-----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, StXuva2LJKQsKKMXNtZJSHWd9fti/GK45wQfGzTLXY2RuTF5YgPWw6BGT5ZO90mg seQL0v18oT58j8sFPxvHpw== 0000950123-99-010265.txt : 19991117 0000950123-99-010265.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950123-99-010265 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 000-10004 FILM NUMBER: 99755682 BUSINESS ADDRESS: STREET 1: 333 BAYVIEW AVE CITY: AMITYVILLE STATE: NY ZIP: 11701 BUSINESS PHONE: 5168429400 MAIL ADDRESS: STREET 1: C/O FORCHELLI CURTO SCHWARTZ ET AL, LLP STREET 2: 330 OLD COUNTRY RD. - 3RD FL. CITY: MINEOLA STATE: NY ZIP: 11501 10-Q 1 NAPCO SECURITY SYSTEMS, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - ------- SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1999 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - ------- SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________ . Commission File Number: 0-10004 ---------------------------------- NAPCO SECURITY SYSTEMS, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) DELAWARE 11-2277818 - ------------------------------------ --------------------------------- (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 333 Bayview Avenue Amityville, New York 11701 - ------------------------------------ ------------------------------------- (Zip Code) (516) 842-9400 ----------------------------------------------------- (Registrant's telephone number including area code) NONE ----------------------------------------------------- (Former name, former address and former fiscal year if changed from last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No ------ ------ Number of shares outstanding of each of the issuer's classes of common stock, as of: SEPTEMBER 30, 1999 COMMON STOCK, $.01 PAR VALUE PER SHARE 3,495,351
2 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES INDEX SEPTEMBER 30, 1999
Page ---- PART I: FINANCIAL INFORMATION (unaudited) Condensed Consolidated Balance Sheets, September 30, 1999 and June 30, 1999 3 Condensed Consolidated Statements of Income for the Three Months Ended September 30, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II: OTHER INFORMATION 11 SIGNATURE PAGE 12 INDEX TO EXHIBITS 13
-2- 3 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
September 30, June 30, ASSETS 1999 1999 ------ -------------- ------------- (in thousands, except share data) Current Assets: Cash and cash equivalents $ 1,688 $ 2,230 Accounts receivable, less allowance for doubtful accounts: September 30, 1999 $ 897 June 30, 1999 $ 887 14,410 16,446 Inventories, net (Note 2) 22,865 21,495 Prepaid expenses and other current assets 538 809 Deferred income taxes, net 716 716 -------------- -------------- Total current assets 40,217 41,696 Property, Plant and Equipment, net of accumulated depreciation and amortization (Note 3): September 30, 1999 $ 12,631 June 30, 1999 $ 12,316 11,195 11,280 Goodwill, net 2,459 2,485 Other Assets 313 326 -------------- -------------- $ 54,184 $ 55,787 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Current portion of long-term debt $ 1,208 $ 1,433 Accounts payable 3,271 3,651 Accrued and other current liabilities 1,257 1,582 Accrued taxes 19 110 -------------- -------------- Total current liabilities 5,755 6,776 Long-Term Debt 17,042 17,241 Deferred Income Taxes 442 442 -------------- -------------- Total liabilities 23,239 24,459 Stockholders' Equity: Common stock, par value $.01 per share; 21,000,000 shares authorized, 5,908,602 shares issued; 3,495,351 and 3,490,151 shares outstanding, respectively 59 59 Additional paid-in capital 764 751 Retained earnings 34,571 34,967 Less: Treasury stock, at cost (2,418,451 shares) (4,449) (4,449) -------------- -------------- Total stockholders' equity 30,945 31,328 -------------- -------------- $ 54,184 $ 55,787 ============== ==============
See accompanying notes to Condensed consolidated Financial Statements. -3- 4 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended September 30, ----------------------------------------------- 1999 1998 -------------- -------------- (in thousands, except share and per share data) Net Sales $ 10,449 $ 11,090 Cost of Sales 7,858 8,382 -------------- -------------- Gross profit 2,591 2,708 Selling, General and Administrative Expenses 2,719 2,228 -------------- -------------- Operating income (loss) (128) 480 -------------- -------------- Interest Expense, net 321 368 Other Expense, net 32 5 -------------- -------------- 353 373 -------------- -------------- Income (loss) before (benefit) for income taxes (481) 107 (Benefit) for Income Taxes (85) (165) -------------- -------------- Net income (loss) $ (396) $ 272 ============== ============== Earnings (Loss) Per Share (Note 5): Basic $ (0.11) $ 0.08 ============== ============== Diluted $ (0.11) $ 0.08 ============== ============== Weighted Average Number of Shares Outstanding (Note 5): Basic 3,492,751 3,489,901 ============== ============== Diluted 3,492,751 3,524,825 ============== ==============
See accompanying notes to Condensed consolidated Financial Statements. -4- 5 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended September 30, ------------------------------------ 1999 1998 ------------- --------------- (in thousands) Net Cash Provided by Operating Activities $ 112 $ 790 ------------- --------------- Cash Flows from Investing Activities: Purchases of property, plant and equipment (230) (188) ------------- --------------- Net cash used in investing activities (230) (188) ------------- --------------- Cash Flows from Financing Activities: Proceeds from long-term debt borrowings - - Principal payments on long-term debt (424) (350) ------------- --------------- Net cash (used in) financing activities (424) (350) ------------- --------------- Net Increase (Decrease) in Cash and Cash Equivalents (542) 252 Cash and Cash Equivalents at Beginning of Period 2,230 1,989 ------------- --------------- Cash and Cash Equivalents at End of Period $ 1,688 $ 2,241 ============= =============== Cash Paid During the Period for: Interest $ 315 $ 335 ============= =============== Income taxes $ 6 $ 242 ============= ===============
See accompanying notes to Condensed consolidated Financial Statements. -5- 6 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1.) Summary of Significant Accounting Policies and Other Disclosures The information for the nine months ended September 30, 1999 and 1998 is unaudited, but in the opinion of the Company, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results of operations for such periods have been included. The results of operations for the periods may not necessarily reflect the annual results of the Company. For further information, refer to the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. The Company has adopted all recently effective accounting standards which have an impact on its condensed financial statements. 2.) Inventories
Inventories consist of: September 30, June 30, 1999 1999 ------------- ------------- (in thousands) Component parts $ 10,736 $ 10,093 Work-in-process 5,270 4,954 Finished products 6,859 6,448 ------------- ------------- $ 22,865 $ 21,495 ============= =============
3.) Property, Plant and Equipment
Property, Plant and Equipment consists of: September 30, June 30, 1999 1999 ---------------- ------------- (in thousands) Land $ 904 $ 904 Building 8,911 8,911 Molds and dies 3,251 3,180 Furniture and fixtures 971 964 Machinery and equipment 9,733 9,581 Building improvements 56 56 ---------------- ------------- 23,826 23,596 Less: Accumulated depreciation and amortization 12,631 12,316 ---------------- ------------- $ 11,195 $ 11,280 ================ =============
4.) In August 1995, the Internal Revenue Service ("IRS") informed the Company that it had completed the audit of the Company's Federal tax returns for fiscal years 1986 through 1993. The IRS had issued a report to the Company proposing adjustments that would result in taxes due of approximately $4.3 million excluding interest charges. The primary adjustments presented by the IRS related to intercompany pricing and royalty charges, DISC earnings and charitable contributions. The Company disagreed with the IRS and began the process of vigorously appealing this assessment using all remedies and procedural actions available under the law. The Company had provided a reserve to reflect its estimate of the ultimate resolution of this matter, so that the outcome of this matter would not have a material adverse effect on the Company's consolidated financial statements. During fiscal 1998, the Company continued to discuss the assessment with the IRS Appeals Office and in July 1998 received a revised audit report, which was subject to final government administrative approval, and which reduced the original assessment for the years covered by the IRS audit. The Company accepted the revised audit report and the final government approval was pending as of June 30, 1998. Accordingly, the Company determined that $900,000 of previously recorded reserves should be reversed through the 1998 income tax provision to reflect the expected final settlement with respect to the IRS audit. In fiscal 1999, the Company received the final government approval on the IRS audit related to fiscal years 1986 through 1993. In addition, the IRS completed its audits of fiscal years 1994 through 1997. As a result of the favorable outcome from the audits, the Company reversed an additional $1,896,000 of previously recorded reserves through the income tax provision in fiscal 1999. -6- 7 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5.) Net Income Per Common Share The Company adopted Statement of Financial Accounting standards ("SFAS") No. 128 "Earnings per share". In accordance with SFAS No. 128, net income per common share amounts ("basic EPS") were computed by dividing net income by the weighted average number of common shares outstanding for the period. Net income per common share amounts, assuming dilution ("diluted EPS"), were computed by reflecting the potential dilution from the exercise of stock options. SFAS No. 128 requires the presentation of both basic EPS and diluted EPS on the face of the income statement. Net income per share amounts for the same prior-year periods have been restated to conform to the provisions of SFAS No. 128. A reconciliation between the numerators and denominators of the basic and diluted EPS computations for net income is as follows:
Three Months Ended September 30, 1999 (in thousands, except per share data) ------------------------------------------------------ Net Income Shares Per Share (numerator) (denominator) Amounts Net income (loss) $(396) - - ------- BASIC EPS --------- Net income (loss) attributable to common stock $(396) 3,493 $(0.11) ------- EFFECT OF DILUTIVE SECURITIES ----------------------------- Options - - - ---- ---- ---- DILUTED EPS ----------- Net income (loss) attributable to common stock and assumed option exercises $(396) 3,493 $(0.11) ------- ====== =======
Options to purchase 173,820 shares of common stock in the three months ended September 30, 1999 were not included in the computation of diluted EPS because the exercise prices of 89,370 of the options exceeded the average market price of the common shares for this period and the inclusion of the remaining 84,450 options would have been anti-dilutive. . These options were still outstanding at the end of the period. -7- 8 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Sales for the three months ended September 30, 1999 decreased by $641,000 to $10,449,000 as compared to $11,090,000 for the same period a year ago. This change was primarily a result of the Company's reduction of volume incentives to its customers as partially offset by the increase in sales of the Company's Alarm Lock product line. The Company's gross profit for the three months ended September 30, 1999 decreased by $117,000 to $2,591,000 or 24.8% of sales as compared to $2,708,000 or 24.4% of sales for the same period a year ago. The decrease in gross profit was due primarily to the lower sales as discussed above. The increase in gross profit as a percentage of sales was primarily due to a reduction of product costs and volume incentives and a positive shift in product mix. Selling, general and administrative expenses for the three months ended September 30, 1999 increased by $491,000 to $2,719,000 as compared to $2,228,000 a year ago. This increase was due primarily to the Company's increased selling and marketing efforts in the rollout of its new products. Interest and other expense for the three months ended September 30, 1999 decreased by $20,000 to $353,000 from $373,000 for the same period a year ago. This decrease in expense was primarily due to the continuing reduction in the Company's outstanding debt. The benefit for income taxes for the three months ended September 30, 1999 decreased by $80,000 to a benefit of $85,000 as compared to a benefit of $165,000 for the same period a year ago. The current period benefit relates to the current period results; the decrease in the benefit for income taxes in the current period is primarily due to the reversal of reserves in the same period a year ago that did not recur in the current quarter. Net income decreased by $668,000 to a loss of $396,000 or $(.11) per share for the three months ended September 30, 1999 as compared to income of $272,000 or $.08 per share for the same period a year ago. The change in net income was due primarily to the factors discussed above. Liquidity and Capital Resources During the three months ended September 30, 1999 the Company utilized virtually all of its cash generated from operations and a portion of its cash on hand to reduce its outstanding borrowings and to purchase property and equipment. This resulted in a decrease in outstanding debt to $18,250,000 at September 30, 1999 from $18,674,000 at June 30, 1999 while cash and cash equivalents decreased to $1,688,000 as of September 30, 1999 as compared to $2,230,000 at June 30, 1999. Accounts Receivable at September 30, 1999 decreased $2,036,000 to $14,410,000 as compared to $16,446,000 at June 30, 1999. This decrease is primarily the result of the higher sales volume during the quarter ended June 30, 1999 as compared to the quarter ended September 30, 1999. Inventory at September 30, 1999 increased by $1,370,000 to $22,865,000 as compared to $21,495,000 at June 30, 1999. This increase was primarily the result of the Company increasing production of certain of its existing products as well as preparing for the rollout of several new products later in the fiscal year. In May of 1998 the Company repurchased 889,576 shares of Napco common stock for $5.00 per share from one of its co-founders. $2.5 million was paid at closing with the balance of the purchase price to be paid over a four (4) year period. The portion of the purchase price paid at closing was financed by the Company's primary bank and is to be repaid over a five (5) year period. On May 13, 1997, the Company refinanced the majority of its bank debt with a new primary bank and entered into a $16,000,000 secured revolving credit agreement and a $3,000,000 line of credit to be used in connection with commercial and standby letters of credit, and replaced the $2,500,000 standby letter of credit securing an earlier loan from another bank in connection with the Company's international operations. These agreements replaced the existing $11,000,000 and $2,000,000 credit agreements with another bank. The Company restructured its debt to allow for future growth and expansion as well as to obtain terms more favorable to the Company. As part of the debt restructuring, the Company retired the outstanding Industrial Revenue Bonds relating to the financing of the Company's Amityville facility. The revolving credit agreement will expire in November, 2000 and any outstanding borrowings are to be repaid on or before that time. -8- 9 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) On April 26, 1993 the Company's foreign subsidiary entered into a 99 year lease of approximately four acres of land in the Dominican Republic, at an annual cost of approximately $272,000. The foreign subsidiary relocated its operations to this site at the end of fiscal 1995. The Company has entered into an employment agreement with Michael Carrieri, Vice President of Engineering Development (see Exhibit 10(U)). As of September 30, 1999 the Company had no material commitments for capital expenditures. Year 2000 Date Conversion As the century turns from 1900 to 2000, date-sensitive systems may recognize the year 2000 as 1900 or not at all. This results primarily because of the conventional use of a two digit date field in most software applications. The inability to properly recognize the year 2000 may cause systems to process financial and operational information incorrectly. The Company believes that virtually all of the Company's systems are now fully compliant. Due to the fact that the Company's software manufacturer includes the year 2000 upgrade as part of its ongoing maintenance, the Company expects to expend a minimal amount of its resources in this area. Although the Company expects its critical systems to be compliant, there is no guarantee that these results will be achieved. Specific factors that give rise to this uncertainty include a possible failure to identify all susceptible systems, noncompliance by third parties whose systems and operations impact the Company, and other similar uncertainties. In addition to internal Year 2000 remediation activities, the Company is in contact with key suppliers and customers to reduce the likelihood of any significant interruption in the business between the Company and these important third parties relating to the Year 2000 issue. A comprehensive survey of all vendors and customers has not been made and is not presently planned. The Company's efforts thus far have been focused on key vendors and customers. If these third parties do not convert their systems in a timely manner and in a way that is compatible with the Company's systems, the Year 2000 issue could have a material adverse effect on the Company's operations. The Company believes that its actions with key suppliers and customers will minimize these risks. The vast majority of the Company's products are not date-sensitive. The Company has collected information on current and discontinued date-sensitive products. At this time, the Company does not have in place a comprehensive, global contingency plan relative to potential Year 2000 disruptions. Rather, each significant system with a potential problem either has been repaired and tested or is being updated. Contingency plans for certain types of unforseen problems are being developed. Quantitative and Qualitative Disclosures About Market Risk The Company's principle financial instrument is long-term debt (consisting of a revolving credit and term loan facility) that provides for interest at a spread above the prime rate. The Company is affected by market risk exposure primarily through the effect of changes in interest rates on amounts payable by the Company under this credit facility. A significant rise in the prime rate could materially adversely affect the Company's business, financial condition and results of operations. At September 30, 1999 an aggregate amount of approximately $15,000,000 was outstanding under this credit facility with a weighted average interest rate of 6.8%. If principal amounts outstanding under this facility remained at this quarter-end level for an entire year and the prime rate increased or decreased, respectively, by 1.25% the Company would pay or save, respectively, an additional $187,500 in interest in that year. The Company does not utilize derivative financial instruments to hedge against changes in interest rates or for any other purpose. Where appropriate, the Company requires that letters of credit be provided on foreign sales. In addition, a significant number of transactions by the Company are denominated in U.S. dollars. As such, the Company has shifted foreign currency exposure onto its foreign customers. As a result, if exchange rates move against foreign customers, the Company could experience difficulty collecting unsecured accounts receivable, the cancellation of existing orders or the loss of future orders. The foregoing could materially adversely affect the Company's business, financial condition and results of operations. -9- 10 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Forward-looking Statements This quarterly report, other than historical financial information, contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are set forth in Item 1 of the Company's annual report on Form 10-K for the year ended June 30, 1999. These include risks and uncertainties relating to competition and technological change, intellectual property rights, capital spending, international operations, and the Company's acquisition strategies. -10- 11 PART II: OTHER INFORMATION Item 1. Legal Proceedings In August 1995, the Internal Revenue Service ("IRS") informed the Company that it had completed the audit of the Company's Federal tax returns for fiscal years 1986 through 1993. The IRS had issued a report to the Company proposing adjustments that would result in taxes due of approximately $4.3 million excluding interest charges. The primary adjustments presented by the IRS related to intercompany pricing and royalty charges, DISC earnings and charitable contributions. The Company disagreed with the IRS and began the process of vigorously appealing this assessment using all remedies and procedural actions available under the law. The Company had provided a reserve to reflect its estimate of the ultimate resolution of this matter, so that the outcome of this matter would not have a material adverse effect on the Company's consolidated financial statements. During fiscal 1998, the Company continued to discuss the assessment with the IRS Appeals Office and in July 1998 received a revised audit report, which was subject to final government administrative approval, and which reduced the original assessment for the years covered by the IRS audit. The Company accepted the revised audit report and the final government approval was pending as of June 30, 1998. Accordingly, the Company determined that $900,000 of previously recorded reserves should be reversed through the 1998 income tax provision to reflect the expected final settlement with respect to the IRS audit. In fiscal 1999, the Company received the final government approval on the IRS audit related to fiscal years 1986 through 1993. In addition, the IRS completed its audits of fiscal years 1994 through 1997. As a result of the favorable outcome from the audits, the Company reversed an additional $1,896,000 of previously recorded reserves through the income tax provision in fiscal 1999. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10(U) Employment agreement with Michael Carrieri 27 Financial Data Schedule (b) No reports on Form 8-K have been filed during the Company's fiscal quarter ended September 30, 1999. -11- 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. November 12, 1999 NAPCO SECURITY SYSTEMS, INC. (Registrant) By: /s/ Richard Soloway ----------------------------------- Richard Soloway Chairman of the Board of Directors, President and Secretary (Principal Executive Officer) By: /s/ Kevin S. Buchel ------------------------------------ Kevin S. Buchel Senior Vice President of Operations and Finance and Treasurer (Principal Financial and Accounting Officer) -12- 13 INDEX TO EXHIBITS Exhibits 10(U) Employment Agreement with Michael Carrieri 27 Financial Data Schedule -13- EX-10.U 2 EMPLOYMENT AGREEMENT: CARRIERI 1 EMPLOYMENT AGREEMENT This AGREEMENT is made this 27th day of July 1999, by and between Napco Security Systems, Inc. and/or its related subsidiaries and/or affiliates (herein referred to collectively as "NAPCO"), a Delaware corporation having its principle place of business at 333 Bayview Avenue, Amityville, New York 11701 and Michael Carrieri (hereinafter "EXECUTIVE") residing at . WHEREAS, NAPCO desires to employ EXECUTIVE as Vice President of Engineering Development and EXECUTIVE desires to be employed by NAPCO. NOW THEREFORE: I. EMPLOYMENT: Subject to the terms and conditions hereinafter set forth, NAPCO hereby employs EXECUTIVE and EXECUTIVE agrees to be employed by NAPCO as its Vice President of Engineering Development. EXECUTIVE agrees to devote his full time and best efforts to the business of NAPCO. II. DUTIES: EXECUTIVE shall, during the continuance of his employment hereunder: (a) Devote the whole of his time and attention and abilities to the business of NAPCO during regular working hours and at such other times as may 2 be necessary; (b) Perform such duties as are usually performed by an EXECUTIVE serving in his capacity and such other duties as may be assigned to him from time to time by the Chairman of NAPCO; (c) Use his best efforts to promote the business of NAPCO; and (d) Perform his duties subject to the direction of the Chairman of NAPCO. III. COMPENSATION: For the services to be rendered under this AGREEMENT, NAPCO agrees to pay the EXECUTIVE the following compensation: (a) SALARY - An annual salary of $150,000.00 subject to annual reviews and compensation adjustments hereinafter on the anniversary date of the commencement of employment. Upon being promoted to Senior Vice President of Engineering Development (anticipated to occur approximately May 2000 depending on performance), EXECUTIVE's annual salary will be increased to $160,000.00. The annual salary will be paid periodically in accordance with NAPCO's standard payroll practices, which is presently on a weekly basis. (b) BONUS PLAN - A bonus of $30,000.00 may be earned by 2 3 EXECUTIVE based on getting each of the new products on the Phoenix #1 program into the shipping department on or before March 2000, and by getting the Phoenix #2 Program products into the shipping department by August 2000. The $30,000.00 could be prorated to reflect the portions of the Phoenix #1 and Phoenix #2 programs that are already shipped by March 2000 and the August 2000 dates. But it is understood that shipping 100% of the products of the Phoenix #1 and #2 programs by March 2000 and August 2000 respectively are the goals. In addition, the EXECUTIVE will receive $5,000.00 for meeting the Engineering budget for the fiscal year ending June 30, 2000. (c) STOCK OPTIONS - 15,000 stock options, in accordance with NAPCO's Incentive Stock Option Plan, will be awarded to EXECUTIVE upon employment, at the fair market value price of NAPCO stock (Nasdaq: "NSSC") at that time. These stock options will be recorded according to regulations set forth by the Securities and Exchange Commission ("SEC") and/or other government entities. EXECUTIVE will also receive an additional 10,000 stock options upon being promoted to Senior Vice President of Engineering Development. Thereafter, future stock options may be granted based on performance. (d) SEVERANCE AND HEALTH INSURANCE - In consideration for 3 4 EXECUTIVE entering a new industry, upon any termination of employment not based on cause, EXECUTIVE will be entitled to severance pay equaling six (6) months' salary and continued health insurance for a period of six (6) months. The payment of any such severance or continued health insurance will be paid according to the same payment schedule as if EXECUTIVE was still employed during that time frame. (e) VACATION - EXECUTIVE will be granted three (3) weeks' vacation time. (f) 401(K) PLAN - NAPCO will provide EXECUTIVE with 401(k) benefits in accordance with the terms and conditions of its corporate plan in effect. IV. RESTRICTIVE COVENANTS: (a) EXECUTIVE acknowledges that technical, financial and other confidential information of NAPCO or any third party with which NAPCO is in technical or commercial cooperation, or which EXECUTIVE may obtain knowledge in the course of and by virtue of his employment, constitutes valuable and confidential assets and that unauthorized disclosure or utilization thereof would be detrimental to NAPCO. EXECUTIVE therefore agrees that he will not 4 5 disclose or utilize, either during his employment or thereafter, any such technical or other confidential information, without first obtaining NAPCO's written consent thereto, except as such disclosure or utilization may be required by EXECUTIVE's service to NAPCO or by law. (b) All trade secrets and proprietary information including, but not limited to, all formulas, patterns, designs, sales and business plans, plant secrets, processes, methods for determination of costs, customer lists, and other confidential secrets, or internal information which heretofore have been or hereafter may be conceived by or disclosed to EXECUTIVE in the course of EXECUTIVE's employment, shall at all times be and remain the sole and exclusive property of NAPCO, except as required by law or by EXECUTIVE's employment at NAPCO, and shall be kept confidential by EXECUTIVE and not be utilized personally be EXECUTIVE or divulged by EXECUTIVE to any third party or company. (c) All inventions, improvements, patent pendings, ideas concerning patents or improvements relating thereto (collectively hereinafter referred to as "Inventions") which EXECUTIVE solely, or with others, receives or reduces to practice or may conceive in the course of such employment or with the use of NAPCO time, material or facilities, or relating to any subject matter with which 5 6 my work for NAPCO is or may be concerned or reduced to practice during the term of my employment by NAPCO, shall be the sole property of NAPCO. (d) EXECUTIVE shall promptly disclose in writing to NAPCO and maintain adequate and current written records of such Inventions, in the form of notes, sketches, drawings or reports, which shall be the property of NAPCO, shall specifically assign to NAPCO all such Inventions and shall executed all papers and perform all other lawful acts which NAPCO deems necessary or advisable for the preparation and prosecution of patent applications and the procurement and maintenance of United States and foreign patents and for the transfer of interests therein to NAPCO. It is understood and agreed that all expenses incurred with respect to the obligations of this paragraph shall be by NAPCO or its nominee. EXECUTIVE shall make no other application for intellectual property relating to such Inventions without the express written approval of NAPCO. (e) EXECUTIVE shall not make or permit to be made, except pursuant to his duties hereunder and for the sole use and account of NAPCO, any papers or documents, including drawings and records of research, made by EXECUTIVE or at EXECUTIVE's directions or which may come into EXECUTIVE's possession in any way, and EXECUTIVE shall deliver to NAPCO on the termination of employment, all such materials in EXECUTIVE'S 6 7 possession. (f) EXECUTIVE agrees that during the term of employment hereunder, he will not, except with the prior written consent of NAPCO, directly or indirectly engage in, or accept any position as an agent, employee, officer or director of, or consult, advise with, invest in, or otherwise in any way give assistance to aid any person, firm or corporation (or any of their related entities) in the security alarm, fire alarm, security lock, security hardware or entry access products industry either as a manufacturer, installer and/or distributor. For a period of three (3) years after the termination of EXECUTIVE's employment hereunder, he will not, without the prior written consent of NAPCO, directly or indirectly engage in, or accept any position as agent, employee, officer or director of, or consult, advise with, invest in (except in insignificant amounts) or otherwise in anyway give assistance or aid to any person, firm, or corporation (or any of their related entities) engaging in business which relates directly or indirectly with the business of NAPCO or which would be competitive or a competitive substitute with any product(s) or product lines in the security alarm, fire alarm, security lock, security hardware or entry access products industry either as a manufacturer, installer, and/or distributor of which NAPCO was involved with at the time of termination of EXECUTIVE's employment hereunder. This provision applies to any aforementioned affiliation of EXECUTIVE to any person, firm, or 7 8 corporation (or any of their related entities) engaging in business which relates directly or indirectly with the business of NAPCO or which would be competitive or a competitive substitute with any product(s) or product lines in the security alarm, fire alarm, security lock, security hardware or entry access products industry either as a manufacturer, installer, and/or distributor which is conducting any business in the United States of America. EXECUTIVE explicitly acknowledges the reasonableness of the scope of this paragraph in view of the fact that EXECUTIVE was never previously engaged in any businesses relating to NAPCO, and in view of the fact that EXECUTIVE's position at NAPCO will enable him to become privy to significant and sensitive information. (g) EXECUTIVE covenants and agrees that so long as he is in the employ of NAPCO and after leaving the employ of NAPCO, he will not directly or indirectly disclose, communicate, divulge or furnish to or use for the benefit of himself (except while he is in the employ solely and in the pursuit of the activities of NAPCO) or any other person, firm or corporation, any other of the trade secrets, designs, improvements, marketing plans, inventions of NAPCO belonging to NAPCO, or the designs, or processes of distribution, or processes of manufacture of any product or article sold or distributed by NAPCO, which EXECUTIVE may learn by virtue by his activities or which he may develop for NAPCO. 8 9 V. EXCEPTION TO SECTION IV: Based on EXECUTIVE's representation that he has conceived an invention in the field of telephone answering machines ("the Invention") that is unrelated to NAPCO's business, the parties agree to exclude the Invention from the obligations of Section IV herewith. In order to avoid any future disputes as to the nature and scope of the Invention and to avoid disclosure of the Invention at this time, EXECUTIVE has agreed to provide Attachment A hereto which is a sealed envelope that EXECUTIVE represents contains a written description of the Invention. NAPCO agrees not to unseal Attachment A unless either authorized by EXECUTIVE to do so or if a dispute arises under this Section. In order to avoid any potential conflict of interest, EXECUTIVE agrees not to directly market his Invention or any patent received thereon to any known customer or vendor of NAPCO without prior authorization from NAPCO's Chairman of the Board. VI. REMEDIES: The parties hereto recognize that, in the event of any breach or threatened breach by the EXECUTIVE of the provisions of Section IV hereunder of, NAPCO will suffer irreparable injury in connection with which damages would be difficult, if not impossible, to ascertain and it is therefore agreed that NAPCO, in addition to and without limiting any other remedy or right it may have under this AGREEMENT, or at law or in equity, shall be entitled to an injunction 9 10 against the EXECUTIVE issued by any court of competent jurisdiction enjoining any such breach or threatened breach. VII. EFFECT OF WAIVER: The waiver by either party of a breach of any provision of this AGREEMENT shall not operate or be construed as a waiver of any subsequent breach thereof. VIII. NOTICE: Any and all notices referred to hereunder shall be sufficient if furnished in writing and sent by registered or certified mail to the parties at the addresses given herein, or to such other addresses as may hereafter be designated by notice in writing given in accordance with the provisions of this paragraph. IX. GOVERNING LAW: The parties agree that this AGREEMENT shall be governed, interpreted and construed in accordance with the substantive laws of the State of New York. X. SEVERABILITY: If any provision of this AGREEMENT shall, to any extent, be deemed invalid or unenforceable, the remainder of this AGREEMENT shall not be affected, and each term shall be valid and shall be enforced to the extent permitted by law. 10 11 XI. AMENDMENTS TO AGREEMENT: No amendment of this AGREEMENT shall be effective unless reduced to writing and executed by a duly authorized officer of NAPCO and by EXECUTIVE. XII. TERM: This AGREEMENT shall be for a term of two years from the first date of employment and may be renewed upon mutual written agreement by the parties. The AGREEMENT will be reviewed with respect to a possible renewal one (1) year prior to its expiration date. However, nothing in this provision requires NAPCO to pay severance greater than that established in Section III. XIII. TERMINATION OF EMPLOYMENT: In the event that EXECUTIVE voluntarily leaves the employ of employer without cause or he is terminated with cause, all benefits of this AGREEMENT shall cease. XIV. MISCELLANEOUS: This AGREEMENT is to be read in conjunction with the rights and obligations presented in NAPCO's Salaried Employee Handbook. Furthermore, nothing in this AGREEMENT is intended or should be interpreted to circumvent any obligations applicable to NAPCO pursuant to federal, state or local laws. 11 12 Napco Security Systems, Inc. EXECUTIVE By: /s/ Richard L. Soloway /s/ Michael Carrieri - --- ---------------------- -------------------- Richard L. Soloway Michael Carrieri Chairman of the Board Dated: 7/15/99 Dated: 7/26/99 12 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JUN-30-2000 JUL-01-1999 SEP-30-1999 1,688 0 15,307 897 22,865 40,217 23,826 12,631 54,184 5,755 0 0 0 59 (3,685) 54,184 10,449 10,449 7,858 7,858 2,719 0 353 (481) 85 (396) 0 0 0 (396) (0.11) (0.11)
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