 2016, all filing requirements applicable to our officers, directors and greater than ten percent beneficial owners
were complied with, except for Mr. Caulfield, whose initial Form 3 filing was late.
TRANSACTIONS
WITH RELATED PERSONS
Certain
Relationships and Related Person Transactions
We
engaged in no reportable transactions with related persons during the years ended December 31, 2016 and 2015 other than the following:
The
Company has entered into an agreement that requires it to make monthly payments which will be applied to future commissions and/or
consulting fees to be earned by a limited liability company (“LLC”) that is partially owned by a relative of the Company’s
chief financial officer. Under the agreement, dated January 15, 2016, the LLC provides consulting services for developing a new
distribution channel outside of law enforcement for its body-worn camera and related cloud storage products to customers in the
United States. The Company paid the LLC an advance against commissions ranging from $5,000 to $6,000 per month plus necessary
and reasonable expenses for a period of one year beginning January 2016, which agreement can be automatically extended based on
the LLC achieving certain minimum sales quotas. The agreement was renewed in January 2017 for a period of three years. As of December
31, 2016, the Company had advanced a total of $169,048 pursuant to this agreement.
OTHER
MATTERS
The
Board of Directors is not aware of any other matters to be presented for action at the annual meeting. However, if any other matter
is properly presented at the annual meeting, it is the intention of the persons named in the enclosed proxy to vote the shares
they represent as the Board of Directors may recommend.
ADVANCE
NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS AND NOMINATIONS
The
bylaws of the Company provide that in order for a stockholder to nominate directors at an annual meeting or to propose business
to be brought before an annual meeting, the stockholder must give timely, written notice to the Secretary of the Company and such
notice must be received at the principal executive offices of the Company not less than 120 days before the date of its release
of the proxy statement to stockholders in connection with its previous year’s annual meeting of stockholders.
Such
stockholder’s notice shall include, with respect to each matter that the stockholder proposes to bring before the meeting,
a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business
at the annual meeting, and with respect to each person whom the stockholder proposes to nominate for election as a director, all
information relating to such person, including such person’s written consent to being named in the proxy statement as a
nominee and to serving as a director, that is required under the Securities Exchange Act of 1934, as amended.
In
addition, the stockholder must include in such notice the name and address, as they appear on the Company’s records, of
the stockholder proposing such business or nominating such persons, and the name and address of the beneficial owner, if any,
on whose behalf the proposal or nomination is made, the class and number of shares of capital stock of the Company that are owned
beneficially and of record by such stockholder of record and by the beneficial owner, if any, on whose behalf the proposal or
nomination is made, and any material interest or relationship that such stockholder of record and/or the beneficial owner, if
any, on whose behalf the proposal or nomination is made may respectively have in such business or with such nominee. At the request
of the Board of Directors, any person nominated for election as a director shall furnish to the Secretary of the Company the information
required to be set forth in a stockholder’s notice of nomination which pertains to the nominee.
FUTURE
PROPOSALS OF STOCKHOLDERS
The
deadline for stockholders to submit proposals to be considered for inclusion in the proxy statement for the next annual meeting
of stockholders is November 15, 2017.
ANNUAL
REPORT
This
proxy statement is accompanied by a copy of our annual report for the fiscal year ended December 31, 2016.
BY
ORDER OF THE BOARD OF DIRECTORS
April
10, 2017
Lenexa,
Kansas
|
Chairman
of the Board, Chief Executive
Officer
and President
|
Appendix
A
SECOND
AMENDMENT TO DIGITAL ALLY, INC.
2015
STOCK OPTION AND RESTRICTED STOCK PLAN
Pursuant
to Section 12 of the Digital Ally, Inc. 2015 Stock Option and Restricted Stock Plan (the “Plan”), the Board of Directors
(the “Board”) of Digital Ally, Inc. (the “Corporation”) hereby amends the Plan, subject to the approval
of the Corporation’s stockholders. This Amendment to the Digital Ally, Inc. 2015 Stock Option and Restricted Stock Plan
(the “Second Amendment”) is effective as of the date of shareholder approval as provided in Section 12 hereof. The
Company previously amended the Plan effective May 12, 2016.
1.
PURPOSE OF THE AMENDMENT
The
Corporation wishes to amend the Plan to increase the aggregate number of Shares that may be granted under the Plan.
2.
AMENDMENT
Section
4 of the Plan is hereby amended and restated in its entirety to read as follows:
STOCK
SUBJECT TO THE PLAN.
(a)
Stock Reserve.
Subject to the provisions of Section 11 relating to adjustments upon changes in Common Stock, the shares of
Common Stock that may be issued pursuant to Awards shall not exceed in the aggregate one million two hundred-fifty thousand (1,250,000)
shares of Common Stock.
This
Amendment amends only the provision of the Plan as noted above, and those provisions not expressly amended herein shall be considered
in full force and effect. Notwithstanding the foregoing, this Amendment shall supersede the provisions of the Plan to the extent
those provisions are inconsistent with the provisions and intent of this Amendment.
3.
APPROVAL OF STOCKHOLDERS
This
Amendment was adopted by the Board on February 24, 2017, and is subject to approval by the affirmative vote of a majority of the
shares represented and voting at a duly held meeting at which a quorum is present or by an action by written consent no later
than February 23, 2018.
4.
EXECUTION
To
record the adoption of this Amendment by the Board on February 24, 2017, the Corporation has caused an authorized officer to affix
the Corporate name hereto.
DIGITAL
ALLY, INC.
|
|
|
|
|
By:
|
/s/
STANTON E. ROSS
|
|
|
Stanton
E. Ross, Chairman, Chief Executive Officer and President
|
|
Admission
Ticket
Bring
this ticket with you for admission to the 2017 Annual Meeting
Digital
Ally, Inc.
2017
Annual Meeting of Stockholders
Wednesday,
May 31, 2017 at 10:00 a.m. CDT
9705
Loiret Boulevard
Lenexa,
Kansas 66219
Your
vote is important
FOLD
AND DETACH HERE AND READ THE REVERSE SIDE
DIGITAL
ALLY, INC.
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR
THE 2017 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON WEDNESDAY, MAY 31, 2017
The
undersigned hereby appoints
Thomas J. Heckman
and
Christa Johnson
, and each of them as the true and lawful attorney,
agent and proxy of the undersigned, with full power of substitution, to represent and to vote all shares of common stock of
Digital
Ally, Inc.
held of record by the undersigned on April 3, 2017, at the 2017 Annual Meeting of Stockholders to be held at the
corporate facility located at 9705 Loiret Boulevard, Lenexa, Kansas 66219, on Wednesday, May 31, 2017 at 10:00 a.m., CDT, and
at any adjournments thereof.
Any
and all proxies heretofore given are hereby revoked.
When
properly executed, this proxy will be voted as designated by the undersigned.
If
no choice is specified, the proxy will be voted, in relation to Proposal
3, FOR
the ratification of the appointment of
RSM US LLP as our independent registered public accounting firm.
In
his or her discretion, the proxy is authorized to vote upon such other business that may properly come before the annual meeting.
(Continued
and to be dated and signed on reverse side)
2017
ANNUAL MEETING OF STOCKHOLDERS OF DIGITAL ALLY, INC.
Wednesday,
May 31, 2017
Please
date, sign and mail your proxy card in the envelope provided as soon as possible.
Please
mark your vote in blue or black ink as shown here Please detach along perforated line and mail in the envelope provided.
The
Board of Directors recommends that you vote as follows: “FOR” the election of the four nominees to the Board of
Directors; “FOR” Proposals 2 and 3.
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Proposal
1
:
Election of Directors of the Company
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NOMINEES:
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[ ]
FOR ALL NOMINEES
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[ ]
Stanton E. Ross
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[ ] Daniel
F. Hutchins
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[ ]
Leroy C. Richie
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[ ] Michael
J. Caulfield
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[ ]
WITHHOLD AUTHORITY FOR ALL NOMINEES
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[ ] FOR ALL
EXCEPT ________________
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(See
instructions below)
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INSTRUCTIONS:
To withhold authority to vote for any individual nominee(s), mark
“FOR ALL EXCEPT”
and fill in the
circle next to each nominee you wish to withhold, as shown here: [ ]
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To
change the address on your account, please check the box at right and indicate your new address in the address space above.
Please note that changes to the registered name(s) on the account may not be submitted via this method.
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[ ]
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Proposal
2.
FOR the amendment of the 2015 Stock Option and Restricted Stock Plan to increase the number of shares reserved for
issuance under the Plan by 500,000:
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FOR
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AGAINST
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ABSTAIN
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[ ]
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[ ]
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[ ]
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Proposal
3.
FOR ratification of the appointment of RSM US LLP as our independent registered public accounting firm:
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FOR
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AGAINST
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ABSTAIN
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[ ]
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[ ]
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[ ]
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In
his discretion, the proxy is authorized to vote upon such other business that may properly come before the 2017 Annual Meeting.
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Signature
of Stockholder
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Date
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Signature
of Stockholder
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Date
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NOTE:
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Please
sign exactly as name appears below. When shares are held by joint tenants, both should sign. When signing as attorney, as
executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate
name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person.
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