<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 [Fee Required]
For the fiscal year ended June 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 [No Fee Required]
For the Transition period from ___________ to ___________
COMMISSION FILE NUMBER: 0-10004
NAPCO SECURITY SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-2277818
(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
333 Bayview Avenue, Amityville, New York 11701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(516) 842-9400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of September 18, 1997, 4,369,727 shares of Common Stock were
outstanding, and the aggregate market value of the stock (based upon the last
sale price of the stock on such date) held by non-affiliates was approximately
$14,048,831.
Documents Incorporated by Reference: Portions of the Registrant's
Proxy Statement in connection with its 1997 Annual Meeting of Stockholders are
incorporated by reference in Part III.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
<PAGE> 2
PART I
ITEM 1. BUSINESS.
NAPCO Security Systems, Inc. ("NAPCO") was incorporated in December
1971 in the State of Delaware for the purpose of acquiring National Alarm
Products Co., Inc., a New Jersey corporation founded in 1969 ("National"). In
December 1971, NAPCO issued an aggregate of 300,000 shares of its common stock,
par value $.01 per share ("Common Stock"), to the stockholders of National in
exchange for all of the issued and outstanding capital stock of National, after
which National was merged into NAPCO.
NAPCO and its subsidiaries (collectively, the "Company") are engaged
in the development, manufacture, distribution and sale of security alarm
products and door security devices (the "Products") for commercial and
residential installations.
Products
Alarm Systems. Alarm systems usually consist of various detectors, a
control panel, a digital keypad and signaling equipment. When a break-in
occurs, an intrusion detector senses the intrusion and activates a control
panel via hard-wired or wireless transmission that sets off the signaling
equipment and, in most cases, causes a bell or siren to sound. Communication
equipment such as a digital communicator may be used to transmit the alarm
signal to a central station or another person selected by a customer.
The Company manufactures and markets the following products for alarm
systems:
Automatic Communicators. When a control panel is activated by a
signal from an intrusion detector, it activates a communicator that can
automatically dial one or more predesignated telephone numbers. If programmed
to do so, a digital communicator dials the telephone number of a central
monitoring station and communicates in computer language to a digital
communicator receiver, which prints out an alarm message.
Control Panels. A control panel is the "brain" of an alarm system.
When activated by any one of the various types of intrusion detectors, it can
activate an audible alarm and/or various types of communication devices. For
marketing purposes, the Company refers to its control panels by the trade name,
generally "Magnum AlertTM" followed by a numerical designation.
Combination Control Panels/Digital Communicators and Digitkey Systems.
A combination control panel, digital communicator and a digital keypad (a plate
with push button numbers as on a telephone, which eliminates the need for
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mechanical keys) has continued to grow rapidly in terms of dealer and consumer
preference. Benefits of the combination format include the cost efficiency
resulting from a single micro-computer function, as well as the reliability and
ease of installation gained from the simplicity and sophistication of
microcomputer technology.
Door Security Devices. The Company manufactures a variety of exit
alarm locks ranging from simple dead bolt locks to door alarms.
Fire Alarm Control Panel. Multi-zone fire alarm control panels which
accommodate an optional digital communicator for reporting to a central station
are also manufactured by the Company.
Area Detectors. The Company's area detectors are both passive
infra-red heat detectors and combination microwave/ passive infra-red detectors
that are linked to alarm control panels. Passive infra-red heat detectors
respond to the change in heat patterns caused by an intruder moving within a
protected area. Combination units respond to both changes in heat patterns and
changes in microwave patterns occurring at the same time.
Peripheral Equipment
The Company also markets peripheral and related equipment manufactured
by other companies. Revenues from peripheral equipment have not been
significant.
Research and Development
The Company's business involves a high technology element. A
substantial amount of the Company's efforts are expended to develop and improve
the Products. During the fiscal years ended June 30, 1997, 1996, and 1995, the
Company expended approximately $3,340,000, $3,296,000 and $3,252,000,
respectively, on Company-sponsored research and development activities
conducted by its engineering department and outside consultants. Substantially
all of the Company's research and development activities during fiscal 1997,
1996 and 1995 were conducted by its engineering department. The Company
intends to continue to conduct a significant portion of its future research and
development activities internally.
Employees
As of June 30, 1997, the Company had approximately 1,000 full-time
employees.
Marketing and Major Customers
The Company's staff of approximately 32 sales and marketing support
employees located at the Company's headquarters sells and
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markets the Products directly to independent distributors and wholesalers of
security alarm and security hardware equipment. Management estimates that
these channels of distribution represented approximately 80% of the Company's
total sales for the fiscal year ended June 30, 1997. The Company's sales
representatives periodically contact existing and potential customers to
introduce new products and create demand for those as well as other Company
products. These sales representatives, together with the Company's technical
personnel, provide training and other services to wholesalers and distributors
so that they can better service the needs of their customers. In addition to
direct sales efforts, the Company advertises in technical trade publications
and participates in trade shows in major United States cities. Some of the
Company's products are marketed under the "private label" of certain customers.
Sales to A.D.I., A.D.T., and KingAlarm, each unaffiliated with the
Company, together accounted for approximately 38% and 42% of the Company's total
sales for the fiscal years ended June 30, 1997 and 1996 (see Note 9 to
Consolidated Financial Statements as to percentage breakdown). The loss of any
of these customers could have a material adverse effect on the Company's
business. With respect to a customer that accounted for approximately 9% of the
Company's sales in fiscal year 1997, the Company anticipates that there will be
a significant reduction in the sales to such customer. However, the Company
does not believe that such reduction will have a material adverse effect on the
results of operations or financial condition of the Company.
Competition
The security alarm products industry is highly competitive. The
Company's primary competitors are comprised of approximately 30 other
companies that manufacture and market security equipment to distributors,
dealers, central stations and original equipment manufacturers. The Company
believes that no one of these competitors is dominant in the industry. Certain
of these companies may have substantially greater financial and other resources
than the Company.
The Company competes primarily on the basis of the features, quality,
reliability and price of, and the incorporation of the latest innovative and
technological advances into, its Products. The Company also competes by
offering technical support services to its customers. In addition, the Company
competes on the basis of its expertise, its proven products, reputation and its
ability to provide Products to customers without delay. The inability of the
Company to compete with respect to any one or more of the aforementioned factors
could have an adverse impact on the Company's business. Relatively low-priced
"do-it-yourself" alarm system products have become available in recent years and
are available to the public at retail stores. The Company believes that these
products compete with the Company only to a limited
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extent because they appeal primarily to the "do-it-yourself" segment of the
market. Purchasers of such systems do not receive professional consultation,
installation, service or the sophistication that the Company's Products
provide.
Raw Materials and Backlog
The Company prepares specifications for component parts used in the
Products and purchases the components from outside sources or fabricates the
components itself. These components, if standard, are generally readily
available; if specially designed for the Company, there is usually more than one
alternative source of supply available to the Company on a competitive basis.
The Company generally maintains inventories of all critical components. The
Company for the most part is not dependent on any one source for its raw
materials.
In general, orders for the Products are processed by the Company from
inventory. A backlog of approximately $3,467,000 existed as of June 30, 1997.
This compared to a backlog of approximately $5,300,000 a year ago, which
included several large orders received during the fourth quarter a year ago.
Government Regulation
The Company's telephone dialers, microwave transmitting devices
utilized in its motion detectors and any new communication equipment that may
be introduced from time to time by the Company must comply with standards
promulgated by the Federal Communications Commission ("FCC") in the United
States and similar agencies in other countries where the Company offers such
products, specifying permitted frequency bands of operation, permitted power
output and periods of operation, as well as compatibility with telephone lines.
Each new Product of the Company that is subject to such regulation must be
tested for compliance with FCC standards or the standards of such similar
governmental agencies. Test reports are submitted to the FCC or such similar
agencies for approval.
Patents
The Company has been granted several patents and trademarks relating
to the Products. While the Company obtains patents and trademarks as it deems
appropriate, the Company does not believe that its current or future success is
dependent on its patents.
Foreign Sales
The revenues and identifiable assets attributable to the foreign and
domestic operations of the Company for its last three fiscal years, and the
amount of export sales in the aggregate, are summarized in the following
tabulation.
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Financial Information Relating to Foreign
and Domestic Operations and Export Sales(1)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Sales to unaffiliated
customers:
United States $53,302 $49,088 $48,078
Foreign 0 0 0
Identifiable assets:
United States $41,242 $33,084 $36,031
Foreign 16,002 $24,235 $19,708
Export sales:
United States(2) $10,355 $ 7,994 $ 7,646
</TABLE>
ITEM 2. PROPERTIES.
The Company has executive offices and production and warehousing
facilities at 333 Bayview Avenue, Amityville, New York. This facility consists
of a fully-utilized 90,000 square foot building on a six acre plot. This six
acre plot provides the Company with space for expansion of office,
manufacturing and storage capacities. The Company constructed this facility
with the proceeds from an industrial revenue bond financing in 1985.
The Company's foreign subsidiary, Napco/Alarm Lock Grupo
Internacional, S.A. (formerly known as NSS Caribe, S.A.), is located in the
Dominican Republic where it owns a building of approximately 167,000 square
feet of production and warehousing space. That subsidiary also leases the land
associated with this
- --------------------
(1) Certain prior year amounts have been reclassified to conform to
current year presentation.
(2) Export sales from the United States in fiscal year 1997 included
sales of approximately $6,046,000, $1,608,000, and $1,127,000 to Europe, North
America, and South America respectively. Export sales from the United States
in fiscal year 1996 included sales of approximately $4,744,000, $1,083,000,
and $451,000 to Europe, North America, and South America respectively.
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building under a 99 year lease expiring in the year 2092. As of June 30, 1997,
most of the Company's sales related to labor on assemblies, goods and
subassemblies at these sites, utilizing U.S. quality control standards.
Management believes that these facilities are more than adequate to
meet the needs of the Company in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending or threatened material legal proceedings to which
NAPCO or its subsidiaries or any of their property is subject, other than as
follows:
In May, 1995, the Company was advised of an unexpected Chapter 7
bankruptcy filing of one of its customers. As a result of anticipated cash
recoveries, management believes that the Company's allowance for doubtful
accounts at June 30, 1997 is sufficient and that this bankruptcy filing will not
have a material adverse effect on the Company's financial position or results of
operations.
In August 1995, the Internal Revenue Service ("IRS") informed the
Company that it is proposing adjustments of the Company's Federal tax returns
for fiscal years 1987 through 1992. The IRS has issued a report to the Company
proposing adjustments that would result in taxes due of approximately $4.3
million, excluding interest charges. The primary adjustments presented by the
IRS relate to intercompany pricing and royalty charges, DISC earnings and
charitable contributions. The Company disagrees with the IRS and intends to
vigorously appeal this assessment using all remedies and procedural actions
available under the law. In October 1996, the Company gave the IRS additional
information supporting its position. As a result, the Appeals Division of the
IRS advised the Company that the case had been returned to the Audit Division
for further consideration. Subsequently, the case has again been returned to
the Appeals Division of the IRS, with a meeting with such division scheduled
for early November, 1997. The Company believes that it has provided adequate
reserves at June 30, 1997 to address the ultimate resolution of this matter, so
that it will not have a material impact on the Company's consolidated financial
statements. (See Note 4 to Consolidated Financial Statements.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS.
Principal Market
NAPCO's Common Stock became publicly traded in the over-the-counter
("OTC") market in 1972. In December 1981, the Common Stock was approved for
reporting by the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") under the symbol "NSSC", and in November 1984 the Common
Stock was designated by NASDAQ as a National Market System Security, which has
facilitated the development of an established public trading market for the
Common Stock. The tables set forth below reflect the range of high and low
sales of the Common Stock in each quarter of the past two fiscal years as
reported by the NASDAQ National Market System.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------
Fiscal 1997
--------------------------------------------------------
Sept. 30 Dec. 31 March 31 June 30
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Common Stock
- ------------
High $4.38 $4.25 $5.63 $5.63
Low $3.50 $3.38 $3.75 $4.75
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------
Fiscal 1996
--------------------------------------------------------
Sept. 30 Dec. 31 March 31 June 30
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Common Stock
- ------------
High $3.13 $4.00 $4.13 $4.50
Low $2.00 $2.25 $3.00 $3.38
</TABLE>
Approximate Number of Security Holders
The number of holders of record of NAPCO's Common Stock as of
September 18, 1997 was 239 (such number does not include beneficial owners of
stock held in nominee name).
Dividend Information
NAPCO has declared no cash dividends during the past three years with
respect to its Common Stock, and the Company does not anticipate paying any
cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA.
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
Operations
- ----------
Net Sales $53,302 $49,088 $48,078 $46,873 $46,560
Gross Profit 12,778 11,302 11,325 11,068 11,925
Provision for
(recovery of)
Income Taxes 605 515 532 37 (32)
Net Income 1,639 1,014 512 1,254 2,317
Earnings per Share .37 .23 .12 .29 .53
Cash Dividends per
Share(1) 0 0 0 0 0
</TABLE>
<TABLE>
<CAPTION>
As of June 30,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
Financial Condition
- -------------------
Total Assets $57,244 $57,319 $55,739 $53,810 $51,233
Long-term Debt 13,313 14,150 15,275 13,690 6,567
Working Capital 30,136 28,676 28,660 28,033 19,936
Stockholders' Equity 31,218 29,574 28,560 28,048 26,793
Stockholders' Equity
per Outstanding
Share 7.14 6.77 6.54 6.42 6.14
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Liquidity and Capital Resources
The Company's cash on hand combined with proceeds from operating
activities during fiscal 1997 were adequate to meet the Company's capital
expenditure needs and short and long-term debt obligations. The primary source
of financing related to borrowings under a $16,000,000 secured revolving credit
facility. The Company expects that cash generated from operations and cash
available under the Company's bank line of credit will be adequate to meet its
short-term liquidity requirements. The Company's primary internal source of
liquidity is the cash flow generated from operations. As of June 30, 1997, the
Company's
- --------------------
(1) The Company has never declared or paid a cash dividend on its
common stock. It is the policy of the Board of Directors to retain earnings
for use in the Company's business.
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unused sources of funds consisted principally of $1,006,000 in cash and
approximately $4,037,000 which represents the unused portion of its secured
revolving credit facility.
In fiscal 1988, the Company completed construction of a new
manufacturing and administrative facility in Amityville, N.Y. financed by a $3.9
million industrial revenue bond issue bearing interest at a variable rate
determined weekly by the underwriting bank based upon market conditions. During
fiscal 1997, the average interest rate was approximately 3.28% per annum. The
bonds had a maturity date of April 1, 2000, subject to quarterly sinking fund
payments. Such bonds were retired in May 1997 as part of the Company's debt
refinancing with its new primary bank as discussed below.
On April 26, 1993, the Company's foreign subsidiary entered into a
99-year lease of approximately 4 acres of land near its former facility in
the Dominican Republic, at an annual cost of approximately $272,000.
On July 27, 1994, the Company entered into an $11,000,000 secured
revolving credit and term loan facility with two banks, with the Company's
primary bank acting as agent. The revolving credit loan, which provided for
interest based upon a number of options available to the Company and did not
require principal payments until conversion, converted to a term loan on June
30, 1997 payable in sixteen (16) equal quarterly installments beginning on
September 30, 1997.
On May 13, 1997, the Company refinanced the majority of its bank debt
with a new primary bank and entered into a $16,000,000 secured revolving credit
agreement, a $3,000,000 line of credit to be used in connection with commercial
and standby letters of credit, and replaced the $2,500,000 standby letter of
credit securing an earlier loan from another bank in connection with the
Company's international operations. These agreements replaced the $11,000,000
credit agreement described above. The Company restructured its debt to allow
for future growth and expansion as well as to obtain terms more favorable to the
Company. As part of the debt restructuring, the Company retired the outstanding
industrial revenue bonds relating to the financing of the construction of the
Company's Amityville, N.Y. facility. The revolving credit agreement will expire
in May, 2000 and any outstanding borrowings are to be repaid on or before that
time.
In addition, a subsidiary of the Company maintains a $4,500,000 line
of credit with another bank. The balance outstanding under the line as of
December 31, 1994 automatically converted to a term loan payable in 20 equal
quarterly installments commencing on that date. $2,250,000 was outstanding as
of June 30, 1997 (see Note 5 to Consolidated Financial Statements).
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The Company takes into consideration a number of factors in measuring
its liquidity, including the ratios set forth below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current Ratio 3.5 to 1 3.2 to 1 3.5 to 1
Net Sales to Receivables 3.8 to 1 3.6 to 1 3.5 to 1
Total Debt to Equity .8 to 1 .9 to 1 1.0 to 1
</TABLE>
As of June 30, 1997, the Company had no material commitments for
purchases or capital expenditures.
Working Capital. Working capital increased by $1,460,000 to
$30,136,000 at June 30, 1997 from $28,676,000 at June 30, 1996. This was
primarily due to the Company's restructuring of its debt as previously
discussed and improved cash flows as discussed below.
Accounts Receivable. Accounts receivable increased by $178,000 to
$13,937,000 at June 30, 1997 from $13,759,000 at June 30, 1996. This increase
resulted primarily from an increase in sales in the second half of the fourth
quarter as compared to sales in the same period a year ago.
Inventory. Inventory decreased by $242,000 to $25,702,000 at June 30,
1997 as compared to $25,944,000 at June 30, 1996. This decrease is due
primarily to improvements in the Company's MRP (Material Requirements Planning)
system, the goal of which is to have shipments of raw materials as close as
possible to "just in time". This improvement, which resulted in a reduction
in inventory was partially offset by higher inventory levels necessary to
support the increased sales volume.
Accounts Payable and Accrued Expenses. Accounts payable and accrued
expenses decreased by $987,000 to $6,713,000 at June 30, 1997 from $7,700,000
at June 30, 1996. This decrease is primarily the result of improved inventory
management and stronger cash flows.
Results of Operations
Fiscal 1997 Compared to Fiscal 1996
Net Sales. Net Sales in fiscal 1997 increased approximately $4,214,000
or 8.6% to $53,302,000 from $49,088,000 in fiscal 1996. This increase was
primarily the result of increased export sales as well as the market's favorable
reception to the Company's new hybrid hard-wired/wireless products and new
digital locks that more than offset the decrease in sales of hard-wired only
products, decreased sales to one major customer, and continued price pressure in
the industry.
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Gross Profit. The Company's gross profit increased $1,476,000 to
$12,778,000 or 24.0% of net sales in fiscal 1997 as compared to $11,302,000 or
23% of net sales in fiscal 1996. The increase in gross profit as a percentage
of net sales was primarily due to improvements in the Company's manufacturing
efficiency as well as efficiencies of scale resulting from the higher sales
volume mentioned above.
Expenses. Selling, general and administrative expenses in fiscal 1997
increased 9% or $759,000 to $9,133,000 or 17.1% of net sales from $8,374,000 or
17.1% of net sales in fiscal 1996. This increase is primarily due to the
Company's additional marketing efforts relating to several new products
introduced during the year.
Other Expenses. Other Expenses in fiscal 1997 remained relatively
constant at $1,401,000 as compared to $1,399,000 in fiscal 1996.
Income Taxes. Provision for income taxes increased $90,000 to
$605,000 or approximately 27% of income before provision for income taxes
during fiscal 1997. This compared to a provision of $515,000 or approximately
34% of income before provision for income taxes during fiscal 1996. The
decrease in the provision as a percentage of income before provision for income
taxes is primarily attributable to lower reserve requirements.
Fiscal 1996 Compared to Fiscal 1995
Net Sales. Net Sales in fiscal 1996 increased approximately $1,010,000
or 2.1% to $49,088,000 from $48,078,000 in fiscal 1995. This increase was
achieved despite a continued general price erosion in the marketplace.
Gross Profit. The Company's gross profit remained relatively flat at
$11,302,000 or 23% of net sales in fiscal 1996 as compared to $11,325,000 or
23.6% of net sales in fiscal 1995. The decrease in gross profit as a percentage
of net sales was primarily due to the aforementioned general price erosion in
the marketplace, as partially offset by improvements in the Company's
manufacturing efficiency.
Expenses. Selling, general and administrative expenses in fiscal 1996
decreased 6.9% or $620,000 to $8,374,000 or 17.1% of net sales from $8,994,000
or 18.7% of net sales in fiscal 1995. This decrease is primarily the result of
reduction in professional fees and bad debt expenses from those incurred in
fiscal 1995. In addition, further decreases in expenses were achieved as a
result of the continuation of general cost control procedures established by
management.
Other Expenses. Other Expenses in fiscal 1996 increased 8.7% or
$112,000 to $1,399,000 from $1,287,000 in fiscal 1995. This increase is
primarily the result of an unfavorable shift in
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the UK Pounds Sterling exchange rates.
Income Taxes. Provision for income taxes decreased $17,000 to
$515,000 or approximately 34% of income before provision for income taxes
during fiscal 1996. This compared to a provision of $532,000 or approximately
51% of income before provision for income taxes during fiscal 1995. The higher
effective income tax rate in 1995 was primarily due to the recording of
additional income taxes related to DISC earnings that no longer qualify for tax
deferral.
Effects of Inflation
During the three-year period ended June 30, 1997, inflation and
changing prices did not have a significant impact on the Company's operations.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants
as of June 30, 1997 and 1996 and for each of the three
years in the Period Ended June 30, 1997 . . . . . . . . . . 15
Consolidated Financial Statements:
Consolidated Balance Sheets as of
June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . 16
Consolidated Statements of Income
for the Years Ended June 30,
1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of
Stockholders' Equity for the
Years Ended June 30, 1997, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 18
Consolidated Statements of Cash
Flows for the Years Ended
June 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . 19
Notes to Consolidated Financial
Statements, June 30, 1997, 1996 and 1995 . . . . . . . . . 20
Schedules:
I. Condensed Financial Information on
Parent Company . . . . . . . . . . . . . . . . 30
II. Valuation and Qualifying Accounts . . . . . . . 32
</TABLE>
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Napco Security Systems, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Napco Security
Systems, Inc. (a Delaware corporation) and subsidiaries as of June 30, 1997 and
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended June 30, 1997.
These consolidated financial statements and the schedules referred to below are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedules
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Napco Security Systems, Inc.
and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
index to consolidated financial statements are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic consolidated financial statements. These schedules have been
subjected to the auditing procedures applied in our audits of the basic
consolidated financial statements and, in our opinion, fairly state in all
material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Melville, New York
September 25, 1997
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ---- ----
(in thousands, except share data)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,006 $ 426
Accounts receivable, less reserve for doubtful accounts of $805 and
$864, respectively 13,937 13,759
Inventories, net 25,702 25,944
Prepaid expenses and other current assets 390 489
Deferred income taxes 986 911
------------ ------------
Total current assets 42,021 41,529
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
and amortization of approximately $10,344 and $9,137, respectively 12,088 12,549
GOODWILL, net of accumulated amortization of approximately $1,042
and $935, respectively 2,699 2,806
OTHER ASSETS 436 435
------------ ------------
$ 57,244 $ 57,319
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 5,500 $ 5,986
Accrued expenses 1,213 1,714
Accrued salaries and wages 595 502
Current portion of long-term debt 900 1,500
Accrued income taxes 3,677 3,151
------------ ------------
Total current liabilities 11,885 12,853
LONG-TERM DEBT 13,313 14,150
DEFERRED INCOME TAXES 828 742
------------ ------------
Total liabilities 26,026 27,745
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share; 21,000,000 shares authorized;
5,898,602 and 5,896,602 shares issued, respectively; 4,369,727 and
4,367,727 shares outstanding, respectively 59 59
Additional paid-in capital 724 719
Retained earnings 30,436 28,797
Less: Treasury stock, at cost (1,528,875 shares) (1) (1)
------------- ------------
Total stockholders' equity 31,218 29,574
------------ ------------
$ 57,244 $ 57,319
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
16
<PAGE> 17
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands, except share and per share data)
<S> <C> <C> <C>
NET SALES $ 53,302 $ 49,088 $ 48,078
COST OF SALES 40,524 37,786 36,753
------------- ------------- -------------
Gross profit 12,778 11,302 11,325
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,133 8,374 8,994
------------- ------------- -------------
Operating income 3,645 2,928 2,331
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense, net (1,081) (1,278) (1,398)
Other, net (320) (121) 111
------------- ------------- -------------
(1,401) (1,399) (1,287)
------------- ------------- -------------
Income before provision for income taxes 2,244 1,529 1,044
PROVISION FOR INCOME TAXES 605 515 532
------------- ------------- -------------
Net income $ 1,639 $ 1,014 $ 512
============= ============= =============
EARNINGS PER SHARE $ .37 $ .23 $ .12
============= ============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,383,000 4,373,000 4,390,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
17
<PAGE> 18
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(in thousands except share data)
<TABLE>
<CAPTION>
Common Stock
-------------------------
Number Additional
of Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
--------- ---------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1994 5,896,602 $ 59 $ 719 $ 27,271 $ (1) $ 28,048
Net income - - - 512 - 512
--------- ---------- ------------ ------------- ------------ -------------
BALANCE AT JUNE 30, 1995 5,896,602 59 719 27,783 (1) 28,560
Net income - - - 1,014 - 1,014
--------- ---------- ------------ ------------- ------------ -------------
BALANCE AT JUNE 30, 1996 5,896,602 59 719 28,797 (1) 29,574
Net income - - - 1,639 - 1,639
Exercise of employee stock options 2,000 - 5 - - 5
--------- ---------- ------------ ------------- ------------ -------------
BALANCE AT JUNE 30, 1997 5,898,602 $ 59 $ 724 $ 30,436 $ (1) $ 31,218
========= ========== ============ ============= ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
18
<PAGE> 19
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,639 $ 1,014 $ 512
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization 1,440 1,425 1,357
Provision for doubtful accounts 55 202 212
Deferred income taxes (11) 351 (320)
Changes in operating assets and liabilities resulting from increases and
decreases in:
Accounts receivable (233) (314) 828
Inventories 242 (1,766) (565)
Prepaid expenses and other current assets 99 (44) 25
Other assets (105) (112) (97)
Accounts payable, accrued expenses, accrued salaries and wages and accrued
income taxes (368) 2,779 (1,259)
------------- ------------- -----------
Net cash provided by operating activities 2,758 3,535 693
------------ ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (746) (1,170) (3,332)
------------- ------------- -----------
Net cash used in investing activities (746) (1,170) (3,332)
------------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable to bank - - 500
Principal payments on notes payable to bank - (500) (8,100)
Principal payments on capital lease obligation - (7) (21)
Principal payments on long-term debt (13,400) (1,800) (1,925)
Proceeds from long-term debt 11,963 - 11,218
Proceeds from exercise of employee stock options 5 - -
------------ ------------- -----------
Net cash (used in) provided by financing activities (1,432) (2,307) 1,672
------------- ------------- -----------
NET INCREASE (DECREASE) IN CASH 580 58 (967)
CASH, beginning of year 426 368 1,335
------------ ------------- -----------
CASH, end of year $ 1,006 $ 426 $ 368
============ ============= ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,076 $ 1,155 $ 1,388
============ ============= ===========
Income taxes paid $ 35 $ 144 $ 61
============ ============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
19
<PAGE> 20
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Napco Security Systems, Inc. and subsidiaries (the "Company") is engaged
principally in the development, manufacture and distribution of security alarm
products and door security devices for commercial and residential use.
Principles of Consolidation
The consolidated financial statements include the accounts of Napco Security
Systems, Inc. and all of its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent gains and losses at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Inventories
Inventories are valued at the lower of cost (using the first-in, first-out
method) or market.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is recorded
over the estimated service lives of the related assets using primarily the
straight-line method. Amortization of leasehold improvements is calculated by
using the straight-line method over the estimated useful life of the asset or
lease term, whichever is shorter.
Goodwill
Goodwill is being amortized on a straight-line basis over 35 years. Subsequent
to its acquisition, the Company continually evaluates whether later events and
circumstances have occurred that indicate the remaining estimated useful life
of the goodwill may warrant revision or that the remaining balance may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the undiscounted cash
flows over the remaining life of the goodwill in measuring whether it is
recoverable. In the years ended June 30, 1997 and 1996, there were no
adjustments to the carrying value of goodwill.
Revenue
Revenue is recognized upon shipment of the Company's products to its customers.
20
<PAGE> 21
Income Taxes
Deferred income taxes are recognized for the expected future tax consequences
of temporary differences between the amounts reflected for financial reporting
and tax purposes. The provision for income taxes represents U.S. Federal and
state taxes on income generated from U.S. operations. Income generated by the
Company's foreign subsidiary is non-taxable. The Company accounts for the
research and development credit as a reduction of income tax expense in the
year in which such credits are allowable for tax purposes.
In prior years, the Company did not provide for income taxes on the
undistributed earnings of its Domestic International Sales Corporation ("DISC")
subsidiary because it was the Company's intent to continue the subsidiary's
qualification for tax deferral. Due to the shifting of manufacturing outside
the U.S., management determined in fiscal 1995 that the DISC no longer
qualified for continued tax deferral. As a result, previously deferred earnings
of the DISC totalling $2,031,000 must now be reported as taxable income over a
ten-year period in the Company's future tax returns. The respective tax
liability was recorded in fiscal 1995.
The Company does not provide for income taxes on the undistributed earnings of
its foreign subsidiary because such earnings are reinvested abroad and it is
the intention of management that such earnings will continue to be reinvested
abroad. As of June 30, 1997 and 1996, approximately $18,328,000 and $17,206,000
in cumulative earnings of the foreign subsidiary are included in consolidated
retained earnings.
Earnings Per Share
Earnings per share is computed based upon the weighted average number of common
shares and common stock equivalents (options) outstanding. Fully diluted
earnings per share does not materially differ from the earnings per share
presented in the consolidated statements of income.
Stock-Based Compensation
During October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation". This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. SFAS No. 123
encourages entities to adopt a fair value based method of accounting for stock
compensation costs under pre-existing accounting pronouncements. If the fair
value based method of accounting is not adopted, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share in the notes to the
consolidated financial statements. The accounting requirements of SFAS No. 123
are effective for transactions entered into in fiscal years that begin after
December 15, 1995, though they may be adopted on issuance. The disclosure
requirements of SFAS No. 123 are effective for financial statements for fiscal
years beginning after December 15, 1995, or for an earlier fiscal year for
which SFAS No. 123 is initially adopted for recognizing compensation cost. The
Company has adopted this standard in fiscal 1997, and has elected to continue
the accounting set forth in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and to provide the
necessary pro-forma disclosures (Note 6).
Reclassifications
Certain prior year balances have been reclassified to conform with the current
year presentation.
21
<PAGE> 22
New Accounting Pronouncements
In March, 1997, the FASB issued SFAS No. 128, "Earnings Per Share". This
statement establishes standards for computing and presenting earnings per share
("EPS"), replacing the presentation of currently required primary EPS with a
presentation of Basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both Basic EPS and Diluted EPS on
the face of the statement of income. Under this new standard, Basic EPS is
computed based on weighted average shares outstanding and excludes any potential
dilution; Diluted EPS reflects potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock and is similar to the currently-required fully diluted EPS. SFAS
No. 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods, and earlier application is not
permitted. When adopted, the Company will be required to restate its EPS data
for all prior periods presented. The Company does not expect the impact of the
adoption of this statement to be material to previously reported EPS amounts.
2. INVENTORIES:
Inventories, net, consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------------
1997 1996
------- -------
(in thousands)
<S> <C> <C>
Component parts $12,197 $17,908
Work-in-process 3,374 4,449
Finished products 10,131 3,587
------- -------
$25,702 $25,944
======= =======
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
June 30, Depreciation/
------------------------------- amortization-
1997 1996 annual rates
-------- -------- -------------
(in thousands)
<S> <C> <C> <C>
Land $ 904 $ 904 -
Building 8,911 8,807 3%
Molds and dies 2,554 2,339 20%
Furniture and fixtures 977 942 10% to 20%
Machinery and equipment 8,660 8,268 10% to 33%
Leasehold improvements 426 426 Shorter of the lease
------- ------- term or life of asset
22,432 21,686
Less: Accumulated depreciation and
amortization 10,344 9,137
------- -------
$12,088 $12,549
------- -------
</TABLE>
Depreciation and amortization expense on property, plant and equipment was
approximately $1,332,000, $1,222,000 and $1,189,000 for the years ended June
30, 1997, 1996 and 1995, respectively.
22
<PAGE> 23
4. INCOME TAXES:
In August 1995, the Internal Revenue Service (the "IRS") informed the Company
that it had completed the audit of the Company's Federal tax returns for fiscal
years 1987 through 1992. The IRS has issued a report to the Company proposing
adjustments that would result in taxes due of approximately $4.3 million,
excluding interest charges. The primary adjustments presented by the IRS relate
to intercompany pricing and royalty charges, DISC earnings and charitable
contributions. The Company disagrees with the IRS and intends to vigorously
appeal this assessment using all remedies and procedural actions available under
the law. The Company believes that it has provided an adequate reserve to
address the ultimate resolution of this matter, so that the resolution of this
matter will not have a material adverse effect on the Company's consolidated
financial statements.
The deferred tax assets and deferred tax liabilities at June 30, 1997 and 1996
are as follows (in thousands):
<TABLE>
<CAPTION>
Deferred Net Deferred
Deferred Tax Assets Tax Liabilities Tax Assets (Liabilities)
------------------- ----------------- ------------------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Current:
Accounts receivable $ 322 $ 346 $ - $ - $ 322 $ 346
Inventories 548 495 - - 548 495
Accrued liabilities 180 97 - - 180 97
Other 29 54 93 81 (64) (27)
---------- -------- -------- -------- --------- --------
1,079 992 93 81 986 911
Noncurrent:
Fixed assets - - 828 742 (828) (742)
---------- -------- -------- -------- --------- --------
Total deferred taxes $ 1,079 $ 992 $ 921 $ 823 $ 158 $ 169
========== ======== ======== ======== ========= ========
</TABLE>
As a result of the U.S. operations generating income in each of the three years
in the period ended June 30, 1997, management believes it is more likely than
not that the Company will realize the benefit of the net deferred tax assets
existing at June 30, 1997 and 1996. Accordingly, the Company has not reflected
any valuation allowance against the deferred tax assets at June 30, 1997 and
1996. Furthermore, management believes that the existing net deductible
temporary differences will reverse during periods in which the Company generates
net taxable income. There can be no assurance, however, that the Company will
generate taxable earnings or any specific level of continuing earnings in the
future.
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
For the Years Ended June 30,
---------------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Taxes currently payable:
Federal $340 $104 $ 35
State 120 19 48
---- ---- -----
460 123 83
Taxes on DISC earnings and other 156 41 769
Deferred income tax (benefit) provision (11) 351 (320)
---- ---- -----
Provision for income taxes $605 $515 $ 532
==== ==== =====
</TABLE>
23
<PAGE> 24
The difference between the statutory U.S. Federal income tax rate and the
Company's effective tax rate as reflected in the consolidated statements of
income is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
% of % of % of
pre-tax pre-tax pre-tax
Amount Income Amount Income Amount Income
------ -------- ------ -------- ------ --------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Tax at Federal statutory rate $763 34.0% $520 34.0% $355 34.0%
Increases (decreases) in taxes resulting from:
State income taxes, net of Federal income
tax benefit 96 4.3 44 2.9 32 3.1
Amortization of non-deductible goodwill 36 1.6 36 2.4 36 3.6
Non-taxable foreign source income (382) (17.0) (260) (17.0) (177) (17.0)
Taxes on previously deferred DISC earnings, net - - - - 563 53.9
Utilization of net operating loss carryforward - - - - (348) (33.3)
Other, net 92 4.1 175 11.4 71 6.7
---- ---- ---- ---- ---- ----
Provision for income taxes $605 27.0% $515 33.7% $532 51.0%
==== ==== ==== ==== ==== ====
</TABLE>
Foreign income taxes are not provided on income generated by the Company's
subsidiary in the Dominican Republic, as such income is presently exempt from
domestic income tax.
5. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Revolving credit and term loan facility (a) (b) $11,963 $11,000
Notes payable to banks (c) 2,250 3,375
Industrial Revenue Bonds (d) - 1,275
------- -------
14,213 15,650
Less: Current portion 900 1,500
------- -------
$13,313 $14,150
======= =======
</TABLE>
(a) On May 13, 1997, the Company refinanced the majority of its bank
debt with a new primary bank and entered into a $16,000,000 secured
revolving credit agreement, a $3,000,000 line of credit to be used in
connection with commercial and standby letters of credit, and
replaced the $2,500,000 standby letter of credit securing an earlier
loan from another bank in connection with the Company's international
operations. The revolving credit agreement and the letters of credit
are secured by all the accounts receivable, inventory and certain
other assets of Napco Security Systems, Inc., a first and second
mortgage on the Company's headquarters in Amityville, New York as
well as common stock of two of the Company's subsidiaries. The
revolving credit agreement bears interest at either the bank's prime
rate (8.5% at June 30,1997) or an alternate rate based on LIBOR as
described in the agreement. These agreements replaced the $11,000,000
credit agreement described below. The Company restructured its debt
to allow for future growth and expansion as well as to obtain terms
more favorable to the Company. As part of the debt restructuring,
the Company retired the outstanding Industrial Revenue Bonds
relating to the financing of the
24
<PAGE> 25
construction of the Company's Amityville, New York facility described
below. The revolving credit agreement will expire in May, 2000 and
any outstanding borrowings are to be repaid on or before that time.
The agreement contains various restrictions and covenants including,
among others, restrictions on payment of dividends, restrictions on
borrowings, restrictions on capital expenditures, the maintenance of
minimum amounts of tangible net worth, and compliance with other
certain financial ratios, as defined in the agreement. As of June 30,
1997, the Company was in compliance with all of these financial
covenants.
(b) On July 27, 1994, the Company entered into an $11,000,000 secured
revolving credit and term loan facility with two banks, with the
Company's primary bank acting as an agent. In conjunction with this
agreement, the banks received as collateral all accounts receivable
and inventory located in the United States. These facilities were
paid in full by the Company in fiscal 1997, in conjunction with the
refinancing described above.
(c) In November 1991, a subsidiary of the Company entered into a
$4,500,000 line of credit agreement with a bank in connection with
the Company's international operations. The line is secured by a
letter of credit from the Company's primary bank. Interest on
amounts outstanding under this line is payable quarterly at a rate
determined periodically based on a number of options available to
the Company. The balance outstanding under the line as of December
31, 1994 automatically converted to a term loan payable in 20 equal
quarterly installments commencing on that date. At June 30, 1997 and
1996, the amounts outstanding bore interest at rates of 5.94% and
5.73%, respectively.
Under the terms of the agreement, all advances under the line must
be used to pay for certain specified costs incurred by this
subsidiary. In addition, the terms of the agreement limit, among
other things, the amount of additional debt or liens that may be
incurred and prohibit the payment of dividends by this subsidiary.
In May 1997, the Company entered into an agreement with its primary
bank to replace a previous $2,500,000 standby letter of credit
agreement which expired in February 1997 with a new $2,500,000
standby letter of credit, as described above, for the purpose of
providing additional collateral for the line of credit agreement.
(d) In connection with the Company's refinancing of its bank debt in May
1997, the Company repaid the remaining portion of the $3,900,000 of
Industrial Revenue Bonds issued by the Town of Babylon (the "Town"),
which were used for the purchase of land and the construction of a
new office and manufacturing facility in Amityville, New York. Based
on the terms of the bond agreement, the Company purchased the
facilities for $1 at the date of the repayment of the bonds as title
to the land and building was held by the Town as security for the
bonds.
Maturities of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending June 30,
--------------------
<S> <C>
1998 $ 900
1999 900
2000 12,413
-------
$14,213
=======
</TABLE>
25
<PAGE> 26
6. STOCK OPTIONS:
In November 1992, the stockholders approved a 10-year extension of the already
existing 1982 Incentive Stock Option Plan (the "1992 Plan"). The 1992 Plan
authorizes the granting of awards, the exercise of which would allow up to an
aggregate of approximately 815,000 shares of the Company's common stock to be
acquired by the holders of such awards. Under the 1992 Plan, the Company may
grant stock options, which are intended to qualify as incentive stock options
("ISOs"), to key employees, officers, and employee directors. Any plan
participant who is granted ISOs and possesses more than 10% of the voting rights
of the Company's outstanding common stock must be granted an option with a price
at least 110% of the fair market value on the date of grant and the option must
be exercised within five years from the date of grant. Under the 1992 Plan,
stock options have been granted to employees and directors for terms of up to 5
years at an exercise price equal to the fair market on the date of grant and are
exercisable in whole or in part at 20% per year from the date of grant. At June
30, 1997, 46,750 stock options granted to employees and directors were
exercisable. The Company accounts for awards granted to employees, directors and
key employees under APB Opinion No. 25, under which compensation cost is
recognized for stock options granted at an exercise price less than the market
value of the options on the grant date. Had compensation cost for all stock
option grants in fiscal years 1997 and 1996 been determined consistent with SFAS
No. 123, the Company's net income and earnings per share would have been:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C> <C>
Net income: As Reported $1,639 $1,014
Pro Forma 1,629 1,005
Earnings per Share: As Reported .37 .23
Pro Forma .37 .23
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to option awards
granted prior to fiscal year 1996, and additional awards in future years are
anticipated.
The following table reflects activity under the plan year ended:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------------------ ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 76,000 $3.02 81,000 $3.07
Granted 3,250 3.59 35,000 2.52
Exercised (2,000) 2.25 - -
Forfeited - - (2,400) 3.25
Canceled/Lapsed (1,500) 2.25 (37,600) 2.63
------ -------
Outstanding at end of year 75,750 3.083 76,000 3.02
====== ======
Exercisable at end of year 46,750 3.208 35,100 3.17
====== ======
Weighted average fair value of options granted $1.76 $1.24
</TABLE>
26
<PAGE> 27
The fair value of each stock option grant is estimated as of the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Risk-Free Interest Rates 5.99% 6.05%
Expected Lives 5 years 5 years
Expected Volatility 47% 47%
Expected Dividend Yields 0% 0%
</TABLE>
The following table summarizes information about stock options outstanding at
June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------
Number Weighted Number Weighted
Outstanding Weighted Average Average Exercisable Average
at Remaining Exercise at Exercise
Range of Exercise Prices 6/30/97 Contractual Life Price 6/30/97 Price
------------------------ ----------- ---------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$2.50 - $3.75 54,750 2.60 $2.59 29,950 $2.55
3.76 - 5.64 21,000 1.57 4.38 16,800 4.38
------ ------
2.50 - 5.64 75,750 2.31 3.08 46,750 3.21
====== ======
</TABLE>
Effective October 1990, the Company established a non-employee stock option
plan (the "1990 Plan") to encourage non-employee directors and consultants of
the Company to invest in the Company's stock. The 1990 Plan provides for the
granting of non-qualified stock options, the exercise of which would allow up
to an aggregate of 50,000 shares of the Company's common stock to be acquired
by the holders of the stock options. The 1990 Plan provides that the option
price shall not be less than 100% of the fair market value of the stock at the
date of grant. Options are exercisable at 20% per year and expire five years
after the date of grant. The Company has adopted SFAS No. 123 to account for
stock-based compensation awards granted to non-employee directors and
consultants, under which a compensation cost is recognized for the fair value
of the options granted as of the date of grant. As of June 30, 1997, no shares
have been granted under this plan.
7. RESEARCH AND DEVELOPMENT COSTS:
Research and development costs charged to cost of sales were approximately
$3,340,000, $3,296,000, $3,252,000 for the years ended June 30, 1997, 1996 and
1995, respectively.
8. 401(k) PLAN:
The Company maintains a 401(k) plan covering all employees with one or more
years of service. The plan is qualified under Sections 401(a) and 401(k) of the
Internal Revenue Code. The Company provides for matching contributions of 50%
of the first 2% of employee contributions. Company contributions to the plan
totaled approximately $47,000, $48,000 and $56,000 for the years ended June 30,
1997, 1996 and 1995, respectively.
27
<PAGE> 28
9. BUSINESS AND CREDIT CONCENTRATIONS:
The Company is engaged in one major line of business - the development,
manufacture and distribution of security alarm products and door security
devices for commercial and residential use. Sales to unaffiliated customers are
primarily shipped from the United States. The Company's customers are primarily
located throughout the United States and Europe. Identifiable assets (net of
intercompany receivables and payables) relating to the Company's foreign
operations were approximately $16,002,000 and $24,235,000 at June 30, 1997 and
1996, respectively.
Export sales amounted to $10,355,000, $7,994,000 and $7,646,000 for the years
ended June 30, 1997, 1996 and 1995, respectively. At June 30, 1997 and 1996,
the Company had three customers with accounts receivable balances that
aggregated 40% and 58% of the Company's accounts receivable, respectively.
Revenues from the three largest customers are summarized as follows:
<TABLE>
<CAPTION>
Percentage of Net Sales
----------------------------------------
For the Years Ended June 30,
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Customer 1 21% 21% 22%
Customer 2 8% 9% 6%
Customer 3 9% 12% 11%
</TABLE>
The Company anticipates a significant decrease in sales to Customer 3 during
fiscal 1998. However, the Company does not believe that such decrease will
have a material adverse effect on the results of operations or financial
condition.
10. COMMITMENTS AND CONTINGENCIES:
Leases
The Company is committed under various operating leases which do not extend
beyond fiscal 2001. Minimum lease payments through the expiration dates of
these leases, with the exception of the land lease referred to below, are as
follows (in thousands):
<TABLE>
<CAPTION>
Year ending June 30,
--------------------
<S> <C>
1998 $423
1999 338
2000 63
2001 28
----
$852
====
</TABLE>
Rent expense totaled approximately $736,000, $389,000 and $369,000 for the
years ended June 30, 1997, 1996 and 1995, respectively.
Land Lease
On April 26, 1993, the Company's foreign subsidiary entered into a 99 year
lease for approximately four acres of land in the Dominican Republic, at an
annual cost of approximately $272,000, on which the Company's main production
facility is located.
28
<PAGE> 29
Letters of Credit
At June 30, 1997, the Company was committed for approximately $2,961,000 under
open commercial letters of credit and steamship guarantees.
Litigation
In the normal course of business, the Company is a party to claims and/or
litigation. Management believes that the settlement of such claims and/or
litigation, considered in the aggregate, will not have a material adverse
effect on the Company's financial position and results of operations.
29
<PAGE> 30
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION ON PARENT COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30
---------------------------------------
ASSETS 1997 1996
------ ---- ----
(in thousands)
<S> <C> <C>
CASH $ 872 $ 427
ACCOUNTS RECEIVABLE, net 11,735 12,053
INVENTORIES, net 16,890 8,755
PREPAID EXPENSES AND OTHER CURRENT ASSETS 279 324
DUE FROM SUBSIDIARIES - 1,551
DEFERRED INCOME TAXES 986 911
------------ ------------
Total current assets 30,762 24,021
INVESTMENT IN SUBSIDIARIES, on equity basis 24,345 23,223
PROPERTY, PLANT AND EQUIPMENT, net 5,808 5,956
OTHER ASSETS 240 317
------------ ------------
$ 61,155 $ 53,517
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES $ 10,516 $ 11,301
DUE TO SUBSIDIARIES 6,630 -
LONG-TERM DEBT 11,963 11,900
DEFERRED INCOME TAXES 828 742
------------ ------------
Total liabilities 29,937 23,943
STOCKHOLDERS' EQUITY 31,218 29,574
------------ ------------
$ 61,155 $ 53,517
============ ============
</TABLE>
This schedule should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.
30
<PAGE> 31
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION ON PARENT COMPANY
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended June 30,
------------------------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
NET SALES $ 43,921 $ 40,482 $ 38,547
COST OF SALES 33,733 30,319 27,938
------------- ------------- -------------
Gross profit 10,188 10,163 10,609
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 7,826 7,277 7,808
------------- ------------- -------------
Operating income 2,362 2,886 2,801
EQUITY IN EARNINGS (LOSS) OF SUBSIDIARIES 1,122 (184) (561)
OTHER EXPENSE, net (1,240) (1,173) (1,196)
------------- ------------- -------------
Income before provision for income taxes 2,244 1,529 1,044
PROVISION FOR INCOME TAXES 605 515 532
------------- ------------- -------------
Net income $ 1,639 $ 1,014 $ 512
============= ============= =============
</TABLE>
This schedule should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.
31
<PAGE> 32
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Balance at Charged to Balance
Beginning Costs and Deductions at End of
Description of Period Expenses Describe (1) Period
----------- --------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
For the year ended June 30, 1995:
Allowance for doubtful accounts
(deducted from accounts receivable) $454 $212 $ 4 $662
==== ==== ==== ====
For the year ended June 30, 1996:
Allowance for doubtful accounts
(deducted from accounts receivable) $662 $202 $ - $864
==== ==== ==== ====
For the year ended June 30, 1997:
Allowance for doubtful accounts
(deducted from accounts receivable) $864 $ 55 $114 $805
==== ==== ==== ====
</TABLE>
(1) Deductions relate to uncollectible accounts charged off to valuation
accounts, net of recoveries.
This schedule should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.
32
<PAGE> 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
33
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Part III (Items 10, 11, 12 and 13) is
incorporated herein by reference from the Company's definitive proxy statement
for the 1997 annual meeting of stockholders which the Company intends to file
with the Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the end of the Company's 1997 fiscal year, and,
accordingly, items 10, 11, 12 and 13 are omitted pursuant to General
Instruction G(3).
34
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a)1. Financial Statements
The following consolidated financial statements of Napco Security
Systems, Inc. and its subsidiaries are included in Part II, Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Report of Independent Public Accountants
as of June 30, 1997 and 1996 and for the three years
in the Period Ended June 30, 1997 . . . . . . . . 15
Consolidated Balance Sheets as of
June 30, 1997 and 1996 . . . . . . . . . . . . . . 16
Consolidated Statements of Income
for the Years Ended June 30, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of
Stockholders' Equity for the
Years Ended June 30, 1997, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . 18
Consolidated Statements of Cash
Flows for the Years Ended
June 30, 1997, 1996 and 1995 . . . . . . . . . . . 19
Notes to Consolidated Financial
Statements, June 30, 1997, 1996 and 1995 . . . . . 20
</TABLE>
(a)2. Financial Statement Schedules
The following consolidated financial statement schedules of Napco
Security Systems, Inc. and its subsidiaries are included in Part II, Item 8:
<TABLE>
<S> <C> <C>
I: Condensed Financial Information
on Parent Company . . . . . . . . . . . . . . 30
II: Valuation and Qualifying Accounts . . . . . . 32
</TABLE>
Schedules other than those listed above are omitted because of the
absence of the conditions under which they are required or because the required
information is shown in the consolidated financial statements and/or notes
thereto.
35
<PAGE> 36
(a)3 and (c). Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Title
- ------- -----
<S> <C> <C>
Ex-3.(i) Articles of Incorporation, as amended. . Exhibit 3a to Report on Form 10-K for fiscal
year ended June 30, 1988
Ex-3.(ii) By-Laws . . . . . . . . . . . . . . . . Exhibit 3b to Report on Form 10-K for fiscal
year ended June 30, 1988
Ex-10.A 1992 Amended and Restated Incentive
Stock Option Plan (extending 1982 Plan). Exhibit 4(a) of Form S-8 of the Registrant
filed October 24, 1996
Ex-10.B 1990 Non-Employee Stock Option Plan. . . Exhibit 10c to Report on Form 10-K for fiscal year
ended June 30, 1991
Ex-10.C Defined Contribution Pension Plan
Basic Plan Document. . . . . . . . . . . Exhibit 10d to Report on Form 10-K for fiscal
year ended June 30, 1989
Ex-10.D Defined Contribution Pension Plan
401(k) Profit Sharing Plan
Adoption Agreement . . . . . . . . . . . Exhibit 10e to Report on Form 10-K for fiscal
year ended June 30, 1989
</TABLE>
36
<PAGE> 37
<TABLE>
<S> <C> <C>
Ex-10.E Promissory Note dated as of November
8, 1991 between Citibank, N.A. and
the Company . . . . . . . . . . . . . . Exhibit 10-i to Report on Form 10-K for
fiscal year ended June 30, 1992
Ex-10.F Credit Agreement dated November 8,
1991 between N.S.S. Caribe S.A. and
Citibank, N.A. . . . . . . . . . . . . . Exhibit 10-j to Report on Form 10-K for
fiscal year ended June 30, 1992
Ex-10.G Construction Contract dated June 5,
1993 . . . . . . . . . . . . . . . . . . Exhibit 10-l to Report on Form 10-K for
fiscal year ended June 30, 1993
Ex-10.H First Amendment dated as of November 5,
1993 to Credit Agreement dated as of
November 8, 1991 with Citibank,
N.A. . . . . . . . . . . . . . . . . . . Exhibit 10-o to Report on Form 10-K for
fiscal year ended June 30, 1993
Ex-10.I Loan and Security Agreement with
Marine Midland Bank dated as of
May 12, 1997 . . . . . . . . . . . . . . E-1
Ex-10.J Revolving Credit Note #1 to Marine
Midland Bank dated as of May 12, 1997. . E-49
Ex-10.K Revolving Credit Note #2 to Marine
Midland Bank dated as of May 12, 1997. . E-56
Ex-10.L Promissory Note to Marine Midland Bank
dated as of May 12, 1997 . . . . . . . . E-63
Ex-11 Computation of earnings per share. . . . E-67
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C> <C>
Ex-12 Computation of ratios . . . . . . . . . . E-68
Ex-21 Subsidiaries of the Registrant . . . . . E-69
Ex-23 Consent of Independent Public Accountants E-70
Ex-27 Financial Data Schedule . . . . . . . . . E-71
</TABLE>
Exhibits have been included in copies of this Report filed with the
Securities and Exchange Commission. Stockholders of the registrant will be
provided with copies of these exhibits upon written request to the Company.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended June
30, 1997.
38
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
October 10, 1997
NAPCO SECURITY SYSTEMS, INC.
(Registrant)
By: /s/ RICHARD SOLOWAY By: /s/ KENNETH ROSENBERG
--------------------- ------------------------
Richard Soloway Kenneth Rosenberg
Chairman of the Board of President and Treasurer
Directors and Secretary (Co-Principal Executive
(Co-Principal Executive Officer) Officer)
By: /s/ KEVIN S. BUCHEL
---------------------
Kevin S. Buchel
Senior Vice President of
Operations and Finance
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/RICHARD SOLOWAY Chairman of the October 10, 1997
- ---------------------- Board of Directors
Richard Soloway
/s/KENNETH ROSENBERG Director October 10, 1997
- ----------------------
Kenneth Rosenberg
/s/RANDY B. BLAUSTEIN Director October 10, 1997
- ----------------------
Randy B. Blaustein
/s/ANDREW J. WILDER Director October 10, 1997
- ----------------------
Andrew J. Wilder
</TABLE>
39
<PAGE> 40
Index to Exhibits
<TABLE>
<S> <C> <C>
Ex-10.I Loan and Security Agreement with
Marine Midland Bank dated as of
May 12, 1997 . . . . . . . . . . . . . . . E-1
Ex-10.J Revolving Credit Note #1 to Marine
Midland Bank dated as of May 12, 1997 . . E-49
Ex-10.K Revolving Credit Note #2 to Marine
Midland Bank dated as of May 12, 1997. . . E-56
Ex-10.L Promissory Note to Marine Midland Bank
dated as of May 12, 1997 . . . . . . . . . E-63
Ex-11 Computation of earnings per share . . . . E-67
Ex-12 Computation of ratios . . . . . . . . . . E-68
Ex-21 Subsidiaries of the Registrant . . . . . . E-69
Ex-23 Consent of Independent Public Accountants. E-70
Ex-27 Financial Data Schedule . . . . . . . . . E-71
</TABLE>
E-i
<PAGE> 1
LOAN AND SECURITY AGREEMENT
between
NAPCO SECURITY SYSTEMS, INC.
("Debtor")
With a place of business at:
333 Bayview Avenue
Amityville, NY 11701
(Suffolk County)
and
MARINE MIDLAND BANK
("Secured Party")
With a place of business at:
534 Broad Hollow Road
New York, NY 11747
Dated as of May 12, 1997
E-1
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. DEFINITIONS...............................................
1.1. CERTAIN SPECIFIC TERMS.........................
1.2. SINGULARS AND PLURALS..........................
1.3. U.C.C. DEFINITIONS.............................
1.4. ACCOUNTING TERMS...............................
2. ADVANCES..................................................
2.1. REQUESTS FOR AN ADVANCE........................
2.2. PROCEEDS OF AN ADVANCE.........................
2.3. INTENTIONALLY DELETED..........................
2.4. LETTERS OF CREDIT..............................
3. COLLATERAL AND INDEBTEDNESS SECURED.......................
3.1. SECURITY INTEREST..............................
3.2. OTHER COLLATERAL...............................
3.3. INDEBTEDNESS SECURED...........................
4. REPRESENTATIONS AND WARRANTIES............................
4.1. CORPORATE EXISTENCE............................
4.2. CORPORATE CAPACITY.............................
4.3. VALIDITY OF RECEIVABLES........................
4.4. INVENTORY......................................
4.5. TITLE TO COLLATERAL............................
4.6. INTENTIONALLY DELETED
PRIOR TO EXECUTION ............................
4.7. INTENTIONALLY DELETED..........................
4.8. PLACE OF BUSINESS..............................
4.9. FINANCIAL CONDITION............................
4.10. TAXES..........................................
4.11. LITIGATION.....................................
4.12. ERISA MATTERS..................................
4.13. ENVIRONMENTAL MATTERS..........................
4.14. VALIDITY OF TRANSACTION DOCUMENTS..............
4.15. NO CONSENT OR FILING...........................
4.16. NO VIOLATIONS..................................
4.17. TRADEMARKS AND PATENTS.........................
4.18. CONTINGENT LIABILITIES.........................
4.19. COMPLIANCE WITH LAWS...........................
4.20. LICENSES, PERMITS, ETC.........................
4.21. LABOR CONTRACTS................................
4.22. CONSOLIDATED SUBSIDIARIES......................
4.23. AUTHORIZED SHARES..............................
4.24. LABOR MATTERS..................................
4.25. MATERIALITY....................................
5. INTENTIONALLY DELETED.....................................
</TABLE>
E-2
<PAGE> 3
<TABLE>
<S> <C>
6. REVOLVING CREDIT FACILITY.................................
6.1. COMMITMENT TO MAKE ADVANCES....................
6.2. ADVANCES.......................................
6.3. INTEREST RATE..................................
6.4. DEFAULT........................................
6.5. METHOD AND PLACE OF PAYMENT....................
6.6. REVOLVING CREDIT NOTE..........................
7. PAYMENT OF PRINCIPAL, INTEREST, FEES, AND COSTS AND
EXPENSES...................................................
7.1. PROMISE TO PAY PRINCIPAL.......................
7.2. PROMISE TO PAY INTEREST........................
7.3. PROMISE TO PAY FEES............................
7.4. PROMISE TO PAY COSTS AND EXPENSES..............
7.5. METHOD OF PAYMENT OF PRINCIPAL, INTEREST, FEES,
AND COSTS AND EXPENSES.........................
7.6. COMPUTATION OF DAILY OUTSTANDING BALANCE.......
7.7. ACCOUNT STATED.................................
8. INTENTIONALLY DELETED PRIOR TO EXECUTION..................
9. AFFIRMATIVE COVENANTS.....................................
9.1. FINANCIAL STATEMENTS...........................
9.2. GOVERNMENT AND OTHER SPECIAL RECEIVABLES.......
9.3. TERMS OF SALE..................................
9.4. BOOKS AND RECORDS..............................
9.5. INVENTORY IN POSSESSION OF THIRD PARTIES......
9.6. EXAMINATIONS...................................
9.7. VERIFICATION OF COLLATERAL.....................
9.8. RESPONSIBLE PARTIES............................
9.9. TAXES..........................................
9.10. LITIGATION.....................................
9.11. INSURANCE......................................
9.12. GOOD STANDING; BUSINESS........................
9.13. PENSION REPORTS................................
9.14. NOTICE OF NON-COMPLIANCE.......................
9.15. COMPLIANCE WITH ENVIRONMENTAL LAWS.............
9.16. DEFEND COLLATERAL..............................
9.17. USE OF PROCEEDS................................
9.18. COMPLIANCE WITH LAWS...........................
9.19. MAINTENANCE OF PROPERTY........................
9.20. LICENSES, PERMITS, ETC.........................
9.21. TRADEMARKS AND PATENTS.........................
9.22. ERISA..........................................
9.23. MAINTENANCE OF OWNERSHIP.......................
9.24. ACTIVITIES OF CONSOLIDATED SUBSIDIARIES........
9.25. LABOR DISPUTES.................................
9.26. FINANCIAL COVENANTS............................
</TABLE>
E-3
<PAGE> 4
<TABLE>
<S> <C>
10. NEGATIVE COVENANTS........................................
10.1. LOCATION OF INVENTORY, EQUIPMENT, AND
BUSINESS RECORDS..............................
10.2. BORROWED MONEY.................................
10.3. SECURITY INTEREST AND OTHER ENCUMBRANCES.......
10.4. STORING AND USE OF COLLATERAL..................
10.5. MERGERS, CONSOLIDATIONS OR SALES...............
10.6. CAPITAL STOCK..................................
10.7. DIVIDENDS OR DISTRIBUTIONS.....................
10.8. INVESTMENTS AND ADVANCES.......................
10.9. GUARANTIES.....................................
10.10. LEASES.........................................
10.11. CAPITAL EXPENDITURES...........................
10.12. COMPENSATION...................................
10.13. NAME CHANGE....................................
10.14. DISPOSITION OF COLLATERAL......................
10.15. FINANCIAL COVENANTS............................
10.16. NEGATIVE PLEDGE................................
11. EVENTS OF DEFAULT.........................................
11.1. EVENTS OF DEFAULT..............................
11.2. EFFECTS OF AN EVENT OF DEFAULT.................
12. SECURED PARTY'S RIGHTS AND REMEDIES.......................
12.1. GENERALLY......................................
12.2. INTENTIONALLY DELETED PRIOR TO EXECUTION.......
12.3. POSSESSION OF COLLATERAL.......................
12.4. COLLECTION OF RECEIVABLES......................
12.5. INTENTIONALLY DELETED PRIOR TO EXECUTION
12.6. LICENSE TO USE PATENTS, TRADEMARKS, AND
TRADENAMES....................................
13. MISCELLANEOUS.............................................
13.1. PERFECTING THE SECURITY INTEREST;
PROTECTING THE COLLATERAL.....................
13.2. PERFORMANCE OF DEBTOR'S DUTIES.................
13.3. NOTICE OF SALE.................................
13.4. WAIVER BY SECURED PARTY........................
13.5. WAIVER BY DEBTOR...............................
13.6. SETOFF.........................................
13.7. ASSIGNMENT.....................................
13.8. SUCCESSORS AND ASSIGNS.........................
13.9. MODIFICATION...................................
13.10. COUNTERPARTS...................................
13.11. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.......
13.12. INDEMNIFICATION................................
13.13. TERMINATION; PREPAYMENT PREMIUM................
13.14. FURTHER ASSURANCE..............................
</TABLE>
E-4
<PAGE> 5
<TABLE>
<S> <C>
13.15. HEADINGS.......................................
13.16. CUMULATIVE SECURITY INTEREST, ETC..............
13.17. SECURED PARTY'S DUTIES.........................
13.18. NOTICES GENERALLY..............................
13.19. SEVERABILITY...................................
13.20. INCONSISTENT PROVISIONS........................
13.21. ENTIRE AGREEMENT...............................
13.22. APPLICABLE LAW.................................
13.23. CONSENT TO JURISDICTION........................
13.24. JURY TRIAL WAIVER..............................
EXHIBITS
--------
"A" --- Trademarks and Patents........................
"B" --- Consolidated Subsidiaries.....................
"C" --- Authorized Shares.............................
"D" --- Compliance Certificate........................
"E" --- Request for Advance and Notice of Interest
Rate Section.................................
"F" --- Financial Statement Certification
</TABLE>
E-5
<PAGE> 6
DEBTOR AND SECURED PARTY AGREE AS FOLLOWS:
1. DEFINITIONS:
1.1. CERTAIN SPECIFIC TERMS. For purposes of this Agreement, the
following terms shall have the following meanings:
(a) ACCOUNT DEBTOR means the person, firm, or entity obligated
to pay a Receivable.
(b) ADJUSTED LIBOR RATE means a rate per annum (rounded
upwards, if necessary, to the next 1/16 of 1%) equal to the product arrived at
by multiplying the Base Libor Rate (as hereinafter defined) with respect to the
applicable Interest Period (as hereinafter defined) by a fraction (expressed as
a decimal); the numerator of which shall be the number one and the denominator
of which shall be the number one minus the aggregate reserve percentages
(expressed as a decimal) from time to time established by the Board of
Governors of the Federal Reserve System of the United States and other banking
authority to which the Secured Party is now or hereafter subject, including,
but not limited to, any Reserve Eurocurrency Liabilities as defined in
Regulation D of the Board of Governors of the Federal Reserve System of the
United States at the ratios provided in such Regulation, from time to time, it
being agreed that any portion of the Indebtedness (as hereinafter defined)
bearing interest at a Libor Rate shall be deemed to constitute Eurocurrency
Liabilities, as defined by such Regulation, and it being further agreed that
such Eurocurrency Liabilities shall be deemed to be subject to such reserve
requirements without benefit of or credit for prorations, exceptions or offsets
that may be available to the Secured Party from time to time under such
Regulation and irrespective of whether the Secured Party actually maintains all
or any portion of such reserve.
(c) ADVANCE means a loan made to Debtor by Secured Party,
pursuant to this Agreement.
(d) AGREEMENT or LOAN AGREEMENT means this Loan and Security
Agreement including all exhibits hereto, as the same may be amended or
otherwise modified from time to time; the terms "herein", "hereunder" and like
terms shall be taken as referring to this Agreement in its entirety and shall
not be limited to any particular section or provision thereof.
(e) BASE LIBOR RATE applicable to a particular Interest Period
means a rate per annum (rounded upwards, if necessary, to the next 1/16th of
1%) equal to the rate at which dollars approximately equal in principal amount
to the applicable portion of the Indebtedness and for a maturity equal to the
applicable
6
E-6
<PAGE> 7
Interest Period are offered in immediately available funds to the Secured Party
by leading banks in the London Interbank Market for Eurodollars at
approximately 11:00 a.m., London time, two (2) Business Days prior to the
commencement of such Interest Period.
(f) BORROWING means the incurrence of an Advance on a given
date.
(g) BORROWING CAPACITY means, at the time of computation,
$16,000,000.
(h) BUSINESS DAY means a day other than a Saturday, Sunday, or
other day on which banks are authorized or required to close under the laws of
New York or the State.
(i) COLLATERAL means collectively all of the property of
Debtor subject to the Security Interest and described in Sections 3.1 and 3.2.
(j) COMMITMENT or COMMITMENTS means Secured Party's
obligations, pursuant to the terms of this Agreement, to make Advances under
the Revolving Credit Facility.
(k) CONSOLIDATED SUBSIDIARY means Alarm Lock Systems, Inc.
("Alarm"), NAPCO Security Systems International, Inc. ("NAPCO International"),
UMI Manufacturing Corp. ("UMI"), E.E. Electronic Components Inc. ("E.E."),
Derringer Security Systems, Inc. ("Derringer"), Raltech Logic, Inc.
("Raltech") and any other corporation of which at least 50% of the voting stock
is owned by Debtor directly, or indirectly, through one or more Consolidated
Subsidiaries.
(l) CURRENT ASSETS shall be determined in accordance with GAAP.
(m) CURRENT LIABILITIES shall be determined in accordance with
GAAP.
(n) DEBTOR means the person or entity defined on the cover
page to this Agreement.
(o) DEBT SERVICE COVERAGE RATIO means net income plus non cash
expense plus interest expense divided by interest expense plus current portion
of long term debt.
(p) DISPOSAL means the intentional or unintentional
abandonment, discharge, deposit, injection, dumping, spilling, leaking,
burning, thermal destruction, or placing of any Hazardous Substance so that it
or any of its constituents may enter the environment.
7
E-7
<PAGE> 1
(q) ENVIRONMENT means any water including, but not limited to,
surface water and ground water or water vapor; any land including land surface
or subsurface; stream sediments; air, fish, wildlife, plants; and all other
natural resources or environmental media.
(r) ENVIRONMENTAL LAWS means all federal, state, and local
environmental, land use, zoning, health, chemical use, safety and sanitation
laws, statutes, ordinances, regulations, codes, and rules relating to the
protection of the Environment and/or governing the use, storage, treatment,
generation, transportation, processing, handling, production, or disposal of
Hazardous Substances and the policies, guidelines, procedures, interpretations,
decisions, orders, and directives of federal, state, and local governmental
agencies and authorities with respect thereto.
(s) ENVIRONMENTAL PERMITS means all licenses, permits,
approvals, authorizations, consents or registrations required by any applicable
Environmental Laws and all applicable judicial and administrative orders in
connection with ownership, lease, purchase, transfer, closure, use, and/or
operation of any property owned, leased or operated by Debtor or any
Consolidated Subsidiary and/or as may be required for the storage, treatment,
generation, transportation, processing, handling, production, or disposal of
Hazardous Substances.
(t) ENVIRONMENTAL QUESTIONNAIRE means a questionnaire and all
attachments thereto concerning (i) activities and conditions affecting the
Environment at any property of Debtor or any Consolidated Subsidiary or (ii)
the enforcement or possible enforcement of any Environmental Law against Debtor
or any Consolidated Subsidiary.
(u) ENVIRONMENTAL REPORT means a written report prepared for
Secured Party by an environmental consulting or environmental engineering firm.
(v) ERISA means the Employee Retirement Income Security Act of
1974, as amended from time to time.
(w) EVENT OF DEFAULT or EVENTS OF DEFAULT means an Event of
Default or Events of Default as defined in Section 11.1.
(x) FEDERAL BANKRUPTCY CODE means Title 11 of the United
States Code, entitled "Bankruptcy," as amended, or any successor federal
bankruptcy law.
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(y) GAAP means Generally Accepted Accounting Principles set
forth in the opinions and pronouncements of the Accounting Principles Board and
the American Institute of certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or such other
statements by such other entity as may be approved by a significant segment of
the accounting profession, which are applicable in the circumstances as of the
date in question, consistently applied within a period and from period to
period, provided, however, that if employment of more than one principle shall
be permissible at such time in respect to a particular accounting matter,
"GAAP" shall refer to the principle which is then employed by Debtor with the
concurrence of the independent certified public accountants of Debtor.
(z) HAZARDOUS SUBSTANCES means, without limitation, any
explosives, radon, radioactive materials, asbestos, urea formaldehyde foam
insulation, polychlorinated biphenyls, petroleum and petroleum products,
methane, hazardous materials, hazardous wastes, hazardous or toxic substances,
and any other material defined as a hazardous substance in Section 101(14) of
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, 42 U.S.C. Section 9601(14).
(aa) INDEBTEDNESS means the indebtedness secured by the
Security Interest and described in Section 3.3.
(bb) INTANGIBLE ASSETS means (1) all loans or advances
to, and other receivable owing from, any officers, employees, subsidiaries and
other affiliates, (2) all investments in a subsidiary, (3) goodwill, (4) any
other assets deemed intangible under GAAP.
(cc) INTEREST PERIOD means the period of time during which a
particular Libor Rate Option (as hereinafter defined) will be applicable to a
portion of the Indebtedness, it being agreed that (i) each Interest Period
shall be of a duration of, at the option of the Borrower, one month, two
months, three months, four months, six months, nine months or twelve months
(ii) no Interest Period shall extend beyond the Term, (iii) the principal
balance with respect to which a particular Interest Period is applicable will
bear interest at the Libor Rate Option pertaining to such Interest Period from
and including the first day of such Interest Period to, but not including, the
last day of such Interest Period.
(dd) INTERNAL REVENUE CODE means the Internal Revenue Code of
1986, as amended from time to time.
(ee) INVENTORY means inventory, as defined in the Uniform
Commercial Code as in effect in the State as of the date of this Agreement, and
in any event shall include returned or repossessed
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Goods.
(ff) LIBOR RATE OPTION means a rate per annum equal to one and
one half of one (1.50%) percent per annum plus the Adjusted Libor Rate with
respect to the applicable Interest Period.
(gg) PENSION EVENT means, with respect to any Pension Plan,
the occurrence of (i) any prohibited transaction described in Section 406 of
ERISA or in Section 4975 of the Internal Revenue Code; (ii) any Reportable
Event; (iii) any complete or partial withdrawal, or proposed complete or
partial withdrawal, of Debtor or any Consolidated Subsidiary from such Pension
Plan; (iv) any complete or partial termination, or proposed complete or partial
termination, of such Pension Plan; or (v) any accumulated funding deficiency
(whether or not waived), as defined in Section 302 of ERISA or in Section 412
of the Internal Revenue Code.
(hh) PENSION PLAN means any pension plan, as defined in
Section 3(2) or ERISA, which is a multiemployer plan or a single employer plan,
as defined in Section 4001 of ERISA, and subject to Title IV of ERISA and which
is (i) a plan maintained by Debtor or any Consolidated Subsidiary for employees
or former employees of Debtor or of any Consolidated Subsidiary; (ii) a plan to
which Debtor or any Consolidated Subsidiary contributes or is required to
contribute; (iii) a plan to which Debtor or any Consolidated Subsidiary was
required to make contributions at any time during the five (5) calendar years
preceding the date of this Agreement; or (iv) any other plan with respect to
which Debtor or any Consolidated Subsidiary has incurred or may incur
liability, including, without limitation, contingent liability, under Title IV
of ERISA either to such plan or to the Pension Benefit Guaranty Corporation.
For purposes of this definition, and for purposes of Sections 1.1(cc), 4.12,
and 11.1(i), Debtor shall include any trade or business (whether or not
incorporated) which, together with Debtor or any Consolidated Subsidiary, is
deemed to be a "single employer" within the meaning of Section 4001(b)(1) of
ERISA.
(ii) PRIME RATE means the rate of interest publicly announced
by Marine Midland Bank from time to time as its prime rate and is a base rate
for calculating interest on certain loans. The rate announced by Marine
Midland Bank as its prime rate may or may not be the most favorable rate
charged by Marine Midland Bank to its customers.
(jj) RECEIVABLE means the right to payment for Goods sold or
leased or services rendered by Debtor, whether or not earned by performance,
and may, without limitation, in whole or in part be in the form of an Account,
Chattel Paper, Document, or Instrument.
(kk) RELEASE means "release", as defined in Section
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101(22) of the Comprehensive, Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. Section 9601(22), and the regulations
promulgated thereunder.
(ll) REPORTABLE EVENT means any event described in Section
4043(b) of ERISA or in regulations issued thereunder with regard to a Pension
Plan.
(mm) REVOLVING CREDIT FACILITY means the Advances made or to
be made available to Debtor by Secured Party pursuant to the terms of this
Agreement, and as evidenced by the Revolving Credit Note.
(nn) REVOLVING CREDIT NOTE or NOTE means, individually,
jointly, severally, and collectively, the revolving credit note #1 in the
aggregate sum not to exceed $1,000,000., as the same may be amended and/or
extended from time to time ("Note #1") and the revolving credit note # 2 in the
aggregate sum not to exceed $15,000,000. ("Note #2"), as the same may be
amended and/or extended from time to time ("Note #2"),.
(oo) RESPONSIBLE PARTY means an Account Debtor, a general
partner of an Account Debtor, or any party otherwise in any way directly or
indirectly liable for the payment of a Receivable.
(pp) SECURED PARTY means the person or entity defined on the
cover page of this Agreement and any successors or assigns of Secured Party.
(qq) SECURITY INTEREST means the security interest granted to
Secured Party by Debtor as described in Section 3.1.
(rr) STATE means New York State.
(ss) TANGIBLE NET WORTH means total stockholders' equity minus
Intangible Assets, all to be determined in accordance with GAAP.
(tt) TERM or LOAN PERIOD means the period from the date hereof
until the Termination Date.
(uu) TERMINATION DATE means the earlier to occur of (a) May
__, 2000 or if such day shall not be a Business Day, the next succeeding
Business Day, or (b) upon the occurrence of an Event of Default.
(vv) THIRD PARTY means any person or entity who has executed
and delivered, or who in the future may execute and deliver, to Secured Party
any agreement, instrument, or document, pursuant to which such person or entity
has guarantied to Secured
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Party the payment of the Indebtedness or has granted Secured Party a security
interest in or lien on some or all of such person's or entity's real or
personal property to secure the payment of the Indebtedness.
(ww) TOTAL LIABILITIES shall be determined in accordance with
GAAP, but, in any event, shall exclude the principal balance of any debt that
is subordinated to Secured Party in a manner satisfactory to Secured Party.
(xx) TRANSACTION DOCUMENTS means this Agreement and all
documents, including, without limitation, collateral documents, letter of
credit agreements, notes, acceptance credit agreements, security agreements,
pledges, guaranties, mortgages, title insurance, assignments, and subordination
agreements required to be executed by Debtor, any Third Party, or any
Responsible Party pursuant hereto or in connection herewith, in connection with
the issuance of a certain standby letter of credit in the amount not to exceed
$2,500,000. by Secured Party in favor of Citibank, N.A., at the request of and
for the benefit of Debtor, the reimbursement obligations being evidenced by a
promissory note in the principal sum not to exceed $2,500,000., and a letter of
credit application and reimbursement agreement, each dated of even date hereof,
and a certain uncommitted trade line established by Marine in favor of Debtor
to provide for commercial and standby letters of credit, evidenced by, among
other documents, a continuing letter of credit agreement, and a continuing
indemnity agreement, each dated of even date hereof.
(yy) VARIABLE RATE OPTION means a fluctuating annual rate
equal to the Prime Rate.
1.2. SINGULARS AND PLURALS. Unless the context otherwise requires,
words in the singular number include the plural, and in the plural include the
singular.
1.3. U.C.C. DEFINITIONS. Unless otherwise defined in Section 1.1 or
elsewhere in this Agreement, capitalized words shall have the meanings set
forth in the Uniform Commercial Code as in effect in the State as of the date
of this Agreement.
1.4. ACCOUNTING TERMS. All other accounting terms used herein or in
the other Transaction Documents not specifically defined shall have the
meanings defined under GAAP.
2. ADVANCES.
2.1. REQUESTS FOR AN ADVANCE. From time to time, Debtor may make a
written or oral request for an Advance, so long as the sum
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of the aggregate principal balance of outstanding advances and the requested
Advance does not exceed the Borrowing Capacity as then computed; and Secured
Party shall make such requested Advance, provided that (i) the Borrowing
Capacity would not be so exceeded; (ii) there has not occurred an Event of
Default for which a waiver signed by a duly authorized Officer of Secured Party
was not obtained, or an event which, with notice or lapse of time or both,
would constitute an Event of Default; and (iii) all representations and
warranties contained in this Agreement and in the other Transaction Documents
are true and correct on the date such requested Advance is made as though made
on and as of such date. Each oral request for an Advance shall be conclusively
presumed to be made by a person authorized by Debtor to do so, and the making
of the Advance to Debtor as hereinafter provided shall conclusively establish
Debtor's obligation to repay the Advance.
2.2. PROCEEDS OF AN ADVANCE. Proceeds of Advances shall be paid in
the manner agreed by Debtor and Secured Party in writing or, absent any such
agreement, as determined by Secured Party.
2.3. Intentionally Deleted.
2.4. LETTERS OF CREDIT. At the request of Debtor, and upon execution
of Letter of Credit documentation satisfactory to Secured Party, Secured Party,
within the limits of the Borrowing Capacity as then computed, may issue Letters
of Credit from time to time for the account of Debtor in an amount not
exceeding in the aggregate at any one time outstanding $2,500,000.00. The
Letters of Credit shall be on terms mutually acceptable to Secured Party and
Debtor and no Letter of Credit shall have an expiration date later than the
termination date of this Agreement. An Advance in an amount equal to any
amount paid by Secured Party on any draft drawn under any Letter of Credit
shall be deemed made to Debtor, without request therefor, immediately upon any
payment by Secured Party on such draft. In connection with the issuance of
Letters of Credit, Debtor shall pay to Secured Party fees as mutually agreed
upon.
3. COLLATERAL AND INDEBTEDNESS SECURED.
3.1. SECURITY INTEREST. Debtor hereby grants to Secured Party a
security interest in, and a lien on, the following property of Debtor wherever
located and whether now owned or hereafter acquired:
(a) All Accounts, Inventory, General Intangibles, Chattel
Paper, Documents, and Instruments, whether or not specifically assigned to
Secured Party, including, without limitation, all Receivables.
(b) All guaranties, collateral, liens on, or security
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interests in, real or personal property, leases, letters of credit and other
rights, agreements, and property securing or relating to payment of
Receivables.
(c) All books, records, ledger cards, data processing records,
computer software, and other property at any time evidencing or relating to
Collateral.
(d) All monies, securities, and other property now or
hereafter held, or received by, or in transit to, Secured Party from or for
Debtor, and all of Debtor's deposit accounts, credits, and balances with
Secured Party existing at any time.
(e) All parts, accessories, attachments, special tools,
additions, replacements, substitutions and accessions to or for all of the
foregoing.
(f) All Proceeds and products of all of the foregoing in any
form, including, without limitation, amounts payable under any policies of
insurance insuring the foregoing against loss or damage, and all increases and
profits received from all of the foregoing.
3.2. OTHER COLLATERAL. Nothing contained in this Agreement shall
limit the rights of Secured Party in and to any other collateral securing the
Indebtedness which may have been, or may hereafter be, granted to Secured Party
by Debtor or any Third Party, pursuant to any other agreement.
3.3. INDEBTEDNESS SECURED. The Security Interest secures payment of
any and all indebtedness, and performance of all obligations and agreements, of
Debtor to Secured Party, whether now existing or hereafter incurred or arising,
of every kind and character, primary or secondary, direct or indirect, absolute
or contingent, sole, joint or several, and whether such indebtedness is from
time to time reduced and thereafter increased, or entirely extinguished and
thereafter reincurred, including, without limitation: (a) all Advances; (b)
all interest which accrues on any such indebtedness, until payment of such
indebtedness in full, including, without limitation, all interest provided for
under this Agreement; (c) all other monies payable by Debtor, and all
obligations and agreements of Debtor to Secured Party, pursuant to the
Transaction Documents; (d) all debts owed, or to be owed, by Debtor to others
which Secured Party has obtained, or may obtain, by assignment or otherwise;
(e) all monies payable by any Third Party, and all obligations and agreements
of any Third Party to Secured Party, pursuant to any of the Transaction
Documents; and (f) all monies due, and to become due, pursuant to Section 7.3.
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4. REPRESENTATIONS AND WARRANTIES. To induce Secured Party to enter into this
Agreement, and make Advances to Debtor from time to time as herein provided,
Debtor represents and warrants, to the best of its knowledge, and, so long as
any Indebtedness remains unpaid or this Agreement remains in effect, shall be
deemed continuously to represent and warrant as follows:
4.1. CORPORATE EXISTENCE. Debtor and Alarm each is duly organized and
existing and in good standing under the laws of the state of Delaware and is
duly licensed or qualified to do business and in good standing in every state
in which the nature of its business or ownership of its property requires such
licensing or qualification. Other than Alarm (Alarm being a corporation
organized under the laws of the state of Delaware) and other than Raltech
(Raltech having been dissolved by proclamation, with Raltech not having any
present intention of being reinstated), each domestic Consolidated Subsidiary
is duly organized and existing and in good standing under the laws of the State
and is duly licensed or qualified to do business and in good standing in every
state in which the nature of its business or ownership of its property requires
such licensing or qualification.
4.2 CORPORATE CAPACITY. The execution, delivery and performance of
the Transaction Documents are within Debtor's corporate powers, have been duly
authorized by all necessary and appropriate corporate and shareholder action,
and are not in contravention of any law or the terms of Debtor's articles or
certificate of incorporation or by-laws or any amendment thereto, or of any
indenture, agreement, undertaking, or other document to which Debtor is a party
or by which Debtor or any of Debtor's property is bound or affected.
4.3. VALIDITY OF RECEIVABLES. (a) each copy of each invoice is a true
and genuine copy of the original invoice sent to the account debtor named
therein and accurately evidences the transaction from which the underlying
Receivable arose, and the date payment is due as stated on each Invoice or
computed based on the information set forth on each such Invoice is correct;
(b) all Chattel Paper, and all promissory notes, drafts, trade acceptances, and
other instruments for the payment of money relating to or evidencing each
Receivable, and each endorsement thereon, are true and genuine and in all
respects what they purport to be, and are the valid and binding obligation of
all parties thereto, and the date or dates stated on all such items as the date
on which payment in whole or in part is due is correct; (c) all Inventory
described in each Invoice has been delivered to the Account Debtor named in
such Invoice or placed for such delivery in the possession of a carrier not
owned or controlled directly or indirectly by Debtor; (d) all evidence of the
delivery or shipment of Inventory is true and genuine; (e) all services to be
performed by Debtor in
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connection with each Receivable have been performed by Debtor; and (f) all
evidence of the performance of such services by Debtor is true and genuine.
4.4. INVENTORY. (a) All representations made by Debtor to Secured
Party, and all documents and schedules given by Debtor to Secured Party,
relating to the description, quantity, quality, condition, and valuation of the
Inventory are true and correct; (b) Inventory is located only at the address or
addresses of Debtor set forth at the beginning of this Agreement, or such other
place or places as approved by Secured Party in writing; (however Debtor has
signed a lease for a location at 9/21 Prestwood, Risley, Warrington, England,
where it will house Inventory (c) all Inventory is insured as required by
Section 9.11, pursuant to policies in full compliance with the requirements of
such Section; and (d) all domesticly manufactured or produced Inventory has
been
produced by Debtor in accordance with the Federal Fair Labor Standards Act of
1938, as amended, and all rules, regulations and orders promulgated thereunder.
4.5. TITLE TO COLLATERAL. (a) Debtor is the owner of the Collateral
free of all security interests, liens, and other encumbrances, except the
Security Interest; (b) Debtor has the unconditional authority to grant the
Security Interest to Secured Party; and (c) assuming that all necessary Uniform
Commercial Code filings have been made and, if applicable, assuming compliance
with the Federal Assignment of Claims Act of 1940, as amended, Secured Party
has an enforceable first lien on all Collateral.
4.6. Intentionally Deleted Prior to Execution.
4.7. Intentionally Deleted Prior to Execution.
4.8. PLACE OF BUSINESS. (a) Debtor is engaged in business operations
which are in whole, or in part, carried on at the address or addresses
specified at the beginning of this Agreement and at no other address or
addresses (except that Debtor has signed a lease for space at 9/21 Prestwood,
Risley, Warrington, England); (b) if Debtor has more than one place of
business, its chief executive office is at the address specified as such at the
beginning of this Agreement; and (c) Debtor's records concerning the Collateral
are kept at the address specified at the beginning of this Agreement.
4.9. FINANCIAL CONDITION. Debtor has furnished to Secured Party
Debtor's most current financial statements, including, without limiting the
foregoing, the most recent interim statements of Debtor, which statements
represent correctly and fairly the
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results of the operations and transactions of Debtor and the Consolidated
Subsidiaries as of the dates, and for the period referred to, and have been
prepared in accordance with GAAP applied during each interval involved and from
interval to interval. Since the date of such financial statements, there have
not been any materially adverse changes in the financial condition reflected in
such financial statements, except as disclosed in writing by Debtor to Secured
Party.
4.10. TAXES. Except as disclosed in writing by Debtor to Secured Party
including Debtor's financial statements provided to Secured Party: (a) all
federal and other tax returns required to be filed by Debtor and each
Consolidated Subsidiary have been filed, and all taxes required by such returns
have been paid; and (b) neither Debtor nor any Consolidated Subsidiary has
received any notice from the Internal Revenue Service or any other taxing
authority proposing additional taxes.
4.11. LITIGATION. Except as disclosed in writing by Debtor to
Secured Party, there are no actions, suits, proceedings, or investigations
pending or, to the knowledge of Debtor, threatened against Debtor or any
Consolidated Subsidiary or any basis therefor which, if adversely determined,
would, in any case or in the aggregate, materially adversely affect the
property, assets, financial condition, or business of Debtor or any
Consolidated Subsidiary or materially impair the right or ability of Debtor or
any Consolidated Subsidiary to carry on its operations substantially as
conducted on the date of this Agreement.
4.12. ERISA MATTERS. (a) No Pension Plan has been terminated, or
partially terminated, or is insolvent, or in reorganization, nor have any
proceedings been instituted to terminate or reorganize any Pension Plan; (b)
neither Debtor nor any Consolidated Subsidiary has withdrawn from any Pension
Plan in a complete or partial withdrawal, nor has a condition occurred which,
if continued, would result in a complete or partial withdrawal; (c) neither
Debtor nor any Consolidated Subsidiary has incurred any withdrawal liability,
including, without limitation, contingent withdrawal liability, to any Pension
Plan, pursuant to Title IV of ERISA; (d) neither Debtor nor any Consolidated
Subsidiary has incurred any liability to the Pension Benefit Guaranty
Corporation other than for required insurance premiums which have been paid
when due; (e) no Reportable Event has occurred; (f) no Pension Plan or other
"employee pension benefit plan" as defined in Section 3(2) of ERISA, to which
Debtor or any Consolidated Subsidiary is a party has an "accumulated funding
deficiency" (whether or not waived), as defined in Section 302 of ERISA or in
Section 412 of the Internal Revenue Code; (g) the present value of all benefits
vested under any Pension Plan
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does not exceed the value of the assets of such Pension Plan allocable to such
vested benefits; (h) each Pension Plan and each other "employee benefit plan",
as defined in Section 3(3) of ERISA, to which Debtor or any Consolidated
Subsidiary is a party is in substantial compliance with ERISA, and no such plan
or any administrator, trustee, or fiduciary thereof has engaged in a prohibited
transaction described in Section 406 of ERISA or in Section 4975 of the
Internal Revenue Code; (i) each Pension Plan and each other "employee benefit
plan" as defined in Section 3(2) of ERISA, to which Debtor or any Consolidated
Subsidiary is a party has received a favorable determination by the Internal
Revenue Service with respect to qualification under Section 401(a) of the
Internal Revenue Code; and (j) neither Debtor nor any Consolidated Subsidiary
has incurred any liability to a trustee or trust established pursuant to
Section 4049 of ERISA or to a trustee appointed pursuant to Section 4042(b) or
(c) of ERISA.
4.13. ENVIRONMENTAL MATTERS.
(a) Any Environmental Questionnaire previously provided to
Secured Party was and is accurate and complete and does not omit any material
fact the omission of which would make the information contained therein
materially misleading.
(b) No above ground or underground storage tanks containing
Hazardous Substances are, or have been located on, any property owned, leased,
or operated by Debtor or any domestic Consolidated Subsidiary.
(c) No property owned, leased, or operated by Debtor or any
domestic Consolidated Subsidiary is, or has been, used for the Disposal of any
Hazardous Substance or for the treatment, storage, or Disposal of Hazardous
Substances.
(d) No Release of a Hazardous Substance has occurred, or is
threatened on, at, from, or near any property owned, leased, or operated by
Debtor or any domestic Consolidated Subsidiary.
(e) Neither Debtor nor any domestic Consolidated Subsidiary is
subject to any existing, pending, or threatened suit, claim, notice of
violation, or request for information under any Environmental Law nor has
Debtor or any domestic Consolidated Subsidiary provided any notice or
information under any Environmental Law.
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(f) Debtor and each domestic Consolidated Subsidiary are in
compliance with, and have obtained all Environmental Permits required by, all
Environmental Laws.
4.14. VALIDITY OF TRANSACTION DOCUMENTS. The Transaction Documents
constitute the legal, valid, and binding obligations of Debtor and each
Consolidated Subsidiary and any Third Parties thereto, enforceable in
accordance with their respective terms, except as enforceability may be limited
by applicable bankruptcy and insolvency laws and laws affecting creditors'
rights generally.
4.15. NO CONSENT OR FILING. No consent, license, approval, or
authorization of, or registration, declaration, or filing with, any court,
governmental body or authority, or other person or entity is required in
connection with the valid execution, delivery, or performance of the
Transaction Documents or for the conduct of Debtor's business as now conducted,
other than filings and recordings to perfect security interests in or liens on
the Collateral in connection with the Transaction Documents.
4.16. NO VIOLATIONS. Neither Debtor nor any Consolidated Subsidiary
is in violation of any term of its articles, or Certificate of Incorporation,
or by-laws, or of any mortgage, borrowing agreement, or other instrument or
agreement pertaining to indebtedness for borrowed money. Neither Debtor nor
any Consolidated Subsidiary is in violation of any term of any other indenture,
instrument, or agreement to which it is a party or by which it or its property
may be bound, resulting, or which might reasonably be expected to result, in a
material and adverse effect upon its business or assets. Neither Debtor nor
any Consolidated Subsidiary is in violation of any order, writ, judgment,
injunction, or decree of any court of competent jurisdiction or of any statute,
rule or regulation of any governmental authority. The execution and delivery
of the Transaction Documents and the performance of all of the same, is, and
will be, in compliance with the foregoing and will not result in any violation
thereof, or result in the creation of any mortgage, lien, security interest,
charge, or encumbrance upon, any properties or assets except in favor of
Secured Party. There exists no fact or circumstance (whether or not disclosed
in the Transaction Documents) which materially adversely affects, or in the
future (so far as Debtor can now foresee) may materially adversely affect, the
condition, business, or operations of Debtor or any Consolidated Subsidiary.
4.17. TRADEMARKS AND PATENTS. Debtor and each Consolidated Subsidiary
possesses all trademarks, trademark rights, patents, patent rights, tradenames,
tradename rights and copyrights that are required to conduct its business as
now conducted without conflict with the rights or claimed rights of others. A
list of the foregoing as set forth in Exhibit A attached hereto.
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4.18. CONTINGENT LIABILITIES. There are no suretyship agreements,
guaranties, or other contingent liabilities of Debtor or any Consolidated
Subsidiary which are not disclosed by the financial statements described in
Section 4.9.
4.19. COMPLIANCE WITH LAWS. Debtor is in compliance with all
applicable laws, rules, regulations, and other legal requirements with respect
to its business and the use, maintenance and operations of the real and
personal property owned or leased by it in the conduct of its business.
4.20. LICENSES, PERMITS, ETC. Each franchise, grant, approval,
authorization, license, permit, easement, consent, certificate, and order of
and registration, declaration, and filing with, any court, governmental body or
authority, or other person or entity required for or in connection with the
conduct of Debtor's and each Consolidated Subsidiary's business as now
conducted is in full force and effect.
4.21. LABOR CONTRACTS. Neither Debtor nor any Consolidated
Subsidiary is a party to any collective bargaining agreement or to any existing
or threatened labor dispute or controversies.
4.22. CONSOLIDATED SUBSIDIARIES. Debtor has no Consolidated
Subsidiaries other than those listed in Exhibit B attached hereto and the
percentage ownership of Debtor in each such Consolidated Subsidiary is
specified in such Exhibit B.
4.23. AUTHORIZED SHARES. Debtor's total authorized common shares, the
par value of such shares, and the number of such shares issued and outstanding,
are set forth in Exhibit C. All of such shares are of one class and have been
validly issued in full compliance with all applicable federal and state laws,
and are fully paid and non-assessable. No other shares of the Debtor of any
class or type are authorized or outstanding.
4.24. LABOR MATTERS.
(a) Debtor is not engaged in any unfair labor practice.
Debtor is in compliance in all material respects with all applicable federal,
state and local laws, regulations, rules, orders or other requirements
respecting terms and conditions of employment, employment practices, and wages
and hours,
(b) No strike, walkout or similar business interruption
resulting from any labor dispute has been suffered by Debtor during the last
five years nor is any state of facts known to Debtor which would indicate that
such event or circumstance is likely to occur
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in the next twelve months.
(c) There is no pending, or to the knowledge of Debtor,
threatened unfair labor practice complaint against Debtor, before the National
Labor Relations Board.
(d) There is no strike, labor dispute, slowdown or
stoppage actually pending or, to the knowledge of Debtor, threatened against
them.
(e) No union representation question exists respecting
the employees, or any group of employees, of Debtor.
(f) No grievance which might have a material adverse
effect on Debtor or the conduct of their business nor any arbitration
proceeding arising out of or under collective bargaining agreements is pending,
and no claims therefor exist.
(g) No collective bargaining agreement which is binding
on Debtor restricts Debtor from relocating or closing any office, warehouse or
any other facility presently being used by Debtor.
(h) Debtor has not experienced any material work stoppage
or other material labor difficulty at any office, warehouse or other facility.
(i) There are no claims, complaints or charges pending
before any state or federal agency concerning employment penalties, including
without limitation, employment discrimination, retaliatory discharge and wage
and hour claims.
4.25 MATERIALITY. Notwithstanding anything to the contrary
contained in Section 4 hereof, no representation or warranty contained in
Section 4 shall be deemed false or cause an Event of Default to the extent that
the falsity of such representation or warranty is not material, would not have
a material adverse effect on Debtor and/or any domestic Consolidated
Subsidiary, would not cause an untrue statement of material fact, and/or would
not result in an omission to state a material fact in order to make the
statements contained herein not misleading, and/or would not materially
adversely affect the financial and/or business condition of Debtor and/or any
domestic Consolidated Subsidiary.
5. Intentionally Deleted Prior to Execution.
6. REVOLVING CREDIT FACILITY.
6.1. COMMITMENT TO MAKE ADVANCES.
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(a) Secured Party agrees, subject to the terms and conditions
contained herein, to make Advances from the date hereof until but not including
the Termination Date (the "Commitment Period"), provided that (i) each request
for an Advance be in writing and specify the Interest Rate Option selected, as
more specifically described in Section 7.2. herein and shall be accompanied by
a Compliance Certificate, in the form attached hereto as Exhibit D; (ii) all
representations and warranties contained in this Agreement are true and correct
in all respects on the date of the Advance; (iii) all covenants and agreements
contained in this Agreement and the other Loan Documents have been complied
with; and (iv) no Event of Default has occurred and be continuing under the
Transaction Documents.
6.2. ADVANCES. Debtor's obligation to pay the principal, and interest
on, the Obligations under the Revolving Credit Loan Credit Facility shall be
evidenced by the Revolving Credit Note. Availability under the Revolving
Credit Loan Credit Facility is subject to the terms and conditions contained
herein, including but not limited to, those set forth herein.
6.3. INTEREST RATE. For each Advance, the Interest Rate shall be as
set forth in Section 7 herein and be evidenced by the Revolving Credit Note.
6.4. DEFAULT. The Note shall provide that upon the happening of any
"Event of Default" hereunder and/or under the Transaction Documents, the
principal sum hereof, together with accrued interest and all other expenses,
including, but not limited to reasonable attorneys' fees for legal services
incurred by the holder hereof in connection with the collection of the Note
and/or the enforcement of payment hereof whether or not suit is brought, and if
suit is brought, then through all appellate actions, shall immediately become
due and payable at the option of the holder of the Note, notwithstanding the
Termination Date set forth herein. In the Event of Default, whether the Bank
exercises any of its rights and remedies contained herein, including the right
to declare all Obligations hereunder to be immediately due and payable, the
Borrower shall pay interest on the unpaid principal balance hereunder at a rate
equal to the Default Rate. The unpaid principal balance under the Note shall
bear the Default Rate of Interest until the first to occur of the following:
(i) all Obligations under this Note are paid in full; (ii) Debtor has cured
said Event of Default to the satisfaction of the Bank; or (iii) the Bank, in
writing, has waived said Event of Default. Notwithstanding anything to the
contrary contained in the Revolving Credit Note, the Revolving Credit Note is
subject to the express condition that at no time shall Debtor be obligated to
be required to pay interest on the principal balance of the Revolving Credit
Note at a rate which could subject Secured Party either to civil or
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criminal penalty as a result of being in excess of the maximum rate which
Debtor is permitted by law to contract or agree to pay. If by the terms of the
Revolving Credit Note, Debtor at any time are required or obligated to pay
interest on the principal balance of such note at a rate in excess of such
maximum rate then the rate of interest under such note shall be deemed to be
immediately reduced to such maximum rate and interest payable hereunder shall
be computed at such maximum rate and any prior interest payments made in excess
of such maximum rate shall be applied and shall be deemed to have been payments
made in reduction of the principal balance of such note.
6.5. METHOD AND PLACE OF PAYMENT. All payments under the Revolving
Credit Note and this Agreement shall be made by debiting the checking account
of Debtor required to be maintained with Secured Party pursuant to the terms
hereof.
6.6. REVOLVING CREDIT NOTE. The amount of Indebtedness under the
Revolving Credit Facility may increase and decrease from time to time as
Secured Party advances, Debtor repays, and Secured Party readvances, sums on
account of the Revolving Credit Facility. It is hereby agreed that all
Advances, first, shall be deemed evidenced by Note #1 up to the principal
amount of $1,000,000., so that the first sums advanced by Secured Party shall
be evidenced by Note #1. Note #1, and the Indebtedness evidenced by Note #1,
shall be reduced only by the last and final sums that Debtor repays with
respect to the Revolving Credit Facility and shall not be reduced by any
intervening repayments of Advances by Secured Party until all Indebtedness
under Note #2 has been repaid. All Advances
(including readvances) shall first be deemed borrowed under Note #1 (to the
extent of $1,000,000.) and all repayments of Advances shall first be applied to
Note #2.
7. PAYMENT Of PRINCIPAL, INTEREST, FEES AND COSTS AND EXPENSES- Revolving
Credit Facility.
7.1. PROMISE TO PAY PRINCIPAL. Debtor promises to pay to Secured
Party the outstanding principal of Advances in full upon termination of the
Revolving Credit Facility pursuant to Section 13.13, or acceleration of the
time for payment of the Indebtedness, pursuant to Section 11.2. Whenever the
outstanding principal balance of Advances exceeds the Borrowing Capacity,
Debtor shall immediately pay to Secured Party the excess of the outstanding
principal balance of Advances over the Borrowing Capacity.
7.2. PROMISE TO PAY INTEREST.
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(a) Debtor promises to pay to Secured Party interest on the
outstanding principal of Advances from time to time unpaid at either (a) the
Variable Rate Option, or (b) the Libor Rate Option for the Interest Period
selected by Debtor. The amount of principal based upon the Libor Rate Option
shall be minimum amounts of $50,000.00 for the Interest Period selected by
Debtor. From the date of the occurrence of, and during the continuance of, an
Event of Default, Debtor, as additional compensation to Secured Party for its
increased credit risk promises to pay interest on (i) the principal of
Advances, whether or not past due; and (ii) past due interest and any other
amount past due under the Transaction Documents, at a per annum rate of the
Prime Rate plus three percent per annum ("Default Rate").
(b) Interest shall be paid (i) on the first day of each month
in arrears, (ii) on the Termination Date, (iii) on acceleration of the time for
payment of the Indebtedness, pursuant to Section 11.2, and (iv) on the date the
Indebtedness is paid in full.
(c) Any change in the interest rate resulting from a change in
the Prime Rate shall take effect simultaneously with such change in the Prime
Rate. Whether the Variable Rate Option or Libor Rate Option is in effect,
interest shall be computed on the daily unpaid principal balance of Advances.
Interest shall be calculated for each calendar day at 1/360th of the applicable
per annum rate which will result in an effective per annum rate higher than the
rate specified herein. In no event shall the rate of interest exceed the
maximum rate permitted by applicable law. If Debtor pays to Secured Party
interest in excess of the amount permitted by applicable law, such excess shall
be applied in reduction of the principal of Advances under the Revolving Credit
Facility made pursuant to this Agreement, and any remaining excess interest,
after application thereof to the principal of Advances, shall be refunded to
Debtor.
(d) At Debtor's option, Debtor may elect to pay interest on
one or more Advances for one or more Interest Periods or for the term of this
Note, or any period of time, so long as such period is made available by
Secured Party and does not extend beyond the Term, subject to the provisions
contained herein, by giving notice of such election to the Secured Party by
11:00 a.m. at least three (3) Business Days before the first day of such
Advance. If the Debtor does not elect an Interest Rate Option for an Advance,
or prior to the expiration of an Interest Period, the Variable Rate Option
shall be deemed to have been chosen by Debtor.
(e) At the option of Debtor, Debtor may elect to pay interest
on the Indebtedness herein or portion(s) thereof, in minimum amounts of
$50,000.00 at the Libor Rate Option for the
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Interest Period selected by the Debtor by giving notice of such election by the
Secured Party by 11:00 a.m. at least three (3) Business Days before the first
day of such Interest Period.
(f) All written notices of Interest Rate Selection and/or
Requests for Advances shall be substantially in the form annexed hereto as
Exhibit E, attached hereto and incorporated herein by this reference.
(g) At any time while the LIBOR Rate Option is in effect,
Debtor agrees to pay to Secured Party and hold Secured Party harmless from any
loss or expense ("breakage fees" or "breakage costs") which Secured Party may
sustain or incur as a consequence of such prepayment. Such breakage fees shall
equal the amount of the Indebtedness being prepaid, multiplied by a per annum
interest rate equal to the difference between the then applicable Base Libor
Rate and the 360-day equivalent interest yield (hereinafter the "Bank Bid
Rate") reasonably selected by the Secured Party in its sole and absolute
discretion, for an aggregate amount comparable to the then remaining principal
balance of the Indebtedness, and with maturities comparable to the Rollover
Date (as hereinafter defined) applicable to the principal balance of the
Indebtedness, calculated over a period of time from and including the date of
prepayment to, but not including, the Rollover Date applicable to the then
remaining principal balance of the Indebtedness being prepaid. If the Base
Libor Rate applicable to the principal balance of the portion of the
Indebtedness being prepaid is equal to or less than the Bank Bid Rate, no Libor
Rate breakage fee shall be due. The term "Rollover Date" applicable to a
particular Libor Interest Period shall mean the last day of Libor Interest
Period. The Secured Party shall submit a certificate to the Debtor setting
forth in reasonable detail the amount of the breakage costs, which certificate
shall be conclusive in the absence of manifest error. The breakage costs shall
also apply to prepayments due as a result of a default. There shall be no
breakage costs for any portion of the indebtedness being prepaid bearing
interest at the Variable Rate Option.
7.3. PROMISE TO PAY FEES. Debtor promises to pay to Secured Party
monthly, on the first day of each calendar month, an unused fee equal to one
quarter of one percent (.25%) of $16,000,000. less the aggregate principal
balance of all Advances outstanding during the calendar month just ended under
the Revolving Credit Facility.
7.4. PROMISE TO PAY COSTS AND EXPENSES.
(a) Debtor agrees to pay to Secured Party, on demand, all
costs and expenses as provided in this Agreement, and all costs and expenses
incurred by Secured Party from time to time in connection with this Agreement,
including, without limitation, those incurred
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in: (i) preparing, negotiating, amending, waiving, or granting consent with
respect to the terms of any or all of the Transaction Documents; (ii) enforcing
the Transaction Documents; (iii) performing, pursuant to Section 13.2, Debtor's
duties under the Transaction Documents upon Debtor's failure to perform them;
(iv) filing financing statements, assignments, or other documents relating to
the Collateral (e.g., filing fees, recording taxes, and documentary stamp
taxes); (v) realizing upon or protecting any Collateral; (vi) enforcing or
collecting any Indebtedness or guaranty thereof; and (vii) upon the occurrence
of an Event of Default, employing collection agencies or other agents to
collect any or all of the Receivable.
(b) Without limiting Section 7.4(a), Debtor also agrees to pay
to Secured Party, on demand, the actual reasonable fees and disbursements
incurred by Secured Party for attorneys retained by Secured Party for advice,
suit, appeal, or insolvency or other proceedings under the Federal Bankruptcy
Code or otherwise upon the occurrence of an Event of Default specified in
Section 13.13.
7.5. METHOD OF PAYMENT OF PRINCIPAL, INTEREST, FEES AND COSTS AND
EXPENSES.
7.7. ACCOUNT STATED. Debtor agrees that each monthly or other
statement of account mailed or delivered by Secured Party to Debtor pertaining
to the outstanding balance of Advances, the amount of interest due thereon,
fees, and costs and expenses shall be final, conclusive, and binding on Debtor
and shall constitute an "account stated" with respect to the matters contained
therein unless, within thirty (30) calendar days from when such statement is
mailed or, if not mailed, delivered to Debtor, Debtor shall deliver to Secured
Party written notice of any objections which it may have as to such statement
of account, and in such event, only the items to which objection is expressly
made in such notice shall be considered to be disputed by Debtor.
8. Intentionally Deleted Prior to Execution.
9. AFFIRMATIVE COVENANTS. So long as any part of the Indebtedness remains
unpaid, or this Agreement remains in effect, Debtor shall comply with the
covenants contained elsewhere in this Agreement, and with the covenants listed
below:
9.1. FINANCIAL STATEMENTS. Debtor shall furnish to Secured Party:
(a) Annual Audited Financial Statements of Debtor. Within
one hundred twenty (120) days after the end of each fiscal year, audited
consolidated financial statements of Debtor and each Consolidated Subsidiary as
of the end of such year, fairly
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presenting Debtor's and each Consolidated Subsidiary's financial position,
which statements shall consist of a balance sheet and related statements of
income, retained earnings, and cash flow covering the period of Debtor's
immediately preceding fiscal year, and which shall be prepared by Debtor and
audited by independent certified public accountants satisfactory to Secured
Party in the form submitted to the Securities and Exchange Commission, and in
accordance with GAAP. At the same time, Debtor shall deliver to Secured Party a
copy of the Form 10-K filed with the Securities and Exchange Commission, and
internally prepared consolidating financial statements of Debtor and each
Consolidated Subsidiary. All such financial statements and other documents
delivered to Secured Party are to be certified as accurate by the chief
financial officer of Debtor.
(b) Quarterly 10-Q Reports. Within sixty (60) days of each
first, second and third fiscal quarter of each fiscal year, consolidated 10-Q
report filed with the Securities and Exchange Commission of Debtor and each
Consolidated Subsidiary as of the end of such period, fairly presenting
Debtor's and each Consolidated Subsidiary's financial position, and internally
prepared consolidating financial statements of Debtor and each Consolidated
Subsidiary. All such reports shall be in such detail as the Securities and
Exchange Commission shall request and in accordance with GAAP and shall be
signed and certified to be correct by the chief financial officer of Debtor or
such other financial officer satisfactory to Secured Party.
(c) Management Letters. Within sixty (60) days of each fiscal
quarter of each fiscal year end (but in connection with year end statements,
120 days after each fiscal year end) a management letter certifying that there
are no defaults to the Transaction Documents and the accounts receivable aging
reports and inventory designation reports required to be submitted to Secured
Party executed by the chairman, president or chief financial officer of Debtor
or other financial officer satisfactory to Secured Party, and otherwise in form
and substance satisfactory to Secured Party in its reasonable discretion.
Simultaneously with the delivery of such financial statements, Debtor shall
deliver to Secured Party a compliance certificate executed by the president or
chief financial officer of Debtor or other financial officer satisfactory to
Secured Party in the form of Exhibit E attached hereto and made a part hereof.
In addition, Debtor shall deliver to Secured Party, as soon as available, a
true copy of any "Management Letter" or other communication to Debtor, from its
certified public accountants regarding matters which arose or were ascertained
during the course of their review and which such accountants determined ought
to be brought to management's attention.
(d) Other Reporting. Within forty five days of each fiscal
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quarter of each fiscal year concerning Debtor and all Consolidated
Subsidiaries, all such reports to be in form and substance satisfactory to
Secured Party in its reasonable discretion:
(i) accounts receivable aging reports; and
(ii) inventory designation reports.
(e) Other Information. Copies of any and all proxy statements,
financial statements, and reports which Debtor sends to its shareholders, and
copies of any and all periodic and special reports and registration statements
which Debtor files with the Securities and Exchange Commission, and such
additional information as Secured Party may from time to time reasonably
request regarding the financial and business affairs of Debtor or any
Consolidated Subsidiary.
9.2. GOVERNMENT AND OTHER SPECIAL RECEIVABLES. Debtor shall promptly
notify Secured Party in writing of the existence of any Receivable as to which
the perfection, enforceability, or validity of Secured Party's Security
Interest in such Receivable, or Secured Party's right or ability to obtain
direct payment to Secured Party of the Proceeds of such Receivable, is governed
by any federal or state statutory requirements other than those of the Uniform
Commercial Code, including, without limitation, any Receivable subject to the
Federal Assignment of Claims Act of 1940, as amended.
9.3. Intentionally Deleted.
9.4. BOOKS AND RECORDS. Debtor shall maintain, at its own cost and
expense, accurate and complete books and records with respect to the
Collateral, in form satisfactory to Secured Party, and including, without
limitation, records of all payments received and all Credits and Extensions
granted with respect to the Receivables, of the return, rejection,
repossession, stoppage in transit, loss, damage, or destruction of any
Inventory, and of all other dealings affecting the Collateral. Debtor shall
deliver such books and records to Secured Party or its representative upon
reasonable request. At Secured Party's request, Debtor shall mark all or any
records to indicate the Security Interest. Debtor shall further indicate the
Security Interest on all financial statements issued by it or shall cause the
Security Interest to be so indicated by its accountants.
9.5. INVENTORY IN POSSESSION OF THIRD PARTIES. If any Inventory
remains in the hands or control of any of Debtor's agents, finishers,
contractors, or processors, or any other third party, Debtor, if requested by
Secured Party, shall notify such party of Secured Party's Security Interest in
the Inventory and
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shall instruct such party to hold such Inventory for the account of Secured
Party and subject to the instructions of Secured Party.
9.6. EXAMINATIONS. Debtor shall at all reasonable times and from time
to time permit Secured Party or its agents upon reasonable advance notice to
Debtor to inspect the Collateral and to examine and make extracts from, or
copies of, any of Debtor's books, ledgers, reports, correspondence, and other
records.
9.7. VERIFICATION OF COLLATERAL. Secured Party shall have the right
to verify all or any Collateral in any manner and through any medium Secured
Party may consider appropriate and Debtor agrees to furnish all assistance and
information and perform any acts which Secured Party may require in connection
therewith.
9.8. RESPONSIBLE PARTIES. Debtor shall notify Secured Party of the
occurrence of any event specified in Section 11.1(v)(iv) with respect to any
Responsible Party promptly after receiving notice thereof.
9.9. TAXES. Debtor shall promptly pay and discharge all of its taxes,
assessments, and other governmental charges prior to the date on which
penalties are attached thereto, establish adequate reserves for the payment of
such taxes, assessments, and other governmental charges, make all required
withholding and other tax deposits, and, upon request, provide Secured Party
with receipts or other proof that such taxes, assessments, and other
governmental charges have been paid in a timely fashion; provided, however,
that nothing contained herein shall require the payment of any tax, assessment,
or other governmental charge so long as its validity is being contested in good
faith, and by appropriate proceedings diligently conducted, and adequate
reserves for the payment thereof have been established.
9.10. LITIGATION.
(a) Debtor shall promptly notify Secured Party in writing of
any litigation, proceeding, or counterclaim against, or of any investigation
of, Debtor or any Consolidated Subsidiary if: (i) the outcome of such
litigation, proceeding, counterclaim, or investigation may materially and
adversely affect the finances or operations of Debtor or any Consolidated
Subsidiary or title to, or the value of, any Collateral; or (ii) such
litigation, proceeding, counterclaim, or investigation questions the validity
of any Transaction Document or any action taken, or to be taken, pursuant to
any Transaction Document.
(b) Debtor shall furnish to Secured Party such information
regarding any such litigation, proceeding, counterclaim, or investigation as
Secured Party shall request.
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9.11. INSURANCE.
(a) Debtor shall at all times carry and maintain in full force
and effect such insurance as Secured Party may from time to time require, in
coverage, form, and amount, and issued by insurers, satisfactory to Debtor and
Secured Party, including, without limitation: workers' compensation or similar
insurance; public liability insurance; business interruption insurance; and
insurance against such other risks as are usually insured against by business
entities of established reputation engaged in the same or similar businesses as
Debtor and similarly situated.
(b) Debtor shall deliver to Secured Party the policies of
insurance required by Secured Party, with appropriate endorsements designating
Secured Party as an additional insured, mortgagee and loss payee as requested
by Secured Party. Each policy of insurance shall provide that if such policy
is cancelled for any reason whatsoever, if any substantial change is made in
the coverage which affects Secured Party, or if such policy is allowed to lapse
for nonpayment of premium, such cancellation, change, or lapse shall not be
effective as to Secured Party until thirty (30) days after receipt by Secured
Party of written notice thereof from the insurer issuing such policy.
9.12. GOOD STANDING; BUSINESS.
Debtor shall take all necessary steps to preserve its
corporate existence and its right to conduct business in all states in which
the nature of its business or ownership of its property requires such
qualification.
9.13. PENSION REPORTS. Upon the occurrence of any Pension Event,
Debtor shall furnish to Secured Party, as soon as possible and, in any event,
within thirty (30) days after Debtor knows, or has reason to know, of such
occurrence, the statement of the president or chief financial officer of Debtor
setting forth the details of such Pension Event and the action which Debtor
proposes to take with respect thereto.
9.14. NOTICE OF NON-COMPLIANCE. Debtor shall notify Secured Party in
writing of any failure by Debtor or any Third Party to comply with any
provision of any Transaction Document within ten (10) days of learning of such
non-compliance, or if any representation or warranty contained in any
Transaction Document is no longer true.
9.15. COMPLIANCE WITH ENVIRONMENTAL LAWS.
(a) Debtor shall comply with all Environmental Laws.
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(b) Debtor shall not suffer, cause, or permit the Disposal of
Hazardous Substances at any property owned, leased, or operated by it or any
domestic Consolidated Subsidiary.
(c) Debtor shall promptly notify Secured Party in the event of
the Disposal of any domestic Hazardous Substance at any property owned, leased,
or operated by Debtor or any domestic Consolidated Subsidiary, or in the event
of any Release, or threatened Release, of a Hazardous Substance, from any such
property.
(d) Debtor shall, at Secured Party's request, provide, at
Debtor's expense, updated Environmental Questionnaires concerning any property
owned, leased, or operated by Debtor or any domestic Consolidated Subsidiary.
(e) Debtor shall deliver promptly to Secured Party (i) copies
of any documents received from the United States Environmental Protection
Agency or any state, county, or municipal environmental or health agency
concerning Debtor's or any domestic Consolidated Subsidiary's operations and
(ii) copies of any documents submitted by Debtor or any domestic Consolidated
Subsidiary to the United States Environmental Protection Agency or any state,
county, or municipal environmental or health agency concerning its operations.
9.16. DEFEND COLLATERAL. Debtor shall defend the Collateral against
the claims and demands of all other parties (other than Secured Party),
including, without limitation, defenses, setoffs, and counterclaims asserted by
any Account Debtor against Debtor or Secured Party.
9.17. USE OF PROCEEDS. Debtor shall use the proceeds of Advances
solely for Debtor's working capital and for such other legal and proper
corporate purposes as are consistent with all applicable laws, Debtor's
articles or certificate of incorporation and by-laws, resolutions of Debtor's
Board of Directors, and the terms of this Agreement.
9.18. COMPLIANCE WITH LAWS. Debtor shall comply with all applicable
laws, rules, regulations, and other legal requirements with respect to its
business and the use, maintenance, and operations of the real and personal
property owned or leased by it in the conduct of its business.
9.19. MAINTENANCE OF PROPERTY. Debtor shall maintain its property,
including, without limitation, the Collateral, in good
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condition and repair and shall prevent the Collateral, or any part thereof,
from being or becoming an accession to other goods not constituting Collateral.
9.20 LICENSES, PERMITS, ETC. Debtor shall maintain all of its
franchises, grants, authorizations, licenses, permits, easements, consents,
certificates, and orders, if any, in full force and effect until their
respective expiration dates.
9.21. TRADEMARKS AND PATENTS. Debtor shall maintain all of its
trademarks, trademark rights, patents, patent rights, licenses, permits,
tradenames, tradename rights, and approvals, if any, in full force and effect
until their respective expiration dates.
9.22. ERISA. Debtor shall comply with the provisions of ERISA and
the Internal Revenue Code with respect to each Pension Plan.
9.23. MAINTENANCE OF OWNERSHIP. Debtor shall at all times maintain
ownership of the percentages of issued and outstanding capital stock of each
Consolidated Subsidiary set forth in Exhibit B and notify Secured Party in
writing prior to the incorporation of any new Consolidated Subsidiary.
9.24. ACTIVITIES OF CONSOLIDATED SUBSIDIARIES. Unless the provisions
of this Section 9.24 are expressly waived by Secured Party in writing, Debtor
shall cause each domestic Consolidated Subsidiary (except for Raltech Logic,
Inc.) to comply with Sections 9.1(b) 9.9, 9.11(a), 9.12, 9.15, 9.26 and 9.18
through 9.22, inclusive, and any of the provisions contained in Schedule, and
shall cause each domestic Consolidated Subsidiary to refrain from doing any of
the acts proscribed by Sections 10.2, 10.3, and 10.5 through 10.14, inclusive.
9.25. LABOR DISPUTES. Debtor shall notify the Secured Party promptly
upon Debtor's learning of any material labor dispute to which Debtor may become
a party to, any strikes or walkouts relating to any of its plants or any of its
facilities and/or the expiration of any labor contract to which Debtor is a
party to or by which Debtor is bound.
9.26. FINANCIAL COVENANTS. The financial covenants to include the
following:
(a) Debtor and its Consolidated Subsidiaries shall maintain,
at all times, on a consolidated basis, a ratio of Total Liabilities to Tangible
Net Worth of not greater than 1.00 to 1, to be tested each fiscal quarter end
of each fiscal year, based upon the financial statements required to be
presented to Secured Party pursuant to Section 9.1. hereinabove.
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(b) Debtor and its Consolidated Subsidiaries shall maintain,
at fiscal year end June 30, 1997, on a consolidated basis, a minimum Tangible
Net Worth of not less than $28,000,000., and at each fiscal year end
thereafter, the required minimum Tangible Net Worth shall increase by
$1,000,000. per fiscal year; to be tested each fiscal quarter end of each
fiscal year, based upon the financial statements required to be presented to
Secured Party pursuant to Section 9.1. hereinabove.
(c) At all times, Debtor and its Consolidated Subsidiaries
shall maintain, on a consolidated basis, a ratio of Current Assets to Current
Liabilities (i) of not less than 2.75 to 1 from the date hereof through June
29, 1998, (ii) of not less than 3.00 to 1 from June 30, 1998 through June 29,
1999, (iii) of not less than 3.25 to 1 from June 30, 1999 through June 29, 2000
and beyond, to be tested each fiscal quarter end of each fiscal year, based
upon the financial statements required to be presented to Secured Party
pursuant to Section 9.1. hereinabove.
(d) Debtor and its Consolidated Subsidiaries shall maintain,
on a consolidated basis, a minimum "Debt Service Coverage Ratio" of 1.25 to 1,
to be tested at the end of each fiscal year, based upon the financial
statements required to be presented to Secured Party pursuant to Section 9.1.
hereinabove.
(e) At all times during the Loan Period, Debtor and its
Consolidated Subsidiaries shall maintain, on a consolidated basis, a ratio of
the aggregate of cash plus total Receivables to Current Liabilities (i) of not
less than 1.00 to 1 from the date hereof through June 29, 1998, (ii) of not
less than 1.25 to 1 from June 30, 1998 through June 29, 1999, (iii) of not less
than 1.50 to 1 from June 30, 1999 through June 29, 2000 and beyond, to be
tested each fiscal quarter of each fiscal year, based upon the financial
statements required to be presented to Secured Party pursuant to Section 9.1.
hereinabove.
The above ratios of this Section 9.26. are being calculated assuming that in
the last year of the Loan Agreement, the Advances under the Revolving Credit
Facility are viewed as long term debt, unless there is an event of default
which is continuing under the Revolving Credit Facility.
10. NEGATIVE COVENANTS. So long as any part of the Indebtedness remains unpaid
or this Agreement remains in effect, Debtor, without the written consent of
Secured Party, shall not violate any covenant contained otherwise herein and
shall not:
10.1. LOCATION OF INVENTORY, EQUIPMENT, AND BUSINESS RECORDS. Move
the Inventory, Equipment or the records concerning the
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Collateral from the location where they are kept as specified herein, except in
the ordinary course of business.
10.2. BORROWED MONEY. Create, incur, assume, or suffer to exist any
liability for borrowed money, except to Secured Party and except for permitted
Capital Expenditures.
10.3. SECURITY INTEREST AND OTHER ENCUMBRANCES. Create, incur,
assume, or suffer to exist any mortgage, security interest, lien, or other
encumbrance upon any of its properties or assets, whether now owned or
hereafter acquired, except mortgages, security interests, liens, and
encumbrances (a) except in favor of Secured Party, (b) except all existing
liens, mortgages, or encumbrances, and (c) except in connection with the grant
of a security interest in Equipment in connection with financing the purchase
of Equipment or in connection with the leasing of Equipment, so long as Debtor
is in compliance with Sections 10.10 and 10.11. herein.
10.4. STORING AND USE OF COLLATERAL. Place the Collateral in any
warehouse which may issue a negotiable Document with respect thereto or use the
Collateral in violation of any provision of the Transaction Documents, of any
applicable statute, regulation, or ordinance, or of any policy insuring the
Collateral.
10.5. MERGERS, CONSOLIDATIONS, OR SALES.
(a) Merge or consolidate with or into any corporation; (b)
enter into any joint venture or partnership with any person, firm, or
corporation; (c) convey, lease, or sell all or any material portion of its
property or assets or business to any other person, firm, or corporation except
for the sale of Inventory in the ordinary course of its business and in
accordance with the terms of this Agreement; or (d) convey, lease, or sell any
of its assets to any person, firm or corporation for less than the fair market
value thereof.
10.6. CAPITAL STOCK. Purchase or retire any of its capital stock or
issue any capital stock, except (1) in connection with its employee stock
option plan and its non-employee stock option plan and (2) pro rata to its
present stockholders, or otherwise change the capital structure of Debtor or
change the relative rights, preferences, or limitations relating to any of its
capital stock.
10.7. DIVIDENDS OR DISTRIBUTIONS. Pay or declare any cash or other
dividends or distributions on any of its corporate stock, or permit a
Consolidated Subsidiary to pay or declare and cash or other dividends or
distributions on any of the corporate stock of any Consolidated Subsidiary, or
accept any such cash or other dividends or distributions from a Consolidated
Subsidiary.
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10.8. INVESTMENTS AND ADVANCES. Make any investment in, or advances
to, any other person, firm, or corporation, except (a) advance payments or
deposits against purchases made in the ordinary course of Debtor's regular
business; (b) direct obligations of the United States of America, money-market
funds or certificates of deposit; or (c) any existing investments in, or
existing advances to, the Consolidated Subsidiaries.
10.9. GUARANTIES. Become a guarantor, a surety, or otherwise liable
for the debts or other obligations of any other person, firm, or corporation,
whether by guaranty or suretyship agreement, agreement to purchase
indebtedness, agreement for furnishing funds through the purchase of goods,
supplies, or services (or by way of stock purchase, capital contribution,
advance, or loan) for the purpose of paying or discharging indebtedness, or
otherwise, except as an endorser of instruments for the payment of money
deposited to its bank account for collection in the ordinary course of
business.
10.10. LEASES. Enter, as lessee, into any lease of real or personal
property (whether such lease is classified on Debtor's financial statements as
a capital lease or operating lease) in excess of $500,000 per fiscal year.
10.11. CAPITAL EXPENDITURES. During any fiscal year during the Loan
Period, cause the Capital Expenditures of Debtor and its Consolidated
Subsidiaries to exceed, on a combined basis, $1,500,000 per fiscal year.
10.12. Intentionally Deleted.
10.13. NAME CHANGE. Change its name without giving at least thirty
(30) days prior written notice of its proposed new name to Secured Party,
together with delivery to Secured Party of UCC-1 Financing Statements
reflecting Debtor's new name, all in form and substance satisfactory to Secured
Party.
10.14. DISPOSITION OF COLLATERAL. Sell, assign, or otherwise
transfer, dispose of, or encumber the Collateral or any interest therein, or
grant a security interest therein, or license thereof, except to Secured Party
and except the sale or lease of Inventory in the ordinary course of business of
Debtor and in accordance with the terms of this Agreement.
10.15. FINANCIAL COVENANTS. Fail to comply with the financial
covenants set forth in Section 9.26. hereinabove.
10.16. NEGATIVE PLEDGE. Encumber or cause to encumber, or cause
NAPCO/Alarm Lock Grupo Internacional, S.A. f/k/a NSS Caribe S.A. to encumber,
the assets (personal property, fixtures or real property) of NAPCO/Alarm Lock
Grupo Internacional, S.A. f/k/a NSS
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Caribe S.A.
11. EVENTS OF DEFAULT.
11.1. EVENTS OF DEFAULT. The occurrence of any one or more of the
following events shall constitute an event of default (individually, an Event
of Default and, collectively, Events of Default):
(a) Nonpayment. Nonpayment when due of any principal,
interest, premium, fee, cost, or expense due under the Transaction Documents,
and such nonpayment is not cured within ten (10) days after notice therof by
Secured Party to Debtor.
(b) Negative Covenants. Default in the observance of any
covenant or agreement of Debtor contained in Article 10,and any such default is
not cured by Debtor or waived by Secured Party within ten (10) days after
notice thereof by Secured Party to Debtor.
(c) Article 6. Default in the observance of any covenant or
agreement of Debtor contained in Article 6,and such default is not cured by
Debtor or waived by Secured Party within ten (10) days after notice thereof by
Secured Party to Debtor.
(d) Other Covenants. Default in the observance of any of the
covenants or agreements of Debtor contained in the Transaction Documents, other
than in Article 10, Article 6 or Sections 7.1, 7.2, 7.3, or 7.4, or in any
other agreement with Secured Party which is not remedied within the earlier of
thirty (30) days after (i) notice thereof by Secured Party to Debtor, or (ii)
ten (10) days after date Debtor was required to give notice to Secured Party
under Section 9.14.
(e) Cessation of Business or Voluntary Insolvency Proceedings.
The (i) cessation of operations of Debtor's business as conducted on the date
of this Agreement; (ii) filing by Debtor of a petition or request for
liquidation, reorganization, arrangement, adjudication as a bankrupt, relief as
a debtor, or other relief under the bankruptcy, insolvency, or similar laws of
the United States of America or any state or territory thereof or any foreign
jurisdiction now or hereafter in effect; (iii) making by Debtor of a general
assignment for the benefit of creditors; (iv) consent by the Debtor to the
appointment of a receiver or
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trustee, including, without limitation, a "custodian," as defined in the
Federal Bankruptcy Code, for Debtor or any of Debtor's assets; (v) making of
any, or sending of any, notice of any intended bulk sale by Debtor; or (vi)
execution by Debtor of a consent to any other type of insolvency proceeding
(under the Federal Bankruptcy Code or otherwise) or any formal or informal
proceeding for the dissolution or liquidation of, or settlement of, claims
against or winding up of affairs of, Debtor.
(f) Involuntary Insolvency Proceedings. (i) The appointment
of a receiver, trustee, custodian, or officer performing similar functions,
including, without limitation, a "custodian," as defined in the Federal
Bankruptcy Code, for Debtor or any of Debtors assets; or the filing against
Debtor of a request or petition for liquidation, reorganization, arrangement,
adjudication as a bankrupt, or other relief under the bankruptcy, insolvency,
or similar laws of the United States of America, any state or territory
thereof, or any foreign jurisdiction now or hereafter in effect; or of any
other type of insolvency proceeding (under the Federal Bankruptcy Code or
otherwise) or any formal or informal proceeding for the dissolution or
liquidation of, settlement of claims against, or winding up of affairs of
Debtor shall be instituted against Debtor; and (ii) such appointment shall not
be vacated, or such petition or proceeding shall not be dismissed, within sixty
(60) days after such appointment, filing, or institution.
(g) Other Indebtedness and Agreements. Failure by Debtor to
pay, when due, (or, if permitted by the terms of any applicable documentation,
within any applicable grace period) any indebtedness owing by Debtor to Secured
Party or any other person or entity (other than the Indebtedness incurred,
pursuant to this Agreement, and including, without limitation, indebtedness
evidencing a deferred purchase price), whether such indebtedness shall become
due by scheduled maturity, by required prepayment, by acceleration, by demand,
or otherwise, or failure by the Debtor to perform any term, covenant, or
agreement on its part to be performed under any agreement or instrument (other
than a Transaction Document) evidencing or securing or relating to any
indebtedness owing by Debtor when required to be performed if the effect of
such failure is to permit the holder to accelerate the maturity of such
indebtedness, and such failure is not cured within thirty (30) days after such
failure to pay when due.
(h) Judgments. Any judgment or judgments against Debtor
(other than any judgment for which Debtor is fully insured) shall remain
unpaid, unstayed on appeal, undischarged, unbonded, or undismissed for a period
of thirty (30) days.
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(i) Pension Default. Any Reportable Event which Secured Party
shall determine in good faith constitutes grounds for the termination of any
Pension Plan by the Pension Benefit Guaranty Corporation, or for the
appointment by an appropriate United States district court of a trustee to
administer any Pension Plan, shall occur and shall continue thirty (30) days
after written notice thereof to Debtor by Secured Party; or the Pension Benefit
Guaranty Corporation shall institute proceedings to terminate any Pension Plan
or to appoint a trustee to administer any Pension Plan; or a trustee shall be
appointed by an appropriate United States district court to administer any
Pension Plan; or any Pension Plan shall be terminated; or Debtor or any
Consolidated Subsidiary shall withdraw from a Pension Plan in a complete
withdrawal or a partial withdrawal; or there shall arise vested unfunded
liabilities under any Pension Plan that, in the good faith opinion of Secured
Party, have or will or might have a material adverse effect on the finances or
operations of Debtor; or Debtor or any Consolidated Subsidiary shall fail to
pay to any Pension Plan any contribution which it is obligated to pay under the
terms of such plan or any agreement or which is required to meet statutory
minimum funding standards, and such pension default is not remedied within
thirty (30) days of default;
(j) Collateral; Impairment. There shall occur with respect to
the Collateral any (i) misappropriation, conversion, diversion, or fraud; (ii)
levy, seizure, or attachment; or (iii) material loss, theft, or damage, and
such impairment is not cured to the reasonable satisfaction of Secured Party
within ten (10) days of written notice by Secured Party to Debtor.
(k) Insecurity; Change. Secured Party shall believe in good
faith that the prospect of payment of all, or any part, of the Indebtedness or
performance of Debtor's obligations under the Transaction Documents or any
other agreement between Secured Party and Debtor is impaired; or there shall
occur any materially adverse change in the business or financial condition of
Debtor.
(l) Third Party Default. There shall occur with respect to
any Third Party or any Consolidated Subsidiary, including, without limitation,
any guarantor or Consolidated Subsidiary (i) any event described in Section
11.1(e), 11.1(f), 11.1(g), or 11.1(h); (ii) any pension default event such as
described in Section 11.1(i) with respect to any pension plan maintained by
such Third Party or such Consolidated Subsidiary; or (iii) any failure by Third
Party or such Consolidated Subsidiary to perform in accordance with the terms
of any agreement between such Third Party and Secured Party, and such Third
Party default remains unremedied within thirty (30) days of default.
(m) Representations. Any certificate, statement,
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representation, warranty, or financial statement furnished by, or on behalf of,
Debtor or any Third Party, pursuant to, or in connection with, this Agreement
(including, without limitation, representations and warranties contained
herein) or as an inducement to Secured Party to enter into this Agreement or
any other lending agreement with Debtor shall prove to have been false in any
material respect at the time as of which the facts therein set forth were
certified or to have omitted any substantial contingent or unliquidated
liability or claim against Debtor or any such Third Party, or if on the date of
the execution of this Agreement there shall have been any materially adverse
change in any of the facts disclosed by any such statement or certificate which
shall not have been disclosed in writing to Secured Party at, or prior to, the
time of such execution.
(n) Challenge to Validity. Debtor or any Third Party
commences any action or proceeding to contest the validity or enforceability of
any Transaction Document or any lien or security interest granted or
obligations evidenced by any Transaction Document.
(o) Death or Incapacity; Termination. Any Third Party dies or
becomes incapacitated, or terminates or attempts to terminate, in accordance
with its terms or otherwise, any guaranty or other Transaction Document
executed by such Third Party.
(p) Intentionally deleted prior to execution.
(q) Location of Collateral Within the United States. If, at
any time during the Loan Period, Debtor and its Consolidated Subsidiaries shall
fail to maintain, on a consolidated basis, not less than fifty (50%) of the
value of all of their identifiable assets (as disclosed in the 10k statement)
in the United States, to be tested annually, at each fiscal year end.
11.2. EFFECTS OF AN EVENT OF DEFAULT.
(a) Upon the happening of one or more Events of Default
(except an Event of Default under either Section 11.1(e) or 11.1(f)), Secured
Party may declare any obligations it may have hereunder to be cancelled, and
the principal of the Indebtedness then outstanding to be immediately due and
payable, together with all interest thereon and costs and expenses accruing
under the Transaction Documents. Upon such declaration, any obligations
Secured Party may have hereunder shall be immediately cancelled, and the
Indebtedness then outstanding shall become immediately due and payable without
presentation, demand, or further notice of any kind to Debtor.
(b) Upon the happening of one or more Events of Default
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under Section 11.1(e) or 11.1(f), Secured Party's obligations hereunder shall
be cancelled immediately, automatically, and without notice, and the
Indebtedness then outstanding shall become immediately due and payable without
presentation, demand, or notice of any kind to the Debtor.
12. SECURED PARTY'S RIGHTS AND REMEDIES.
12.1. GENERALLY. Secured Party's rights and remedies with respect to
the Collateral, in addition to those rights granted herein and in any other
agreement between Debtor and Secured Party now or hereafter in effect, shall be
those of a secured party under the Uniform Commercial Code as in effect in the
State and under any other applicable law.
12.2. INTENTIONALLY DELETED PRIOR TO EXECUTION.
12.3. POSSESSION OF COLLATERAL. Whenever Secured Party may take
possession of the Collateral, pursuant to Section 12.1, Secured Party may take
possession of the Collateral on Debtor's premises or may remove the Collateral,
or any part thereof, to such other places as the Secured Party may, in its sole
discretion, determine. If requested by Secured Party, Debtor shall assemble
the Collateral and deliver it to Secured Party at such place as may be
designated by Secured Party.
12.4. COLLECTION OF RECEIVABLES. Upon the occurrence of an Event of
Default or an event which with notice or lapse of time, or both, would
constitute an Event of Default, Secured Party may demand, collect, and sue for
all monies and proceeds due, or to become due, on the Receivables (in either
Debtor's or Secured Party's name at the latter's option) with the right to
enforce, compromise, settle, or discharge any or all Receivables. If Secured
Party takes any action contemplated by this Section with respect to any
Receivable, Debtor shall not exercise any right that Debtor would otherwise
have had to take such action with respect to such Receivable.
12.5. Intentionally Deleted Prior to Execution
12.6. LICENSE TO USE PATENTS, TRADEMARKS AND TRADENAMES. Debtor
grants to Secured Party a royalty-free license to use any and all patents,
trademarks, and tradenames now or hereafter owned by, or licensed to, Debtor
for the purposes of manufacturing and disposing of Inventory after the
occurrence of an Event of Default. All Inventory shall at least meet quality
standards maintained by Debtor prior to such Event of Default.
13. MISCELLANEOUS.
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13.1. PERFECTING THE SECURITY INTEREST; PROTECTING THE COLLATERAL.
Debtor hereby authorizes Secured Party to file such financing statements
relating to the Collateral without Debtor's signature thereon as Secured Party
may deem appropriate, and appoints Secured Party as Debtor's attorney-in-fact
(without requiring Secured Party) to execute any such financing statement or
statements in Debtor's name and to perform all other acts which Secured Party
deems appropriate to perfect and continue the Security Interest and to protect,
preserve, and realize upon the Collateral.
13.2. PERFORMANCE OF DEBTOR'S DUTIES. Upon Debtor's failure to
perform any of its duties under the Transaction Documents, including, without
limitation, the duty to obtain insurance as specified in Section 9.11, Secured
Party may, but shall not be obligated to, perform any or all such duties.
13.3. NOTICE OF SALE. Without in any way requiring notice to be given
in the following manner, Debtor agrees that any notice by Secured Party of
sale, disposition, or other intended action hereunder, or in connection
herewith, whether required by the Uniform Commercial Code as in effect in the
State or otherwise, shall constitute reasonable notice to Debtor if such notice
is mailed by regular or certified mail, postage prepaid, at least five (5) days
prior to such action, to Debtor's address or addresses specified above or to
any other address which Debtor has specified in writing to Secured Party as the
address to which notices hereunder shall be given to Debtor.
13.4. WAIVER BY SECURED PARTY. No course of dealing between Debtor
and Secured Party and no delay or omission by Secured Party in exercising any
right or remedy under the Transaction Documents or with respect to any
Indebtedness shall operate as a waiver thereof or of any other right or remedy,
and no single or partial exercise thereof shall preclude any other or further
exercise thereof or the exercise of any other right or remedy. All rights and
remedies of Secured Party are cumulative.
13.5. WAIVER BY DEBTOR. Secured Party shall have no obligation to
take, and Debtor shall have the sole responsibility for taking, any and all
steps to preserve rights against any and all Account Debtors and against any
and all prior parties to any note, Chattel Paper, draft, trade acceptance or
other instrument for the payment of money covered by the Security Interest,
whether or not in Secured Party's possession. Secured Party shall not be
responsible to Debtor for loss or damage resulting from Secured Party's failure
to enforce any Receivables or to collect any moneys due, or to become due,
thereunder or other Proceeds constituting
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Collateral hereunder. Debtor waives protest of any note, check, draft, trade
acceptance, or other instrument for the payment of money constituting
Collateral at any time held by Secured Party on which Debtor is in any way
liable and waives notice of any other action taken by Secured Party, including,
without limitation, notice of Secured Party's intent to accelerate the
Indebtedness or any part thereof.
13.6 SETOFF. Without limiting any other right of Secured Party,
whenever Secured Party has the right to declare any Indebtedness to be
immediately due and payable (whether or not it has so declared), Secured Party,
at its sole election, may setoff against the Indebtedness any and all monies
then or thereafter owed to Debtor by Secured Party in any capacity, whether or
not the Indebtedness or the obligation to pay such monies owed by Secured Party
is then due, and Secured Party shall be deemed to have exercised such right of
setoff immediately at the time of such election even though any charge therefor
is made or entered on Secured Party's records subsequent thereto.
13.7. ASSIGNMENT. The rights and benefits of Secured Party hereunder
shall, if Secured Party so agrees, inure to any party acquiring any interest in
the Indebtedness or any part thereof. Prior to the occurrence of an Event of
Default hereunder,Secured Party shall give Debtor ninety (90) days prior
written notice of an assignmentin fullof its interest in the Indebtedness, with
the exception of assignments of its interest in the Indebtedness due to
acquisition, merger, consolidation, takeover or such other like activity.
13.8. SUCCESSORS AND ASSIGNS. Secured Party and Debtor, as used
herein, shall include the successors or assigns of those parties, except that
Debtor shall not have the right to assign its rights hereunder or any interest
herein.
13.9. MODIFICATION. No modification, rescission, waiver, release, or
amendment of any provision of this Agreement shall be made, except as may be
provided in a written agreement signed by Debtor and a duly authorized officer
of Secured Party.
13.10. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and by Secured Party and Debtor on separate counterparts, each of
which, when so executed and delivered, shall be an original, but all of which
shall together constitute one and the same Agreement.
13.11. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Any financial
calculation to be made, all financial statements and other financial
information to be provided, and all books and
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records to be kept in connection with the provision of this Agreement, shall be
in accordance with GAAP consistently applied during each interval and from
interval to interval; provided, however, that in the event changes in GAAP
shall be mandated by the Financial Accounting Standards Board or any similar
accounting body of comparable standing, or should be recommended by Debtor's
certified public accountants, to the extent such changes would affect any
financial calculations to be made in connection herewith, such changes shall be
implemented in making such calculations only from and after such date as Debtor
and Secured Party shall have amended this Agreement to the extent necessary to
reflect such changes in the financial and other covenants to which such
calculations relate.
13.12. INDEMNIFICATION.
(a) If after receipt of any payment of all, or any part of,
the Indebtedness, Secured Party is, for any reason, compelled to surrender such
payment to any person or entity because such payment is determined to be void
or voidable as a preference, an impermissible setoff, or a diversion of trust
funds, or for any other reason, the Transaction Documents shall continue in
full force and Debtor shall be liable, and shall indemnify and hold Secured
Party harmless for, the amount of such payment surrendered. The provisions of
this Section shall be and remain effective notwithstanding any contrary action
which may have been taken by Secured Party in reliance upon such payment, and
any such contrary action so taken shall be without prejudice to Secured Party's
rights under the Transaction Documents and shall be deemed to have been
conditioned upon such payment having become final and irrevocable. The
provisions of this Section 13.12(a) shall survive the termination of this
Agreement and the Transaction Documents.
(b) Debtor agrees to indemnify, defend and hold harmless
Secured Party from, and against, any and all liabilities, claims, damages,
penalties, expenditures, losses, or charges, including, but not limited to, all
costs of investigation, monitoring, legal representations, remedial response,
removal, restoration or permit acquisition, which may now, or in the future, be
undertaken, suffered, paid, awarded, assessed, or otherwise incurred by Secured
Party or any other person or entity as a result of the presence of, Release of,
or threatened Release of Hazardous Substances on, in, under, or near the
property owned, leased or operated by Debtor or any Consolidated Subsidiary.
The liability of Debtor under the covenants of this Section 13.12(b) is not
limited by any exculpatory provisions in this Agreement or any other documents
securing the Indebtedness and shall survive repayment of the Indebtedness or
any transfer or termination of this Agreement regardless of the means of such
transfer or termination. Debtor agrees that Secured Party shall not be liable
in any way for the
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completeness or accuracy of any Environmental Report or the information
contained therein. Debtor further agrees that Secured Party has no duty to
warn Debtor or any other person or entity about any actual or potential
environmental contamination or other problem that may have become apparent, or
will become apparent, to Secured Party.
(c) Debtor agrees to pay, indemnify, and hold Secured Party
harmless from, and against, any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses, or
disbursements of any kind or nature whatsoever (including, without limitation,
counsel and special counsel fees and disbursements in connection with any
litigation, investigation, hearing, or other proceeding) with respect, or in
any way related, to the existence, execution, delivery, enforcement,
performance, and administration of this Agreement and any other Transaction
Document (all of the foregoing, collectively, the "Indemnified Liabilities").
The agreements in this Section 13.12(c) shall survive repayment of the
Indebtedness.
13.13. TERMINATION.
This Agreement is, and is intended to be, a continuing
Agreement and shall remain in full force and effect for the Term and for any
renewal term, if any; provided, however, that Secured Party may terminate this
Agreement by giving Debtor notice to terminate in writing at least one hundred
twenty (120) days prior to the end of the Term whereupon at the end of the Term
all Indebtedness shall be due and payable in full without presentation, demand,
or further notice of any kind, whether or not all or any part of such
Indebtedness is otherwise due and payable pursuant to the agreement or
instrument evidencing same. Notwithstanding the above, Secured Party may
terminate this Agreement immediately and without further notice (except as
specifically provided for herein or in the other Transaction Documents) upon
the occurrence of an uncured or unremedied Event of Default herein or under any
of the Transaction Documents. In addition, the one hundred twenty (120) day
prior notice provision contained in this Section 13.13. does not apply and
shall not be enforceable in the event that an uncureddefault has occurred and
is continuing under the Transaction Documents with respect to payment
covenants, bankruptcy covenants or bankruptcy events of default, financial
covenants contained in Section 9.26. herein, the negative covenants contained
in Sections 10.11, 10.15 and 10.16 herein, the cross-default with other
creditors covenants, and the event of default specified in Section
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11.1. (q). Notwithstanding the foregoing or anything in this Agreement or
elsewhere to the contrary, the Security Interest, Secured Party's rights and
remedies under the Transaction Documents and Debtor's obligations and
liabilities under the Transaction Documents, shall survive any termination of
this Agreement and shall remain in full force and effect until all of the
Indebtedness outstanding, or contracted or committed for (whether or not
outstanding), before the receipt of such notice by Secured Party, and any
extensions or renewals thereof (whether made before or after receipt of such
notice), together with interest accruing thereon after such notice, shall be
finally and irrevocably paid in full. No Collateral shall be released or
financing statement terminated until: (i) such final and irrevocable payment in
full of the Indebtedness as described in the preceding sentence; and (ii)
Debtor and Secured Party execute a mutual general release, subject to Section
13.12 of this Agreement, in form and substance satisfactory to the Secured
Party and Debtor and their counsel.
13.14. FURTHER ASSURANCES. From time to time, Debtor shall take such
action and execute and deliver to Secured Party such additional documents,
instruments, certificates, and agreements as Secured Party may reasonably
request to effectuate the purposes of the Transaction Documents.
13.15. HEADINGS. Article and Section headings used in this Agreement
are for convenience only and shall not affect the construction of this
Agreement.
13.16. CUMULATIVE SECURITY INTEREST, ETC. The execution and delivery
of this Agreement shall in no manner impair or affect any other security (by
endorsement or otherwise) for payment or performance of the Indebtedness, and
no security taken hereafter as security for payment or performance of the
Indebtedness shall impair in any manner or affect this Agreement, or the
security interest granted hereby, all such present and future additional
security to be considered as cumulative security.
13.17. SECURED PARTY'S DUTIES. Without limiting any other provision
of this Agreement: (a) the powers conferred on Secured Party hereunder are
solely to protect its interests and shall not impose any duty to exercise any
such powers; and (b) except as may be required by applicable law, Secured Party
shall not have any duty as to any Collateral or as to the taking of any
necessary steps to preserve rights against any parties or any other rights
pertaining to any Collateral.
13.18. NOTICE GENERALLY. All notices and other communications
hereunder shall be made by telegram, telex, electronic transmitter, overnight
air courier, or certified or registered mail, return receipt requested, and
shall be deemed to be received by the party
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to whom sent one Business Day after sending, if sent by telegram, telex,
electronic transmitter or overnight air courier, and three Business Days after
mailing, if sent by certified or registered mail. All such notices and other
communications to a party hereto shall be addressed to such party at the
address set forth on the cover page hereof or to such other address as such
party may designate for itself in a notice to the other party given in
accordance with this Section 13.18. Notices to Debtor shall be sent to the
attention of the Senior Vice President for Operations and Finance. As of this
date the Senior Vice President for Operations and Finance is Kevin Buchel.
13.19. SEVERABILITY. The provisions of this Agreement are
independent of, and separable from, each other, and no such provision shall be
affected or rendered invalid or unenforceable by virtue of the fact that for
any reason any other such provision may be invalid or unenforceable in whole or
in part. If any provision of this Agreement is prohibited or unenforceable in
any jurisdiction, such provision shall be ineffective in such jurisdiction only
to the extent of such prohibition or unenforceability, and such prohibition or
unenforceability shall not invalidate the balance of such provision to the
extent it is not prohibited or unenforceable nor render prohibited or
unenforceable such provision in any other jurisdiction.
13.20. INCONSISTENT PROVISIONS. The terms of this Agreement and the
other Transaction Documents shall be cumulative except to the extent that they
are specifically inconsistent with each other, in which case the terms of this
Agreement shall prevail.
13.21. ENTIRE AGREEMENT. This Agreement and the other Transaction
Documents constitute the entire agreement and understanding between the parties
hereto with respect to the transactions contemplated hereby and supersede all
prior negotiations, understandings, and agreements between such parties with
respect to such transactions, including, without limitation, those expressed in
any commitment letter delivered by Secured Party to Debtor.
13.22. APPLICABLE LAW. THIS AGREEMENT, AND THE TRANSACTIONS
EVIDENCED HEREBY, SHALL BE GOVERNED BY, AND CONSTRUED UNDER, THE INTERNAL LAWS
OF THE STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW, AS THE SAME MAY
FROM TIME TO TIME BE IN EFFECT, INCLUDING, WITHOUT LIMITATION, THE UNIFORM
COMMERCIAL CODE AS IN EFFECT IN THE STATE.
13.23. CONSENT TO JURISDICTION. DEBTOR AND SECURED PARTY AGREE THAT
ANY ACTION OR PROCEEDING TO ENFORCE, OR ARISING OUT OF, THE TRANSACTION
DOCUMENTS MAY BE COMMENCED IN ANY COURT OF THE STATE IN ANY COUNTY, OR IN THE
DISTRICT COURT OF THE UNITED STATES
46
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<PAGE> 40
IN ANY DISTRICT, IN WHICH SECURED PARTY HAS AN OFFICE, AND DEBTOR WAIVES
PERSONAL SERVICE OF PROCESS AND AGREES THAT A SUMMONS AND COMPLAINT COMMENCING
AN ACTION OR PROCEEDING IN ANY SUCH COURT SHALL BE PROPERLY SERVED AND SHALL
CONFER PERSONAL JURISDICTION IF SERVED BY REGISTERED OR CERTIFIED MAIL TO
DEBTOR, OR AS OTHERWISE PROVIDED BY THE LAWS OF THE STATE OR THE UNITED STATES.
13.24. JURY TRIAL WAIVER. DEBTOR AND SECURED PARTY HEREBY KNOWINGLY,
VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHT TO TRIAL BY JURY DEBTOR OR
SECURED PARTY MAY HAVE IN ANY ACTION OR PROCEEDING, IN LAW OR IN EQUITY, IN
CONNECTION WITH THE TRANSACTION DOCUMENTS OR THE TRANSACTIONS RELATED THERETO.
DEBTOR REPRESENTS AND WARRANTS THAT NO REPRESENTATIVE OR AGENT OF SECURED PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SECURED PARTY WILL NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THIS RIGHT TO JURY TRIAL WAIVER. DEBTOR
ACKNOWLEDGES THAT SECURED PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT
BY, AMONG OTHER THINGS, THE PROVISIONS OF THIS SECTION 13.24.
47
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<PAGE> 41
Accepted at Garden City, New York by:
MARINE MIDLAND BANK NAPCO SECURITY SYSTEMS, INC.
By: /s/ By: /s/
------------------------- -------------------------
John S. Wamboldt Kevin Buchel
Vice President Senior Vice President
STATE OF NEW YORK )
) SS:
COUNTY OF NASSAU )
On this 12th day of May, 1997, before me personally came KEVIN
BUCHEL, to me known, who being by me duly sworn, did depose and say that he
resides at ______________________________________________________________; that
he is the Senior Vice President of NAPCO SECURITY SYSTEMS, INC., the
corporation described in and which executed the foregoing instrument; that he
signed his name thereto by order of the Board of Directors of said corporation.
/s/
------------------------------
NOTARY PUBLIC
STATE OF NEW YORK )
) SS:
COUNTY OF NASSAU )
On the 12th day of May, 1997, before me personally came JOHN
S. WAMBOLDT, to me known, who, being by me duly sworn, did depose and say that
he has an office at 534 Broad Hollow Road, Melville, New York; that he is a
Vice President of MARINE MIDLAND BANK, the corporation described in and which
executed the foregoing instrument; and that he signed his name thereto by order
of the Board of Directors of said corporation.
/s/
------------------------------
NOTARY PUBLIC
48
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<PAGE> 42
REVOLVING CREDIT NOTE # 1
<TABLE>
<S> <C>
Amount of Note: $1,000,000.00
Date of Note: As of May 12, 1997
Borrower: NAPCO Security Systems, Inc., the undersigned borrower, having
its principal office at the place indicated beneath its name,
and including its successors and/or assigns.
Default Rate: All overdue amounts shall bear interest, payable on demand, at
a rate per annum equal to the Interest Rate, then in effect,
plus three (3.0%) percent per annum.
Interest Rate: Interest is to be computed from the date hereof at a rate per
annum equal to either (a) the Variable Rate Option, or (b) the
Libor Rate Option for the Interest Period selected by the
Borrower. In all instances, interest shall be payable in
arrears and computed on an actual/360-day basis (i.e., interest
for each day during which the indebtedness evidenced by this
Note, or any portion thereof, is outstanding), all as more
specifically described in the Loan Agreement, incorporated
herein by this reference.
Interest Period: Interest Period, as the term "Interest Period" is defined in the
Loan Agreement.
Lender: Marine Midland Bank, including its successors and/or assigns, with
a place of business at 534 Broad Hollow Road, Melville, New
York 11747.
Libor Rate Option: Libor Rate Option, as the term "Libor Rate Option" is defined in the
Loan Agreement.
Loan Agreement: The Loan and Security Agreement dated as of even date hereof,
including all exhibits hereto, by and between the Borrower and
the Lender, as the same may be amended or otherwise modified
from time to time.
Prime Rate: Prime Rate, as the term "Prime Rate" is defined in the Loan Agreement.
</TABLE>
E-49
<PAGE> 43
<TABLE>
<S> <C>
Note or Revolving
Credit Note or
Revolving Credit
Note # 1 This Revolving Credit Note # 1, including all exhibits thereto,
as the same may be amended or otherwise modified from time to
time; the terms "herein", "hereunder" and like terms shall be
taken in its entirety and shall not be limited to any
particular paragraph or provision hereof.
Termination
Date: Termination Date, as the term "Termination Date is defined in
the Loan Agreement.
Transaction
Documents: Transaction Documents, as the term "Transaction Documents" is
defined in the Loan Agreement.
Variable Rate
Option: Variable Rate Option, as the term "Variable Rate Option" is
defined in the Loan Agreement.
</TABLE>
FOR VALUE RECEIVED, the Borrower does hereby covenant and promise to
pay to the order of the Lender at its office at 534 Broad Hollow Road;
Melville, New York 11747 or at such other place or places as the Lender may
designate to the Borrower in writing from time to time, in check, coin or
currency of the United States which is then legal tender for the payment of
public or private debts, in immediately available funds, the lesser of (a) the
principal amount of One Million ($1,000,000.00) Dollars; or (b) the aggregate
unpaid principal amount of all loans (or Advances) made by the Lender to the
Borrower from time to time hereunder (collectively the "Loans", or if used in
the singular, the "Loan").
The Borrower agrees that each monthly or other statement of account
mailed or delivered by the Lender to the Borrower pertaining to the outstanding
balance of the Loans, the amount of interest due thereon, fees, and costs and
expenses shall be final, conclusive, and binding on the Borrower and shall
constitute an "account stated" with respect to the matters contained therein
unless, within thirty (30) calendar days from when such statement is mailed or,
if not mailed, delivered to the Borrower, the Borrower shall deliver to the
Lender written notice of any objections which it may have as to such statement
of account, and in such event, only the items to which objection is expressly
made in such notice shall be considered to be disputed by the Borrower.
No legal proceedings or actions shall be brought by the Borrower against the
Lender claiming any such error unless (a) the Borrower shall have given the
written notice as provided hereinabove, and (b)
2
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<PAGE> 44
such legal proceeding or action shall be commenced within one (1) year of the
date when such statement of account, notice or advice was delivered or mailed
to the Borrower.
The Borrower also shall pay, in lawful money of the United States, and
in immediately available funds, interest to the Lender on the unpaid principal
balance of all Loans outstanding from time to time from the date hereof until
fully paid at a rate per annum equal to at the election of Borrower the Libor
Rate Option or the Variable Rate Option, subject to the provisions contained in
the Loan Agreement and all as more specifically described in the Loan
Agreement. All payments shall be credited, when collected, first to interest
and then to principal.
Interest Rate and Interest Period selection shall be governed by the
provisions contained in the Loan Agreement. All written notices of Interest
Rate and/or Interest Period selection shall be in the form annexed hereto as
Exhibit A, attached hereto and incorporated herein by this reference.
A late payment premium equal to five (5%) percent of any principal or
interest payment made more than ten (10) days after the due date thereof shall
be due with any such late payment (other than the final payment due on the
Maturity Date).
This Note is secured by and the parties hereto are entitled to the
benefits of that certain Second Mortgage and Security Agreement in the
principal amount of $1,000,000., of even date herewith (the "Mortgage"), made
by the Borrower to the Lender, encumbering, among other things, certain real
property and improvements now or hereafter located on said real property,
situate at 333 Bayview Avenue, a/k/a 359 Bayview Avenue, Amityville, in the
Town of Babylon, County of Suffolk, State of New York, as more particularly
described in the Mortgage ("Mortgaged Premises" or "Mortgaged Property"), and
is executed and delivered pursuant to the Loan Agreement, all of the covenants,
conditions and agreements of the Mortgage and the Loan Agreement being made a
part hereof by this reference. This Note also is secured by the Collateral of
the Borrower described in the Loan Agreement, and the pledged collateral
described in certain pledge agreements dated of even date hereof, and the
collateral of the domestic Consolidated Subsidiaries described in the general
security agreements executed and delivered to the Lender by each of the
domestic Consolidated Subsidiaries on even date hereof, and the Lender is
entitled to the benefits of all of the collateral described therein and the
collateral described in the other Transaction Documents.
This Revolving Credit Note is the Note # 1 referred to in the Loan
Agreement, and the Lender shall be entitled to the benefit of all of the
provisions contained therein and in the other Transaction Documents. The Loan
Agreement, among other things, contains
3
E-51
<PAGE> 45
provisions for payment of principal, interest, fees and charges in connection
with the Revolving Credit Facility as well as provisions for acceleration of
this Note upon the happening of certain stated events. The Loan Agreement also
contains representations, warranties, covenants and conditions precedent to
Advances under the Revolving Credit Facility, all of which are hereby made part
of this Revolving Credit Note to the same extent and with the same effect as if
set forth herein at length.
It is expressly agreed that, upon the failure of the Borrower timely
to make any payment due hereunder, or upon the happening of any "Event of
Default" under the Mortgage, the Loan Agreement and/or the other Transaction
Documents, the principal sum hereof, together with accrued interest and all
other expenses, including, but not limited to reasonable attorneys' fees for
legal services incurred by the Lender in connection with the collection of this
Note and/or the enforcement of payment hereof whether or not suit is brought,
and if suit is brought, then through all appellate actions, shall immediately
become due and payable at the option of the Lender, notwithstanding the
Termination Date set forth herein. In the Event of Default, whether the Lender
exercises any of its rights and remedies contained herein, including the right
to declare all Indebtedness hereunder to be immediately due and payable, the
Borrower shall pay interest on the unpaid principal balance hereunder at a rate
equal to the Default Rate. The unpaid principal balance under the Note shall
bear the Default Rate of Interest until the first to occur of the following:
(i) all Indebtedness under this Note are paid in full; (ii) Borrower has cured
said Event of Default to the satisfaction of the Lender; or (iii) the Lender,
in writing, has waived said Event of Default. Notwithstanding anything to the
contrary contained in this Note, the Note is subject to the express condition
that at no time shall Borrower be obligated to be required to pay interest on
the principal balance of this Note at a rate which could subject the Lender
either to civil or criminal penalty as a result of being in excess of the
maximum rate which Borrower is permitted by law to contract or agree to pay.
If by the terms of this Note, Borrower at any time are required or obligated to
pay interest on the principal balance of this Note at a rate in excess of such
maximum rate then the rate of interest under this Note shall be deemed to be
immediately reduced to such maximum rate and interest payable hereunder shall
be computed at such maximum rate and any prior interest payments made in excess
of such maximum rate shall be applied and shall be deemed to have been payments
made in reduction of the principal balance of such note.
The indebtedness evidenced by this Note shall be prepayable, in whole
or in part, subject to the provisions contained in the Loan Agreement.
Should the indebtedness represented by this Note or any part thereof
be collected at law or in equity, or in bankruptcy, receivership or any other
court proceedings (whether at the trial or
4
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<PAGE> 46
appellate level), or should this Note be placed in the hands of attorneys for
collection upon an Event of Default, the Borrower agrees to pay, in addition to
the principal, premium, breakage costs, and interest due and payable hereon,
all costs of collection or attempting to collect this Note, including
reasonable attorneys' fees and expenses.
The Borrower hereby waives valuation and appraisement, demand,
presentment for payment, notice of dishonor, protest and notice of protest of
this Note.
Any notice, demand or request relating to any matter set forth herein
shall be in writing and shall be deemed effective when mailed, postage prepaid,
by registered or certified mail, return receipt requested, to any party hereto
at its address stated herein or at such other address of which it shall have
notified the party giving such notice in writing as aforesaid.
This Note, being drawn, executed and delivered in the State of New
York, where all advances and repayments shall be made, shall be construed and
enforced in accordance with the laws of the State of New York.
This Note may not be changed or terminated orally, but only by
an agreement in writing signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought.
All capitalized terms used herein not specifically defined shall have
the meanings assigned to such terms in the Loan Agreement.
THE BORROWER AND THE LENDER AGREE THAT ANY LITIGATION GROWING OUT OF
ANY CONTROVERSY WITH RESPECT TO, IN CONNECTION WITH OR ARISING OUT OF THIS NOTE
OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT HERETO WILL BE TRIED BY A
COURT BY A JUDGE SITTING WITHOUT A JURY. IN ADDITION, THE BORROWER WAIVES THE
RIGHT TO INTERPOSE ANY DEFENSE BASED UPON ANY STATUTE OF LIMITATIONS OR ANY
CLAIM OF LACHES AND ANY SET-OFF OR COUNTERCLAIM EXCEPT FOR COMPULSORARY COUNTER
CLAIMS OF ANY NATURE OR DESCRIPTION, EXCEPT FOR PAYMENT PROVIDED BORROWER MAY
INSTITUTE A SEPARATE CLAUSE OF ACTION AS TO SUCH MATTERS. THE BORROWER AND THE
LENDER CONFIRM THAT THE FOREGOING WAIVERS ARE INFORMED AND FREELY MADE.
5
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<PAGE> 47
IN WITNESS WHEREOF, the Borrower has duly executed this Note as of the
Date of Note.
NAPCO SECURITY SYSTEMS, INC.
BY: /s/
-----------------------------------
KEVIN BUCHEL
SENIOR VICE PRESIDENT
with offices at 333 Bayview Avenue
Amityville, New York 11701
STATE OF NEW YORK )
) SS:
COUNTY OF NASSAU )
On this 12th day of May, 1997, before me personally came Kevin Buchel,
to me known, who being by me duly sworn, did depose and say that he resides at
, that he is the Senior Vice
President of NAPCO Security Systems, Inc., the corporation described in and
which executed the foregoing instrument; that he signed his name thereto by
order of the Board of Directors of said corporation.
/s/
-----------------------------------
NOTARY PUBLIC
6
E-54
<PAGE> 48
EXHIBIT "A"
REQUEST FOR ADVANCE AND
NOTICE OF INTEREST RATE SELECTION
TO: MARINE MIDLAND BANK
534 Broad Hollow Road
Melville, New York 11747
Attention: John S. Wamboldt
Fax No.: (516) 752-4340
This Request for Advance Notice of Interest Rate Selection is governed
by the terms of the Loan and Security Agreement dated May 12, 1997 made by and
between NAPCO Security Systems, Inc. ("Debtor") and MARINE MIDLAND BANK
("Secured Party") (the "Agreement").
The undersigned hereby GIVES THE SECURED PARTY IRREVOCABLE NOTICE that
Debtor requests the following Interest Rate under the Agreement as follows:
1. Rate Option and Interest Period. The requested Interest Rate
option and Interest Rate Period for the requested amount is ((a) or (b),
checked as applicable):
[ ] (a) The Libor Rate Option for an Interest Period of (one
checked as applicable):
[ ] one month;
[ ] two months; or
[ ] three months; or
[ ] four months; or
[ ] six months; or
[ ] nine months; or
[ ] twelve months; or
[ ] (b) The Variable Rate Option.
2. The Interest Rate shall be in effect for a requested Advance
equalling $______________.
Dated: ____________, 1997
NAPCO Security Systems, Inc.
By:
-------------------------------------
Kevin Buchel
Senior Vice President
7
E-55
<PAGE> 1
REVOLVING CREDIT NOTE # 2
<TABLE>
<S> <C>
Amount of Note: $15,000,000.00
Date of Note: As of May 12, 1997
Borrower: NAPCO Security Systems, Inc., the undersigned borrower, having
its principal office at the place indicated beneath its name,
and including its successors and/or assigns.
Default Rate: All overdue amounts shall bear interest, payable on demand, at
a rate per annum equal to the Interest Rate, then in effect,
plus three (3.0%) percent per annum.
Interest Rate: Interest is to be computed from the date hereof at a rate per
annum equal to either (a) the Variable Rate Option, or (b) the
Libor Rate Option for the Interest Period selected by the
Borrower. In all instances, interest shall be payable in
arrears and computed on an actual/360-day basis (i.e., interest
for each day during which the indebtedness evidenced by this
Note, or any portion thereof, is outstanding), all as more
specifically described in the Loan Agreement, incorporated
herein by this reference.
Interest Period: Interest Period, as the term "Interest Period" is defined in
the Loan Agreement.
Lender: Marine Midland Bank, including its successors and/or assigns,
with a place of business at 534 Broad Hollow Road, Melville,
New York 11747.
Libor Rate Option: Libor Rate Option, as the term "Libor Rate Option" is defined
in the Loan Agreement.
Loan Agreement: The Loan and Security Agreement dated as of even date hereof,
including all exhibits hereto, by and between the Borrower and
the Lender, as the same may be amended or otherwise modified
from time to time.
Prime Rate: Prime Rate, as the term "Prime Rate" is defined in the Loan Agreement.
</TABLE>
E-56
<PAGE> 2
<TABLE>
<S> <C>
Note or Revolving
Credit Note or
Revolving Credit
Note # 2 This Revolving Credit Note # 2, including all exhibits thereto,
as the same may be amended or otherwise modified from time to
time; the terms "herein", "hereunder" and like terms shall be
taken in its entirety and shall not be limited to any
particular paragraph or provision hereof.
Termination
Date: Termination Date, as the term "Termination Date is defined in
the Loan Agreement.
Transaction
Documents: Transaction Documents, as the term "Transaction Documents" is
defined in the Loan Agreement.
Variable Rate
Option: Variable Rate Option, as the term "Variable Rate Option" is
defined in the Loan Agreement.
</TABLE>
FOR VALUE RECEIVED, the Borrower does hereby covenant and promise to
pay to the order of the Lender at its office at 534 Broad Hollow Road;
Melville, New York 11747 or at such other place or places as the Lender may
designate to the Borrower in writing from time to time, in check, coin or
currency of the United States which is then legal tender for the payment of
public or private debts, in immediately available funds, the lesser of (a) the
principal amount of Fifteen Million ($15,000,000.00) Dollars; or (b) the
aggregate unpaid principal amount of all loans (or Advances) made by the Lender
to the Borrower from time to time hereunder (collectively the "Loans", or if
used in the singular, the "Loan").
The Borrower agrees that each monthly or other statement of account
mailed or delivered by the Lender to the Borrower pertaining to the outstanding
balance of the Loans, the amount of interest due thereon, fees, and costs and
expenses shall be final, conclusive, and binding on the Borrower and shall
constitute an "account stated" with respect to the matters contained therein
unless, within thirty (30) calendar days from when such statement is mailed or,
if not mailed, delivered to the Borrower, the Borrower shall deliver to the
Lender written notice of any objections which it may have as to such statement
of account, and in such event, only the items to which objection is expressly
made in such notice shall be considered to be disputed by the Borrower.
No legal proceedings or actions shall be brought by the Borrower against the
Lender claiming any such error unless (a) the Borrower
2
E-57
<PAGE> 3
shall have given the written notice as provided hereinabove, and (b) such legal
proceeding or action shall be commenced within one (1) year of the date when
such statement of account, notice or advice was delivered or mailed to the
Borrower.
The Borrower also shall pay, in lawful money of the United States, and
in immediately available funds, interest to the Lender on the unpaid principal
balance of all Loans outstanding from time to time from the date hereof until
fully paid at a rate per annum equal to at the election of Borrower the Libor
Rate Option or the Variable Rate Option, subject to the provisions contained in
the Loan Agreement and all as more specifically described in the Loan
Agreement. All payments shall be credited, when collected, first to interest
and then to principal.
Interest Rate and Interest Period selection shall be governed by the
provisions contained in the Loan Agreement. All written notices of Interest
Rate and/or Interest Period selection shall be in the form annexed hereto as
Exhibit A, attached hereto and incorporated herein by this reference.
A late payment premium equal to five (5%) percent of any principal or
interest payment made more than ten (10) days after the due date thereof shall
be due with any such late payment (other than the final payment due on the
Maturity Date).
This Note is executed and delivered pursuant to the Loan Agreement,
all of the covenants, conditions and agreements of the Loan Agreement being
made a part hereof by this reference. This Note also is secured by the
Collateral of the Borrower described in the Loan Agreement, and the pledged
collateral described in certain pledge agreements dated of even date hereof,
and the collateral of the domestic Consolidated Subsidiaries described in the
general security agreements executed and delivered to the Lender by each of the
domestic Consolidated Subsidiaries on even date hereof, and the Lender is
entitled to the benefits of all of the collateral described therein and the
collateral described in the other Transaction Documents.
This Revolving Credit Note is the Note # 2 referred to in the Loan
Agreement, and the Lender shall be entitled to the benefit of all of the
provisions contained therein and in the other Transaction Documents. The Loan
Agreement, among other things, contains provisions for payment of principal,
interest, fees and charges in connection with the Revolving Credit Facility as
well as provisions for acceleration of this Note upon the happening of certain
stated events. The Loan Agreement also contains representations, warranties,
covenants and conditions precedent to Advances under the Revolving Credit
Facility, all of which are hereby made part of this Revolving Credit Note to
the same extent and with the same effect as if set forth herein at length.
3
E-58
<PAGE> 4
It is expressly agreed that, upon the failure of the Borrower timely
to make any payment due hereunder, or upon the happening of any "Event of
Default" under the Loan Agreement and/or the other Transaction Documents, the
principal sum hereof, together with accrued interest and all other expenses,
including, but not limited to reasonable attorneys' fees for legal services
incurred by the Lender in connection with the collection of this Note and/or
the enforcement of payment hereof whether or not suit is brought, and if suit
is brought, then through all appellate actions, shall immediately become due
and payable at the option of the Lender, notwithstanding the Termination Date
set forth herein. In the Event of Default, whether the Lender exercises any of
its rights and remedies contained herein, including the right to declare all
Indebtedness hereunder to be immediately due and payable, the Borrower shall
pay interest on the unpaid principal balance hereunder at a rate equal to the
Default Rate. The unpaid principal balance under the Note shall bear the
Default Rate of Interest until the first to occur of the following: (i) all
Indebtedness under this Note are paid in full; (ii) Borrower has cured said
Event of Default to the satisfaction of the Lender; or (iii) the Lender, in
writing, has waived said Event of Default. Notwithstanding anything to the
contrary contained in this Note, the Note is subject to the express condition
that at no time shall Borrower be obligated to be required to pay interest on
the principal balance of this Note at a rate which could subject the Lender
either to civil or criminal penalty as a result of being in excess of the
maximum rate which Borrower is permitted by law to contract or agree to pay.
If by the terms of this Note, Borrower at any time are required or obligated to
pay interest on the principal balance of this Note at a rate in excess of such
maximum rate then the rate of interest under this Note shall be deemed to be
immediately reduced to such maximum rate and interest payable hereunder shall
be computed at such maximum rate and any prior interest payments made in excess
of such maximum rate shall be applied and shall be deemed to have been payments
made in reduction of the principal balance of such note.
The indebtedness evidenced by this Note shall be prepayable, in whole
or in part, subject to the provisions contained in the Loan Agreement.
Should the indebtedness represented by this Note or any part thereof
be collected at law or in equity, or in bankruptcy, receivership or any other
court proceedings (whether at the trial or appellate level), or should this
Note be placed in the hands of attorneys for collection upon an Event of
Default, the Borrower agrees to pay, in addition to the principal, premium,
breakage costs, and interest due and payable hereon, all costs of collection or
attempting to collect this Note, including reasonable attorneys' fees and
expenses.
4
E-59
<PAGE> 5
The Borrower hereby waives valuation and appraisement, demand,
presentment for payment, notice of dishonor, protest and notice of protest of
this Note.
Any notice, demand or request relating to any matter set forth herein
shall be in writing and shall be deemed effective when mailed, postage prepaid,
by registered or certified mail, return receipt requested, to any party hereto
at its address stated herein or at such other address of which it shall have
notified the party giving such notice in writing as aforesaid.
This Note, being drawn, executed and delivered in the State of New
York, where all advances and repayments shall be made, shall be construed and
enforced in accordance with the laws of the State of New York.
This Note may not be changed or terminated orally, but only by
an agreement in writing signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought.
All capitalized terms used herein not specifically defined shall have
the meanings assigned to such terms in the Loan Agreement.
THE BORROWER AND THE LENDER AGREE THAT ANY LITIGATION GROWING OUT OF
ANY CONTROVERSY WITH RESPECT TO, IN CONNECTION WITH OR ARISING OUT OF THIS NOTE
OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT HERETO WILL BE TRIED BY A
COURT BY A JUDGE SITTING WITHOUT A JURY. IN ADDITION, THE BORROWER WAIVES THE
RIGHT TO INTERPOSE ANY DEFENSE BASED UPON ANY STATUTE OF LIMITATIONS OR ANY
CLAIM OF LACHES AND ANY SET-OFF OR COUNTERCLAIM EXCEPT FOR COMPULSORARY COUNTER
CLAIMS OF ANY NATURE OR DESCRIPTION, EXCEPT FOR PAYMENT, PROVIDED BORROWER MAY
INSTITUTE A SEPARATE CAUSE OF ACTION AS TO SUCH MATTERS. THE BORROWER AND THE
LENDER CONFIRM THAT THE FOREGOING WAIVERS ARE INFORMED AND FREELY MADE.
5
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<PAGE> 6
IN WITNESS WHEREOF, the Borrower has duly executed this Note as of the
Date of Note.
NAPCO SECURITY SYSTEMS, INC.
BY: /s/
---------------------------------
KEVIN BUCHEL
SENIOR VICE PRESIDENT
with offices at 333 Bayview Avenue
Amityville, New York 11701
STATE OF NEW YORK )
) SS:
COUNTY OF NASSAU )
On this 12th day of May, 1997, before me personally came Kevin Buchel,
to me known, who being by me duly sworn, did depose and say that he resides at
, that he is the Senior Vice
President of NAPCO Security Systems, Inc., the corporation described in and
which executed the foregoing instrument; that he signed his name thereto by
order of the Board of Directors of said corporation.
/s/
--------------------------------
NOTARY PUBLIC
6
E-61
<PAGE> 7
EXHIBIT "A"
REQUEST FOR ADVANCE AND
NOTICE OF INTEREST RATE SELECTION
TO: MARINE MIDLAND BANK
534 Broad Hollow Road
Melville, New York 11747
Attention: John S. Wamboldt
Fax No.: (516) 752-4340
This Request for Advance Notice of Interest Rate Selection is governed
by the terms of the Loan and Security Agreement dated May 12, 1997 made by and
between NAPCO Security Systems, Inc. ("Debtor") and MARINE MIDLAND BANK
("Secured Party") (the "Agreement").
The undersigned hereby GIVES THE SECURED PARTY IRREVOCABLE NOTICE that
Debtor requests the following Interest Rate under the Agreement as follows:
1. Rate Option and Interest Period. The requested Interest Rate
option and Interest Rate Period for the requested amount is ((a) or (b),
checked as applicable):
[ ] (a) The Libor Rate Option for an Interest Period of (one
checked as applicable):
[ ] one month;
[ ] two months; or
[ ] three months; or
[ ] four months; or
[ ] six months; or
[ ] nine months; or
[ ] twelve months; or
[ ] (b) The Variable Rate Option.
2. The Interest Rate shall be in effect for a requested Advance
equalling $______________.
Dated: _______________, 1997
NAPCO Security Systems, Inc.
By:
-------------------------------------
Kevin Buchel
Senior Vice President
7
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<PAGE> 1
PROMISSORY NOTE
Dated: May 12, 1997
ON DEMAND, FOR VALUE RECEIVED, the undersigned, NAPCO Security
Systems, Inc. (the "Company"), a corporation formed under the laws of the State
of Delaware, having its principal office located at 333 Bayview Avenue,
Amityville, New York 11701, hereby promises to pay to the order of MARINE
MIDLAND BANK (the "Bank") at its office at 534 Broad Hollow Road, Melville, New
York 11747, or at such other place as the holder of this Promissory Note may
from time to time designate in writing, in lawful money of the United States
and in immediately available funds, the principal sum of TWO MILLION FIVE
HUNDRED THOUSAND AND 00/100 ($2,500,000) DOLLARS, or so much as may be drawn on
the Letter of Credit (as defined in the Reimbursement Agreement [hereinafter
defined]) and such other amounts as may be owed to the Bank pursuant to the
Loan Documents (as defined in the Reimbursement Agreement) including, but not
limited to, the Bank's reasonable attorney's fees upon the occurrence of an
Event of Default under the Reimbursement Agreement together with interest on
the principal amount remaining unpaid hereunder from time to time from the date
of any draw on the Letter of Credit until such principal amount has been paid
in full. Any amount owed the Bank pursuant to this Promissory Note shall bear
interest at a rate per annum equal to the Prime Rate plus three (3%) percent
per annum in accordance with the terms herein and as set forth in the
Reimbursement Agreement.
The interest rate shall be adjusted, without notice, as of the
effective date of any change in the Prime Rate and shall be computed hereunder
on the basis of a 360 day year for the actual number of days elapsed. "Prime
Rate" shall mean that floating rate of interest per annum announced by the Bank
from time to time as being the Bank's prime rate, which is a base for
calculating interest on certain loans.
In no event shall the interest rate and charges herein or in
the Reimbursement Agreement or other Loan Documents, exceed the highest rate
permissible under any law which a court of competent jurisdiction shall, in a
final determination, deem applicable hereto. In the event that a court
determines that the Bank has received interest and other charges in excess of
the highest rate applicable hereto, such excess shall be deemed received on
account of, and shall automatically be applied to reduce the obligations
arising under or in connection with this Promissory Note other than interest,
and the provisions hereof shall be deemed amended to provide for the highest
permissible rate. If there is no indebtedness outstanding, the Bank shall
refund such excess to the Borrower.
Capitalized words and phrases not otherwise defined herein
shall have the meanings ascribed to such terms in the standby letter of credit
application and reimbursement agreement by and between the Company and the Bank
dated as of May 12, 1997 (the "Reimbursement Agreement").
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<PAGE> 2
Notwithstanding the foregoing, this Promissory Note is also
intended to evidence the Letter of Credit fees, commissions and expenses of the
Company to the Bank and any and all charges and expenses which the Bank may pay
or incur relative to the draw on the Letter of Credit.
This Promissory Note is the Promissory Note (or Note) referred
to in the Reimbursement Agreement and shall be entitled to the benefit of all
security granted in the Loan Documents and all benefits thereof. The Loan
Documents, among other things, contain provisions for payment of fees, charges
and expenses and regarding the remedies of the Bank upon the occurrence of an
Event of Default. The Loan Documents also contain representations, warranties,
covenants and conditions, all of which are hereby made part of this Promissory
Note to the same extent and with the same effect as if set forth herein at
length. Without limiting the foregoing, this Promissory Note is secured by and
the parties hereto are entitled to the benefits of that certain mortgage and
security agreement, dated of even date herewith (the "Mortgage"), made by the
Company to the Bank, encumbering, among other things, certain real property and
improvements now or hereafter located on said real property, situate at 359
Bayview Avenue, a\k\a 333 Bayview Avenue, Amityville, New York 11701 in the
Town of Babylon, County of Suffolk, State of New York, as more particularly
described in the Mortgage ("Mortgaged Premises" or "Mortgaged Property"), and
is executed and delivered pursuant to the Reimbursement Agreement, all of the
covenants, conditions and agreements of the Mortgage and the Reimbursement
Agreement being made a part hereof by this reference.
The holder of this Promissory Note at its option may extend
the time for payment of this Promissory Note, postpone the enforcement hereof,
or grant any other indulgences, without affecting or diminishing the holder's
right to recourse against the Company or any endorsers, sureties or guarantors,
which right is expressly reserved.
The Company and any endorsers, sureties and guarantors of this
Promissory Note waive presentment for payment, demand, protest, notice of
protest and notice of dishonor hereof, and, except as expressly set forth in
the other Bank Documents, all other notices to which they may be entitled.
The terms and provisions hereof shall inure to the benefit of
the Bank, and its successors and assigns and shall be binding upon the
respective successors and assigns of the Company.
In the event the Bank, for any reason whatsoever, shall deem
it necessary to refer this Promissory Note to an attorney for the enforcement
thereof or any rights thereunder, by suit or
2
E-64
<PAGE> 3
otherwise or for the protection or preservation of any rights hereunder, there
shall be due and owing reasonable attorneys' fees, together with all costs and
expenses of any such action, and the Bank may take judgment for all such
amounts.
This Promissory Note and the rights and obligations of the
parties hereunder shall be governed and construed in accordance with the laws
of the State of New York.
The Company agrees that any action or proceeding to enforce
this Promissory Note or arising out of or related to this Promissory Note may
be commenced in any State court of competent jurisdiction in Nassau, Suffolk or
Kings County, New York, or in the United States District Court for the Eastern
District of New York, and the Company consents and submits in advance to such
jurisdiction and agrees that venue shall be proper in such courts on any such
matter.
The Company acknowledges that this Promissory Note is and
shall be effective upon its execution by the Company and delivery hereof to the
Bank and it shall not be necessary for the Bank to execute any acceptance
hereto or to otherwise signify or express its acceptance hereof.
THE COMPANY AGREES THAT ANY LITIGATION GROWING OUT OF ANY
CONTROVERSY WITH RESPECT TO, IN CONNECTION WITH OR ARISING OUT OF THIS
PROMISSORY NOTE, THE AGREEMENT OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT
HERETO AND THERETO WILL BE TRIED BY A COURT BY A JUDGE SITTING WITHOUT A JURY.
THE COMPANY CONFIRMS THAT THE FOREGOING WAIVER OF A TRIAL BY JURY IS INFORMED
AND FREELY MADE.
3
E-65
<PAGE> 4
IN WITNESS WHEREOF, the Company has caused this Promissory
Note to be executed by it by its officer on the date first written above.
NAPCO Security Systems, Inc.
By: /s/
-----------------------------------
Kevin Buchel
Senior Vice President
4
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<PAGE> 1
EXHIBIT 11
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Weighted average number of
shares outstanding 4,368,727 4,367,727 4,367,727 4,367,577 4,366,827
Add common stock equivalents 14,222 5,396 21,904 27,053 39,077
------ ----- ------ ------ ------
Adjusted weighted average
shares outstanding 4,382,949 4,373,123 4,389,631 4,394,630 4,405,904
========== ========= ========= ========= =========
Net Income: $1,639,000 $1,014,000 $512,000 $1,254,000 $2,317,000
========== ========== ======== ========== ==========
Earnings per share:
primary and fully diluted: $ .37 $ .23 $ .12 $ .29 $ .53
========== ========== ======== ========== ==========
</TABLE>
Earnings per common and common equivalent shares are based upon the weighted
average number of shares of common stock and common stock equivalents
outstanding during the respective periods. Stock options have been considered
to be the equivalent of common stock. Shares issuable upon exercise of stock
options, to the extent appropriate, have been added to the average common
shares actually outstanding for purposes of this computation, and shares
assumed to be purchased at the average market price during the respective
periods, with proceeds from the exercise of such options, have been deducted
from the average shares outstanding.
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<PAGE> 1
EXHIBIT 12
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands, except for ratios)
<S> <C> <C> <C> <C>
A. Current Assets $42,021 $41,529 $39,916
B. Current Liabilities 11,885 12,853 11,256
Current Ratio
(Line A / Line B) 3.5 to 1 3.2 to 1 3.5 to 1
C. Net Sales $53,302 $49,088 $48,078
D. Receivables 13,937 13,759 13,647
Ratio (Line C / Line D) 3.8 to 1 3.6 to 1 3.5 to 1
E. Total Current
Liabilities $11,885 $12,853 $11,256
F. Long Term Debt 13,313 14,150 15,275
G. Deferred Income Taxes 828 742 648
H. Total Liabilities 26,026 27,745 27,179
I. Equity 31,218 29,574 28,560
Ratio (Line H / Line I) .8 to 1 .9 to 1 1 to 1
</TABLE>
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<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
The following are the Company's subsidiaries as of the close of the fiscal
year ended June 30, 1997. All beneficial interests are wholly-owned, directly
or indirectly, by the Company and are included in the Company's consolidated
financial statements.
<TABLE>
<CAPTION>
State or
Jurisdiction of
Name Organization
---- ---------------
<S> <C>
Alarm Lock Systems, Inc. Delaware
Derringer Security Systems, Inc. New York
E.E. Electronic Components Inc. New York
Napco Security Systems International, Inc. New York
Napco/Alarm Lock Grupo Internacional, S.A. Dominican
(formerly known as NSS Caribe, S.A.) Republic
Napco Group Europe Limited England
Raltech Logic, Inc. New York
UMI Manufacturing Corp. New York
</TABLE>
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<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement No. 333-1743 on Form S-8 relating to comon stock of
Napco Security Systems, Inc. issuable under the 1992 Incentive Stock Option
Plan.
/s/ Arthur Andersen LLP
New York, New York
October 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,006
<SECURITIES> 0
<RECEIVABLES> 14,742
<ALLOWANCES> 805
<INVENTORY> 25,702
<CURRENT-ASSETS> 42,021
<PP&E> 12,088
<DEPRECIATION> 10,344
<TOTAL-ASSETS> 57,244
<CURRENT-LIABILITIES> 11,885
<BONDS> 13,313
0
0
<COMMON> 59
<OTHER-SE> 31,159
<TOTAL-LIABILITY-AND-EQUITY> 57,244
<SALES> 53,302
<TOTAL-REVENUES> 53,302
<CGS> 40,524
<TOTAL-COSTS> 9,133
<OTHER-EXPENSES> 320
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,081
<INCOME-PRETAX> 2,244
<INCOME-TAX> 605
<INCOME-CONTINUING> 1,639
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,639
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
