-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CGAIUh0E4d9fyFzFAz01xNhWHKqR4EdbvCJ+TfrXyCXB/QLXusYjip3fcZEMir1I VD/tNGhu+M3X55IW86Pmdg== 0000950123-04-001402.txt : 20040209 0000950123-04-001402.hdr.sgml : 20040209 20040209140625 ACCESSION NUMBER: 0000950123-04-001402 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20040209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAPCO SECURITY SYSTEMS INC CENTRAL INDEX KEY: 0000069633 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 112277818 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10004 FILM NUMBER: 04577092 BUSINESS ADDRESS: STREET 1: 333 BAYVIEW AVE CITY: AMITYVILLE STATE: NY ZIP: 11701 BUSINESS PHONE: 5168429400 MAIL ADDRESS: STREET 1: 333 BAYVIEW AVE STREET 2: XXXXXXXXXXXXXXXXXXX CITY: AMITYVILLE STATE: NY ZIP: 11701 10-K 1 y93828e10vk.txt NAPCO SECURITY SYSTEMS, INC. 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 [No Fee Required] For the fiscal year ended June 30, 2003 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: (631) 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 [ ] No [X] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No As of December 31, 2002, the aggregate market value of the stock based upon the last sale price of the stock on such date held by non-affiliates was $16,757,522. As of January 15, 2004 3,207,616 shares of common stock were outstanding. Documents Incorporated by Reference: None. 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. [ ] 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 Access Control Systems. Access control systems consist of one or more of the following: various types of identification readers (e.g. card readers, hand scanners, etc.), a control panel, a PC-based computer and electronically activated door-locking devices. When an identification card or other identifying information is entered into the reader, the information is transmitted to the control panel/PC which then validates the data and determines whether to grant access or not by electronically deactivating the door locking device. An electronic log is kept which records various types of data regarding access activity. The Company designs, engineers and markets the software and control panels discussed above. It also buys and resells various identification readers, PC-based computers and various peripheral equipment for access control systems. 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 pre-designated 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 -2- types of communication devices. For marketing purposes, the Company refers to its control panels by the trade name, generally "Gemini(TM)" and "Magnum Alert(TM)" followed by a numerical designation. Combination Control Panels/Digital Communicators and Digital Keypad 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 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 microcomputer function, as well as the reliability and ease of installation gained from the simplicity and sophistication of micro-computer technology. Door Security Devices. The Company manufactures a variety of exit alarm locks including simple dead bolt locks, door alarms and microprocessor-based electronic door locks with push button and card reader operation. 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 infrared heat detectors and combination microwave/passive infrared detectors that are linked to alarm control panels. Passive infrared 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, 2003, 2002, and 2001, the Company expended approximately $4,516,000, $4,239,000 and $4,220,000, respectively, on Company-sponsored research and development activities 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, 2003, the Company had approximately 874 full-time employees. -3- Marketing and Major Customers The Company's staff of 59 sales and marketing support employees located at the Company's Amityville and United Kingdom offices sells and 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 76% and 80% of the Company's total sales for the fiscal year ended June 30, 2003 and 2002, respectively. 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 and European cities. Some of the Company's products are marketed under the "private label" of certain customers. Sales to one distributor customer unaffiliated with the Company (Customer A) accounted for approximately 19%, 17%, and 18% of the Company's total sales for the fiscal years ended June 30, 2003, 2002, and 2001, respectively (see Note 3 to Consolidated Financial Statements). During the second quarter of fiscal 2004, the Company began the process of realigning its burglar alarm products distribution network which culminated in the termination of this distributor customer. The Company reallocated its burglar alarm products business across its extensive national network of independent distributors. The Company therefore does not believe that the termination of this distributor customer will have a material adverse effect on its business. The Company had two customers (Customers A and B) with accounts receivable balances that aggregated 44% and 43% of the Company's accounts receivable at June 30, 2003 and 2002 respectively. There were no accounts receivable due from Customer A referred to in the previous paragraph at the time the relationship with such distributor customer was terminated. Competition The security alarm products industry is highly competitive. The Company's primary competitors are comprised of approximately 20 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 pricing 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, its 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 -4- 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 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 Sales 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 sales backlog of approximately $226,000 existed as of June 30, 2003. This compared to a sales backlog of approximately $1,055,000 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 and Trademarks 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 or trademarks. -5- Foreign Sales The revenues and identifiable assets attributable to the Company's domestic and foreign operations for its last three fiscal years, are summarized in the following tabulation: Financial Information Relating to Domestic and Foreign Operations
2003 2002 2001 ------- ------- ------- (in thousands) Sales to external customers(1): Domestic $47,965 $46,652 $44,819 Foreign 9,375 9,184 9,952 ------- ------- ------- Total Net Sales 57,340 55,836 54,771 Identifiable assets: United States $39,005 $40,955 $38,282 Dominican Republic(2) 15,691 17,035 21,187 Other foreign countries 2,653 2,762 4,208
- ------------------- (1) All of the Company's sales occur in the United States and are shipped primarily from the Company's facilities in the United States and United Kingdom. There were no sales into any one foreign country in excess of 10% of total Net Sales. (2) Identifiable assets consist primarily of inventories and fixed assets located at the Company's principal manufacturing facility in the Dominican Republic. ITEM 2. PROPERTIES. The Company owns 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 completed construction on this facility in 1988 with the proceeds from industrial revenue bonds that have since been retired. The Company also leased approximately 3,000 square feet of warehouse space in Sparks, Nevada. This lease was terminated by the Company during fiscal 2003. The Company's foreign subsidiary located in the Dominican Republic, NAPCO/Alarm Lock Grupo International, S.A. (formerly known as NSS Caribe, S.A.), owns a building of approximately 167,000 square feet of production and warehousing space in the Dominican Republic. That subsidiary also leases the land associated with this building under a 99-year lease expiring in the year 2092. As of June 30, 2003, a majority of the Company's products were manufactured at this facility, utilizing U.S. quality control standards. The Company's foreign subsidiary located in the United Kingdom, Napco Group Europe Ltd, leases office and warehouse space of approximately 10,000 square feet. This lease expires in June 2010. Management believes that these facilities are more than adequate to meet the needs of the Company in the foreseeable future. -6- 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, except: As previously reported, on or about August 27, 2001, a five-count Verified Complaint was filed against NAPCO Security Group and Alarm Lock Systems, Inc. by Jose Ramirez and Glenda Ramirez in the Supreme Court of State of New York, County of the Bronx. The Verified Complaint seemingly seeks fifteen million dollars ($15,000,000) in damages on behalf of Mr. Ramirez based on theories including strict liability in tort, negligence, breach of warranty, failure to warn, etc. The Verified Complaint also seeks damages in the amount of two million dollars ($2,000,000) on behalf of Ms. Ramirez based on an allegation that she has been, and forever will be, "deprived of the society, services, companionship consortium and support of" Mr. Ramirez based on the personal injuries he suffered in a fire which purportedly occurred on November 5, 1999. This case was consolidated with the related case concerning the same incident, captioned Jose Ramirez and Glenda Ramirez v. Mark T. Miller, Chelsea Gardens Owners Corp., Eichner Rudd Management Associates, Ltd., Napco Security Group and Alarm Lock Systems, Inc., asserting the same claims against the Company. The action is being defended by NAPCO's insurance company on behalf of NAPCO. The Alarm Lock product in question has been tested and still functions correctly, and the Company believes that action is without merit. NAPCO plans to have this action vigorously defended. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 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. -7- 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.
Quarter Ended ------------- Fiscal 2003 Fiscal 2004 ----------- ----------- Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- -------- ------- Common Stock High $9.24 $10.19 $10.20 $9.47 $9.75 $8.95 Low $5.58 $ 8.60 $ 7.61 $7.50 $8.55 $7.25
Quarter Ended Fiscal 2002 Sept. 30 Dec. 31 March 31 June 30 -------- ------- -------- ------- Common Stock High $5.95 $6.91 $5.99 $7.22 Low $4.75 $5.00 $5.16 $5.62
Approximate Number of Security Holders The number of holders of record of NAPCO's Common Stock as of January 16, 2004 was 161 (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. Any dividends must be authorized by the Company's primary lender. -8- ITEM 6. SELECTED FINANCIAL DATA. The table below summarizes selected financial information. For further information, refer to the audited consolidated financial statements and the notes thereto beginning on page FS-1 of this report.
Fiscal Year Ended or at June 30 ----------------------------------------------------------------------- (In thousands, except share data) 2003* 2002*(1) 2001* 2000 1999 ---- ---- ---- ---- ---- (Restated) Statement of Earnings Data: Net Sales $ 57,340 $ 55,836 $ 54,771 $ 53,946 $ 50,875 Gross Profit 15,401 14,717 14,317 13,198 11,777 Income from Operations 2,225 2,817 1,859 3,122 1,911 Net Income(4) 1,010 1,575 251 2,010 2,493 Cash Flow Data: Net cash flows provided by $ 6,482 $ 7,091 $ 1,326 $ 2,822 $ 2,926 operating activities Net cash flows used in investing (752) (709) (8,283) (1,221) (1,050) activities Net cash flows (used in) provided by (5,436) (5,919) 5,610 (1,447) (1,635) financing activities Per Share Data: Net earnings per common share: Basic $ .30 $ .47 $ .07 $ .57 $ .71 Diluted $ .28 $ .45 $ .07 $ .57 $ .71 Weighted average common shares outstanding: Basic 3,332,000 3,342,000 3,464,000 3,495,000 3,493,000 Diluted 3,584,000 3,492,000 3,527,000 3,513,000 3,512,000 Cash Dividends declared per common share (2) $ .00 $ .00 $ .00 $ .00 $ .00
- ------------- * includes results of Continental Instruments, LLC which was acquired in July, 2000. -9-
Fiscal Year Ended or at June 30 ------------------------------------------------------------------ (In thousands, except share data) 2003 2002(1) 2001 2000 1999 ---- ---- ---- ---- ---- (Restated) Balance Sheet Data(3): Working capital $28,843 $31,812 $33,232 $35,280 $34,920 Total assets 57,349 60,752 63,677 55,529 55,787 Long-term debt 14,100 16,588 21,567 16,183 17,241 Stockholders' equity 33,357 34,528 32,944 33,359 31,328
- --------------------- (1) See footnote 1 to consolidated financial statements. (2) The Company has never paid a dividend on its common stock. It is the policy of the Board of Directors to retain earnings for use in the Company's business. Any dividends must be authorized by the Company's primary lender. (3) Working capital is calculated by deducting Current Liabilities from Current Assets. (4) Net income results through 2001 included Amortization Expense related to goodwill. See note 1 to Consolidated Financial Statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently actual results could differ from those estimates. Our most critical accounting policies relate to revenue recognition; concentration of credit risk; inventory; goodwill; and income taxes. REVENUE RECOGNITION Revenues from merchandise sales are recorded at the time the product is shipped or delivered to the customer pursuant to the terms of purchase. We report our sales levels on a net sales basis, which is computed by deducting from gross sales the amount of actual returns received and an amount established for anticipated returns and allowances. Our sales return accrual is a subjective critical estimate that has a direct impact on reported net sales. This accrual is calculated based on a history of gross sales and actual sales returns, as well as management's estimate of anticipated returns and allowances. As a percentage -10- of gross sales, sales returns and allowances were 10%, 7% and 8% in fiscal 2003, 2002 and 2001, respectively. CONCENTRATION OF CREDIT RISK An entity is more vulnerable to concentrations of credit risk if it is exposed to risk of loss greater than it would have had it mitigated its risk through diversification of customers. Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance. We had one major distributor customer that accounted for approximately $11,117,000 or 19%, of our consolidated net sales in fiscal 2003 and $3,787,000 or 22%, of our accounts receivable at June 30, 2003. This distributor customer sells products primarily within North America to several thousand alarm dealers. During the second quarter of fiscal 2004, the Company began the process of realigning its burglar alarm products distribution network which culminated in the termination of this distributor customer. The Company reallocated its burglar alarm products business across its extensive national network of independent distributors to improve service to its alarm dealers. The Company therefore does not believe that the termination of this distributor customer will have a material adverse effect on net sales, cash flows, and/or financial condition. There were no accounts receivable due from this distributor customer at the time the relationship with such distributor customer was terminated. A second major customer accounted for approximately $3,878,000, or 22% of our accounts receivable at June 30, 2003. In the ordinary course of business, we have established an allowance for doubtful accounts and customer deductions in the amount of $215,000 and $393,000 as of June 30, 2003 and 2002, respectively. Our allowance for doubtful accounts is a subjective critical estimate that has a direct impact on reported net earnings. This reserve is based upon the evaluation of accounts receivable agings, specific exposures and historical trends. INVENTORY We state our inventory at the lower of cost or fair market value, with cost being determined on the first-in, first-out (FIFO) method. We believe FIFO most closely matches the flow of our products from manufacture through sale. The reported net value of our inventory includes finished saleable products, work-in-process and raw materials that will be sold or used in future periods. Inventory cost includes raw materials, direct labor and overhead. We also record an inventory obsolescence reserve, which represents the difference between the cost of the inventory and its estimated market value, based on various product sales projections. This reserve is calculated using an estimated obsolescence percentage applied to the inventory based on age, historical trends and requirements to support forecasted sales. In addition, and as necessary, we may establish specific reserves for future known or anticipated events. -11- GOODWILL Goodwill is calculated as the excess of the cost of purchased businesses over the value of their underlying net assets. Commencing July 1, 2001, goodwill is no longer amortized. In June 2001, Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" were issued. These Statements establish financial accounting and reporting standards for acquired goodwill and other intangible assets. Specifically, the standards address how acquired intangible assets should be accounted for both at the time of acquisition and after they have been recognized in the financial statements. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, early application is permitted for entities with fiscal years beginning after March 15, 2001. The Company adopted this standard effective July 1, 2001 and, accordingly, those intangible assets that will continue to be classified as goodwill or as other intangibles with indefinite lives are no longer being amortized. This resulted in the exclusion of approximately $503,000 in amortization expense for the fiscal years ending June 30, 2003 and June 30, 2002. In accordance with SFAS No. 142, intangible assets, including purchased goodwill, will be evaluated periodically for impairment. On an annual basis, we test goodwill and other intangible assets for impairment. To determine the fair value of these intangible assets, there are many assumptions and estimates used that directly impact the results of the testing. We have the ability to influence the outcome and ultimate results based on the assumptions and estimates we choose. To mitigate undue influence, we use industry accepted valuation models and set criteria that are reviewed and approved by various levels of management. Additionally, we evaluate our recorded goodwill with the assistance of a third-party valuation firm. 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 (benefit) for income taxes represents U.S. Federal, State and foreign taxes. Through June 30, 2001, the Company's subsidiary in the Dominican Republic, Napco/Alarm Lock Group International, S.A. ("Napco DR"), was not subject to tax in the United States, and as a result, no taxes were provided. Effective July 1, 2001, the Company made a domestication election for Napco DR. Accordingly, its income will be subject to taxation in the United States on a going forward basis. In March 2003, Napco Security Systems, Inc. timely filed its income tax return for the fiscal year ended June 30, 2002. This return included an election to treat one of the Company's foreign subsidiaries as if it were a domestic corporation beginning July 1, 2001. This election is based on a recently enacted Internal Revenue Code ("Code") provision. As a result of this election, this subsidiary is treated, for Federal income tax purposes, as transferring all of its assets to a domestic corporation in connection with an exchange. Although this type of transfer usually results in the recognition of taxable income to the extent of any untaxed earnings and profits, the -12- recently enacted Code provision provides an exemption for applicable corporations. The Company qualifies as an applicable corporation per this Code section, and based on this Code exemption, the Company's tax return treated the transfer of approximately $27,000,000 of this subsidiary's untaxed earnings and profits as nontaxable. The Internal Revenue Service has issued a Revenue Procedure that is inconsistent with the Code exemption described above. Management believes that it has appropriately relied on the guidance in the Code when filing its income tax return. Nevertheless, as of June 30, 2002, the Company has removed the $2,225,000 deferred tax asset related to its net operating loss carryforward ("NOL") of $6,545,000. The NOL would have expired through 2017. As a result of the utilization of the NOL for book purposes, the Company has also eliminated the valuation reserve of $2,913,000 during the year ended June 30, 2002. The Company's tax provision utilizes estimates made by management and as such is subject to change as described in note 1 to the Consolidated Financial Statements. Liquidity and Capital Resources The Company's cash on hand combined with proceeds from operating activities during fiscal 2003 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 $18,000,000 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, 2003, the Company's unused sources of funds consisted principally of $1,794,000 in cash and approximately $6,487,000 which represents the unused portion of its secured revolving credit facility. The Company's management believes that current working capital, cash flows from operations and its revolving credit agreement will be sufficient to fund the Company's operations through at least the first quarter of fiscal 2005. In May 2001, the Company amended its secured revolving credit agreement with its primary bank. The Company's borrowing capacity under the amended agreement was increased to $18,000,000. The amended revolving credit agreement is 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 and common stock of three of the Company's subsidiaries. The revolving credit agreement bears interest at either the Prime Rate less 1/4% or an alternate rate based on LIBOR as described in the agreement. The revolving credit agreement will expire in January, 2005 and any outstanding borrowings are to be repaid or refinanced on or before that time. The Company plans to refinance this agreement prior to its expiration. 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. During fiscal 2003, at certain dates the Company was not in compliance with certain covenants, but received waivers and amendments from its bank. As of June 30, 2003, the Company was not in compliance with one covenant related to the agreement described above for which it has received a waiver from its bank. -13- 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 pursuant to an interest-bearing note. The portion of the purchase price paid at closing was financed by the Company's primary bank and was repaid over a five (5) year period. At the closing, Mr. Rosenberg retired as President and Director of the Company but is 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. In November 2000 the Company adopted a stock repurchase program. As amended, this program authorizes the Company to repurchase up to 205,000 shares of its common stock. As of June 30, 2003 the Company had repurchased 202,605 shares under this program. In January 2003, the Company repurchased 250,000 shares of its common stock from two shareholders, unaffiliated with the Company, at $9.75 per share, a discount from its then current trading price of $10.01. The transaction was approved by the board of directors and the purchase price of $2,437,500 was financed through the Company's revolving line of credit and a new five (5) year term loan from its primary lender for $1,250,000. This term loan is being repaid in 60 equal monthly installments commencing on April 30, 2003. The Company takes into consideration a number of factors in measuring its liquidity, including the ratios set forth below:
2003 2002 2001 ---- ---- ---- Current Ratio 4.2 to 1 4.5 to 1 4.7 to 1 Sales to Receivables 3.3 to 1 3.0 to 1 3.2 to 1 Total Debt to Equity .5 to 1 .6 to 1 .8 to 1
As of June 30, 2003, the Company had no material commitments for purchases or capital expenditures, except as discussed below. On April 26, 1993, the Company's foreign subsidiary entered into a 99-year land lease of approximately 4 acres of land in the Dominican Republic, at an annual cost of approximately $288,000. On July 27, 2000, the Company signed an Asset Purchase Agreement to acquire the net assets of Continental Instruments, LLC ("Continental") for an purchase price of $7,522,500 in cash, less subsequent purchase price adjustments of approximately $460,000, plus future deferred payments of $1,700,000 in cash to be paid over 24 months. The Company financed the transaction with borrowings under a 60 Month Installment loan of $8,250,000. Continental designs and sells access control and other security control systems to dealers and distributors worldwide. -14- The acquisition described above has been accounted for as a purchase and was valued based on management's estimate of the fair value of the assets acquired and liabilities assumed. Costs in excess of net assets acquired of approximately $7,768,000 have been allocated to goodwill. Working Capital. Working capital decreased by $2,969,000 to $28,843,000 at June 30, 2003 from $31,812,000 at June 30, 2002. The decrease in working capital was primarily the result of debt reduction and purchase of treasury stock, as well as the reduction in inventory and in Accounts Receivable as of June 30, 2003 as compared to June 30, 2002. These reductions resulted primarily from Company's improved management of its inventory and the reduction in Accounts Receivable as discussed below. Working capital is calculated by deducting Current Liabilities from Current Assets. Accounts Receivable. Accounts Receivable decreased by $888,000 to $17,425,000 at June 30, 2003 from $18,313,000 at June 30, 2002. This decrease resulted primarily from the timing of payments from some of the Company's customers and the decrease in 4th quarter sales in fiscal 2003 as compared to the same period in fiscal 2002. Inventory. Inventory decreased by $2,041,000 to $16,922,000 at June 30, 2003 as compared to $18,963,000 at June 30, 2002. The decrease in inventory levels was primarily the result of the Company's improvement in production and delivery scheduling. Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses increased by $177,000 to $5,186,000 as of June 30, 2003 as compared to $5,009,000 at June 30, 2002. This increase was due primarily to the timing of component part purchases closer to year end during fiscal 2003 as compared to fiscal 2002. Results of Operations Fiscal 2003 Compared to Fiscal 2002 Net Sales. Net sales in fiscal 2003 increased by 3% to $57,340,000 from $55,836,000 in fiscal 2002. The Company's sales growth was due primarily to increased domestic sales volume in the Company's burglar alarm product line. Gross Profit. The Company's gross profit increased $684,000 to $15,401,000 or 26.9% of net sales in fiscal 2003 as compared to $14,717,000 or 26.4% of net sales in fiscal 2002. The increase in gross profit in both absolute dollars and as a percentage of net sales was due primarily to the increase in sales as discussed above. Gross profit was also positively impacted by cost reductions of certain of the Company's raw material costs. Expenses. Selling, general and administrative expenses increased by 11% to $13,176,000, or 23% of net sales in fiscal 2003 from $11,900,000, or 21% of net sales in fiscal 2002. This increase was due primarily to additional investment in the Company's sales force, primarily in the international and access control areas. -15- Other Expenses. Other expenses decreased $858,000 to $600,000 in fiscal 2003 as compared to $1,458,000 in fiscal 2002. This decrease was due primarily to the decrease in interest expense resulting from the Company's continued reduction of the outstanding principal on its outstanding debt as well as a decline in interest rates available to the Company. In addition, during the quarter ended September 30, 2002, the Company settled litigation which it had initiated as the plaintiff and realized a gain of approximately $210,000. This gain was recorded as Other Income during the quarter ended September 30, 2002. Income Taxes. Benefit for income taxes changed by $831,000 to a provision of $615,000 in fiscal 2003 as compared to a benefit of $216,000 in fiscal 2002. The current year income tax provision relates primarily to the Company electing to treat its main foreign subsidiary as a U.S. Company for book and tax purposes. Prior Period Adjustment The Company's financial statements for the year ended June 30, 2002 have been restated to reflect an adjustment of its income tax provision related to the taxation of one of the Company's foreign subsidiaries, Napco DR. As further described in Note 6 to The Consolidated Financial Statements, in March 2003, the Company made an election with the filing of its income tax return for the fiscal year ended June 30, 2002. As a result, the tax provision and related deferred tax balance sheet accounts have been restated. See Note 1 to the Consolidated Financial Statements. Fiscal 2002 Compared to Fiscal 2001 Net Sales. Net sales in fiscal 2002 increased by 2% to $55,836,000 from $54,771,000 in fiscal 2001. The Company's sales growth was due primarily to increased sales in the Company's Continental access control product line, which was acquired in July 2000. Gross Profit. The Company's gross profit increased $400,000 to $14,717,000 or 26.4% of net sales in fiscal 2002 as compared to $14,317,000 or 26.1% of net sales in fiscal 2001. The increase in gross profit in both absolute dollars and as a percentage of net sales was due primarily to the increase in sales of the Continental access control products as well the positive shift in product mix due to the higher margins associated with, in general, the Continental product lines. Gross profit was also positively impacted by cost reductions of certain of the Company's raw material costs. Expenses. Selling, general and administrative expenses decreased by 5% to $11,900,000 in fiscal 2002 from $12,458,000 in fiscal 2001. This decrease was due primarily to the elimination of approximately $503,000 of amortization expense relating to Goodwill as described above. Other Expenses. Other expenses decreased $175,000 to $1,458,000 in fiscal 2002 as compared to $1,633,000 in fiscal 2001. This decrease was due primarily to the decrease in interest expense resulting from the Company's continued reduction of the outstanding principal on its outstanding debt. Other income in fiscal 2001 included an insurance settlement of approximately $175,000. Income Taxes. Benefit for income taxes changed by $191,000 to a benefit of $216,000 in fiscal 2002 as compared to a benefit of $25,000 in fiscal 2001. The current year income tax benefit relates primarily to the Company's foreign operations in the Dominican Republic. The prior year income tax benefit of $25,000 related primarily to revisions to the Company's estimated valuation allowance on deferred income taxes. -16- FORWARD-LOOKING INFORMATION This Annual Report on Form 10-K and the information incorporated by reference may include "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. The Company intends the Forward-Looking Statements to be covered by the Safe Harbor Provisions for Forward-Looking Statements. All statements regarding the Company's expected financial position and operating results, its business strategy, its financing plans and the outcome of any contingencies are Forward-Looking Statements. The Forward-Looking Statements are based on current estimates and projections about our industry and our business. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," or variations of such words and similar expressions are intended to identify such Forward-Looking Statements. The Forward-Looking Statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by any Forward-Looking Statements. Factors that could cause actual results to differ materially from the Forward-Looking Statements include, but are not limited to, inability to refinance, adverse tax consequences of offshore of operations, distribution problems, unforeseen environmental liabilities and the uncertain military, political and economic conditions in the world. These and other risks are detailed in Part I, Item 1 and elsewhere in this Form 10-K. The Company assumes no obligation to update publicly the Forward-Looking Statements contained herein, whether as a result of new information, future events or otherwise, except as may be required by law. Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's principal financial instrument is long-term debt (consisting of a revolving credit and term loan facility) that provides for interest at a spread below 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 June 30, 2003, an aggregate principal amount of approximately $15,000,000 was outstanding under the Company's credit facility and term loans with a weighted average interest rate of approximately 4%. If principal amounts outstanding under the Company's credit facility remained at this year-end level for an entire year and the prime rate increased or decreased, respectively, by 1% the Company would pay or save, respectively, an additional $150,000 in interest that year. In October 2000, the Company entered into an interest rate swap to maintain the value-at-risk inherent in its interest rate exposures. This instrument expired on October 30, 2002. 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 have a material adverse affect on the Company's business, financial condition and results of operations. -17- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. a. Financial Statements NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES TABLE OF CONTENTS OF CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND 2002
Page ------ Independent Auditors' Report.................................... FS-1 Report of Independent Public Accountants........................ FS-3 Consolidated Financial Statements: Consolidated Balance Sheets as of June 30, 2003 and 2002...... FS-4 Consolidated Statements of Income for the Fiscal Years Ended June 30, 2003, 2002 and 2001............................ FS-6 Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 2003, 2002 and 2001............... FS-7 Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2003, 2002 and 2001............................ FS-8 Notes to Consolidated Financial Statements, June 30, 2003..... FS-10 Schedules: II. Valuation and Qualifying Accounts........................... FS-30
-18- b. Supplementary Financial Data Quarterly Results The following table sets forth unaudited financial data for each of the Company's last eight fiscal quarters as restated and as previously reported (see footnote 1 to the consolidated financial statements). The first three quarters of fiscal 2003 were restated to properly allocate the tax provision recorded in the fourth quarter of 2003 to the proper periods (in thousands except for per share data).
Fiscal Year Ended June 30, 2003 ------------------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Net Sales $11,725 $13,859 $13,406 $18,350 Gross Profit 3,048 3,569 3,496 5,288 Income (Loss) from Operations (233) 424 9 2,025 Net Income (Loss) (183) 145 (136) 1,184 Net Income (Loss) Per Share: Basic EPS (.05) .04 (.04) .37 Diluted EPS (.05) .04 (.04) .34 As Previously Reported, if restated Net Income (Loss) Per Share (287) 219 (206) -- Basic EPS (.08) .06 (.06) -- Diluted EPS (.08) .06 (.06) --
Fiscal Year Ended June 30, 2002 ------------------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Net Sales $10,083 $13,308 $13,321 $19,124 Gross Profit 2,756 3,321 3,460 5,180 Income (Loss) from Operations (187) 549 547 1,908 Net Income (Loss) (596) 124 207 1,840 Net Income (Loss) Per Share Basic EPS (.17) .04 .06 .55 Diluted EPS (.17) .04 .06 .52 As Previously Reported, if restated Net Income (Loss) Per Share -- -- -- 1,606 Basic EPS -- -- -- .47 Diluted EPS -- -- -- .45
-19- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On July 9, 2002 the Board of Directors of Napco Security Systems, Inc. (the "Company") dismissed Arthur Andersen LLP ("Andersen") as its independent public accountants and appointed KPMG LLP ("KPMG") to serve as its independent public accountants. These actions were taken at the recommendation of the Company's Audit Committee. Andersen had served as the Company's independent public accountants since 1993. None of Andersen's reports on the Company's consolidated financial statements for the fiscal years ended June 30, 2001 and 2000 contained an adverse opinion or disclaimer of opinion, nor was any such report qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal years ended June 30, 2001, 2000 and 1999 and through the date hereof, there were no disagreements between the Company and Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Andersen's satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company's consolidated financial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. During the fiscal years ended June 30, 2001 and 2000 and through the date hereof, the Company did not consult KPMG with respect to either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's consolidated financial statements, or (ii) any matter that was either the subject of a disagreement, within the meaning of Item 304(a)(1)(iv) of Regulation S-K, or any "reportable event," as that term is defined in Item 304(a)(1)(v) of Regulation S-K. We provided Andersen with a copy of our report on Form 8-K on our change in independent accountants and requested that Andersen furnish us with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the statements made by us in this report, and if not, stating the respects in which it does not agree. Andersen has indicated to the Company that Andersen no longer issues such letters. On December 15, 2003, the Registrant engaged Marcum & Kliegman LLP ("New Accountant") as the Registrant's principal independent accountants to audit its consolidated financial statements, replacing KPMG LLP (the "Former Accountants") as the Registrant's independent auditors, who were dismissed on the same day. The change was approved by the Registrant's audit committee and board of directors. The Registrant has not consulted with Marcum & Kliegman LLP during its two most recent fiscal years nor during any subsequent interim period prior to its appointment as auditor for the fiscal year 2003 and 2002 audits regarding the application of accounting principles to a specified transaction either completed or proposed, or the type of audit opinion that might be rendered on the Registrant's consolidated financial statements. The Former Accountants' report on the Registrant's financial statements for fiscal 2002 did not contain any adverse opinion or disclaimer of opinion and was not qualified as to uncertainty, audit scope or accounting principles. KPMG LLP was engaged as the Company's independent accountants on July 9, 2002. During the Registrant's 2002 fiscal year and the subsequent interim period preceding the date of -20- termination, there were no disagreements between the Registrant and the Former Accountants on any matter of accounting principles or practices, financial statement disclosures or auditing scope or procedures, nor were there any "Reportable Events" within the meaning of Item 304(a)(1)(v) of Regulation S-K. The audit of the Registrant's fiscal 2003 financial statements, which was begun by KPMG LLP, was not completed. In performing its audit of the fiscal 2003 financial statements, KPMG LLP identified an international tax matter concerning the Registrant's Dominican Republic subsidiary and at the time of their dismissal, such matter was still unresolved. ITEM 9A. CONTROL AND PROCEDURES At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13 a - 15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. During the fourth quarter of 2003, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonable likely to materially affect, the Company's internal control over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The Board of Directors is divided into three classes. One class will stand for election for a three-year term at the next Annual Meeting of Stockholders. The terms of the other two classes of continuing directors do not expire until the Annual Meetings of Stockholders after fiscal year end 2004 and 2005, respectively. The names of, and certain information concerning, the nominees of the Board of Directors and such other directors are set forth below:
Principal Occupation; Five-Year Employment History and Name and Age Other Directorships Since ------------ ------------------- ----- Directors to serve until next Annual Meeting of Stockholders: Randy B. Blaustein Principal of R.B. Blaustein & Co. since 1985 (52) December 2000; Partner of Blaustein, Greenberg & Co. July 1991 - November 2000; Attorney engaged as a sole practitioner since October 1980, specializing in business and tax matters, and author of six books and numerous articles.
-21- Donna Soloway Board of Directors Security Industry 2001 (55) Association (SIA); Chair of Awards Committee since 1993; Director and Secretary of SAINTS (Safety, Awareness and Independence Now Through Security) Foundation, Inc.; and Monthly Columnist for SECURITY DEALER magazine since 1992. Ms. Soloway is the wife of Richard Soloway, the Chairman and President of the Company. Directors to serve until Annual Meeting of Stockholders following fiscal year end 2004: Richard Soloway Chairman of the Board of Directors since 1972 (57) October 1981; President since 1998; Secretary since 1975. Kevin S. Buchel Senior Vice President of Operations 1998 (51) and Finance since April 1995; Treasurer since May 1998. Nominees to serve until Annual Meeting of Stockholders following fiscal year end 2005: Andrew J. Wilder Officer of Israeloff, Trattner & Co., 1995 (52) independent certified public accountants, since 1990. Arnold Blumenthal Mr. Blumenthal has been Publisher of 2001 (76) SECURITY DEALER magazine at Cygnus Business Media, Inc. since 1978.
During the fiscal year ended June 30, 2003, the Company retained Mr. Blaustein as special counsel for certain general business and tax related matters. Fees for such services were $9,200. During fiscal 2003, there were 4 meetings of the Board of Directors. Each of the directors attended all of the meetings. CODE OF ETHICS The company has adopted a Code of Ethics that applies to its employees and directors, including the Company's principal executive officer, principal financial officer, principal -22- accounting officer or controller, and persons performing similar functions. A copy is filed as Exhibit 14.0 to this Form 10-K. COMPENSATION OF DIRECTORS The directors who are not officers receive $1,000 for each Board of Directors meeting and $1,000 for each Audit Committee meeting that they attend in person or by telephone conference call, except Mr. Wilder is chairman of the Audit Committee and receives $2,000 for attending each Audit Committee meeting. For the fiscal year ended June 30, 2003, Mr. Blaustein, Mr. Wilder, Mr. Blumenthal and Ms. Soloway received $8,000, $12,000, $8,000 and $4,000, respectively in director's fees and committee fees. COMPLIANCE WITH SECTION 16 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), no 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"), failed to file on a timely basis one or more reports during such fiscal year except that Richard Soloway was late on filing one Form 4 due to a delay in obtaining certain necessary codes for EDGAR filing. INFORMATION CONCERNING EXECUTIVE OFFICERS Each executive officer of the Company holds office until the annual meeting of the Board of Directors and his successor is elected and qualified, or until his earlier death, resignation, or removal by the Board. There are no family relationships between any director or officer of the Company, except Richard Soloway and Donna Soloway, his wife. 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 1981; (57) President Since 1998; and Secretary since 1975. Kevin S. Buchel Senior Vice President of Operations and Finance since (51) April 1995; Treasurer since May 1998. Jorge Hevia Senior Vice President of Corporate Sales and Marketing (45) since May 1999; Vice President of Corporate Sales and Marketing since October 1998; Vice President of National Sales of Schieffelin and Somerset Company from December 1993 to October 1998.
-23- Michael Carrieri Senior Vice President of Engineering Development since (46) May 1, 2000; Vice President of Engineering Development since September, 1999; Vice President of Engineering of Chyron Corp. April 1998 to August 1999; Vice President of Engineering of Boundless Technologies from February 1990 until March 1998.
-24- ITEM 11. 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 three most highly compensated other executive officers serving at the end of fiscal year 2003. SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation ---------------------------------- ------------------------------------ Other Annual Restricted LTIP All Other Name and Principal Position Fiscal Year Salary Bonus Compensation(1) Stock Awards Options/SARS Payouts Compensation(2) - --------------------------- ----------- -------- ------- --------------- ------------ ------------ ------- --------------- Richard Soloway, Chairman of 2003 $443,457 $75,000 $27,455 125,000/0 $ 838 the Board of Directors, 2002 $450,637 - $22,433 - 25,000/0 - $ 784 President, Secretary 2001 $432,134 $50,000 $11,990 - 50,000/0 - $ 734 - -------------------------------------------------------------------------------------------------------------------------------- Kevin S. Buchel, Senior Vice 2003 $183,196 $33,525 $ 6,738 5,000/0 $1,811 President of Operations and 2002 $185,842 $30,000 $ 6,690 - 10,000/0 - $1,678 Finance and Treasurer 2001 $152,949 $60,000 $ 6,291 - - - $1,908 - -------------------------------------------------------------------------------------------------------------------------------- Jorge Hevia, Senior Vice 2003 $202,230 $33,525 $ 7,200 5,000/0 $1,903 President of Corporate Sales 2002 $192,269 $10,000 $ 7,260 - 10,000/0 - $1,816 and Marketing 2001 $182,308 $20,000 $ 7,081 - - - $2,015 - -------------------------------------------------------------------------------------------------------------------------------- Michael Carrieri, 2003 $183,999 $23,467 $5,250 5,000/0 $1,820 Senior Vice President of 2002 $175,269 $17,500 $ 60 - 10,000/0 - $1,671 Engineering Development 2001 $166,953 $35,000 $ 61 - - - $1,902 - --------------------------------------------------------------------------------------------------------------------------------
(1) Messrs. Soloway, Buchel, Hevia and Carrieri received $8,073, $7,040, $6,367; $138, $90, $91; $60, $60, $61; $90, $60 and $61, respectively for health and life insurance for fiscal years 2003, 2002 and 2001. Messrs. Soloway, Buchel, Hevia and Carrieri received $19,382, $15,393, $5,623; $6,600, $6,600, $6,200; $7,200, $7,200, $7,020; $5,250, $0, and $0, respectively, for automobile expenses for fiscal years 2003, 2002 and 2001. (2) Company 401(k) Plan Contributions. -25- OPTION GRANTS, OPTION EXERCISES AND OUTSTANDING OPTIONS The following tables summarize option grants and exercises during fiscal 2003 to or by the named executive officers and the value of the fiscal 2003 granted options, if any, held by such persons at the end of fiscal 2003.
OPTION GRANTS IN LAST FISCAL YEAR(1) Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(2) ------------------------ Individual Grants Percent of Total Options Granted to Employees Exercise or Options in Base Price Expiration Name Granted Fiscal Year ($/Sh) Date 5% ($) 10% ($) ---- ------- ----------- ------ ---- ------ ------- Richard Soloway 25,000 16% $ 9.65 2/27/13 $116,000 $ 327,500 100,000 62% $10.16 6/26/13 $489,000 $1,381,000 Kevin S. Buchel 5,000 3% $ 9.50 12/20/12 $ 29,850 $ 75,700 Jorge Hevia 5,000 .3% $ 9.50 12/20/12 $ 29,850 $ 75,700 Michael Carrieri 5,000 .3% $ 9.50 12/20/12 $ 29,850 $ 75,700
- ------- (1) Options generally become exercisable in cumulative annual installments of 20% commencing on the date of grant. Options generally terminate upon the earlier of the cessation of employment with the Company or the tenth 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. -26- AGGREGATED OPTION EXERCISES IN LAST YEAR AND FY-END OPTION VALUES
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 ---- ----------- -------- --------------- ------------------- Richard Soloway - - 290,000/135,000 $1,625,150/$144,600 Kevin S. Buchel 15,000 $44,475 29,000/16,000 $ 165,976/$60,794 Jorge Hevia 5,000 $24,300 40,600/16,000 $ 229,312/$60,794 Michael Carrieri - - 25,000/15,000 $ 141,136/$54,584
-27- EMPLOYMENT AGREEMENTS The Company has employment agreements with Richard Soloway and Jorge Hevia. The agreement with Mr. Soloway, entered into on June 26, 2003 for a five year period, provides for an annual salary of $453,235 as adjusted by inflation, certain incentive compensation if earned according to a formula to be determined by the Board of Directors, and 100,000 stock options that vest 20% per year or upon a change in control, as defined in the agreement. In addition, if during the term there should be a change in control, then the employee shall be entitled to terminate the term and his employment thereunder, and the employer shall pay the employee, as a termination payment, an amount equal to 299% of the average of the prior five calendar year's compensation, subject to certain limitations. Mr. Hevia's agreement, which is for a two-year period, provides for an annual salary of $215,000 with certain bonus provisions, including those based on sales and profits. During fiscal year 2003 Michael Carrieri had an agreement that provided for an annual salary of $194,481 with certain bonus provisions including those based on sales and profits. In addition, the Company has a severance agreement with Kevin S. Buchel providing for payments equal to nine months of salary and six months of health insurance in the event of a non-voluntary termination of employment without cause. -28- EQUITY COMPENSATION PLAN INFORMATION As of June 30, 2003
NUMBER OF SECURITIES NUMBER OF SECURITIES REMAINING AVAILABLE FOR TO BE ISSUED UPON WEIGHTED AVERAGE FUTURE ISSUANCE (EXCLUDING EXERCISE OF EXERCISE PRICE OF SECURITIES REFLECTED IN OUTSTANDING OPTIONS OUTSTANDING OPTIONS COLUMN a) PLAN CATEGORY (a) (b) (c) -------------- ------------------- ------------------- -------------------------- Equity compensation plans approved by security holders: 1992 Employee Stock Option Plan 491,200 $3.76 0 2000 Non-employee Stock Option Plan 40,000 $4.13 10,000 $9.91 189,000 2002 Employee Stock Option 151,000 Plan Equity compensation plans not approved by security holders: None - - - Total 682,200 $5.14 199,000
-29- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT BENEFICIAL OWNERSHIP OF COMMON STOCK The following table, together with the accompanying footnotes, sets forth information as of January 16, 2004 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 executive 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. 30
Amount and Nature of beneficial Percent of Beneficial Owner Ownership Common Stock [a] - ---------------- --------- ---------------- Richard Soloway c/o the Company 333 Bayview Avenue Amityville, NY 11701 1,229,976 [b] 33.6% Dimensional Fund 226,650 [c] 6.2% Advisors, Inc. Kevin S. Buchel 69,001 [b] 1.9% Jorge Hevia 54,600 [b] 1.5% Randy B. Blaustein 38,500 [b] 1.1% Michael Carrieri 33,000 [b] .9% Andrew J. Wilder 16,300 [b] .4% Donna Soloway 5,400 .1% All executive officers and 1,446,777 [d] 39.5% directors as a group (7 in number)
- ---------------- [a] Percentages are computed on the basis of 3,658,616 shares, which consists of 3,207,616 shares of Common Stock outstanding on January 16, 2004, plus 451,600, the number of shares that 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] This number includes the number of shares that a person has a right to acquire directly or indirectly within sixty (60) days (Soloway - 310,000, Buchel - - 38,000, Hevia - 38,000, Blaustein - 16,000, Carrieri - 33,000, and Wilder - 16,000). [c] Based on information from Securities and Exchange as of September 30, 2003, a form 13F was filed with the SEC by Dimensional Fund Advisors Inc., 1299 Ocean Avenue, Santa Monica, CA 90401 ("DFAI") reporting beneficial ownership and sole voting power as to 226,650 shares of Common Stock of the Company, owned by advisory clients. As to all of such shares, DFAI disclaims beneficial ownership of all such securities. [d] This number of shares includes (i) 995,777 shares as to which officers and directors have sole voting and investment power, and (ii) 451,000 shares that a person has the right to acquire directly or indirectly within sixty (60) days. 31 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fiscal Year 2003 Fiscal Year 2002 ---------------- ---------------- KPMG M&K KPMG M&K ---- --- ---- --- Audit Fees(1) Billed $237,000 $142,500 $87,000 (1) Paid $ 70,000 $ 89,000 $87,000 (1) Audit Related Fees(2) - - - - Tax Fees(3) - - - - All Other Fees(4) Billed $ 15,000 $ 0 $15,000 $ 0 Paid $ 15,000 $ 0 $15,000 $ 0
- -------------------- (1)Audit Fees. The Company was billed $237,000 and paid $70,000 to date and was billed and paid $87,000 to KPMG LLP ("KPMG") for professional services rendered for the audit of the Company's financial statements for fiscal years 2003 and 2002, respectively. The Company is expected to be billed $142,500 by Marcum & Kliegman LLP ("M&K") for professional services rendered for the audit of the Company's financial statements for fiscal years 2003 and 2002. (2)Audit Related Fees. There were no fees paid by the Company to KPMG or M&K for professional services for assurance and related services by the principal accountant that are currently related to the performance of the audit or review of Napco's financial statements and are not reported under Item 9(e)(i) of Schedule 14 A in fiscal years 2003 and 2002, respectively. (3)Tax Fees. There were no fees paid by the Company to KPMG or M&K for professional services rendered by the principal accountants for tax compliance, tax advice and tax planning for fiscal years 2003 and 2002, respectively. (4)All Other Fees. The Company was billed and paid approximately $15,000 and $15,000 to KPMG for services other than those described above, including services related to the audit of the company's employee benefit plan and reporting by the Company and its subsidiaries to the Securities and Exchange Commission for fiscal years 2003 and 2002, respectively. The 32 Company was not billed by M&K for services other than those described above, including services related to the audit of the company's employee benefit plan and reporting by the Company and its subsidiaries to the Securities and Exchange Commission for fiscal years 2003 and 2002, respectively. The Audit Committee has considered whether the provision of the services described above under the headings "Audit Related Fees", "Tax Fees" and "All Other Fees" is compatible with maintaining the auditor's independence and determined that it is. All of the services described in Items 9(e)(2) through 9(e)(4) of Schedule 14A were approved by the Audit Committee pursuant to paragraph c(7)(i)(C) of Rule 2-01 of Regulation S-X. PART IV ITEM 15. 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:
Page ---- Independent Auditors' Report........................................................................ FS-1 Report of Independent Public Accountants as of June 30, 2003 and 2002 and for each of the 3 Years in the Period Ended June 30, 2003........................................................... FS-3 Consolidated Balance Sheets as of June 30, 2003 and 2002............................................ FS-4 Consolidated Statements of Income for the Years Ended June 30, 2003, 2002 and 2001.................. FS-6 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2003, 2002 and 2001............................................................................................ FS-7 Consolidated Statements of Cash Flows for the Years Ended June 30, 2003, 2002 and 2001.............. FS-8 Notes to Consolidated Financial Statements, June 30, 2003, 2002 and 2001............................ FS-10
33 (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: II: Valuation and Qualifying Accounts.............................................................. FS-30
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. (a)3 and (c). Exhibits Management Contracts designated by asterisk.
Exhibit No. Title - ------- ----- Ex-3.(i) Articles of Incorporation, as amended................................... Exhibit 3(I) to Report on Form 10-Q for fiscal year ended December 31, 2001 Ex-3.(ii) Amended and Restated By-Laws............................................ Exhibit 3.(ii) to Report on Form 10-K for fiscal year ended June 30, 1999 *Ex-10.A (i) Amended and Restated 1992 Incentive Stock Option Plan................... Exhibit 10.A to Report on Form 10-K for fiscal year ended June 30, 2001 *Ex-10.A (ii) 2002 Employee Stock Option Plan......................................... Exhibit 10.Y to Report on Form 10-Q for the fiscal quarter ended December 31, 2003
34 *Ex-10.B 2000 Non-Employee Stock Option Plan..................................... Exhibit 10.B to Report on Form 10-K for fiscal year ended June 30, 2001 Ex-10.C Loan and Security Agreement with Marine Midland Bank dated as of May 12, 1997............................................................ Exhibit 10.I to Rpt. on Form 10K for fiscal year ended June 30, 1997 Ex-10.D Revolving Credit Note #1 to Marine Midland Bank dated as of May 12, 1997............................................................ Exhibit 10.J to Report on Form 10-K for Fiscal year ended June 30, 1997 Ex-10.E Revolving Credit Note #2 to Marine Midland Bank dated as of May 12, 1997............................................................ Exhibit 10.K to Report on Form 10-K for fiscal year ended June 30, 1997 Ex-10.F Promissory Note to Marine Midland Bank dated as of May 12, 1997................................................................ Exhibit 10-L to Report on Form 10-K for fiscal year ended June 30, 1997 Ex-10.G Amendment No. 1 to the Loan and Security Agreement with Marine Midland Bank dated as of May 28, 1998................................... Exhibit 10-M to Report in Form 10-K for fiscal year ended June 30, 1998 Ex.-10.H Term Loan Note to Marine Midland Bank dated as of May 28, 1998.......... Exhibit 10-N to Report in Form 10-K For fiscal year ended June 30, 1998
35 *Ex-10.I Amended and Restated Employment Agreement with Richard Soloway.......... E-1 *Ex-10.J Employment Agreement with Jorge Hevia.................................. Exhibit 10.R to Report in Form 10-Q for period ended March 31, 2001 Ex-10.K Amendment No. 2 to the Loan and Security Agreement with HSBC Bank dated as of June 30,2001........................................... Exhibit 10.S to Report on Form 10-K for fiscal year ended June 30, 2001 *Ex-10.L Employment Agreement with Michael Carrieri.............................. Exhibit 10.U to Report on Form 10-Q For fiscal quarter ended September 30, 2001 *Ex-10.M Indemnification Agreement dated August 9, 2001.......................... Exhibit 10.T to Report on Form 10-K For fiscal year ended June 30, 2001 Ex-10.N Asset Purchase Agreement................................................ Exhibit 2.1 to Report on Form 8-K Filed July 27, 2002 Ex-10.O Amendment No. 4 to Loan and Security Agreement.......................... Exhibit 10.V to Report on Form 8-K Filed July 27, 2002 Ex-10.P Amendment No. 8 to Loan and Security Agreement.......................... Exhibit 10.W to Report on Form 10-K for fiscal year ended June 30, 2001 Ex-10.Q Note Modification Agreement............................................. Exhibit 10.W to Report on Form 10-K for fiscal year ended June 30, 2001 Ex-10.R Amendment No. 10 to the Loan and Security Agreement..................... E-11
36 Ex-14.0 Code of Ethics.......................................................... E-17 Ex-21.0 Subsidiaries of the Registrant.......................................... E-18 Ex-23.1 Consent of Independent Auditors......................................... E-19 Ex-23.2 Notice regarding consent of Arthur Andersen LLP......................... E-20 Ex-24.1 Power of Attorney....................................................... E-21 Ex-31.1 Section 302 Certification of Chief Executive Officer.................... E-22 Ex-31.2 Section 302 Certification of Chief Financial Officer.................... E-23 Ex-32.1 Certification of Chief Executive Officer Pursuant to 18 USC Section 1350 and Section 906 of Sarbanes - Oxley Act of 2002............ E-24 Ex-32.2 Certification of Chief Financial Officer Pursuant to 18 USC Section 1350 and Section 906 of Sarbanes - Oxley Act of 2002............ E-25
(b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended June 30, 2003. 37 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. February 5, 2004 NAPCO SECURITY SYSTEMS, INC. (Registrant) By: /s/ RICHARD SOLOWAY By: /s/ KEVIN S. BUCHEL ------------------------------------- ---------------------------- Richard Soloway Kevin S. Buchel Chairman of the Board of Senior Vice President of Directors, President and Secretary Operations and Finance (Principal Executive Officer) and Treasurer (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.
Signature Title Date --------- ----- ---- /s/RICHARD SOLOWAY Chairman of the February 5, 2004 - --------------------------- Board of Directors Richard Soloway /s/ KEVIN S. BUCHEL - --------------------------- Kevin S. Buchel Director February 5, 2004 /s/ RANDY B. BLAUSTEIN - --------------------------- Randy B. Blaustein Director February 5, 2004 /s/ARNOLD BLUMENTHAL - --------------------------- Arnold Blumenthal Director February 5, 2004 /s/DONNA SOLOWAY - --------------------------- Donna Soloway Director February 5, 2004 /s/ANDREW J. WILDER - --------------------------- Andrew J. Wilder Director February 5, 2004
38 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES June 30, 2003 and 2002 (With Independent Auditors' Report Thereon) INDEPENDENT AUDITORS' REPORT The Audit Committee of the Board of Directors and Stockholders Napco Security Systems, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Napco Security Systems, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of June 30, 2003 and 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. The 2001 consolidated financial statements and financial statement schedule of Napco Security Systems, Inc. as listed in the accompanying index were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and financial statement schedule, before the revision included in Note 1 to the financial statements, in their report dated September 28, 2001. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 2003 and 2002 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, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related 2003 and 2002 financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. FS-1 As discussed above, the 2001 consolidated financial statements of Napco Security Systems, Inc. as listed in the accompanying index, were audited by other auditors who have ceased operations. As described in Note 1, these consolidated financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", which was adopted by the Company as of July 1, 2001. In our opinion, the disclosures for 2001 in Note 1 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole. As discussed in Note 1, the Company's financial statements for the year ended June 30, 2002 have been restated to reflect an adjustment of its income tax provision related to the taxation of the Company's foreign subsidiary. /s/ Marcum & Kliegman LLP Woodbury, New York January 26, 2004 FS-2 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, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three fiscal years in the period ended June 30, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three fiscal years in the period ended June 30, 2001 in conformity with accounting principles generally accepted in the United States. 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 28, 2001 This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with our filing on Form 10-K for the fiscal year ended June 30, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. See Exhibit 23.2 for further discussion. FS-3 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2003 and 2002 (In Thousands, Except Share Data) ASSETS
2003 2002 ------------------------------ (Restated-Note 1) CURRENT ASSETS Cash and cash equivalents $ 1,794 $ 1,500 Accounts receivable, less reserve for doubtful accounts of $215 and $393, respectively 17,425 18,313 Inventories 16,922 18,963 Prepaid expenses and other current assets 525 913 Deferred income taxes 1,253 1,184 ------- ------- Total Current Assets 37,919 40,873 Property, plant and equipment, net 9,466 9,964 Goodwill, net 9,686 9,686 Other assets 278 229 ------- ------- TOTAL ASSETS $57,349 $60,752 ======= =======
See accompanying notes to consolidated financial statements. FS-4 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2003 and 2002 (In Thousands, Except Share Data) LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2002 --------------------------- (Restated-Note 1) CURRENT LIABILITIES Current portion of long-term debt $ 1,900 $ 2,664 Accounts payable 3,374 2,672 Accrued expenses 1,812 2,337 Accrued salaries and wages 1,501 1,388 Accrued income taxes 489 -- -------- -------- Total Current Liabilities 9,076 9,061 Long-term debt 14,100 16,588 Deferred income taxes 816 575 -------- -------- Total Liabilities 23,992 26,224 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, par value $0.01 per share; Authorized 21,000,000 shares; issued 6,069,752 and 6,004,252 shares, respectively; outstanding 3,198,696 and 3,383,196 shares, respectively 61 60 Additional paid-in capital 1,342 1,082 Retained earnings 39,813 38,803 Less: Treasury stock, at cost; 2,871,056 and 2,621,056 shares, respectively (7,859) (5,417) -------- -------- TOTAL STOCKHOLDERS' EQUITY 33,357 34,528 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 57,349 $ 60,752 ======== ========
See accompanying notes to consolidated financial statements. FS-5 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended June 30, 2003, 2002, and 2001 (In Thousands, Except Share Data and Per Share Data)
2003 2002 2001 -------------------------------------------------------- (Restated - Note 1) Net sales $ 57,340 $ 55,836 $ 54,771 Cost of sales 41,939 41,119 40,454 ----------- ----------- ----------- Gross Profit 15,401 14,717 14,317 Selling, general, and administrative expenses 13,176 11,900 12,458 ----------- ----------- ----------- Operating Income 2,225 2,817 1,859 ----------- ----------- ----------- Other income (expense): Interest expense, net (727) (1,409) (1,816) Other, net 127 (49) 183 ----------- ----------- ----------- (600) (1,458) (1,633) ----------- ----------- ----------- Income Before Income Taxes 1,625 1,359 226 Provision (benefit) for income taxes 615 (216) (25) ----------- ----------- ----------- Net Income $ 1,010 $ 1,575 $ 251 =========== =========== =========== Earnings per share: Basic $ 0.30 $ 0.47 $ 0.07 Diluted $ 0.28 $ 0.45 $ 0.07 Weighted average number of shares outstanding Basic 3,332,000 3,342,000 3,464,000 Diluted 3,584,000 3,492,000 3,527,000
See accompanying notes to consolidated financial statements. FS-6 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended June 30, 2003, 2002, and 2001 (In Thousands, Except Share Data)
Common stock Treasury Stock --------------------- Additional --------------------- Number of Paid-in Retained Number of Shares Amount Capital Earnings Shares Amount Total ----------------------------------------------------------------------------------- BALANCE - July 1, 2000 5,917,352 $ 59 $ 772 $ 36,977 2,418,451 $ (4,449) $ 33,359 Purchase of treasury shares -- -- -- -- 153,805 (725) (725) Exercise of employee stock options 21,500 -- 59 -- -- -- 59 Net income -- -- -- 251 -- -- 251 --------- --------- --------- --------- --------- --------- --------- BALANCE - June 30, 2001 5,938,852 59 831 37,228 2,572,256 (5,174) 32,944 Purchase of treasury shares -- -- -- -- 48,800 (243) (243) Exercise of employee stock options 65,400 1 251 -- -- -- 252 Net income (Restated - Note 1) -- -- -- 1,575 -- -- 1,575 --------- --------- --------- --------- --------- --------- --------- BALANCE - June 30, 2002 (Restated - Note 1) 6,004,252 60 1,082 38,803 2,621,056 (5,417) 34,528 Purchase of treasury shares -- -- -- -- 250,000 (2,442) (2,442) Exercise of employee stock options 65,500 1 260 -- -- -- 261 Net income -- -- -- 1,010 -- -- 1,010 --------- --------- --------- --------- --------- --------- --------- BALANCE - June 30, 2003 6,069,752 $ 61 $ 1,342 $ 39,813 2,871,056 $ (7,859) $ 33,357 ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements. FS-7 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 2003, 2002, and 2001 (In Thousands)
2003 2002 2001 ------------------------------------------ (Restated Note 1) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,010 $ 1,575 $ 251 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,294 1,529 2,032 Provision for doubtful accounts 16 45 78 Deferred income taxes 173 (117) (69) Changes in operating assets and liabilities, net of affect from acquisition of business resulting from increases and decreases in: Accounts receivable 872 (1,418) 1,702 Inventories 2,041 4,271 (3,159) Prepaid expenses and other current assets 366 4 217 Other assets (90) 167 (77) Accounts payable, accrued expenses, accrued salaries and wages, and accrued income taxes 800 1,035 351 -------- -------- -------- Net Cash Provided By Operating Activities 6,482 7,091 1,326 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of business, net of cash acquired -- -- (7,248) Purchases of property, plant, and equipment, net (752) (709) (1,035) -------- -------- -------- Net Cash Used In Investing Activities (752) (709) (8,283) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt (7,505) (6,128) (4,774) Proceeds from long-term debt 4,250 200 11,050 Purchase of treasury shares (2,442) (243) (725) Proceeds from exercise of employee stock options 261 252 59 -------- -------- -------- Net Cash (Used In) Provided By Financing Activities (5,436) (5,919) 5,610 -------- -------- -------- Net Increase (Decrease) In Cash and Cash Equivalents 294 463 (1,347) CASH AND CASH EQUIVALENTS - Beginning 1,500 1,037 2,384 -------- -------- -------- CASH AND CASH EQUIVALENTS - Ending $ 1,794 $ 1,500 $ 1,037 ======== ======== ========
See accompanying notes to consolidated financial statements. FS-8 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 2003, 2002, and 2001 (In Thousands)
2003 2002 2001 ----------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION Interest paid, net $ 733 $1,403 $2,121 Income taxes paid $ 15 $ 10 $ 21
See accompanying notes to consolidated financial statements. FS-9 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Nature of Business and Summary of Significant Accounting Policies Nature of Business 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 wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Reclassifications Certain prior year amounts have been reclassified to conform with current year presentation. Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Critical estimates include management's judgments associated with revenue recognition, concentration of credit risk, inventories, goodwill and income taxes. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include approximately $223,000 and $306,000 of short-term time deposits at June 30, 2003 and 2002, respectively. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company has cash balances in banks in excess of the maximum amount insured by the FDIC as of June 30, 2003 and 2002. Inventories Inventories are valued at the lower of cost (using the first-in, first-out method) or market. FS-10 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Nature of Business and Summary of Significant Accounting Policies, continued Property, Plant, and Equipment Property, plant, and equipment is carried at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred; costs of major renewals and improvements are capitalized. At the time property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the asset and accumulated depreciation accounts and the profit or loss on such disposition is reflected in income. 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 Effective July 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. These statements established accounting and reporting standards for acquired goodwill and other intangible assets. Specifically, the standards address how acquired intangible assets should be accounted for both at the time of acquisition and after they have been recognized in the financial statements. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. In accordance with SFAS No. 142, intangible assets, including purchased goodwill, must be evaluated for impairment. Those intangible assets that will continue to be classified as goodwill or as other intangibles with indefinite lives are no longer amortized. In accordance with SFAS No. 142, the Company completed its transitional impairment testing of intangible assets during the first quarter of fiscal 2002. That effort, and preliminary assessments of the Company's identifiable intangible assets, indicated that no adjustment would be required upon adoption of this pronouncement. The impairment testing is performed in two steps: (i) the Company determines impairment by comparing the fair value of a reporting unit with its carrying value, and (ii) if there is an impairment, the Company measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. The adoption of this statement resulted in the exclusion of approximately $503,000 in amortization expense for the fiscal years ended June 30, 2003 and 2002. The Company has performed its annual impairment evaluation required by this standard and determined that the goodwill is not impaired. FS-11 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Nature of Business and Summary of Significant Accounting Policies, continued Goodwill, continued The following table presents adjusted net earnings and earnings per share data restated to include the retroactive impact of the adoption of SFAS No. 142:
Year Ended (In thousands, except per share data) June 30, 2001 - -------------------------------------------------------------------------------------------- Reported net income $ 251 Add back: Goodwill amortization, net of tax 467 ----- Pro Forma Net Income $ 718 ===== Basic net earnings per common share: Reported net earnings per share before SFAS No. 142 $0.07 SFAS No. 142 effect, net of tax 0.14 ----- Pro forma Net Earnings Per Share $0.21 ===== Diluted net earnings per common share: Reported net earnings per share before SFAS No. 142 $0.07 SFAS No. 142 effect, net of tax 0.13 ----- Pro forma Net Earnings Per Share $0.20 =====
Long-Lived Assets In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets in question may not be recoverable. An impairment would be recorded in circumstances where undiscounted cash flows expected to be generated by an asset are less than the carrying value of that asset. Revenue Recognition In accordance with SEC Staff Accounting Bulletin Topic 13, Revenue Recognition, the Company recognizes revenue when the following criteria are met: (i) persuasive evidence of an agreement exists, (ii) there is a fixed and determinable price for the Company's product, (iii) shipment and passage of title occurs, and (iv) collectibility is reasonably assured. Revenues from merchandise sales are recorded at the time the product is shipped or delivered to the customer pursuant to the terms of the sale. The Company reports its sales levels on a net sales basis, with net sales being computed by deducting from gross sales the amount of actual sales returns and the amount of reserves established for anticipated sales returns. FS-12 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Nature of Business and Summary of Significant Accounting Policies, continued Advertising and Promotional Costs Advertising and promotional costs are included in "Selling, General and Administrative" expenses in the consolidated statements of income and are expensed as incurred. Advertising expense for the fiscal years ended June 30, 2003, 2002 and 2001 was $1,336,000, $1,084,000 and $972,000, respectively. Research and Development Costs Research and development costs incurred by the Company are charged to expense in the year incurred. Company-sponsored research and development costs of $4,516,000, $4,239,000 and $4,220,000 were charged to expense for the fiscal years ended June 30, 2003, 2002 and 2001, respectively and are included in "Selling, General and Administrative" expenses in the consolidated statements of income. 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. Net deferred tax assets are adjusted by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized. If the Company determines that a deferred tax asset will not be realizable or that a previously reserved deferred tax asset will become realizable, an adjustment to the deferred tax asset will result in a reduction of, or increase to, earnings at that time. The provision (benefit) for income taxes represents U.S. Federal, state and foreign taxes. Through June 30, 2001, the Company's subsidiary in the Dominican Republic, Napco/Alarm Lock Group International, S.A. ("Napco DR"), was not subject to tax in the United States, as a result, no taxes were provided. Effective July 1, 2001, the Company made a domestication election for Napco DR. Accordingly, its income will be subject to taxation in the United States on a going forward basis. Prior Period Adjustment The Company's financial statements for the year ended June 30, 2002 have been restated to reflect an adjustment of its income tax provision related to the taxation of one of the Company's foreign subsidiaries, Napco DR. As further described in Note 6, in March 2003, the Company made an election with the filing of its income tax return for the fiscal year ended June 30, 2002. As a result, the tax provision and related deferred tax balance sheet accounts have been restated. The effect of this restatement for the fiscal year ended June 30, 2002 is as follows: FS-13 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Nature of Business and Summary of Significant Accounting Policies, continued Prior Period Adjustment
June 30, 2002 ------------------------------------- As Previously As Reported Restated ------------------------------------- (In thousands, except per share data) Balance Sheet Deferred income taxes- asset $ 1,032 $ 1,184 Deferred income taxes- liability 539 575 Total stockholders' equity 34,294 34,528 Statement of Income Provision (benefit) for income taxes $ 18 $ (216) Net income 1,341 1,575 Earnings per share- basic 0.40 0.47 Earning per share- diluted 0.38 0.45
Earnings Per Share The Company follows the provisions of SFAS No. 128, Earnings Per Share. Basic net income per common share (Basic EPS) is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per common share (Diluted EPS) is computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents and convertible securities then outstanding. SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on the face of the consolidated statements of income. The following provides a reconciliation of information used in calculating the per share amounts for the fiscal years ended June 30 (in thousands, except per share data):
Net income Weighted Average Shares Net income per share ------------------------------------------------------------------------------------- 2003 2002 2001 2003 2002 2001 2003 2002 2001 ---- ---- ---- ---- ---- ---- ---- ---- ---- Basic EPS: $1,010 $1,575 $251 3,332 3,342 3,464 $ 0.30 $ 0.47 $0.07 Effect of Dilutive Securities: Employee stock options -- -- -- 252 150 63 (0.02) (0.02) -- ------ ------ ---- ----- ----- ----- ------ ------ ----- Diluted EPS: $1,010 $1,575 $251 3,584 3,492 3,527 $ 0.28 $ 0.45 $0.07 ====== ====== ==== ===== ===== ===== ====== ====== =====
Options to purchase 28,000, 25,000 and 149,500 shares of common stock for the three fiscal years ended June 30, 2003, 2002 and 2001, respectively, were not included in the computation of Diluted EPS because the exercise prices exceeded the average market price of the common shares for the respective periods and, accordingly, their inclusion would be anti-dilutive. These options were still outstanding at the end of the respective periods. FS-14 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Nature of Business and Summary of Significant Accounting Policies, continued Stock-Based Compensation The Company accounts for stock-based compensation under the provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, the Company has elected to continue to apply the intrinsic value method of accounting set forth in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, while providing the required pro forma disclosures as if the fair value method of SFAS No. 123 had been applied. Under the intrinsic value method, no compensation expense is recognized if the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant. Accordingly, no compensation cost has been recognized on options granted to employees. SFAS No. 123, requires that the Company provide pro forma information regarding net earnings and net earnings per common share as if compensation cost for the Company's stock option programs had been determined in accordance with the fair value method prescribed therein. The Company adopted the disclosure portion of SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure requiring quarterly SFAS No. 123 pro forma disclosure. The following table illustrates the effect on net earnings and earnings per common share as if the fair value method had been applied to all outstanding awards in each period presented:
Year Ended June 30, 2003 2002 2001 ---------- ---------- ---------- (In thousands, except per share data) Net income, as reported $ 1,010 $ 1,575 $ 251 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects 329 376 265 ---------- ---------- ---------- Pro forma net income $ 681 $ 1,199 $ (14) ========== ========== ========== Earnings per common share: Net earnings per common share - Basic, as reported $ 0.30 $ 0.47 $ 0.07 ========== ========== ========== Net earnings per common share - Basic, pro forma $ 0.20 $ 0.36 $ 0.00 ========== ========== ========== Net earnings per common share - Diluted, as reported $ 0.28 $ 0.45 $ 0.07 ========== ========== ========== Net earnings per common share - Diluted, pro forma $ 0.19 $ 0.34 $ 0.00 ========== ========== ==========
FS-15 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Nature of Business and Summary of Significant Accounting Policies, continued Stock-Based Compensation, continued The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
2003 2002 2001 ------- ------- ------- Risk-free interest rates 2.71% 3.50% 6.06% Expected lives 5 years 5 years 5 years Expected volatility 42% 43% 42% Expected dividend yields 0% 0% 0%
Foreign Currency All assets and liabilities of foreign subsidiaries are translated into U.S. Dollars at fiscal year-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the fiscal year. The realized and unrealized gains and losses associated with foreign currency translation, as well as related other comprehensive income, were not material for the three years ended June 30, 2003. Comprehensive Income The Company follows the provisions of SFAS No. 130, Reporting Comprehensive Income, which established rules for the reporting of comprehensive income and its components. For the fiscal years ended June 30, 2003, 2002 and 2001, the Company's operations did not give rise to material items includable in comprehensive income, which were not already included in net income. Accordingly, the Company's comprehensive income is the same as its net income for all periods presented. Segment Reporting The Company follows the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Pursuant to this pronouncement, the reportable operating segments are determined based on the Company's management approach. The management approach, as defined by SFAS No. 131, is based on the way that the chief operating decision maker organizes the segments within an enterprise for making operating decisions and assessing performance. The Company's results of operations are reviewed by the chief operating decision maker on a consolidated basis and the Company operates in only one segment. The Company has presented required geographical data in note 12, and no additional segment data has been presented. FS-16 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Nature of Business and Summary of Significant Accounting Policies, continued Fair Value of Financial Instruments The Company calculates the fair value of financial instruments and includes this additional information in the notes to the financial statements where the fair value is different than the book value of those financial instruments. When the fair value approximates book value, no additional disclosure is made. The Company uses quoted market prices whenever available to calculate these fair values. When quoted market prices are not available, the Company uses standard pricing models for various types of financial instruments which take into account the present value of estimated future cash flows. At June 30, 2003 and 2002, management of the Company believes the carrying value of all financial instruments approximated fair value. Shipping and Handling Revenues and Costs In July 2000, the Emerging Issues Task Force (EITF) reached a consensus with respect to EITF Issue No. 00-10, Accounting for Shipping and Handling Revenues and Costs. The consensus reached was that all shipping and handling billed to customers is revenue and the costs associated with these revenues may be classified as either cost of sales, or selling, general, and administrative costs, with footnote disclosure as to classification of these costs. This standard required a restatement of prior periods for changes in classification. Beginning fiscal 2001, the Company records the amount billed to customers in net sales and classifies the costs associated with these revenues in cost of sales. Derivative Instruments and Hedging Activities Effective July 1, 2000, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. These statements established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133, as amended, requires the recognition of all derivative instruments as either assets or liabilities in the balance sheet measured at fair value. In October 2000, the Company entered into an interest rate swap to maintain the value-at-risk inherent in its interest rate exposures. This financial instrument expired in October 2002. This transaction met the requirements for cash flow hedge accounting, as the instrument was designated to a specific debt balance. Accordingly, any gain or loss associated with the difference between interest rates was included as a component of interest expense. The Company does not hold or enter into derivative financial instruments for trading or speculative purposes. FS-17 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Nature of Business and Summary of Significant Accounting Policies, continued New Accounting Pronouncements In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 established standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. It specifically requires that mandatorily redeemable instruments, instruments with obligations to issue a variable number of the issuer's own equity shares, be classified as a liability. Initial and subsequent measurements of the instruments differ based on the characteristics of each instrument and as provided for in the statement. SFAS No. 150 is effective for all freestanding financial instruments entered into or modified after May 31, 2003 and otherwise became effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 will have no impact on the Company's consolidated financial statements. In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN 45 also requires additional disclosure requirements about the guarantor's obligations under certain guarantees it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of this interpretation are effective for financial statement periods ending after December 15, 2002. The Company adopted the disclosure requirements of this interpretation in the fiscal quarter ended March 31, 2003. The adoption of this interpretation did not have a material impact on its consolidated balance sheet, results of operations or cash flows. The Company recognizes the estimated cost associated with its standard warranty on products at the time of sale. The estimate is based on historic as well as current return rates and experience. The changes in the Company's accrued warranty obligation for the period was immaterial. In January 2003, as revised December 2003, the FASB issued Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. FIN 46 is effective for the periods ending after December 15, 2003 for certain types of entities and after March 15, 2004 for other types of entities. The Company does not expect the adoption of FIN 46 will have a material effect on its consolidated financial statements. FS-18 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Acquisition of Business On July 27, 2000, the Company acquired Continental Instruments LLC (Continental), a manufacturer and distributor of access control and security management systems. This acquisition was accounted for by the purchase method and was valued based on management's estimate of the fair value of the assets acquired and liabilities assumed at the date of the acquisition. The purchase price was $7,522,500 in cash, less subsequent purchase price adjustments of approximately $460,000, plus future deferred payments of $1,700,000 in cash to be paid over a period of 24 months. The acquisition was financed by an $8,250,000 loan from the Company's primary lender, to be repaid in 60 equal monthly installments. The loan is secured by a mortgage, guarantees, and other collateral. The excess of the aggregate purchase price over the fair value of net assets acquired of approximately $7,768,000 has been allocated to goodwill. NOTE 3 - Business and Credit Concentrations The Company had two customers (Customer A and B) with accounts receivable balances that aggregated 44% and 43% of the Company's accounts receivable at June 30, 2003 and 2002, respectively. The Company had one distributor customer (Customer A) that accounted for 19%, 17% and 18% of the Company's net sales in fiscal 2003, 2002 and 2001, respectively. During the past three fiscal years no other customer represented more than 10% of the Company's net sales. NOTE 4 - Inventories Inventories consist of the following:
June 30 ----------------------- 2003 2002 ---------- ---------- (In thousands) Component parts $ 9,626 $ 10,583 Work-in-process 2,443 3,308 Finished products 4,853 5,072 ---------- ---------- $ 16,922 $ 18,963 ========== ==========
FS-19 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - Property, Plant, and Equipment Property, plant and equipment consist of the following:
Useful Life June 30 In years --------------------- --------------------- 2003 2002 -------- --------- (In thousands) Land $ 904 $ 904 -- Buildings 8,911 8,911 30 to 40 Molds and dies 4,360 4,197 3 to 5 Furniture and fixtures 1,223 1,141 5 to 10 Machinery and equipment 11,823 11,316 7 to 10 Shorter of the lease Leasehold improvements 191 191 term or life of asset -------- --------- 27,412 26,660 Less: accumulated depreciation and amortization 17,946 16,696 -------- --------- $ 9,466 $ 9,964 ======== =========
Depreciation and amortization expense on property, plant, and equipment was approximately $1,254,000, $1,408,000 and $1,510,000 in fiscal 2003, 2002 and 2001, respectively. NOTE 6 - Income Taxes Provision (benefit) for income taxes consists of the following:
For the Years Ended June 30 ------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (In thousands) Current income taxes: Federal $ 428 $ -- $ -- State -- -- 21 Foreign 15 51 23 ---------- ---------- ---------- 443 51 44 Deferred income tax (benefit) 172 (267) (69) ---------- ---------- ---------- Provision (benefit) for income taxes $ 615 $ (216) $ (25) ========== ========== ==========
FS-20 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - Income Taxes, continued 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 (dollars in thousands):
For the Years Ended June 30 ---------------------------------------------------------------- 2003 2002 2001 ------------------ ------------------ ------------------ % of % of % of Pre-Tax Pre-Tax Pre-Tax Amount Income Amount Income Amount Income ------- ------- ------- ------- ------- ------- Tax at Federal statutory rate $ 553 34.0% $ 462 34.0% $ 77 34.0% Increases (decreases) in taxes resulting from: State income taxes, net of Federal income tax benefit -- -- -- -- (202) (89.4) Meals and entertainment 55 3.4 46 3.3 46 20.3 Amortization of nondeductible goodwill -- -- -- -- 36 15.9 Foreign source income and taxes 19 1.1 2,234 164.3 (890) (393.8) Valuation allowance -- -- (2,913) (214.2) 830 367.3 Other, net (12) (.7) (45) (3.3) 78 34.6 ------- ------- ------- ------- ------- ------- Provision (benefit) for income taxes $ 615 37.8% $ (216) (15.9)% $ (25) (11.1)% ======= ======= ======= ======= ======= =======
Deferred tax assets and deferred tax liabilities at June 30, 2003 and 2002 are as follows (in thousands):
Current Long-Term Deferred Tax Assets Deferred Tax Assets (Liabilities) (Liabilities) 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Accounts receivable $ 108 $ 123 $ -- $ -- Inventories 847 736 -- -- Accrued liabilities 249 227 -- -- Goodwill -- -- (338) (169) Property, plant and equipment -- -- (478) (455) Alternative minimum tax credit 49 98 -- 49 ---------- ---------- ---------- ---------- Net deferred taxes $ 1,253 $ 1,184 $ (816) $ (575) ========== ========== ========== ==========
FS-21 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - Income Taxes, continued In March 2003, Napco Security Systems, Inc. timely filed its income tax return for the fiscal year ended June 30, 2002. This return included an election to treat one of the Company's foreign subsidiaries, Napco DR, as if it were a domestic corporation beginning July 1, 2001. This election is based on a recently enacted Internal Revenue Code ("Code") provision. As a result of this election, Napco DR is treated, for Federal income tax purposes, as transferring all of its assets to a domestic corporation in connection with an exchange. Although this type of transfer usually results in the recognition of taxable income to the extent of any untaxed earnings and profits, the recently enacted Code provision provides an exemption for applicable corporations. The Company qualifies as an applicable corporation per this Code section, and based on this Code exemption, the Company's tax return treated the transfer of approximately $27,000,000 of Napco DR's untaxed earnings and profits as nontaxable. The Internal Revenue service has issued a Revenue Procedure which is inconsistent with the Code exemption described above. Management believes that it has appropriately relied on the guidance in the Code when filing its income tax return. Nevertheless, as of June 30, 2002, the Company has removed the $2,225,000 deferred tax asset related to its net operating loss carryforward ("NOL") of $6,545,000. The NOL would have expired through 2017. As a result of the utilization of the NOL for book purposes, the Company has also eliminated the valuation allowance of $2,913,000 during the year ended June 30, 2002. The Company's tax provision utilizes estimates made by management and as such is subject to change as described in Note 1. The 1998 through 2002 income tax returns of the United Kingdom subsidiary were examined by the United Kingdom Inland Revenue. The resultant tax liability of $33,000 most of which relates to 1999, is reflected in the revised June 30, 2002 financial statements. NOTE 7 - Long-Term Debt Long-term debt consists of the following:
June 30 ----------------------- 2003 2002 ---------- ---------- (In thousands) Revolving credit and term loan facility (a) $ 11,513 $ 13,013 Notes payable (b) -- 500 Term loan (c) 3,300 5,225 Term loan (d) 1,187 -- Deferred acquisition costs, net (e) -- 514 ---------- ---------- 16,000 19,252 Less: current portion 1,900 2,664 ---------- ---------- $ 14,100 $ 16,588 ========== ==========
FS-22 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - Long-Term Debt, continued (a) In May 2001, the Company amended its secured revolving credit agreement with its primary bank. The Company's borrowing capacity under the amended agreement was increased to $18,000,000. The amended revolving credit agreement is secured by all the accounts receivable, inventory, the Company's headquarters in Amityville, New York and certain other assets of Napco Security Systems, Inc., and the common stock of three of the Company's subsidiaries. The revolving credit agreement bears interest at either the Prime Rate less 1/4% or an alternate rate based on LIBOR as described in the agreement. At June 30, 2003, the interest rate on this debt was 2.93%. The revolving credit agreement will expire in January 2005 and any outstanding borrowings are to be repaid or refinanced 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, 2003, the Company was not in compliance with one covenant related to the agreement described above for which it has received a waiver from its bank. (b) In connection with the stock purchase agreement described in Note 9, the Company entered into a term-loan facility in May 1998 with its primary bank for a $2,500,000 term loan. Under the terms of the note, the loan was to be repaid in 60 equal monthly installments of $41,667, plus interest at 7.94%, beginning on July 1, 1998. The Company made its final payment during fiscal 2003. In addition, the Company entered into a four-year term loan in the amount of $1,947,880 with its former president in connection with the stock purchase agreement. This note bears interest at 8% and payments began in April 1999. The Company made its final payment during fiscal 2003. (c) On July 27, 2000, the Company entered into a five year $8,250,000 secured term loan with its primary bank in connection with the acquisition of Continental Instruments Systems, LLC. Under the agreement, the loan is to be repaid in 60 equal monthly installments of $137,500, plus interest. 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, 2003, the Company was not in compliance with one covenant related to the agreement described above for which it has received a waiver from its bank. The Company entered into an interest rate swap agreement to exchange floating rate for fixed rate interest payments periodically over the life of this agreement. The interest rate swap was designated as a cash flow hedge and the difference between interest paid and received was included as a component of interest expense. The swap contract had a fixed interest rate of 8.68% and terminated on October 30, 2002. The debt instrument bears interest at either the Prime Rate or an alternate rate based on LIBOR as described in the agreement. At June 30, 2003 the interest rate on the debt was 3.41% FS-23 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - Long-Term Debt, continued (d) In connection with the treasury stock repurchase described in Note 9, the Company entered into a five year $1,250,000 term loan from its primary bank. Under this agreement, the loan is to be repaid in 60 equal monthly installments of $20,833, plus interest at a variable rate as defined. At June 30, 2003, the interest rate on this debt was 3.28%. (e) In connection with the Continental acquisition described in Note 2, the Company was required to make four scheduled future payments to the former owner, beginning on January 27, 2001 with a final payment, which was made on July 27, 2002. These payments were recorded at their present value using an interest rate of 7%. The difference between the present value and face value of the payments was accounted for as a debt discount and accreted to interest expense over the term of the payments. Maturities of long-term debt are as follows:
Year Ending June 30 Amount - ----------- ------- (In thousands) 2004 $ 1,900 2005 13,413 2006 250 2007 250 2008 187 ------- Total $16,000 =======
NOTE 8 - 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 authorized the granting of awards, the exercise of which would allow up to an aggregate of approximately 816,000 shares of the Company's common stock to be acquired by the holders of such awards. The 1992 Plan terminated in October 2002. As of June 30, 2003, there were 491,000 stock options granted to employees and directors of which 395,000 were exercisable. In December 2002, the stockholders approved the 2002 Employee Stock Option Plan (the 2002 Plan). The 2002 Plan authorizes the granting of awards, the exercise which would allow up to an aggregate of 340,000 shares of the Company's common stock to be acquired by the holders of such awards. Under the 2002 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 of at least 110% of the fair market value on the date of grant. FS-24 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - Stock Options, continued Under the 2002 Plan, stock options have been granted to employees and directors for terms of up to 10 years at an exercise price equal to the fair market value 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, 2003, 151,000 stock options were granted, 189,000 stock options were available for grant, and 30,000 stock options were exercisable under this plan. The following table reflects activity under the 1992 and 2002 Plans for the fiscal years ended:
June 30 ------------------------------------------------------------------ 2003 2002 2001 -------------------- -------------------- -------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price -------- -------- -------- -------- -------- -------- Outstanding at beginning of year 558,700 $ 3.71 576,850 $ 3.51 499,850 $ 3.33 Granted 161,000 9.80 56,000 5.95 109,500 4.18 Exercised (65,500) 3.98 (65,400) 3.85 (22,000) 2.64 Forfeited (3,000) 3.88 (2,000) 3.88 (6,000) 3.79 Canceled/lapsed (9,000) 3.88 (6,750) 3.87 (4,500) 2.64 -------- -------- -------- -------- -------- -------- Outstanding at end of year 642,200 $ 5.21 558,700 $ 3.71 576,850 $ 3.51 ======== ======== ======== ======== ======== ======== Exercisable at end of year 425,200 $ 3.92 365,980 $ 3.49 312,610 $ 3.47 ======== ======== ======== ======== ======== ======== Weighted average fair value of options granted $ 3.90 $ 2.45 $ 1.76
The following table summarizes information about stock options outstanding at June 30, 2003:
Options outstanding Options exercisable -------------------------------------- ------------------------ Weighted average Weighted Weighted Number remaining average Number average outstanding at contractual exercise exercisable at exercise Range of exercise prices June 30, 2003 life price June 30, 2003 price - ------------------------ -------------- ----------- -------- ------------- -------- $3.00 to $3.86 312,900 0.8 $ 3.07 295,100 $ 3.07 $3.87 to $3.99 43,200 2.0 3.88 25,400 3.88 $4.00 to $6.38 125,100 2.5 5.09 72,500 4.83 $6.39 to $10.16 161,000 4.8 9.80 32,200 9.80 ------------- ----------- -------- ------------- -------- 642,200 2.23 $ 5.21 425,200 $ 3.92 ============= =========== ======== ============= ========
FS-25 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - Stock Options, continued In September 2000, the stockholders approved a 10 year extension of the already existing 1990 nonemployee stock option plan (the 2000 Plan) to encourage nonemployee directors and consultants of the Company to invest in the Company's stock. The 2000 Plan provides for the granting of nonqualified 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 2000 Plan provides that the option price will 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 nonemployee consultants, under which a compensation cost is recognized for the fair value of the options granted as of the date of grant. Under this plan as of June 30, 2003, 2002 and 2001, 40,000 options were granted to directors with a weighted average exercise price of $4.13 and a weighted average remaining contractual life of 2.2 years. There were no options exercised, cancelled, or forfeited under the 2000 Plan during the years ended June 30, 2003, 2002 and 2001. As of June 30, 2003, 2002 and 2001 respectively, 24,000, 16,000 and 8,000 stock options were exercisable under this plan. No compensation expense was recorded for stock options granted to directors. NOTE 9 - Stock Purchase On May 28, 1998, the Company entered into a stock purchase agreement with its former president, which called for the purchase by the Company of all the shares of the Company's common stock held by the former president (889,576 shares) at a price of $5 per share, in connection with the former president's retirement. The agreement also contained consulting and noncompete agreements, each with a period of ten years. Upon closing, $2,500,000 of the purchase price was paid to the former president with the proceeds of the term loan described in note 7(b). The remaining purchase price was paid over a 4 year period according to the terms of a note issued to the former president. The common stock purchased is included in treasury stock as of June 30, 2003 and 2002. In January 2003, the Company repurchased 250,000 shares of its common stock from two stockholders, unaffiliated with the Company, at $9.75 per share, a discount from its then current trading price of $10.01. The transaction was approved by the board of directors and the purchase price of $2,437,500 was financed through the Company's revolving line of credit and a new five year term loan from its primary bank for $1,250,000. The term loan is being repaid in 60 equal monthly installments commencing on April 30, 2003. FS-26 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - 401(k) Plan The Company maintains a 401(k) plan covering all U.S. 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 $73,000, $70,000, and $63,000 for the fiscal years ended 2003, 2002 and 2001, respectively. NOTE 11 - Commitments and Contingencies Leases The Company is committed under various operating leases, which do not extend beyond fiscal 2010. Minimum lease payments through the expiration dates of these leases, with the exception of the land lease referred to below, are as follows:
Year Ending June 30: Amount - ----------- -------- 2004 $139,000 2005 96,000 2006 77,000 2007 43,000 2008 35,000 Thereafter 62,000 -------- Total $452,000 ========
Rent expense, with the exception of the land lease referred to below, totaled approximately $321,000, $319,000 and $432,000 for the three fiscal years ended June 30, 2003, 2002 and 2001, respectively. Land Lease On April 26, 1993, one of the Company's foreign subsidiaries entered into a 99 year lease for approximately four acres of land in the Dominican Republic, at an annual cost of approximately $288,000, on which the Company's principal production facility is located. Letters of Credit At June 30, 2003, the Company was committed for approximately $464,000 under open commercial letters of credit. FS-27 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - Commitments and Contingencies, continued Litigation In August 2001, the Company became a defendant in a product related lawsuit, in which the plaintiff seeks damages of approximately $17,000,000. This action is being defended by the Company's insurance company on behalf of the Company. Management believes that the action is without merit and plans to have this action vigorously defended. 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. Employment Agreements As of June 30, 2003, the Company was obligated under four employment agreements and one severance agreement. Compensation under the agreements includes annual salaries approximating $1,047,000. The employment agreements provide for annual bonuses based upon sales and profits, or a formula to be determined by the Board of Directors, and various severance payments as defined in each agreement. One agreement, with current annual compensation of $453,000, includes additional compensation of 100,000 stock options that vest 20% per year or upon a change in control, as defined, and a termination payment in an amount equal to 299% of the average of the prior five calendar year's compensation, subject to certain limitations, as defined. The employment agreements expire at various times through June 2008. NOTE 12 - Geographical Data 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 has customers worldwide with major concentrations in North America, Europe, and South America. FS-28 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - Geographical Data, continued The Company observes the provisions of SFAS No. 131. The following represents selected consolidated geographical data for the fiscal years ended June 30, 2003, 2002, and 2001:
2003 2002 2001 -------- -------- -------- (In thousands) Sales to external customers(1): Domestic $ 47,965 $ 46,652 $ 44,819 Export 9,375 9,184 9,952 -------- -------- -------- $ 57,340 $ 55,836 $ 54,771 ======== ======== ======== Identifiable assets: United States $ 39,005 $ 40,955 $ 38,282 Foreign(2) 18,344 19,797 25,395 -------- -------- -------- $ 57,349 $ 60,752 $ 63,677 ======== ======== ========
(1) All of the Company's sales occur in the United States and are shipped primarily from the Company's facilities in the United States and United Kingdom. There were no sales into any one foreign country in excess of 10% of total net sales. (2) Foreign identifiable assets consist primarily of inventories and fixed assets, which are located at the Company's principal manufacturing facility in the Dominican Republic. FS-29 SCHEDULE II NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Years Ended June 30, 2003, 2002, and 2001 (In Thousands)
Column A Column B Column C Column D Column E - --------------------------------------------------------------------------------------------------------------------------------- Balance at Charged to Balance at beginning of costs and end of Description period expenses Deductions (1) period - --------------------------------------------------------------------------------------------------------------------------------- For the year ended June 30, 2001: Allowance for doubtful accounts (deducted from accounts receivable) $ 622 $ 78 $ -- $ 700 For the year ended June 30, 2002: Allowance for doubtful accounts (deducted from accounts receivable) $ 700 $ 45 $ 352 $ 393 For the year ended June 30, 2003: Allowance for doubtful accounts (deducted from accounts receivable) $ 393 $ 16 $ 194 $ 215
(1) Deductions relate to uncollectible accounts charged off to valuation accounts, net of recoveries. See accompanying independent auditor's report. FS-30 Index to Exhibits Ex-10.I Amended and Restated Employment Agreement with Richard Soloway E-1 Ex-10.R Amendment No. 10 to the Loan and Security Agreement E-11 Ex-14.0 Code of Ethics E-17 Ex-21.0 Subsidiaries of the Registrant E-18 Ex-23.1 Consent of Independent Auditors E-19 Ex-23.2 Notice regarding consent of Arthur Andersen LLP E-20 Ex-24.1 Power of Attorney E-21 Ex-31.1 Section 302 Certification of Chief Executive Officer E-22 Ex-31.2 Section 302 Certification of Chief Financial Officer E-23 Ex-32.1 Certification of Chief Executive Officer Pursuant to 18 USC Section 1350 and Section 906 of Sarbanes - Oxley Act of 2002 E-24 Ex-32.2 Certification of Chief Financial Officer Pursuant to 18 USC Section 1350 and Section 906 of Sarbanes - Oxley Act of 2002 E-25
E-i EX-10.I 3 y93828exv10wi.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.I AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement"), dated as of June 26, 2003, between Napco Security Systems, Inc., a Delaware corporation (the "Company"), and Richard Soloway (the "Employee"). WHEREAS, Employee has been serving as Chairman of the Board, President and Chief Executive Officer of the Company and the parties wish to provide for the continuation of such services. NOW, THEREFORE, in consideration of the covenants and agreements contained herein, the Employment Agreement is hereby amended and restated to read as follows: 1. Employment, Duties and Acceptance. 1.1. The Company hereby employs the Employee for the Term (as hereinafter defined) to render services to the Company as its chairman of the board, president and chief executive officer, subject to the direction of the Board of Directors, and, in connection therewith, to perform such executive and managerial duties as he shall be directed by the Board of Directors consistent with Employee's position as chairman of the board, president and chief executive officer and consistent with the duties performed by the Employee immediately prior to the date of this Agreement. 1.2 Acceptance of Employment by the Employee. The Employee hereby accepts such employment and agrees to render the executive and managerial services described above on the terms and conditions set forth. 2. Term of Employment. The term of the Employee's employment under this Agreement shall commence on the date hereof and shall end five (5) years from the date hereof, unless sooner terminated pursuant to Article 5 of this Agreement and shall renew for additional one year intervals thereafter unless (i) sooner terminated pursuant to Article 5 hereof or (ii) either party gives notices of non-renewal at least six months before the end of the then applicable term of employment (the "Term"). 3. Compensation. 3.1. Salary. For services to be rendered pursuant to this Agreement, the Company agrees to pay the Employee a salary of $453,235 per annum (the "Annual Salary"), payable in accordance with the Company's regular payroll practices but no less frequently than once per month. Employee's annual salary shall be reviewed by the Board of Directors from time to time, but may not be reduced, and shall be increased commencing January 1 of each year of the Term by an amount at least equal to the product of the prior year's Annual Salary and the E-1 increase in the Consumer Price Index ("CPI") (over the CPI for 2003). Any increased amount shall be considered "Annual Salary" for the purposes of this Agreement. 3.2. Incentive Compensation. For each of the Company's fiscal years ending during the Term, including the fiscal year ending June 30, 2003, the Employee shall be awarded an incentive bonus (the "Bonus"), in such amount as determined by the Board of Directors. All or a portion of the amount of such bonus shall, at the Employee's option, be payable in common stock of the Company valued at the average closing sales price of NASDAQ, or the principal market on which the Company's common stock trades, on the last five trading days of the fiscal year for which the bonus is paid. The bonus set forth in this Section 3.2 shall be paid to the Employee no later than thirty (30) days after the Company's receipt of the audited financial statements for the Company with respect to the applicable fiscal year. 3.3. Withholdings and Deductions. All Compensation described in this Article 3 shall be less such deductions as may be required to be withheld by applicable law and regulation including the payment by the Employee of any applicable tax withholding with respect to his receipt of shares of common stock pursuant to Section 3.2 hereof. 3.4. Stock Options. As additional incentive to Employee, simultaneous with the execution of this Agreement, the Company shall grant Employee options under the Company's Stock Option Plan to purchase 100,000 shares of the Company's common stock at an exercise price equal to 110% of the "Market Price" (as defined below) of the shares on the date the Options are granted with respect to incentive stock options and 100% of the Market Price on the date the Options are granted for a non-qualified stock options. Options set forth in this Section 3.4 shall vest as provided in such Plan, but in no event later than on a Change in Control, as defined in Article 6 below, and may be exercisable for 5 years. For the purposes hereof, "Market Price" shall mean the last reported sales price of the Company's common stock on the relevant date. The Stock Option Agreement shall provide that the Employee may exercise options through a "cashless exercise" procedure and shall permit the Employee to sell any or all of the shares acquired through the exercise of any Options to the Company, at the discretion of the Employee, upon a Change in Control, at the Market Price of such shares on the date of sale. 3.5. Supplemental Amount. (a) The Company has a qualified retirement plan, under Section 401 et seq. of the Internal Revenue Code of 1986, as amended (the "Code"). The Employee is a participant in said plans. Section 415 of the Code provides that a plan shall not be a qualified trust under Section 401(a) if it provides for the payment of contributions with respect to a participant in excess of certain amounts. The Company's plan has provisions intended to assure that they are such qualified trusts, by providing that no contribution may be made to a plan if such contribution would cause the plan to be a non-qualified trust (the "Section 415 provisions"). The annual amounts that the Employee, as a participant, would be entitled to have contributed for his benefit by the Company under said plan (or under any other plan qualified under Section 401 et seq. of the Code in which the Employee may be a participant during the Term) if the plans did not have Section 415 provisions (or any successor provisions) in excess of the annual amounts that the Company actually contributes thereto for the benefit of the Employee is referred to as the "Supplemental Amount." E-2 (b) As supplemental compensation for each year during the Term, the Company shall, within 90 days after the end of the year, at the election of the Employee either (i) contribute the Supplemental Amount to non-qualified retirement plan established for the benefit of the Employee, (ii) issue (or transfer from its treasury stock) to the Employee a number of shares of its common stock, subject to no restriction other than as required by the Securities Act of 1933, equal to (x) the Supplemental Amount, (y) divided by the average of the daily closing prices of such stock over the last five trading days during said year. Such number of shares shall be rounded to the nearest number of whole shares. The certificate representing said shares shall bear the following legend: "The shares represented by this certificate were acquired in a transaction not registered under the Securities Act of 1933, and may not be transferred or disposed of except pursuant to an effective registration statement under said Act or an exemption from such registration thereunder" or (iii) pay the Supplemental Amount to the Employee in a lump sum cash payment. 4. Expenses and Benefits. 4.1. Expenses. The Company shall pay or reimburse the Employee for all reasonable expenses actually incurred or paid by him during the Term in the performance of his services under this Agreement, upon presentation of expense statements or vouchers or such other supporting information as it may require. 4.2. Benefits. The Employee shall be entitled to all rights and benefits for which he shall be eligible under any stock option or extra compensation plan, pension, group insurance or other so-called "fringe" benefits which the Company may, in its sole discretion, provide for him or for its senior executive employees generally. 4.3. Vacation. The Employee shall be entitled to such vacation as is provided from time to time to other senior executives of the Company. Upon termination of Employee's employment for any reason, the Company shall pay Employee for all unused vacation pay from the beginning of the Term of this Agreement. 5. Termination. 5.1. Termination upon Death. If the Employee shall die during the Term, this Agreement shall terminate, except that the Employee's legal representatives shall be entitled to receive the Annual Salary provided for in Section 3.1 of this Agreement for a period of one year after the Employee's death, paid in accordance with the Company's normal payroll practices, and his Bonus shall be calculated on a pro rata basis through the end of the fiscal quarter immediately preceding his death. In addition, the Employee's legal representatives shall receive payment for unreimbursed expenses. 5.2. Termination upon Disability. If, during the Term, the Employee shall become physically or mentally disabled, whether totally or partially, as determined by a medical doctor acceptable to both parties hereto, so that he is unable substantially to perform his services hereunder with or without reasonable accommodation for (i) a period of six consecutive months, or (ii) for shorter periods aggregating six months during any twelve-month period, the E-3 Company may at any time after the last day of the sixth consecutive month of disability or the day on which the shorter periods of disability shall have equaled an aggregate of six months, by written notice to the Employee (but before the Employee has recovered from such disability), terminate the term of the Employee's employment hereunder. Notwithstanding such disability, the Company shall continue to pay the Employee an amount equal to sixty (60%) percent of the Annual Salary herein provided for in Section 3.1 up to and through the scheduled Term under Article 2 hereof, but not longer than three (3) years, but his Bonus shall be calculated on a pro rata basis through the end of the fiscal quarter immediately preceding the sixth month of his disability. In addition, the Employee or his legal representatives shall receive payment for unreimbursed expenses. Notwithstanding any provision contained herein to the contrary, the amounts set forth in this Section 5.2 shall be reduced by the amount of any disability insurance payments received by the Employee under disability plans or policies of the Company. 5.3. Termination for Cause. Nothing contained herein shall preclude the Company from terminating this Agreement for "Cause." As used herein the term for "Cause" shall be deemed to mean and include with respect to the Employee only chronic alcoholism, addiction to any illegal drugs, conviction of the Employee of any felony, or of any lesser crime or offense involving the property of the Company or any of its subsidiaries or affiliates, or willful failure or refusal to substantially perform the services required of the Employee under this Agreement, following written notice by the Board of Directors to the Employee and Employee having failed to cure such failure within thirty days after such notice. In the event of a termination of the Employee for Cause, the Employee shall receive any unpaid Annual Salary in effect on the date immediately prior to such termination through the date of termination and payment for all unreimbursed expenses. 5.4. Voluntary Termination Without Good Reason. If the Employee terminates his employment for other than Good Reason, the Company shall pay the Employee the Employee's Annual Salary in effect on the date immediately prior to such termination through the date of termination and all unreimbursed expenses. "Good Reason" means the occurrence, without the Employee's express written consent, of any of the following circumstances: (i) the Company's failure to perform or observe any of the material terms or provisions of this Agreement; (ii) the assignment to the Employee of any duties inconsistent with, or any substantial diminution in, such Employee's status or responsibilities as in effect on the date hereof, including imposition of travel obligations that are materially greater than is reasonably required by the Company's business; (iii) (I) a reduction in the Employee's Annual Salary as in effect on the date hereof, as that amount may be increased from time to time; or (II) the failure to pay any agreed upon bonus award to which the Employee is otherwise entitled, at the time such bonuses are usually paid; E-4 (iv) a change in the principal place of the Employee's employment, as in effect on the date hereof or as in effect after any subsequent change to which the Employee consented in writing, to a location more than fifty (50) miles from the Employee's residence in Manhattan on the date hereof; (v) (I) the Company's failure to continue in effect any incentive compensation plan or stock option plan in which the Employee participates, unless the Company has provided an equivalent alternative compensation arrangement (embodied in an ongoing substitute or alternative plan) to the Employee, or (II) the Company's failure to continue the Employee's participation in any such incentive or stock option plan on substantially the same basis, both in terms of the amount of benefits provided and the level of the Employee's participation relative to other participants; or (vi) the failure of the Company or any successor to obtain a satisfactory written agreement from any successor to assume and agree to perform this Agreement. 5.5. Other. If the Company terminates the Employee's employment other than for Cause or if the Employee terminates employment with the Company for Good Reason, the Company shall pay the Employee, a total amount, in a lump sum cash payment, equal to the product of (i) the sum of (x) the Employee's Annual Salary plus, at a minimum, (y) the Bonus paid to the Employee for the year prior to his termination of employment, multiplied by (ii) the greater of (x) the number of years (and portions thereof) remaining in the Term or (y) three (3). In addition, the Employee shall receive all unreimbursed expenses. 6. Change in Control. (a) If during the Term there should be a Change in Control (hereinafter defined), then the Employee shall, by written notice to the Company at any time within twelve months following a Change in Control, be entitled to terminate the Term and his employment hereunder for any reason or no reason, and within 10 business days following such notice, the Employer shall pay the Employee, as a termination payment, an amount equal to 299% of the average of the prior five calendar year's compensation (including bonuses, pension, profit sharing, health and life insurance benefits and 401(k) contributions), except that in no event shall the amount payable under this paragraph 6(a) exceed $100.00 less than the amount which would (when aggregated with any other amounts which would be subject to the "parachute payment" provisions hereinafter referred to) result in any part of a payment to otherwise be made under this paragraph 6(a) constituting a "parachute payment" under Section 280G of the Code (the "Maximum Termination Payment"). The determination whether or not any part of such payment would constitute a "parachute payment" and the amount of the Maximum Termination Payment shall be made by the Company's regularly engaged independent accountants. In making the determination, the accountants shall rely on the Company's federal income tax returns and on the Code and the regulations thereunder, as then in effect, and may rely on the legislative and Internal Revenue Service reports issued in connection with the adoption of said Paragraph and regulations. (b) For purposes of this Agreement, a "Change in Control" shall mean: E-5 (i) either (x) any merger or consolidation of the Company into or with another corporation, or (y) the acquisition by another person, group or entity after the execution date of this Employment Agreement of beneficial ownership of more than 20% of the common stock of the Company (such person, group or entity reporting, or being required to report, the acquisition pursuant to Section 13 of the Securities Exchange Act of 1934 of all the voting and investment powers of such stock), or (ii) any sale by the Company of substantially all of the assets and business of Company for cash, stock, or any combination thereof, unless, immediately after such sale, the holders of Common Stock of the Company immediately prior to such sale own more than 80% or more of the voting capital stock of the acquiring corporation or, if the acquiring person or entity is not a corporation, more than 80% of the voting equity interests of such acquiring person or entity, or (iii) if a majority of Company's board of directors consists of individuals who were not Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company). (c) In the event that the Employee brings an action to enforce the provisions of this Agreement after a Change in Control, the Company shall pay the legal expenses of the Employee during the proceeding; provided that the court having jurisdiction over the proceeding shall have the right to require the Employee, as part of any judgment against the Employee, to repay the Company for any monies received from the Company for such expenses. 7. Certain Restrictions. 7.1. Non-Competition. Subject to the provisions of this Section 7.1, for the duration of the Term and for a period of one year after termination of the Term for any reason, the Employee will not, directly or indirectly, as an officer, director, stockholder, partner, associate, employee, consultant or owner, become or be interested in, or associated with, any other corporation, firm or business engaged in a business which is the same as, similar to or competitive with the business of the Company; provided that the ownership by the Employee, E-6 directly or indirectly, of shares of stock of a corporation, which shares are regularly traded on a national securities exchange or on the over-the-counter market and which shares do not amount to the lesser of (a) five per cent of the issued and outstanding shares of such corporation, or (b) an aggregate market value in excess of $500,000, shall not, in any event, be deemed to be in violation of the provisions of this Section 7.1. Notwithstanding any provision contained herein to the contrary, the provisions of this Section 7.1 shall not apply after a Change in Control or after the non-renewal of the Term pursuant to Article 2 hereof. 7.2. Mutual Non-Disparagement. During the Term and for a period of one year thereafter (regardless of any termination under Article 5 hereof), the Employee agrees that he will not publish or communicate to any person or entity any "Disparaging" (as defined below) remarks, comments or statements concerning the Company, its employees, agents, current and former directors and officers. In addition, during such period, the officers, directors and employees of the Company shall be instructed not to publish or communicate to any person or entity any Disparaging remarks, comments or statements concerning the Employee. For the purposes of this Agreement, "Disparaging" remarks, comments or statements are those that impugn the character, honesty, integrity or morality or business acumen or abilities in connection with any aspect of the operation of business of the individual or entity being disparaged. 8. Protection of Confidential Information. 8.1. Confidential Information. In view of the fact that the Employee's work for the Company will bring him into close contact with many confidential affairs of the Company not readily available to the public, the Employee agrees: (a) To keep secret and retain in the strictest confidence all confidential matters of the Company, including, without limitation, trade "know-how", secrets, the names of its customers, suppliers and contractors, the Company's procedures and policies in purchasing and sales, including its pricing policies, operational methods and technical processes, and other business affairs of the Company, learned by him heretofore or hereafter, and not to disclose them to anyone outside of the Company, either during or after his employment with the Company, except in the course of performing his duties hereunder or with the Company's express written consent; and (b) To deliver promptly to the Company on termination of his employment, all memoranda, notes, records, reports, manuals, drawings and other documents (and all copies thereof) relating to the Company's business and all property associated therewith, which he may then possess or have under his control. (c) Notwithstanding any provision contained herein to the contrary, confidential information shall not include information that is public knowledge (other than by acts by the Employee in violation of this Section 8.1) and the Employee shall be permitted to disclose information covered under this Section 8.1 if required by law, an order of court or a governmental agency with jurisdiction. E-7 8.2. Survival. The provisions related to post-termination payments under Article 5, Article 7 and Article 8 shall survive any termination of this Agreement; provided that the provisions of Section 7.1 shall not apply after a Change in Control or after the non-renewal of the Term pursuant to Article 2 hereof. 8.3. Specific Performance. The parties recognize that, because of the nature of the subject matter of this Article 8, it would be impractical and extremely difficult to determine the Company's actual damages in the event of a breach of this Article 8 by the Employee. Accordingly, if the Employee commits a breach, or threatens to commit a breach, of any of the provisions of Section 8.1, the Company shall be entitled to have the provisions of said Sections specifically enforced by temporary, preliminary and permanent injunctive relief without the posting of bond or other security by and court of competent jurisdiction, notwithstanding the provisions of Article 8 hereof. 9. Notices. All notices, requests, consents and other communications, required or permitted to be given hereunder, shall be in writing and shall be deemed to have been duly given if delivered personally, or mailed first-class, postage prepaid by registered or certified mail (notices shall be deemed to have been given when so delivered personally) or, if mailed, two days after the date of mailing, as follows (or to such other address as either party shall designate by notice so given to the other in accordance herewith): If to the Company, to: Napco Security Systems, Inc. Attention: Randy B. Blaustein 333 Bayview Avenue Amityville, NY 11701 If to the Employee, to: Richard Soloway [intentionally omitted] With a copy to: Schulte Roth & Zabel LLP Attention: Marc Weingarten, Esq. 919 Third Avenue New York, NY 10022 10. General. 10.1. Governing Law and Venue. This Agreement shall be governed by and construed and enforced in accordance with the local laws of the State of New York applicable to agreements made and to be performed entirely in New York. Any proceeding E-8 seeking to enforce any provision of this Agreement shall be brought only in the courts of the State of New York, sitting in the Borough of Manhattan, City of New York or in the United States District Court for the Southern District of New York and the Employee and the Company consent to the exclusive jurisdiction of such courts. 10.2. Section Headings. The article and section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 10.3. Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof. No representation, promise or inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or liable for any alleged representation, promise or inducement not so set forth. 10.4. Successors and Assigns. This Agreement, and the Employee's rights and obligations hereunder, may not be assigned by the Employee; provided that the Employee's legal representatives shall have the rights set forth in Article 5. The Company may assign its rights, together with its obligations, hereunder in connection with any sale, transfer or other disposition of all or substantially all of its business or assets; in any event the obligations of the Company hereunder shall be binding on its successors or assigns, whether by merger, consolidation or acquisition of all or substantially all of its business or assets. 10.5. Amendments, Modifications, etc. This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants hereof may be waived, only by a written instrument executed by the party to be charged therewith. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. The invalidity or unenforceability of any term or provision of this Agreement shall in no way impair or affect the balance thereof, which shall remain in full force and effect. E-9 IN WITNESS WHEREOF, the parties have executed this Agreement on June 26, 2003. NAPCO SECURITY SYSTEMS, INC. By: /s/ Randy Bruce Blaustein ------------------------------------------------ RANDY BRUCE BLAUSTEIN, for the Board of Directors /s/ Richard Soloway ------------------------------------------------ RICHARD SOLOWAY E-10 EX-10.R 4 y93828exv10wr.txt AMENDMENT NO. 10 TO THE LOAN AND SECURITY AGRMNT EXHIBIT 10.R AMENDMENT NO. 10 TO THE LOAN AND SECURITY AGREEMENT AMENDMENT NO. 10 to the Loan and Security Agreement dated as of March __, 2003 ("Amendment No. 10") by and between NAPCO SECURITY SYSTEMS, INC., a New York corporation having a place of business at 333 Bayview Avenue, Amityville, New York 11701 (the "Debtor") and HSBC BANK USA f/k/a MARINE MIDLAND BANK, having a place of business at 534 Broad Hollow Road, Melville, New York 11747 (the "Secured Party"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, as of May 12, 1997, Debtor and Secured Party had entered into a certain loan and security agreement, as amended by amendment no. 1 to the loan and security agreement dated as of May 28, 1998, as amended by amendment no. 2 to the loan and security agreement dated as of June 30, 1999, as amended by amendment no. 3 to the loan and security agreement dated as of February 9, 2000, as amended by amendment no.4 to the loan and security agreement dated as of July 27, 2000, as amended by amendment no. 5 to the loan and security agreement dated as of September 22, 2000, as amended by amendment no. 6 to the loan and security agreement dated as of November 22, 2000, as amended by amendment no. 7 to the loan and security agreement dated as of February 14, 2001, as amended by amendment no. 8 to the loan and security agreement dated as of May 15, 2001, as mended by amendment no. 9 to the loan and security agreement dated as of September 30, 2001, as may be amended from time to time (the "Agreement"); WHEREAS, the Debtor has requested that (i) the Secured Party modify certain financial covenants and the Secured Party has agreed to do so, in the manner set forth below, and (ii) the Secured Party extend a $1,250,000 term loan to Borrower ("2003 Term Loan") provided however, that, among other things, Debtor execute this Amendment No. 10. NOW, THEREFORE, in consideration of the mutual promises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. The definition of "Transaction Documents" contained in Section 1.1. of the Agreement is hereby amended to read in its entirety as follows: E-11 TRANSACTION DOCUMENTS means, individually, jointly, severally and collectively, the Agreement (including all amendments to date, including this Amendment No. 10), the term loan note dated as of even date hereof by Debtor in favor of Secured Party evidencing the 2003 Term Loan, as the same may be extended, re-executed, modified or otherwise amended from time to time, and all documents, instruments, notes and agreements by Debtor, Continental Systems or any other Third Party or any Responsible Party in favor of Secured Party, whether in existence now or hereinafter created, executed and delivered to Secured Party, as the same may be extended, re-executed, modified or otherwise amended from time to time, including, without limitation, the Term Loan Note, the Continental Term Loan Note, the Note, 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, Continental Systems any other Third Party, or any Responsible Party pursuant hereto or in connection herewith, or in connection with a letter of credit application and reimbursement agreement, each dated as of May 12, 1997, as may be reaffirmed or restated from time to time, a certain uncommitted trade line established by Secured Party 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 as of May 12, 1997, as may be re-executed, amended, extended or otherwise modified from time to time, the Term Loan Note in the principal sum of $2,500,000.00, as may be extended or otherwise modified from time to time, the Note, the Continental Term Loan Note in the principal sum of $8,250,000, that certain ISDA master agreement dated as of July 27, 2000 by and between Continental Systems and Secured Party, inclusive of all schedules thereto, as the same may be modified from time to time (the "Master Agreement") and all such other mortgages, security agreements, guaranties and other documents as may be executed and delivered to Secured Party to evidence, guaranty and secure the Continental Term Loan Note, and the obligations thereunder, as may be extended or otherwise modified from time to time, and uncommitted line of credit facility to be used by Debtor to finance certain acquisitions, as may be executed and delivered to Secured Party from time to time to evidence and secure the obligations under such facilities pursuant to the terms that the Secured Party shall request, and all other documents, agreements, reaffirmations, certificates and resolutions related thereto, and amendments or supplements thereto, all such other agreements, E-12 resolutions, certificates, resolutions and opinion letters executed and/or issued as a condition precedent to or in connection with the Agreement, the Term Loan Note, Note, the Continental Term Loan Note, and all such other documents, agreements, and instruments delivered hereunder or as a supplement or amendment thereto or as Secured Party may reasonably require from time to time in order to evidence, guaranty and/or secure any and all indebtedness of Debtor and/or Continental Systems, as the case may be, to Secured Party or to create, perfect, continue the perfection or protect the Secured Party's security interest in the Collateral or any of the other collateral specified in the other Transaction Documents. 2. Section 9.26. (b) and Section 9.26. (g) of the Agreement are hereby amended in their entirety to read as follows: (b) The Debtor and its Consolidated Subsidiaries shall maintain, on a consolidated basis, a minimum Tangible Net Worth (to be tested quarterly based upon the financial statements required to be presented to Secured Party pursuant to Section 9.1. hereof) of not less than: (i) during the period commencing on October 1, 2002 through December 31, 2002, $21,000,000, and (ii) during the period commencing on January 1, 2003 through March 31, 2003, $21,470,000, and (iii) during the period commencing on April 1, 2003 through June 30, 2003, and thereafter while any Indebtedness remains outstanding, $23,040,000. (iv) during the period commencing on July 1, 2003 through September 30, 2003, not less than the actual Tangible Net Worth at 6/30/2003 minus $630,000, and (v) during the period commencing on October 1, 2003 through December 31, 2003, not less than the actual Tangible Net Worth at 6/30/2003 minus $865,000, and (vi) during the period commencing on January 1, 2004 through March 31, 2004, not less than the actual Tangible Net Worth at 6/30/2003 minus $390,000, and (vii) during the period commencing on April 1, 2004 through June 30, 2004, not less than the actual Tangible E-13 Net Worth at 6/30/2003 plus $880,000. (g) The Debtor and its Consolidated Subsidiaries shall maintain, on a consolidated basis, a ratio of Funded Debt to EBIDTA (to be tested quarterly, on a rolling four quarter basis, based upon the financial statements required to be presented to Secured Party pursuant to Section 9.1 hereof): (i) of not greater than 5.51 to 1 from October 1, 2002 through the period ending March 31, 2003, and (ii) of not greater than 5.00 to 1 from April 1, 2003 through the period ending June 30, 2003, and (iii) of not greater than 4.45 to 1 from July 1, 2003 and thereafter while any Indebtedness remains outstanding. 3. As an inducement to the Bank modifying some of the provisions of Section 9.26. of the Agreement pursuant to the terms hereof, Debtor represents and warrants to Secured Party that, as of the date of execution of this Amendment No. 10, (i) the representations and warranties set forth in Article 4 of the Agreement and the representations and warranties of Debtor and any Third Party set forth in the other Transaction Documents to which any is a party are true and correct in all respects, (ii) no event has occurred and is continuing which constitutes an "Event of Default" under any of the Transaction Documents (as "Event of Default" is defined in each of those Transaction Documents"), (iii) Debtor is in compliance with the covenants set forth in Articles 9 and 10 of the Agreement, as modified herein; and(iv) Debtor will pay Secured Party's reasonable legal fees and disbursements thereof. 4. Debtor represents and warrants to Secured Party that there are no offsets, defenses or counterclaims to the payment of the Indebtedness owing Secured Party, including the Advances, and to the continuing general security interest in the Collateral granted to Secured Party by Debtor as security for payment of the Indebtedness, as fully described in the Agreement. 5. Except as modified herein, all other provisions of the Agreement and the other Transaction Documents remain unmodified and are in full force and effect. 6. Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Agreement. 7. This Amendment No. 10 shall be governed by the laws of the State of New York. E-14 IN WITNESS WHEREOF, the parties have executed this Amendment No. 10 to the Loan and Security Agreement as of the day and year first above written. HSBC BANK USA f/k/a MARINE MIDLAND BANK By: /s/ Roger Coleman ---------------------------------------- Roger Coleman Vice President NAPCO SECURITY SYSTEMS, INC. By: /s/ Kevin S. Buchel ---------------------------------------- Kevin Buchel Senior Vice President E-15 STATE OF NEW YORK ) ) SS: COUNTY OF SUFFOLK ) On this 13th day of March, 2003, before me, the undersigned, a Notary Public in and for said State, personally came ROGER COLEMAN, personally known to me or proved to me on the basis of satisfactory evidence to be the person, whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity and that by his signature on the instrument, the person or entity upon behalf of which the person acted executed the instrument. /S/ Michelle Lin -------------------------------------------- Notary Public STATE OF NEW YORK ) ) SS: COUNTY OF SUFFOLK ) On this 17th day of March, 2003, before me, the undersigned, a Notary Public in and for said State, personally came KEVIN BUCHEL personally known to me or proved to me on the basis of satisfactory evidence to be the person, whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity and that by his signature on the instrument, the person or entity upon behalf of which the person acted executed the instrument. /s/ Linda Patsakos -------------------------------------------- Notary Public E-16 EX-14.0 5 y93828exv14w0.txt CODE OF ETHICS EXHIBIT 14.0 January 2004 NAPCO SECURITY SYSTEMS, INC. CODE OF ETHICS This Code of Ethics applies to the employees and directors of Napco Security Systems, Inc. Napco expects all of its employees and directors to act in accordance with the highest standards of personal and professional integrity in all aspects of their activities, to comply with all applicable laws, rules and regulations, to deter wrongdoing and abide by the Napco policies and procedures adopted by Napco that govern the conduct of its employees and directors, as follows: (a) Engage in and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (b) Avoid conflicts of interest and to disclose to the Director of Napco Compliance any material transaction or relationship that reasonably could be expected to give rise to such a conflict; (c) Take all reasonable measures to protect the confidentiality of non-public information about Napco or its subsidiaries and their customers obtained or created in connection with employee's activities and to prevent the unauthorized disclosure of such information unless required by applicable law or regulation or legal or regulatory process; (d) Produce full, fair, accurate, timely, and understandable disclosure in reports and documents that Napco or its subsidiaries files with, or submits to, the Securities and Exchange Commission and other regulators and in other public communications made by Napco or its subsidiaries; (e) Comply with applicable governmental laws, rules and regulations, as well as the rules and regulations of self-regulatory organizations of which Napco or its subsidiaries is a member; and (f) Promptly report any possible violation of this Code of Ethics to the Director of Napco Compliance or any of the parties or channels listed in the Napco policies. Employees and directors are prohibited from directly or indirectly taking any action to fraudulently influence, coerce, manipulate or mislead Napco or its subsidiaries' independent public auditors for the purpose of rendering the financial statements of Napco or its subsidiaries misleading. Employees and directors understand that they will be held accountable for their adherence to this Code of Ethics. Their failure to observe the terms of this Code of Ethics may result in disciplinary action, up to and including termination of employment. Violations of this Code of Ethics may also constitute violations of law and may result in civil and criminal penalties for directors, employees, their supervisors and/or Napco. If employees and directors have any questions regarding the best course of action in a particular situation, they should promptly contact the Director of Napco Compliance. Employees and directors may choose to remain anonymous in reporting any possible violation of this Code of Ethics. E-17 EX-21.0 6 y93828exv21w0.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.0 SUBSIDIARIES OF THE COMPANY SUBSIDIARIES OF THE COMPANY The following are the Company's subsidiaries as of the close of the fiscal year ended June 30, 2003. All beneficial interests are wholly-owned, directly or indirectly, by the Company and are included in the Company's consolidated financial statements.
State or Jurisdiction Name of Organization - ---- --------------------- Alarm Lock Systems, Inc. Delaware Continental Instruments, LLC New York Napco Security Systems International, Inc. New York Napco/Alarm Lock Exportadora, S.A. Dominican Republic Napco/Alarm Lock Grupo Internacional, S.A. (formerly known as NSS Caribe, S.A.) Dominican Republic Napco Group Europe, Limited England
E-18 EX-23.1 7 y93828exv23w1.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the registration statements on Form S-8 (numbers 333-104700 and 333-14743) of Napco Security Systems, Inc. of our report dated January 26, 2004 (such report explains that the 2001 consolidated financial statements and financial statement schedule of Napco Security Systems, Inc. were audited by other auditors who have ceased operations), appearing in this annual report on Form 10-k of Napco Security Systems, Inc. for the year ended June 30, 2003. /s/ Marcum & Kliegman LLP Woodbury, New York February 5, 2004 E-19 EX-23.2 8 y93828exv23w2.txt NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.2 NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP Section 11(a) of the Securities Act of 1933, as amended (the "Securities Act"), provides that if part of a registration statement at the time it becomes effective contains an untrue statement of a material fact, or omits a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring a security pursuant to such registration statement (unless it is proved that at the time of such acquisition such person knew of such untruth or omission) may assert a claim against, among others, an accountant who has consented to be named as having certified any part of the registration statement or as having prepared any report for use in connection with the registration statement. On July 9, 2002, the Board of Directors of Napco Security Systems, Inc. (the "Company"), upon recommendation of its Audit Committee, decided to end the engagement of Arthur Andersen LLP ("Arthur Andersen") as the Company's independent public accountants, effective after Arthur Andersen's review of the Company's financial results for the quarter ended March 31, 2002 and the filing of the Company's Form 10-Q for such quarter, and authorized the engagement of KPMG LLP to serve as the Company's independent public accountants for the fiscal year ending June 30, 2003. For additional information, see the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission ("SEC") on July 10, 2002. After reasonable efforts, the Company has been unable to obtain Arthur Andersen's written consent to the incorporation by reference into the Company's registration statements (Form S-8 No. 333-104700 and No. 333-14743) and the related prospectuses (the "Registration Statements") of Arthur Andersen's audit report with respect to the Company's consolidated financial statements as of June 30, 2001 and for the two years in the period then ended. Under these circumstances, Rule 437a under the Securities Act permits the Company to file this Annual Report on Form 10-K, which is incorporated by reference into the Registration Statements, without a written consent from Arthur Andersen. As a result, with respect to transactions in the Company's securities pursuant to the Registration Statements that occur subsequent to the date this Annual Report on Form 10-K is filed with the Securities and Exchange Commission, Arthur Andersen will not have any liability under Section 11(a) of the Securities Act for any untrue statements of a material fact contained in the financial statements audited by Arthur Andersen or any omissions of a material fact required to be stated therein. Accordingly, you would be unable to assert a claim against Arthur Andersen under Section 11(a) of the Securities Act. E-20 EX-24.1 9 y93828exv24w1.txt POWER OF ATTORNEY EXHIBIT 24.1 POWER-OF-ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard Soloway and Kevin S. Buchel, and each of them, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities to sign the Annual Report on Form 10-K for the fiscal year ended June 30, 2003 of Napco Security Systems, Inc. and any and all amendments thereto, and to file the same with all exhibits thereto, and the other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE -------------- -------- -------- /s/ Richard Soloway Chairman of the Board September 23, 2003 - --------------------------- of Directors, President Richard Soloway and Secretary (Principal Executive Officer) /s/ Kevin S. Buchel Director, Senior Vice September 23, 2003 - --------------------------- President of Operations Kevin S. Buchel and Finance and Treasurer (Principal Financial and Accounting Officer) /s/ Randy B. Blaustein Director September 23, 2003 - --------------------------- Randy B. Blaustein /s/ Arnold Blumenthal Director - --------------------------- September 23, 2003 Arnold Blumenthal /s/ Donna Soloway Director September 23, 2003 - --------------------------- Donna Soloway /s/ Andrew J. Wilder Director September 23, 2003 - --------------------------- Andrew J. Wilder
E-21 EX-31.1 10 y93828exv31w1.txt CERTIFICATION Exhibit 31.1 SECTION 302 CERTIFICATION I, Richard Soloway, certify that: 1. I have reviewed this annual report on Form 10-K of Napco Security Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 5, 2004 /s/ Richard Soloway ----------------------------- Richard Soloway Chief Executive Officer (Principal Executive Officer) E-22 EX-31.2 11 y93828exv31w2.txt CERTIFICATION Exhibit 31.2 SECTION 302 CERTIFICATION I, Kevin S. Buchel, certify that: 1. I have reviewed this annual report on Form 10-K of Napco Security Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 5, 2004 /s/ Kevin S. Buchel ------------------------------ Kevin S. Buchel Chief Financial Officer (Principal Financial Officer) E-23 EX-32.1 12 y93828exv32w1.txt CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Napco Security Systems, Inc. (the "Company") on Form 10-K for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard Soloway, Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: February 5, 2004 /s/ Richard Soloway --------------------------------- Richard Soloway Chief Executive Officer (Principal Executive Officer) E-24 EX-32.2 13 y93828exv32w2.txt CERTIFICATION Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Napco Security Systems, Inc. (the "Company") on Form 10-K for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin S. Buchel, Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: February 5, 2004 /s/ Kevin S. Buchel ------------------------------ Kevin S. Buchel Chief Financial Officer (Principal Financial Officer) E-25 -----END PRIVACY-ENHANCED MESSAGE-----