<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------- SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED: SEPTEMBER 30, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------- SECURITIES AND EXCHANGE ACT OF 1934 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 (IRS Employer Identification Number)
incorporation or organization)
333 Bayview Avenue
Amityville, New York 11701
- ------------------------------------ -------------------------------------
(Zip Code)
(516) 842-9400
-----------------------------------------------------
(Registrant's telephone number including area code)
NONE
-----------------------------------------------------
(Former name, former address and former fiscal year
if changed from last report)
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 and Exchange Act
of 1934 during the preceding 12 months (or 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
------ ------
<TABLE>
<S> <C>
Number of shares outstanding of each of the issuer's classes of common stock, as of: SEPTEMBER 30, 1999
COMMON STOCK, $.01 PAR VALUE PER SHARE 3,495,351
</TABLE>
<PAGE> 2
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I: FINANCIAL INFORMATION (unaudited)
Condensed Consolidated Balance Sheets,
September 30, 1999 and June 30, 1999 3
Condensed Consolidated Statements of Income for the Three
Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II: OTHER INFORMATION 11
SIGNATURE PAGE 12
INDEX TO EXHIBITS 13
</TABLE>
-2-
<PAGE> 3
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 1999 1999
------ -------------- -------------
(in thousands, except share data)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,688 $ 2,230
Accounts receivable, less allowance for doubtful accounts:
September 30, 1999 $ 897
June 30, 1999 $ 887 14,410 16,446
Inventories, net (Note 2) 22,865 21,495
Prepaid expenses and other current assets 538 809
Deferred income taxes, net 716 716
-------------- --------------
Total current assets 40,217 41,696
Property, Plant and Equipment, net of accumulated depreciation
and amortization (Note 3):
September 30, 1999 $ 12,631
June 30, 1999 $ 12,316 11,195 11,280
Goodwill, net 2,459 2,485
Other Assets 313 326
-------------- --------------
$ 54,184 $ 55,787
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current portion of long-term debt $ 1,208 $ 1,433
Accounts payable 3,271 3,651
Accrued and other current liabilities 1,257 1,582
Accrued taxes 19 110
-------------- --------------
Total current liabilities 5,755 6,776
Long-Term Debt 17,042 17,241
Deferred Income Taxes 442 442
-------------- --------------
Total liabilities 23,239 24,459
Stockholders' Equity:
Common stock, par value $.01 per share; 21,000,000 shares authorized,
5,908,602 shares issued; 3,495,351 and 3,490,151
shares outstanding, respectively 59 59
Additional paid-in capital 764 751
Retained earnings 34,571 34,967
Less: Treasury stock, at cost (2,418,451 shares) (4,449) (4,449)
-------------- --------------
Total stockholders' equity 30,945 31,328
-------------- --------------
$ 54,184 $ 55,787
============== ==============
</TABLE>
See accompanying notes to Condensed consolidated Financial Statements.
-3-
<PAGE> 4
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------------------
1999 1998
-------------- --------------
(in thousands, except share and per share data)
<S> <C> <C>
Net Sales $ 10,449 $ 11,090
Cost of Sales 7,858 8,382
-------------- --------------
Gross profit 2,591 2,708
Selling, General and Administrative Expenses 2,719 2,228
-------------- --------------
Operating income (loss) (128) 480
-------------- --------------
Interest Expense, net 321 368
Other Expense, net 32 5
-------------- --------------
353 373
-------------- --------------
Income (loss) before (benefit) for income taxes (481) 107
(Benefit) for Income Taxes (85) (165)
-------------- --------------
Net income (loss) $ (396) $ 272
============== ==============
Earnings (Loss) Per Share (Note 5): Basic $ (0.11) $ 0.08
============== ==============
Diluted $ (0.11) $ 0.08
============== ==============
Weighted Average Number of Shares Outstanding (Note 5): Basic 3,492,751 3,489,901
============== ==============
Diluted 3,492,751 3,524,825
============== ==============
</TABLE>
See accompanying notes to Condensed consolidated Financial Statements.
-4-
<PAGE> 5
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------------
1999 1998
------------- ---------------
(in thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities $ 112 $ 790
------------- ---------------
Cash Flows from Investing Activities:
Purchases of property, plant and equipment (230) (188)
------------- ---------------
Net cash used in investing activities (230) (188)
------------- ---------------
Cash Flows from Financing Activities:
Proceeds from long-term debt borrowings - -
Principal payments on long-term debt (424) (350)
------------- ---------------
Net cash (used in) financing activities (424) (350)
------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents (542) 252
Cash and Cash Equivalents at Beginning of Period 2,230 1,989
------------- ---------------
Cash and Cash Equivalents at End of Period $ 1,688 $ 2,241
============= ===============
Cash Paid During the Period for:
Interest $ 315 $ 335
============= ===============
Income taxes $ 6 $ 242
============= ===============
</TABLE>
See accompanying notes to Condensed consolidated Financial Statements.
-5-
<PAGE> 6
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.) Summary of Significant Accounting Policies and Other Disclosures
The information for the nine months ended September 30, 1999 and
1998 is unaudited, but in the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of the results of
operations for such periods have been included. The results of
operations for the periods may not necessarily reflect the annual
results of the Company. For further information, refer to the
consolidated financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1999.
The Company has adopted all recently effective accounting
standards which have an impact on its condensed financial
statements.
2.) Inventories
<TABLE>
<CAPTION>
Inventories consist of: September 30, June 30,
1999 1999
------------- -------------
(in thousands)
<S> <C> <C>
Component parts $ 10,736 $ 10,093
Work-in-process 5,270 4,954
Finished products 6,859 6,448
------------- -------------
$ 22,865 $ 21,495
============= =============
</TABLE>
3.) Property, Plant and Equipment
<TABLE>
<CAPTION>
Property, Plant and Equipment consists of: September 30, June 30,
1999 1999
---------------- -------------
(in thousands)
<S> <C> <C>
Land $ 904 $ 904
Building 8,911 8,911
Molds and dies 3,251 3,180
Furniture and fixtures 971 964
Machinery and equipment 9,733 9,581
Building improvements 56 56
---------------- -------------
23,826 23,596
Less: Accumulated depreciation and amortization 12,631 12,316
---------------- -------------
$ 11,195 $ 11,280
================ =============
</TABLE>
4.) In August 1995, the Internal Revenue Service ("IRS") informed the
Company that it had completed the audit of the Company's Federal
tax returns for fiscal years 1986 through 1993. The IRS had
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
related to intercompany pricing and royalty charges, DISC
earnings and charitable contributions. The Company disagreed
with the IRS and began the process of vigorously appealing this
assessment using all remedies and procedural actions available
under the law. The Company had provided a reserve to reflect its
estimate of the ultimate resolution of this matter, so that the
outcome of this matter would not have a material adverse effect
on the Company's consolidated financial statements.
During fiscal 1998, the Company continued to discuss the
assessment with the IRS Appeals Office and in July 1998 received
a revised audit report, which was subject to final government
administrative approval, and which reduced the original
assessment for the years covered by the IRS audit. The Company
accepted the revised audit report and the final government
approval was pending as of June 30, 1998. Accordingly, the
Company determined that $900,000 of previously recorded reserves
should be reversed through the 1998 income tax provision to
reflect the expected final settlement with respect to the IRS
audit.
In fiscal 1999, the Company received the final government
approval on the IRS audit related to fiscal years 1986 through
1993. In addition, the IRS completed its audits of fiscal years
1994 through 1997. As a result of the favorable outcome from the
audits, the Company reversed an additional $1,896,000 of
previously recorded reserves through the income tax provision in
fiscal 1999.
-6-
<PAGE> 7
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5.) Net Income Per Common Share
The Company adopted Statement of Financial Accounting standards
("SFAS") No. 128 "Earnings per share". In accordance with SFAS
No. 128, net income per common share amounts ("basic EPS") were
computed by dividing net income by the weighted average number of
common shares outstanding for the period. Net income per common
share amounts, assuming dilution ("diluted EPS"), were computed
by reflecting the potential dilution from the exercise of stock
options. SFAS No. 128 requires the presentation of both basic EPS
and diluted EPS on the face of the income statement. Net income
per share amounts for the same prior-year periods have been
restated to conform to the provisions of SFAS No. 128.
A reconciliation between the numerators and denominators of the
basic and diluted EPS computations for net income is as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1999
(in thousands, except per share data)
------------------------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
<S> <C> <C> <C>
Net income (loss) $(396) - -
-------
BASIC EPS
---------
Net income (loss) attributable to
common stock $(396) 3,493 $(0.11)
-------
EFFECT OF DILUTIVE SECURITIES
-----------------------------
Options - - -
---- ---- ----
DILUTED EPS
-----------
Net income (loss) attributable to
common stock and assumed
option exercises $(396) 3,493 $(0.11)
------- ====== =======
</TABLE>
Options to purchase 173,820 shares of common stock in the three months
ended September 30, 1999 were not included in the computation of diluted
EPS because the exercise prices of 89,370 of the options exceeded the
average market price of the common shares for this period and the
inclusion of the remaining 84,450 options would have been anti-dilutive. .
These options were still outstanding at the end of the period.
-7-
<PAGE> 8
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Sales for the three months ended September 30, 1999 decreased by $641,000 to
$10,449,000 as compared to $11,090,000 for the same period a year ago. This
change was primarily a result of the Company's reduction of volume incentives
to its customers as partially offset by the increase in sales of the Company's
Alarm Lock product line.
The Company's gross profit for the three months ended September 30, 1999
decreased by $117,000 to $2,591,000 or 24.8% of sales as compared to $2,708,000
or 24.4% of sales for the same period a year ago. The decrease in gross profit
was due primarily to the lower sales as discussed above. The increase in gross
profit as a percentage of sales was primarily due to a reduction of product
costs and volume incentives and a positive shift in product mix.
Selling, general and administrative expenses for the three months ended
September 30, 1999 increased by $491,000 to $2,719,000 as compared to
$2,228,000 a year ago. This increase was due primarily to the Company's
increased selling and marketing efforts in the rollout of its new products.
Interest and other expense for the three months ended September 30, 1999
decreased by $20,000 to $353,000 from $373,000 for the same period a year ago.
This decrease in expense was primarily due to the continuing reduction in the
Company's outstanding debt.
The benefit for income taxes for the three months ended September 30, 1999
decreased by $80,000 to a benefit of $85,000 as compared to a benefit of
$165,000 for the same period a year ago. The current period benefit relates to
the current period results; the decrease in the benefit for income taxes in the
current period is primarily due to the reversal of reserves in the same period
a year ago that did not recur in the current quarter.
Net income decreased by $668,000 to a loss of $396,000 or $(.11) per share for
the three months ended September 30, 1999 as compared to income of $272,000 or
$.08 per share for the same period a year ago. The change in net income was
due primarily to the factors discussed above.
Liquidity and Capital Resources
During the three months ended September 30, 1999 the Company utilized virtually
all of its cash generated from operations and a portion of its cash on hand to
reduce its outstanding borrowings and to purchase property and equipment. This
resulted in a decrease in outstanding debt to $18,250,000 at September 30, 1999
from $18,674,000 at June 30, 1999 while cash and cash equivalents decreased to
$1,688,000 as of September 30, 1999 as compared to $2,230,000 at June 30, 1999.
Accounts Receivable at September 30, 1999 decreased $2,036,000 to $14,410,000 as
compared to $16,446,000 at June 30, 1999. This decrease is primarily the result
of the higher sales volume during the quarter ended June 30, 1999 as compared to
the quarter ended September 30, 1999.
Inventory at September 30, 1999 increased by $1,370,000 to $22,865,000 as
compared to $21,495,000 at June 30, 1999. This increase was primarily the
result of the Company increasing production of certain of its existing products
as well as preparing for the rollout of several new products later in the
fiscal year.
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. $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.
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 and 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 existing
$11,000,000 and $2,000,000 credit agreements with another bank. 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 Company's Amityville facility. The revolving credit agreement
will expire in November, 2000 and any outstanding borrowings are to be repaid
on or before that time.
-8-
<PAGE> 9
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
On April 26, 1993 the Company's foreign subsidiary entered into a 99 year lease
of approximately four acres of land in the Dominican Republic, at an annual
cost of approximately $272,000. The foreign subsidiary relocated its operations
to this site at the end of fiscal 1995.
The Company has entered into an employment agreement with Michael Carrieri, Vice
President of Engineering Development (see Exhibit 10(U)).
As of September 30, 1999 the Company had no material commitments for capital
expenditures.
Year 2000 Date Conversion
As the century turns from 1900 to 2000, date-sensitive systems may recognize
the year 2000 as 1900 or not at all. This results primarily because of the
conventional use of a two digit date field in most software applications. The
inability to properly recognize the year 2000 may cause systems to process
financial and operational information incorrectly.
The Company believes that virtually all of the Company's systems are now fully
compliant. Due to the fact that the Company's software manufacturer includes
the year 2000 upgrade as part of its ongoing maintenance, the Company expects
to expend a minimal amount of its resources in this area.
Although the Company expects its critical systems to be compliant, there is no
guarantee that these results will be achieved. Specific factors that give rise
to this uncertainty include a possible failure to identify all susceptible
systems, noncompliance by third parties whose systems and operations impact the
Company, and other similar uncertainties.
In addition to internal Year 2000 remediation activities, the Company is in
contact with key suppliers and customers to reduce the likelihood of any
significant interruption in the business between the Company and these
important third parties relating to the Year 2000 issue. A comprehensive
survey of all vendors and customers has not been made and is not presently
planned. The Company's efforts thus far have been focused on key vendors and
customers. If these third parties do not convert their systems in a timely
manner and in a way that is compatible with the Company's systems, the Year
2000 issue could have a material adverse effect on the Company's operations.
The Company believes that its actions with key suppliers and customers will
minimize these risks. The vast majority of the Company's products are not
date-sensitive. The Company has collected information on current and
discontinued date-sensitive products.
At this time, the Company does not have in place a comprehensive, global
contingency plan relative to potential Year 2000 disruptions. Rather, each
significant system with a potential problem either has been repaired and tested
or is being updated. Contingency plans for certain types of unforseen problems
are being developed.
Quantitative and Qualitative Disclosures About Market Risk
The Company's principle financial instrument is long-term debt (consisting of a
revolving credit and term loan facility) that provides for interest at a spread
above the prime rate. The Company is affected by market risk exposure primarily
through the effect of changes in interest rates on amounts payable by the
Company under this credit facility. A significant rise in the prime rate could
materially adversely affect the Company's business, financial condition and
results of operations. At September 30, 1999 an aggregate amount of
approximately $15,000,000 was outstanding under this credit facility with a
weighted average interest rate of 6.8%. If principal amounts outstanding under
this facility remained at this quarter-end level for an entire year and the
prime rate increased or decreased, respectively, by 1.25% the Company would pay
or save, respectively, an additional $187,500 in interest in that year. The
Company does not utilize derivative financial instruments to hedge against
changes in interest rates or for any other purpose.
Where appropriate, the Company requires that letters of credit be provided on
foreign sales. In addition, a significant number of transactions by the Company
are denominated in U.S. dollars. As such, the Company has shifted foreign
currency exposure onto its foreign customers. As a result, if exchange rates
move against foreign customers, the Company could experience difficulty
collecting unsecured accounts receivable, the cancellation of existing orders
or the loss of future orders. The foregoing could materially adversely affect
the Company's business, financial condition and results of operations.
-9-
<PAGE> 10
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Forward-looking Statements
This quarterly report, other than historical financial information, contains
forward-looking statements, as defined in the Private Securities Litigation
Reform Act of 1995, that involve a number of risks and uncertainties. Important
factors that could cause actual results to differ materially from those
indicated by such forward-looking statements are set forth in Item 1 of the
Company's annual report on Form 10-K for the year ended June 30, 1999. These
include risks and uncertainties relating to competition and technological
change, intellectual property rights, capital spending, international
operations, and the Company's acquisition strategies.
-10-
<PAGE> 11
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In August 1995, the Internal Revenue Service ("IRS") informed the
Company that it had completed the audit of the Company's Federal
tax returns for fiscal years 1986 through 1993. The IRS had 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 related to
intercompany pricing and royalty charges, DISC earnings and
charitable contributions. The Company disagreed with the IRS and
began the process of vigorously appealing this assessment using
all remedies and procedural actions available under the law. The
Company had provided a reserve to reflect its estimate of the
ultimate resolution of this matter, so that the outcome of this
matter would not have a material adverse effect on the Company's
consolidated financial statements.
During fiscal 1998, the Company continued to discuss the
assessment with the IRS Appeals Office and in July 1998 received a
revised audit report, which was subject to final government
administrative approval, and which reduced the original assessment
for the years covered by the IRS audit. The Company accepted the
revised audit report and the final government approval was pending
as of June 30, 1998. Accordingly, the Company determined that
$900,000 of previously recorded reserves should be reversed
through the 1998 income tax provision to reflect the expected
final settlement with respect to the IRS audit.
In fiscal 1999, the Company received the final government approval
on the IRS audit related to fiscal years 1986 through 1993. In
addition, the IRS completed its audits of fiscal years 1994
through 1997. As a result of the favorable outcome from the
audits, the Company reversed an additional $1,896,000 of
previously recorded reserves through the income tax provision in
fiscal 1999.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10(U) Employment agreement with Michael Carrieri
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the Company's fiscal
quarter ended September 30, 1999.
-11-
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 12, 1999
NAPCO SECURITY SYSTEMS, INC.
(Registrant)
By: /s/ Richard Soloway
-----------------------------------
Richard Soloway
Chairman of the Board of Directors,
President and Secretary
(Principal Executive Officer)
By: /s/ Kevin S. Buchel
------------------------------------
Kevin S. Buchel
Senior Vice President of Operations
and Finance and Treasurer
(Principal Financial and Accounting
Officer)
-12-
<PAGE> 13
INDEX TO EXHIBITS
Exhibits
10(U) Employment Agreement with Michael Carrieri
27 Financial Data Schedule
-13-
<PAGE> 1
EMPLOYMENT AGREEMENT
This AGREEMENT is made this 27th day of July 1999, by and between Napco
Security Systems, Inc. and/or its related subsidiaries and/or affiliates (herein
referred to collectively as "NAPCO"), a Delaware corporation having its
principle place of business at 333 Bayview Avenue, Amityville, New York 11701
and Michael Carrieri (hereinafter "EXECUTIVE") residing at .
WHEREAS, NAPCO desires to employ EXECUTIVE as Vice President of
Engineering Development and EXECUTIVE desires to be employed by NAPCO.
NOW THEREFORE:
I. EMPLOYMENT:
Subject to the terms and conditions hereinafter set forth, NAPCO hereby
employs EXECUTIVE and EXECUTIVE agrees to be employed by NAPCO as its Vice
President of Engineering Development. EXECUTIVE agrees to devote his full time
and best efforts to the business of NAPCO.
II. DUTIES:
EXECUTIVE shall, during the continuance of his employment hereunder:
(a) Devote the whole of his time and attention and abilities
to the business of NAPCO during regular working hours and at such other
times as may
<PAGE> 2
be necessary;
(b) Perform such duties as are usually performed by an
EXECUTIVE serving in his capacity and such other duties as may be
assigned to him from time to time by the Chairman of NAPCO;
(c) Use his best efforts to promote the business of NAPCO; and
(d) Perform his duties subject to the direction of the
Chairman of NAPCO.
III. COMPENSATION:
For the services to be rendered under this AGREEMENT, NAPCO agrees to
pay the EXECUTIVE the following compensation:
(a) SALARY - An annual salary of $150,000.00 subject to annual
reviews and compensation adjustments hereinafter on the anniversary
date of the commencement of employment. Upon being promoted to Senior
Vice President of Engineering Development (anticipated to occur
approximately May 2000 depending on performance), EXECUTIVE's annual
salary will be increased to $160,000.00. The annual salary will be paid
periodically in accordance with NAPCO's standard payroll practices,
which is presently on a weekly basis.
(b) BONUS PLAN - A bonus of $30,000.00 may be earned by
2
<PAGE> 3
EXECUTIVE based on getting each of the new products on the Phoenix #1
program into the shipping department on or before March 2000, and by
getting the Phoenix #2 Program products into the shipping department by
August 2000. The $30,000.00 could be prorated to reflect the portions
of the Phoenix #1 and Phoenix #2 programs that are already shipped by
March 2000 and the August 2000 dates. But it is understood that
shipping 100% of the products of the Phoenix #1 and #2 programs by
March 2000 and August 2000 respectively are the goals.
In addition, the EXECUTIVE will receive $5,000.00 for meeting
the Engineering budget for the fiscal year ending June 30, 2000.
(c) STOCK OPTIONS - 15,000 stock options, in accordance with
NAPCO's Incentive Stock Option Plan, will be awarded to EXECUTIVE upon
employment, at the fair market value price of NAPCO stock (Nasdaq:
"NSSC") at that time. These stock options will be recorded according to
regulations set forth by the Securities and Exchange Commission ("SEC")
and/or other government entities. EXECUTIVE will also receive an
additional 10,000 stock options upon being promoted to Senior Vice
President of Engineering Development. Thereafter, future stock options
may be granted based on performance.
(d) SEVERANCE AND HEALTH INSURANCE - In consideration for
3
<PAGE> 4
EXECUTIVE entering a new industry, upon any termination of employment
not based on cause, EXECUTIVE will be entitled to severance pay
equaling six (6) months' salary and continued health insurance for a
period of six (6) months. The payment of any such severance or
continued health insurance will be paid according to the same payment
schedule as if EXECUTIVE was still employed during that time frame.
(e) VACATION - EXECUTIVE will be granted three (3) weeks'
vacation time.
(f) 401(K) PLAN - NAPCO will provide EXECUTIVE with 401(k)
benefits in accordance with the terms and conditions of its corporate
plan in effect.
IV. RESTRICTIVE COVENANTS:
(a) EXECUTIVE acknowledges that technical, financial and other
confidential information of NAPCO or any third party with which NAPCO
is in technical or commercial cooperation, or which EXECUTIVE may
obtain knowledge in the course of and by virtue of his employment,
constitutes valuable and confidential assets and that unauthorized
disclosure or utilization thereof would be detrimental to NAPCO.
EXECUTIVE therefore agrees that he will not
4
<PAGE> 5
disclose or utilize, either during his employment or thereafter, any
such technical or other confidential information, without first
obtaining NAPCO's written consent thereto, except as such disclosure or
utilization may be required by EXECUTIVE's service to NAPCO or by law.
(b) All trade secrets and proprietary information including,
but not limited to, all formulas, patterns, designs, sales and business
plans, plant secrets, processes, methods for determination of costs,
customer lists, and other confidential secrets, or internal information
which heretofore have been or hereafter may be conceived by or
disclosed to EXECUTIVE in the course of EXECUTIVE's employment, shall
at all times be and remain the sole and exclusive property of NAPCO,
except as required by law or by EXECUTIVE's employment at NAPCO, and
shall be kept confidential by EXECUTIVE and not be utilized personally
be EXECUTIVE or divulged by EXECUTIVE to any third party or company.
(c) All inventions, improvements, patent pendings, ideas
concerning patents or improvements relating thereto (collectively
hereinafter referred to as "Inventions") which EXECUTIVE solely, or
with others, receives or reduces to practice or may conceive in the
course of such employment or with the use of NAPCO time, material or
facilities, or relating to any subject matter with which
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<PAGE> 6
my work for NAPCO is or may be concerned or reduced to practice during
the term of my employment by NAPCO, shall be the sole property of
NAPCO.
(d) EXECUTIVE shall promptly disclose in writing to NAPCO and
maintain adequate and current written records of such Inventions, in
the form of notes, sketches, drawings or reports, which shall be the
property of NAPCO, shall specifically assign to NAPCO all such
Inventions and shall executed all papers and perform all other lawful
acts which NAPCO deems necessary or advisable for the preparation and
prosecution of patent applications and the procurement and maintenance
of United States and foreign patents and for the transfer of interests
therein to NAPCO. It is understood and agreed that all expenses
incurred with respect to the obligations of this paragraph shall be by
NAPCO or its nominee. EXECUTIVE shall make no other application for
intellectual property relating to such Inventions without the express
written approval of NAPCO.
(e) EXECUTIVE shall not make or permit to be made, except
pursuant to his duties hereunder and for the sole use and account of
NAPCO, any papers or documents, including drawings and records of
research, made by EXECUTIVE or at EXECUTIVE's directions or which may
come into EXECUTIVE's possession in any way, and EXECUTIVE shall
deliver to NAPCO on the termination of employment, all such materials
in EXECUTIVE'S
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<PAGE> 7
possession.
(f) EXECUTIVE agrees that during the term of employment
hereunder, he will not, except with the prior written consent of NAPCO,
directly or indirectly engage in, or accept any position as an agent,
employee, officer or director of, or consult, advise with, invest in,
or otherwise in any way give assistance to aid any person, firm or
corporation (or any of their related entities) in the security alarm,
fire alarm, security lock, security hardware or entry access products
industry either as a manufacturer, installer and/or distributor. For a
period of three (3) years after the termination of EXECUTIVE's
employment hereunder, he will not, without the prior written consent of
NAPCO, directly or indirectly engage in, or accept any position as
agent, employee, officer or director of, or consult, advise with,
invest in (except in insignificant amounts) or otherwise in anyway give
assistance or aid to any person, firm, or corporation (or any of their
related entities) engaging in business which relates directly or
indirectly with the business of NAPCO or which would be competitive or
a competitive substitute with any product(s) or product lines in the
security alarm, fire alarm, security lock, security hardware or entry
access products industry either as a manufacturer, installer, and/or
distributor of which NAPCO was involved with at the time of termination
of EXECUTIVE's employment hereunder. This provision applies to any
aforementioned affiliation of EXECUTIVE to any person, firm, or
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<PAGE> 8
corporation (or any of their related entities) engaging in business
which relates directly or indirectly with the business of NAPCO or
which would be competitive or a competitive substitute with any
product(s) or product lines in the security alarm, fire alarm, security
lock, security hardware or entry access products industry either as a
manufacturer, installer, and/or distributor which is conducting any
business in the United States of America. EXECUTIVE explicitly
acknowledges the reasonableness of the scope of this paragraph in view
of the fact that EXECUTIVE was never previously engaged in any
businesses relating to NAPCO, and in view of the fact that EXECUTIVE's
position at NAPCO will enable him to become privy to significant and
sensitive information.
(g) EXECUTIVE covenants and agrees that so long as he is in
the employ of NAPCO and after leaving the employ of NAPCO, he will not
directly or indirectly disclose, communicate, divulge or furnish to or
use for the benefit of himself (except while he is in the employ solely
and in the pursuit of the activities of NAPCO) or any other person,
firm or corporation, any other of the trade secrets, designs,
improvements, marketing plans, inventions of NAPCO belonging to NAPCO,
or the designs, or processes of distribution, or processes of
manufacture of any product or article sold or distributed by NAPCO,
which EXECUTIVE may learn by virtue by his activities or which he may
develop for NAPCO.
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<PAGE> 9
V. EXCEPTION TO SECTION IV:
Based on EXECUTIVE's representation that he has conceived an
invention in the field of telephone answering machines ("the
Invention") that is unrelated to NAPCO's business, the parties agree to
exclude the Invention from the obligations of Section IV herewith. In
order to avoid any future disputes as to the nature and scope of the
Invention and to avoid disclosure of the Invention at this time,
EXECUTIVE has agreed to provide Attachment A hereto which is a sealed
envelope that EXECUTIVE represents contains a written description of
the Invention. NAPCO agrees not to unseal Attachment A unless either
authorized by EXECUTIVE to do so or if a dispute arises under this
Section.
In order to avoid any potential conflict of interest,
EXECUTIVE agrees not to directly market his Invention or any patent
received thereon to any known customer or vendor of NAPCO without prior
authorization from NAPCO's Chairman of the Board.
VI. REMEDIES:
The parties hereto recognize that, in the event of any breach or
threatened breach by the EXECUTIVE of the provisions of Section IV hereunder of,
NAPCO will suffer irreparable injury in connection with which damages would be
difficult, if not impossible, to ascertain and it is therefore agreed that
NAPCO, in addition to and without limiting any other remedy or right it may have
under this AGREEMENT, or at law or in equity, shall be entitled to an injunction
9
<PAGE> 10
against the EXECUTIVE issued by any court of competent jurisdiction enjoining
any such breach or threatened breach.
VII. EFFECT OF WAIVER:
The waiver by either party of a breach of any provision of this
AGREEMENT shall not operate or be construed as a waiver of any subsequent breach
thereof.
VIII. NOTICE:
Any and all notices referred to hereunder shall be sufficient if
furnished in writing and sent by registered or certified mail to the parties at
the addresses given herein, or to such other addresses as may hereafter be
designated by notice in writing given in accordance with the provisions of this
paragraph.
IX. GOVERNING LAW:
The parties agree that this AGREEMENT shall be governed, interpreted
and construed in accordance with the substantive laws of the State of New York.
X. SEVERABILITY:
If any provision of this AGREEMENT shall, to any extent, be deemed
invalid or unenforceable, the remainder of this AGREEMENT shall not be affected,
and each term shall be valid and shall be enforced to the extent permitted by
law.
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<PAGE> 11
XI. AMENDMENTS TO AGREEMENT:
No amendment of this AGREEMENT shall be effective unless reduced to
writing and executed by a duly authorized officer of NAPCO and by EXECUTIVE.
XII. TERM:
This AGREEMENT shall be for a term of two years from the first date of
employment and may be renewed upon mutual written agreement by the parties. The
AGREEMENT will be reviewed with respect to a possible renewal one (1) year prior
to its expiration date. However, nothing in this provision requires NAPCO to pay
severance greater than that established in Section III.
XIII. TERMINATION OF EMPLOYMENT:
In the event that EXECUTIVE voluntarily leaves the employ of employer
without cause or he is terminated with cause, all benefits of this AGREEMENT
shall cease.
XIV. MISCELLANEOUS:
This AGREEMENT is to be read in conjunction with the rights and
obligations presented in NAPCO's Salaried Employee Handbook. Furthermore,
nothing in this AGREEMENT is intended or should be interpreted to circumvent any
obligations applicable to NAPCO pursuant to federal, state or local laws.
11
<PAGE> 12
Napco Security Systems, Inc. EXECUTIVE
By: /s/ Richard L. Soloway /s/ Michael Carrieri
- --- ---------------------- --------------------
Richard L. Soloway Michael Carrieri
Chairman of the Board
Dated: 7/15/99 Dated: 7/26/99
12
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