<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(a)(2))
[X] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-2
NAPCO SECURITY SYSTEMS, INC.
(Name of Registrant as Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-12
(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
NAPCO SECURITY SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
----------------------------------------
To be Held on December 9, 1998
Dear Fellow Stockholder:
The Annual Meeting of the Stockholders of Napco Security Systems,
Inc., a Delaware corporation (the "Company"), will be held at the Company's
offices at 333 Bayview Avenue, Amityville, New York, on Wednesday, December 9,
1998, at 4:00 p.m., for the following purposes, as more fully described in the
accompanying Proxy Statement:
1. Consideration of a proposal to adopt a classified Board of
Directors;
2. To elect four directors;
3. Consideration of a proposal to authorize Preferred Stock; and
4. To transact such other business as may properly come before the
Meeting or any adjournments thereof.
Only stockholders of record at the close of business on October 22,
1998 are entitled to notice and to vote at the Meeting or any adjournment
thereof. A complete list of the stockholders entitled to vote at the Meeting on
the foregoing proposals will be open to examination by any stockholder for any
purpose germane to the Meeting during ordinary business hours for a period of
ten days prior to the Meeting at the offices of the Company, 333 Bayview
Avenue, Amityville, New York 11701.
By order of the Board of Directors,
Richard Soloway
Secretary
October 27, 1998
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING WHETHER OR NOT
YOU ARE PERSONALLY ABLE TO ATTEND. YOUR ARE URGED TO COMPLETE, SIGN AND MAIL
THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE.
<PAGE> 3
NAPCO SECURITY SYSTEMS, INC.
333 BAYVIEW AVENUE
AMITYVILLE, NEW YORK 11701
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 9, 1998
INFORMATION CONCERNING THE SOLICITATION
This Proxy Statement is furnished to the holders of Common Stock, $.01
par value per share ("Common Stock") of Napco Security Systems, Inc. (the
"Company") in connection with the solicitation of proxies on behalf of the Board
of Directors of the Company to be held on December 9, 1998 and at any
adjournment thereof (the "Meeting"), pursuant to the accompanying Notice of
Annual Meeting of Stockholders. Proxies in the enclosed form, if properly
executed and returned in time, will be voted at the Meeting. Any stockholder
giving a proxy may revoke it prior to its exercise by attending the Meeting and
reclaiming the proxy, by executing a later dated proxy or by submitting a
written notice of revocation to the Secretary of the Company at the Company's
office or at the Meeting. Stockholders attending the Meeting may vote their
shares in person. This Proxy Statement and the form of proxy were first mailed
to the stockholders on or about October 27, 1998. A copy of the 1998 Annual
Report of the Company, including financial statements, is being mailed herewith.
Only stockholders of record at the close of business on October 22,
1998 (the "Record Date") are entitled to notice of and to vote at the Meeting.
The outstanding voting securities of the Company on the Record Date consisted of
3,490,151 shares of Common Stock.
On all matters requiring a vote by holders of the Common Stock, each
share of Common Stock entitles the holder of record to one vote. At the Meeting,
the holders of record of Common Stock will vote on: Item 1, the adoption of an
amendment to the Company's Certificate of Incorporation to implement a
classified board of directors; Item 2, the election of four (4) directors; and
Item 3, the authorization of preferred stock; and the transaction of any other
business as may properly come before the Meeting and require a vote of the
Stockholders.
Items 1 and 3 require the affirmative vote of a majority of the
outstanding shares of Common Stock. Accordingly, if a stockholder fails to vote
or abstains from voting on either proposal, such action will have the same
effect as a vote against the proposal.
THEREFORE, THE COMPANY URGES YOU TO SIGN, DATE AND RETURN THE ENCLOSED
PROXY CARD.
<PAGE> 4
ITEM 1
PROPOSAL NO. 1
APPROVAL OF AMENDMENT OF THE COMPANY'S
CERTIFICATE OF INCORPORATION
TO PROVIDE FOR A CLASSIFIED BOARD OF DIRECTORS
On September 11, 1998, the Board of Directors unanimously approved a
proposal to amend the Company's Certificate of Incorporation and By-Laws to
provide for the institution of a classified Board of Directors. The full text of
the proposed amendments to the Company's Certificate of Incorporation and
By-Laws is set forth in Appendix A to this Proxy Statement and the following
description is qualified in its entirety by reference thereto. If the proposed
amendment is approved, the four (4) directors elected to the Board of Directors
will be divided into three classes as provided under "Item 2 -- Election of
Directors."
Delaware law authorizes a corporation's certificate of incorporation
to provide for a classified board of directors. The Board of Directors believes
that the proposed amendment instituting a classified Board of Directors is in
the best interest of the Company and its stockholders and therefore recommends a
vote for this proposal.
The proposed amendments to the Company's Certificate of Incorporation
provide that the Company's Board of Directors will be divided into three (3)
classes, as nearly equal in number as possible. One class would hold office
initially for a term expiring at the Annual Meeting of Stockholders to be held
in 1999; another class would hold office initially for a term expiring at the
Annual Meeting of Stockholders to be held in 2000; and another class would hold
office initially for a term expiring at the Annual Meeting of Stockholders to be
held in 2001. At each Annual Meeting of Stockholders following this initial
classification and election, the successors to the class of directors whose
terms expire at the meeting would be elected for a term of office to expire at
the third succeeding Annual Meeting of Stockholders after their election and
until their successors have been duly elected and qualified. Vacancies which
occur during the term may be filled by the Board of Directors to serve for the
remainder of the full term. Moreover, the proposed amendment provides that the
directors of the classified Board may be removed only for cause, which, unless
otherwise provided for in a corporation's certificate of incorporation, is
required under Delaware law. See "Item 2 -- Election of Directors" for the
initial composition of each class of directors and each director's initial term,
if this Proposal No. 1 is adopted.
The Board believes that classification of the Board of Directors of
the Company will help lend continuity and stability to the management of the
Company. Following adoption of the classified board, at any given time at least
approximately two-thirds of the members of the Board will generally have had
experience as directors of the Company. The Board of Directors believes that
this will facilitate long-range business planning, strategic planning and policy
making and will have a positive impact on customer and employee loyalty.
This proposed amendment to the Company's Certificate of Incorporation
will make difficult and may discourage a hostile tender offer or proxy fight,
even if such transaction or occurrence may be favored by stockholders owning a
majority of the Company's common stock
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<PAGE> 5
and may delay or frustrate the assumption of control of the Company by a holder
of a large block of the Company's stock, and thus make more difficult the
removal of incumbent management. Furthermore, the classification of directors
will have the effect of making it more difficult for stockholders to change the
composition of the Board in a relatively short period of time since at least two
Annual Meetings will be required to be held in order to effect a change in a
majority of the members of the Board of Directors. Currently, a change in a
majority of the members of the Board of Directors can be made by stockholders at
each Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSED AMENDMENT TO THE
CERTIFICATE OF INCORPORATION AND AMENDED AND RESTATED BYLAWS PROVIDING FOR A
CLASSIFIED BOARD OF DIRECTORS.
3
<PAGE> 6
ITEM 2
ELECTION OF DIRECTORS
The Board of Directors of the Company is currently composed of four
(4) members. If Proposal 1 has been adopted, Company's Board of Directors will
be divided into three (3) classes, as nearly equal in number as possible. One
class would hold office initially for a term expiring at the Annual Meeting of
Stockholders to be held in 1999; another class would hold office initially for a
term expiring at the Annual Meeting of Stockholders to be held in 2000; and
another class would hold office initially for a term expiring at the Annual
Meeting of Stockholders to be held in 2001. Mr. Wilder would be in the Class
of 1999, Mr. Blaustein would in the Class of 2000, and Mr. Soloway and Mr.
Buchel would be in the Class of 2001. At each Annual Meeting of Stockholders
following this initial classification and election, the successors to the class
of directors whose terms expire at the meeting would be elected for a term of
office to expire at the third succeeding Annual Meeting of Stockholders after
their election and until their successors have been duly elected and qualified.
If Proposal 1 is not adopted, Directors would be elected annually and
hold office until the next annual meeting of stockholders or until their
respective successors are elected and shall qualify. Four directors are to be
elected by a plurality of the votes cast at the Meeting. It is intended that the
proxies solicited on behalf of the Board of Directors will be voted for the
election of the four nominees listed below unless a contrary instruction is
given.
Each of these nominees has consented to serve if elected. In the
event that any nominee becomes unable or unwilling to serve as a director,
discretionary authority may be exercised by the proxies to vote for the election
of an alternate nominee of the Board of Directors.
Information Concerning the Nominees
The names of the nominees and certain information received from them
are set forth in the following table, including their principal occupations,
five-year employment history and the names of any other companies whose
securities are publicly held and of which they presently serve as directors.
<TABLE>
<CAPTION>
Principal Occupation;
Five-Year Employment History and Director
Name and Age Other Directorships Since
- ------------ ------------------- -----
<S> <C> <C>
Richard Soloway Chairman of the Board of 1972
(52) Directors since October 1981;
President since 1998; Secretary since 1975.
</TABLE>
4
<PAGE> 7
<TABLE>
<S> <C> <C>
Kevin S. Buchel Senior Vice President of 1998
(45) Operations and Finance since
April 1995; Treasurer since May 1998; Vice
President of Finance and Administration
from December 1989 to April 1995.
Randy B. Blaustein Partner of Blaustein, Greenberg & 1985
(46) Co. since July 1991; Attorney
engaged as a sole practitioner
since October 1980, specializing
in business and tax matters, and
author of six books and numerous
articles.
Andrew J. Wilder Officer of Israeloff, Trattner & 1995
(47) Co., independent certified public
accountants, since 1990.
</TABLE>
THE BOARD OF DIRECTORS DEEMS ITEM 2 TO BE IN THE BEST INTEREST OF THE COMPANY
AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL THEREOF.
During the fiscal year ended June 30, 1998, the Company retained, and
currently retains, Mr. Blaustein as special counsel for certain general business
and tax related matters.
During fiscal 1998, there were four meetings of the Board of Directors;
Messrs. Soloway, Blaustein and Wilder attended each meeting, Mr. Buchel attended
the meeting after he was elected, and Mr. Rosenberg, the former Director,
attended those meetings while he was a director. In addition, the Board acted by
unanimous written consent on one occasion during the fiscal year.
Committees of the Board of Directors and Meetings Held
The Board of Directors has a Stock Option Committee consisting of
Richard Soloway and Kevin Buchel. This Committee, which met seven times in
fiscal year 1998, determines the individuals to be granted options under the
Incentive Stock Option Plan and the Non-Employee Stock Option Plan, the number
of shares to be subject to options and the terms of the options and interprets
the provisions of such plans.
The Company has an Audit Committee consisting of Richard Soloway, Randy
Blaustein
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and Andrew J. Wilder. The Committee, which met four times in fiscal year 1998,
recommends to the Board of Directors as to the engagement of an independent
certified public accountant, discusses the adequacy of the accounting procedures
and internal controls and new accounting pronouncements that may affect the
Company, approves the overall scope of the audit, and reviews and discusses the
audited financial statements.
The Company does not have a standing nominating committee of the Board
of Directors, or committees performing similar functions. The Company's
Compensation Committee is made up of two officers of the Company.
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Compensation of Directors
The directors who are not officers receive $1,000 for each Board of
Directors meeting and $1,000 for each Committee meeting that they attend in
person or by telephone conference call. For the fiscal year ended June 30, 1998,
Mr. Blaustein and Mr. Wilder each received $8,000 in director's fees and
committee fees.
Beneficial Ownership of Common Stock
The following table, together with the accompanying footnotes, sets
forth information as of October 22, 1998, regarding the beneficial ownership (as
defined by the Securities and Exchange Commission) of Common Stock of the
Company of (a) each person known by the Company to own more than five percent of
the Company's outstanding Common Stock, (b) each director of the Company (c)
each executive officer named in the Summary Compensation Table, and (d) all
officers and directors of the Company as a group. Except as otherwise indicated,
the named owner has sole voting and investment power over shares listed.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent of
Beneficial Owner Ownership Common Stock [a]
<S> <C> <C>
Richard Soloway
c/o the Company
333 Bayview Avenue
Amityville, NY 11701 894,976[b] 25.4%
Dimensional Fund Advisors, Inc. 316,450[c] 9.0%
Raymond Gaudio 87,267[d] 2.5%
Alfred DePierro 23,107[d] .7%
Randy B. Blaustein 22,500 .6%
Kevin S. Buchel 18,001[d] .5%
Andrew J. Wilder 0 0%
All officers and directors 1,055,021[e] 30.0%
</TABLE>
- ----------------
[a] Percentages are computed on the basis of 3,521,221 shares, which consists of
3,490,151 shares of Common Stock outstanding on October 22, 1998, plus the
number of shares which a person has the right to acquire directly or indirectly
within sixty (60) days. Except as otherwise noted, persons named in the table
and footnotes have sole voting and investment power with respect to all shares
of Common Stock reported as beneficially owned by them.
[b] Includes 5,400 shares owned directly by Mr. Soloway's wife.
[c] A Schedule 13G was filed with the SEC by Dimensional Fund Advisors Inc.,
1299 Ocean Avenue, Santa Monica, CA 90401 ("DFAI") reporting beneficial
ownership of 316,450 shares of Common Stock of the Company, owned by advisory
clients. As to 197,400 shares of such shares it reports having sole voting
power. DFAI disclaims beneficial ownership of all such securities.
[d] This number includes the number of shares which a person has a right to
acquire directly or indirectly within sixty (60) days (DePierro -- 2,000,
Gaudio -- 2,000, and Buchel -- 18,000).
[e] This number of shares includes (i) 1,023,951 shares as to which officers and
directors have sole voting and investment power, and (ii) 5,400 shares as to
which officers and directors share with others or may be deemed to share voting
and investment power, and (iii) 31,070 shares which a person has the right to
acquire directly or indirectly within sixty (60) days.
7
<PAGE> 10
Based solely on a review of the Forms 3, 4 and 5 furnished to the Company with
respect to the most recent fiscal year and written representations of the
reporting person (as defined below), the following is a list of each person, who
at any time during such fiscal year, was an officer, director, beneficial owner
of more than ten (10%) percent of any class of equity securities of the Company
or any other person subject to Section 16 of the Securities Exchange Act of 1934
("reporting person") that failed to file on a timely basis one or more reports
during such fiscal year, the number of late reports, the number of transactions
not reported on a timely basis, and any known failure to file a required form:
Mr. Scardino (as to 300 shares) and Mr. DePierro (as to 3,000 shares) were late
in filing their Form 4's.
INFORMATION CONCERNING EXECUTIVE OFFICERS
The term of office of each executive officer of the Company is one
year. There are no family relationships between any director or officer of the
Company. The following table sets forth as of the date hereof the names and ages
of all executive officers of the Company, all positions and offices with the
Company held by them, the period during which they have served in these
positions and, where applicable, their positions in any other organizations
during the last five years.
Position and Office with the
Company, Term of Office and
Name and Age Five-Year Employment History
- ------------ ----------------------------
Richard Soloway Chairman of the Board of Directors since October
(52) 1981; President Since 1998; and Secretary since
1975.
Kevin S. Buchel Senior Vice President of Operations and Finance
(45) since April 1995; Treasurer since May 1998; Vice
President of Finance and Administration from
December 1989 to April 1995.
Alfred DePierro Vice President of Engineering -- Microcomputer
(51) Applications since September 1985.
Raymond Gaudio Vice President of Engineering -- Software
(54) Applications since September 1985.
Jorge Hevia Vice President of Corporate Sales and Marketing
(40) since October 1998; Vice President of National Sales of
Schieffelin and Somerset Company from December 1993 to
October 1998.
Joseph Scardino Vice President of International Sales since March
(41) 1998; Vice President of Sales of Napco from August
1994 to March 1998; Vice President-New York Sales
Division from January 1994 to August 1994; Regional
Sales Manager of New York from October 1986 to January
1994.
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<PAGE> 12
EXECUTIVE COMPENSATION
The following table sets forth the compensation information for the
President and Chief Executive Officer of the Company and for each of the
Company's four most highly compensated other executive officers serving at the
end of fiscal year 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Other Annual Restricted Options/ LTIP All Other
Name and Principal Fiscal Year Salary Bonus Compensation(3) Stock Awards SARS Payouts Compensation(4)
- ------------------- ----------- ------ ----- ------------ ------------ ------- ------- --------------
Position
- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard Soloway, 1998 $407,793 -- $ 9,123 - -- - $ 4,078
Chairman of the Board 1997 $407,793 -- $ 9,282 - -- - $ 4,078
of Directors, 1996 $407,793 -- $ 8,467 - -- - $ 4,078
President, Secretary
Kenneth Rosenberg, 1998 $379,212 -- $ 12,635 - -- - $ 3,792
Former President and 1997 $407,793 -- $ 11,709 - -- - $ 3,792
Treasurer(1) 1996 $407,793 -- $ 13,553 - -- - $ 3,792
Kevin S. Buchel, Senior 1998 $131,811 $ 50,000 $ 5,252 - 15,000 - $ 1,841
Vice President of 1997 $120,359 $ 25,000 $ 4,902 - -- - $ 1,460
Operations and Finance 1996 $115,202 $ 20,000 $ 4,902 - 15,000 - $ 1,352
and Treasurer
Alfred DePierro, Vice 1998 $222,005(2) -- $ 2,288 - 5,000 - $ 1,331
President of 1997 $221,112(2) -- $ 2,174 - -- - $ 1,165
Engineering - 1996 $224,153(2) -- $ 2,174 - -- - $ 2,242
Microcomputer
Applications
Raymond Gaudio, Vice 1998 $265,950(2) -- $ 288 - 5,000 - $ 2,531
President of 1997 $264,715(2) -- $ 288 - -- - $ 2,517
Engineering- Software 1996 $268,916(2) -- $ 288 - -- - $ 2,689
Application
</TABLE>
(1) Mr. Rosenberg left the employment of the Company on May 28, 1998.
(2) Includes commissions.
(3) Mssrs. Soloway, Rosenberg, Buchel, DePierro, and Gaudio received $1,174,
$1,060, and $3,994; $9,035, $8,921, and $12,953; $288, $174, and $174; $102,
$102, and $102; and $288, $288, and $288, respectively for health and life
insurance for fiscal years 1998, 1997, and 1996. Mssrs. Soloway, Rosenberg,
Buchel, and DePierro received $7,950, $8,222 and $4,473; $3,600, $2,788 and
$600; $5,150, $4,800 and $4,800; and $2,000, $2,000 and $2,000, respectively,
for automobile expenses for fiscal years 1998, 1997 and 1996. (4)401(k) Plan
Contributions.
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OPTION GRANTS AND EXERCISES
The following tables summarize option grants and exercises
during fiscal 1998 to or by the named executive officers and the value of the
fiscal 1998 granted options, if any, held by such persons at the end of fiscal
1998.
OPTION GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term(2)
-------------------------------------------------------------------------- -------------------------
Percent of
Total Options
Granted to Employees in Exercise or
Options Fiscal Year Base Price Expiration
Name Granted ($/Sh) Date 5% ($) 10% ($)
- ---- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Richard Soloway - - - - - -
Kenneth Rosenberg - - - - - -
Kevin S. Buchel 15,000 7.2% $3.875 7/10/02 $16,059 $35,486
Alfred DePierro 5,000 2.4% $3.875 7/10/02 $ 5,353 $11,829
Raymond Gaudio 5,000 2.4% $3.875 7/10/02 $ 5,353 $11,829
</TABLE>
(1) Options generally become exercisable in cumulative annual installments of
20% commencing on the date of grant. Options terminate upon the earlier of the
cessation of employment with the Company or the fifth anniversary of the date of
the grant.
(2) Amounts represent hypothetical gains that could be achieved for options if
exercised at the end of the option term. These gains are based on assumed rates
of stock price appreciation of 5% and 10% annually from the date options are
granted.
10
<PAGE> 14
AGGREGATED OPTION EXERCISES IN LAST YEAR AND FY-END OPTION VALUES(1)
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Shares Options at Options at
Acquired Value FY-End (#) FY-End ($)
on Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
---- ----- -----
<S> <C> <C> <C> <C>
Richard Soloway - - - -
Kenneth Rosenberg - - - -
Kevin S. Buchel - - 12,000/18,000 $61,500/92,250
Alfred DePierro - - 1,000/4,000 $ 5,125/20,500
Raymond Gaudio - - 1,000/4,000 $ 5,125/20,500
</TABLE>
(1) No stock options were exercised by the named executive officers during
fiscal 1998.
11
<PAGE> 15
Employment Agreements
The Company has employment agreements with Alfred DePierro and Raymond
Gaudio. The agreement with Mr. Gaudio provides for an annual salary ($120,330)
and commission draw ($52,000) aggregating $172,330 plus commissions in excess of
the draw. The agreement with Mr. DePierro provides for an annual salary
($116,556) and commission draw ($41,600) aggregating $158,156 plus commissions
in excess of the draw and automobile allowance.
Related Transactions
In May of 1998 the Company repurchased 889,576 shares of Napco common
stock for $5.00 per share from one of its co-founders, Kenneth Rosenberg. $2.5
million was paid at closing with the balance of the purchase price to be paid
over a four (4) year period. The portion of the purchase price paid at closing
was financed by the Company's primary bank and is to be repaid over a five (5)
year period. At the closing, Mr. Rosenberg retired as President and Director of
the Company but will be available to the Company pursuant to a consulting
agreement. The repurchase agreement also provides that Mr. Rosenberg will not
compete with the Company for a ten (10) year period.
Report of the Compensation Committee
The Company's Compensation Committee of the Board of Directors is made
up of the President and the Senior Vice President of Operations and Finance. The
Committee considers and establishes compensation for the management of the
Company. With respect to the compensation of the Chairman and the President, the
Board of Directors considers and approves such compensation.
Overview and Philosophy
The Compensation Committee uses its compensation program to achieve the
following objectives:
- increasing the profitability and net worth of the Company and,
accordingly, increasing stockholder value;
- providing compensation that will enable the Company to attract and
retain high quality employees and reward superior performance;
- providing management with incentives related to the success of the
Company; and
- providing management with long-term equity incentives through stock
options.
The Company believes that its executive compensation program provides
an overall level of compensation that is competitive within the electronic
security products industry and among companies of comparable size and
complexity.
Procedures for Establishing Compensation
At the beginning of each year, the Compensation Committee establishes
an annual salary plan for the Company's senior executive officers.
In fiscal 1998, as in the past several years, the Compensation
Committee set compensation at the start of the year and reviewed it
approximately mid-way through the year. The initial compensation recommendation,
consisting of salary and performance-based incentive compensation, is based in
part upon a survey of comparably sized companies. The Compensation Committee
uses this survey to determine the competitiveness of base salary and incentive
opportunities at the Company and to evaluate the relative mix of salary and
incentive compensation.
12
<PAGE> 16
Executive Officer Compensation Program
The Company's executive compensation program consists of base salary,
annual incentive cash compensation, commissions, long-term equity incentives in
the form of stock options and various benefits such as medical insurance and
401(k) savings plan generally available to employees of the Company. The amount
of perquisites, as determined in accordance with rules promulgated by the
Securities and Exchange Commission, did not exceed 10% of salary in fiscal 1998.
Base Salary
Base compensation is generally set within the range of salaries of
executive officers with comparable qualifications, experience and
responsibilities at other companies in the same or similar businesses and or
comparable size and success as the Company. In addition to external market data,
salary is determined by the Company's financial performance and the individual's
performance based on predetermined, non-financial objectives. Non-financial
objectives include an individual's contribution to the Company as a whole,
including his ability to motivate others, develop the necessary skills as the
Company grows, recognize and pursue new business opportunities and initiate
programs to enhance the Company's growth and success.
Short-Term and Long-Term Compensation
Annual incentive compensation and long-term incentive compensation, in
comparison to base salary, are more highly tied to the Company's success in
achieving financial performance goals. Annual cash bonuses are paid primarily on
the basis of attainment of financial, sales, and production goals of the
Company. The officers do not vote on their own compensation. Raymond Gaudio and
Alfred DePierro do not receive bonuses but do receive commissions.
Long-term incentive compensation, through stock options, enables
executives to develop a long-term stock ownership position in the Company. In
addition to considering an individual's past performance, the Company's desire
to retain an individual is of paramount consideration in the determination of
stock option grants.
Stock options are granted at an option price equal to fair market value
on the date of grant and generally vest over a five-year period in order to
encourage key employees to continue in the employ of the Company. Accordingly,
stock options are intended to retain and motivate executives to improve
long-term stock market performance.
Summary of Compensation of Chief Executive Officers
In fiscal 1998, the Company's Chairman, President, and Chief Executive
Officer, Richard Soloway received a salary of $407,793. He received no stock
options in fiscal year 1998.
Compensation Committee: Richard Soloway
Kevin S. Buchel
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<PAGE> 17
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee are Richard Soloway and Kevin
S. Buchel. Each member of the Compensation Committee was, during fiscal 1998 and
previously, an officer and employee of the Company and each subsidiary of the
Company as described above pursuant to Item 404 of Regulation S-K promulgated
under the Securities and Exchange Act of 1934.
No executive officer of the Company has served as a director or member
of the Compensation Committee (or other committee serving an equivalent
function) of any other entity, one of whose executive officers served as a
director of or member of the Compensation Committee of the Company.
Compensation Pursuant to Plans
Profit Sharing Plan
The Company maintains a defined contribution profit sharing plan (the
"Plan") pursuant to Section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"). In general, all employees who are at least age twenty-one
and have completed one year of employment with the Company are eligible to
participate in the Plan. The effective date of the Plan, as restated, is July 1,
1989. Participants in the Plan may contribute up to the maximum amount permitted
by the Code of their compensation as a salary reduction. The Company matches all
such contributions by contributing an amount equal to 50% of all such salary
reduction deferrals up to a maximum of 1% of each participant's salary
compensation. In addition, the Company may elect at the end of each Plan year to
contribute a discretionary amount to the Plan to be allocated among the eligible
employees on the basis of compensation. During fiscal 1998, the Company
contributed approximately $53,000 to the Plan.
Vested contributions, both participant and the Company's additional
contributions, are payable to the participant (or his beneficiary), upon any of
the following events: retirement, termination of employment, disability, death,
termination of the Plan without the establishment of a successor Plan, or the
attainment of age 59 1/2. Participants may withdraw up to the total of salary
deferral contributions upon suffering a financial hardship, as defined in the
Plan. A participant may also borrow from the Plan against his account balance.
All participant and additional Company contributions are 100% vested at all
times. Benefits at retirement are payable to participants in a lump sum or as an
annuity.
Stock Options
Under the Company's 1992 Incentive Stock Option Plan, as amended ("1992
Plan") which was approved by vote of the stockholders of the Company at the 1992
Annual Meeting (extending the 1982 plan for an additional ten years), incentive
stock options to purchase up to an aggregate of 727,933 shares of Common Stock
(plus the shares at the time subject to option) or a total of 815,933 shares (as
adjusted) may be granted at fair market value to executive officers and key
employees during the ten-year period ending in October 2002. At June 30,
14
<PAGE> 18
1998, 579,683 shares were available for grant under the 1992 Plan. Options to
purchase a total of 236,250 shares of Common Stock were outstanding under the
1992 Plan on June 30, 1998, with exercise prices of $2.50 to $5.63 per share.
The incentive stock options included in the foregoing tabulation expire five
years from the date of grant, are non-transferable and are exercisable beginning
with the date of grant in 20 percent cumulative yearly installments. These
options and shares were registered in October 24, 1996 with the Securities and
Exchange Commission.
The Company's 1990 Non-Employee Stock Option Plan ("1990 Plan") was
adopted to promote the interests of the Company and its stockholders by enabling
the Company to attract and retain outside directors and consultants, to provide
them an incentive to continue service with the Company, and provide them
additional incentive to promote the success of the Company's business. The 1990
Plan was approved by the stockholders at the Company's 1990 annual meeting. At
June 30, 1998, a total of 50,000 shares (with appropriate adjustment in the
event of a stock split or other change in the Company's common stock) of common
stock of the Company, par value $.01 per share, were available for grant of
options under the 1990 Plan. The Plan authorizes grants of options which do not
meet the requirements of Section 422 of the Internal Revenue Code to
non-employee directors and/or consultants of the Company. No option may be
granted after October 15, 2000 or such earlier date as the Board of Directors
may determine. Through June 30, 1998, no options under the 1990 Plan had been
granted.
Each option would have a maximum term of five years, or such lesser
period as the Committee specifies. Options would become exercisable at the rate
of 20% per year. An option may be exercised by an optionee during his tenure as
a director or consultant. Options under the 1990 Plan would not be transferable.
The optionees would have "piggy-back" registration rights whereby if in the
future the Company registered any additional shares with the Securities and
Exchange Commission, the Company would also register the shares subject to such
options.
15
<PAGE> 19
COMPARISON OF TOTAL SHAREHOLDER RETURN
The following graph sets forth the Company's total shareholder return index as
compared to the NASDAQ index and a NASDAQ electronic component stock industry
index.
[Performance Chart]
<TABLE>
<CAPTION>
6/94 9/95 6/96 6/97 6/98
<S> <C> <C> <C> <C> <C>
NAPCO 100.000 68.000 116.000 152.000 164.000
NASDAQ 100.000 133.480 171.376 208.123 274.709
PEER 100.000 145.578 152.268 180.499 105.215
GROUP*
</TABLE>
* Peer Group consists of:
American Medical Alert Corp.
Detection Systems, Inc.
Pittway Corp.
Central Sprinkler Corp.
16
<PAGE> 20
ITEM 3
PROPOSAL NO. 3
APPROVAL OF AMENDMENT OF THE COMPANY'S
CERTIFICATE OF INCORPORATION
TO AUTHORIZE THE ISSUANCE OF PREFERRED STOCK
On September 11, 1998, the Board of Directors unanimously approved a
proposal to amend the Company's Certificate of Incorporation to authorize the
issuance of 2,000,000 shares of preferred stock, par value $.01 per share. The
full text of the proposed amendment to the Company's Certificate of
Incorporation with respect to this Proposal is set forth in Appendix B to this
Proxy Statement and the following description is qualified in its entirety by
reference thereto.
The Company is seeking to expand through acquisitions in appropriate
circumstances and may use shares of preferred or common stock in one or more of
such acquisitions. The Board of Directors believes it is important for the
Company to have preferred stock available for the future needs of the Company.
Having such stock available for issuance in the future will give the Company
greater flexibility without the expense and delay incidental to obtaining
stockholder approval of an amendment to Certificate of Incorporation.
Currently, the Company has 21,000,000 shares of common stock
and no preferred stock authorized. Management believes that the Company needs
more flexibility in its capital structure to support its ability to consummate
potential future acquisitions, although no particular acquisitions are currently
the subject of negotiations, although the Company has, from time to time, had
discussions with potential acquisition candidates.
The Company has no current plan to issue any of the Preferred Stock
for which it seeks authorization. Under Delaware law, the Board of Directors has
the power to set the designations, rights and preferences with respect to the
Preferred Stock. Stockholders must be aware that in the event that all or a
substantial number of the additional shares are issued, existing stockholders
may suffer immediate and substantial dilution of their interests in the Company
and a potential decrease in the valuation of their stock.
An effect of the authorization of preferred stock will be to
strengthen the Board's ability to fight off hostile takeovers. The Company is
not aware of any existing hostile takeover proposals.
THE BOARD OF DIRECTORS BELIEVES APPROVAL OF THE AMENDMENT OF THE
COMPANY'S CERTIFICATE OF INCORPORATION IS IN THE BEST INTEREST OF THE COMPANY
AND RECOMMENDS THAT IT BE AUTHORIZED. THE BOARD RECOMMENDS A VOTE "FOR" APPROVAL
THEREOF.
17
<PAGE> 21
THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors appointed Arthur Andersen LLP ("AA") as the
independent public accountants for the Company and its subsidiaries for its 1998
fiscal year. AA has been serving the Company since fiscal 1993.
Services provided by AA during and for the 1998 fiscal year consisted
of audit and non-audit related services. These services included the examination
of the consolidated financial statements of the Company, services related to
reporting by the Company and its subsidiaries to the Securities and Exchange
Commission and consulting during the year on matters related to accounting,
taxes and financial reporting.
A representative of AA will be present at the Annual Meeting to make a
statement if he desires and to respond to appropriate questions presented at the
Meeting.
SUBMISSION OF FUTURE STOCKHOLDER PROPOSALS
Any stockholder proposal which is intended to be presented at next
year's annual meeting of stockholders must be received by the Company not later
than June 22, 1999 if it is to be considered for inclusion in the Company's
proxy statement and form of proxy for such meeting.
EXPENSES OF SOLICITATION
The Company will bear all costs in connection with the solicitation by
the Board of Directors of proxies of the Meeting. McKenzie Partners, Inc. will
assist in soliciting proxies. They are expected to use 35 people and charge
usual and customary fees not to exceed $10,000 plus reimbursement of expenses.
The Company intends to request brokerage houses, custodial nominees and others
who hold stock in their names to solicit proxies from the persons who
beneficially own such stock. The Company will reimburse brokerage houses,
custodial nominees and others for their out-of-pocket expenses and reasonable
clerical expenses. It is estimated that these expenses will be nominal. In
addition, officers and employees of the Company may solicit proxies personally
or by telephone, telegram or letter; they will receive no extra compensation for
such solicitation.
Dated: October 27, 1998
18
<PAGE> 22
APPENDIX A
PROPOSED AMENDMENTS TO THE CORPORATION'S
CERTIFICATE OF INCORPORATION AND
BY-LAWS ARTICLE II, SECTION 2
1. RESOLVED, that (1) the Certificate of Incorporation of NAPCO
SECURITY SYSTEMS, INC. be amended by adding a new Article ELEVENTH to read as
follows:
The number of directors which shall constitute the whole Board
of Directors shall be not less than three (3) and shall be fixed from
time to time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in the previously
authorized directorships at the time any such resolution is presented
to the Board of Directors for adoption). At the Annual Meeting of
Stockholders at which this Article is adopted, the directors shall be
divided into three classes, designated Class I, Class II, and Class III
(which at all times shall be as nearly equal in number as possible),
with the term of office of Class III directors to expire at the 1999
Annual Meeting of Stockholders, the term of office of Class II
directors to expire at the 2000 Annual Meeting of Stockholders, and the
term of office of Class I directors to expire at the 2001 Annual
Meeting of Stockholders. At each annual meeting of stockholders
following such initial classification and election, directors elected
to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of
stockholders after their election.
Subject to the rights of the holders of any class or series of the
Voting Stock then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies on the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal from office or other cause may be filled by a majority vote of the
directors then in office, though less than a quorum, and directors so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of office of the class to which they have been elected expires.
No decrease in the number of authorized directors constituting the entire Board
of Directors shall shorten the term of any incumbent director.
19
<PAGE> 23
2. RESOLVED, that Sections 2 and 11 of Article II of the By-Laws be
amended to read as follows:
Section 2. Number, Qualifications, Election and Term of Office. The
number and term of office of directors shall be as set forth in the Certificate
of Incorporation, as amended. All directors shall be of full age. Directors need
not be stockholders. Except as otherwise provided by statute, the Certificate of
Incorporation, or these By-Laws, the directors shall be elected at the annual
meeting of stockholders for the election of directors at which a quorum is
present and the persons receiving a plurality of the votes cast at such election
shall be elected.
* * *
Section 11. Vacancies. Vacancies may be filled by a majority of the
directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office as provided in the
Certificate of Incorporation of the Corporation. If there are no directors in
office, then an election of directors may be held in the manner provided by
statute. If, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than majority
of the whole Board (as constituted immediately prior to any such increase), the
Court of Chancery may, upon application of any holder or holders of at least ten
percent of the shares at the time outstanding having the right to vote for such
directors, summarily order an election to be held to fill any such vacancies or
newly created directorships, or to replace the directors chosen by the directors
then in office. Except as otherwise provided in the Certificate of Incorporation
of the Corporation or these By-Laws, when one or more directors shall resign
from the Board, effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in this section in the filling of other vacancies.
20
<PAGE> 24
APPENDIX B
PROPOSED AMENDMENTS TO THE
CORPORATION'S CERTIFICATE OF INCORPORATION ARTICLE FOURTH
RESOLVED, that the Certificate of Incorporation of NAPCO SECURITY
SYSTEMS, INC. be amended by changing the Article thereof numbered "FOURTH" so
that as amended, said article shall be and read as follows.
"FOURTH: The total number of shares of all classes of stock
which the Company is authorized to issue is twenty-three million
(23,000,000), of which 21,000,000 shall be common stock and 2,000,000
shall be preferred stock. All such shares are to have a par value of
$.01 per share.
The designations and the powers, preferences, and rights, and
the qualifications, limitations or restrictions thereof, of the
Preferred Stock and the Common Stock of the Company are set forth in
the following provisions:
A. PREFERRED STOCK.
I. The Board of Directors is authorized, subject to limitations
prescribed by law, to provide for the issuance of the preferred stock in series
and by filing a certificate pursuant to the Delaware General Corporation Law to
establish the number of shares to be included in each series. The Preferred
Stock may be issued either as a class without series, or one or more series
thereof, or both unless the context shall otherwise require.
II. There is hereby expressly granted to the Board of Directors
Authority to fix the voting power, the designations, preferences, and relative,
participating, organizational or other special rights, and the qualifications,
limitations or restrictions of said Preferred Stock in the resolution or
resolutions adopted by the Board of Directors providing for the issuance of said
Preferred Stock.
B. COMMON STOCK.
I. Subject to the provisions of law and the preferences of the
Preferred Stock, dividends may be paid on the Common Stock of the Company at
such time and in such amounts as the Board of Directors may deem advisable.
II. The Board of Directors of the Company is authorized to effect the
elimination of shares of its Common Stock purchased or otherwise reacquired by
the Company from the authorized capital stock or number of shares of the Company
in the manner provided for in the General Corporation Law of Delaware.
21
<PAGE> 25
GENERAL.
I. No holder of Common Stock or Preferred Stock shall have any
pre-emptive right to subscribe to stock, obligations, warrants, rights to
subscribe to stock or other securities of any class, whether now or hereafter
authorized.
II. Subject to the provisions of law and the foregoing provisions of
this Certificate of Incorporation, the Company may issue shares of its Preferred
Stock or Common Stock, from time to time for such consideration (not less than
the par value or stated value thereof) as may be fixed by the Board of
Directors, which is expressly authorized to fix the same in its absolute and
uncontrolled discretion, subject as aforesaid, or in the absence of a quorum of
directors necessary to act upon such issuance of shares, by a vote of majority
of the outstanding stock entitled to vote thereon. Shares so issued, for which
the consideration has been paid or delivered to the Company, shall be deemed
fully paid stock, and shall not be liable to any further call or assessments
thereon, and the holders of such shares shall not be liable for any further
payments in respect of such shares.
22
<PAGE> 26
NAPCO SECURITY SYSTEMS, INC.
333 Bayview Avenue
Amityville, New York 11701
PROXY - SOLICITED BY THE BOARD OF DIRECTORS
The undersigned stockholder of NAPCO SECURITY SYSTEMS, INC. hereby
appoints Messrs. Richard Soloway and Kevin S. Buchel, and each or either of
them, the proxy or proxies of the undersigned, with full power of substitution,
to vote as specified on the reverse side all shares of Common Stock of said
Corporation which the undersigned is entitled to vote at the Annual Meeting of
Stockholders of said Corporation, to be held on Wednesday, December 9, 1998 and
at all adjournments of such Meeting, with all powers the undersigned would
possess if personally present.
This Proxy will be voted as specified. If no specification is made, the
Proxy will be voted FOR the adoption of a classified board of directors (Item
1), FOR the election of the four (4) directors (Item 2), and FOR the
authorization of preferred stock (Item 3); and as to any other matters as may
properly come before the meeting, this Proxy will be voted in the discretion and
in the best judgment of the Proxies. This Proxy may be revoked at any time prior
to the voting thereof.
The Board of Directors recommends a Vote FOR Items 1, 2 and 3.
Item 1 - Amendment of Certificate of Incorporation to provide for a
classified Board of Directors as described in the proxy statement in which the
aforementioned directors' terms would run until: the 1999 Annual Meeting in the
case of A. Wilder, the 2000 Annual Meeting in the case of R. Blaustein; and the
2001 Annual Meeting in the case of R. Soloway and K. Buchel.
FOR / / AGAINST / / ABSTAIN / /
(Please date and sign on the reverse side.)
<PAGE> 27
Item 2 - Election of four directors: Randy B. Blaustein, Kevin S. Buchel,
Richard Soloway and Andrew J. Wilder.
FOR / / WITHHOLD / /
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below.)
- ------------------------------------------------------------------------------
Item 3 - Amendment to Certificate of Incorporation to provide for a series
of Preferred Stock with the designations, powers, preferences, rights,
qualifications, limitations and restrictions to be determined as set forth in
the proxy statement.
FOR / / AGAINST / / ABSTAIN / /
Date:
----------------------------------
----------------------------------
----------------------------------
Signature or Signatures
Please sign exactly as your name appears
at the left. Executors, administrators,
trustees, guardians, attorneys and
agents should give their full titles and
submit evidence of appointment unless
previously furnished to the Corporation
or its transfer agent.
