UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(A) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(a)(2))
[X] Definitive Materials
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-2
NAPCO SECURITY SYSTEMS, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
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NAPCO SECURITY SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 13, 2004
Dear Fellow Stockholder:
The Annual Meeting of the Stockholders of Napco Security Systems, Inc., a
Delaware corporation (the "Company"), will be held at the Company's offices at
333 Bayview Avenue, Amityville, New York, on Monday, December 13, 2004, at 4:00
p.m., for the following purposes, as more fully described in the accompanying
Proxy Statement:
1. to elect two directors to serve for a term of three years and until
their successors are elected and qualified; and
2. to transact such other business as may properly come before the
Meeting or any adjournments thereof.
Only stockholders of record at the close of business on October 25, 2004
are entitled to notice and to vote at the Meeting or any adjournment thereof.
By order of the Board of Directors,
Richard L. Soloway, Secretary
October 25, 2004
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING WHETHER OR NOT
YOU ARE PERSONALLY ABLE TO ATTEND. YOU ARE URGED TO COMPLETE, SIGN AND MAIL THE
ENCLOSED PROXY CARD AS SOON AS POSSIBLE.
NAPCO SECURITY SYSTEMS, INC.
333 BAYVIEW AVENUE
AMITYVILLE, NEW YORK 11701
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 13, 2004
INFORMATION CONCERNING THE SOLICITATION
This Proxy Statement is furnished to the holders of Common Stock, $.01 par
value per share ("Common Stock") of Napco Security Systems, Inc. (the "Company")
in connection with the solicitation of proxies on behalf of the Board of
Directors of the Company for the Annual Meeting following Fiscal Year 2004, to
be held on December 13, 2004, and at any adjournment thereof (the "Meeting"),
pursuant to the accompanying Notice of Annual Meeting of Stockholders. Proxies
in the enclosed form, if properly executed and returned in time, will be voted
at the Meeting. Any stockholder giving a proxy may revoke it prior to its
exercise by attending the Meeting and reclaiming the proxy, by executing a later
dated proxy or by submitting a written notice of revocation to the Secretary of
the Company at the Company's office or at the Meeting. Stockholders attending
the Meeting may vote their shares in person. This Proxy Statement and the form
of proxy were first mailed to the stockholders on or about November 1, 2004. A
copy of the 2004 Annual Report of the Company, including financial statements,
is being mailed herewith.
Only stockholders of record at the close of business on October 25, 2004
(the "Record Date") are entitled to notice of and to vote at the Meeting. The
outstanding voting securities of the Company on the Record Date consisted of
7,090,592 shares of Common Stock.
On all matters requiring a vote by holders of the Common Stock, each share
of Common Stock entitles the holder of record to one vote. At the Meeting, the
holders of record of Common Stock will vote on: Item 1, the election of two (2)
directors and the transaction of any other business as may properly come before
the Meeting and require a vote of the stockholders.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Common Stock authorized to vote will constitute a quorum
for the transaction of business at the Meeting.
The affirmative vote of a plurality of the votes cast at the Annual
Meeting is required for the election of directors. A properly executed proxy
marked "WITHHOLD" with respect to the election of one or more directors will not
be voted with respect to the director or directors indicated, although it will
be counted for purposes of determining whether there is a quorum.
If you hold your shares in "street name" through a broker or other
nominee, your broker or nominee may not be permitted to exercise voting
discretion with respect to certain matters. Thus, if you do not give your broker
or nominee specific instructions, your shares may not be voted on those matters
and will not be counted in determining the number of shares necessary for
approval. Shares represented by such "broker non-votes" will, however, be
counted in determining if there is a quorum
THEREFORE, THE COMPANY URGES YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY
CARD.
2
ITEM 1: ELECTION OF DIRECTORS
The Board of Directors is divided into three classes. At the upcoming
Annual Meeting, one class will stand for election for the term ending at the
Annual Meeting of Stockholders following Fiscal Year 2007. The terms of the
other two classes of continuing directors do not expire until the Annual
Meetings of Stockholders after fiscal year end 2005 and 2006, respectively.
Unless otherwise specified, shares represented by the enclosed proxy will
be voted for the election of Richard L. Soloway and Kevin S. Buchel, currently
directors, who have been recommended for nomination by the Nominating Committee
of the Board of Directors and nominated by the Board of Directors for reelection
as a director to serve until the Annual Meeting of Stockholders in 2007 and
until his successor is elected and qualified.
Mr. Soloway and Mr. Buchel have consented to serve if reelected. In the
event that any nominee becomes unable or unwilling to serve as a director,
discretionary authority may be exercised by the proxies to vote for the election
of an alternate nominee of the Board of Directors.
The names of, and certain information concerning, the nominees and the
continuing directors are set forth below:
Principal Occupation; Director
Name and Age Five-Year Employment History Since
------------ ---------------------------- -----
Nominees for election to serve until
Annual Meeting of Stockholders
following Fiscal Year 2007:
Richard L. Soloway........................ Chairman of the Board of Directors since October 1972
(58) 1981; President since 1998; Secretary since 1975.
Kevin S. Buchel........................... Senior Vice President of Operations and Finance 1998
(51) since April 1995; Treasurer since May 1998.
Directors to serve until Annual Meeting
of Stockholders following Fiscal Year
2005:
Andrew J. Wilder.......................... Officer of Israeloff, Trattner & Co., independent 1995
(53) certified public accountants, since 1990.
Arnold Blumenthal......................... V.P. of Government Security News and Editor of 2001
(77) MBFAA since 2004; Group Publisher of Security
Group of Cygnus Publishing, 1999
through 2003.
3
Directors to serve until Annual Meeting
of Stockholders following Fiscal Year
2006:
Paul Stephen Beeber....................... Licensed Attorney in New York State since 1970, 2004
(60) focusing on elder law, estate planning and real
estate; member of Suffolk County Bar Association
Randy B. Blaustein........................ Principal of R.B. Blaustein & Co. since December 1985
(52) 2000; Partner of Blaustein, Greenberg & Co. July
1991 - November 2000; Attorney since
October 1980, specializing in
general business and tax matters,
and author of six books and numerous
articles.
Donna A. Soloway.......................... Board of Directors of Security Industry 2001
(56) Association (SIA); Chair of Awards Committee since
1993; Director and Secretary of SAINTS (Safety,
Awareness and Independence Now Through Security)
Foundation, Inc.; Monthly Columnist for SECURITY
DEALER magazine since 1992; and Columnist for
SECURITY SALES & INTEGRATION magazine since 2004.
Ms. Soloway is the wife of Richard L. Soloway, the
Chairman and President of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE
ELECTION OF MR. SOLOWAY AND MR. BUCHEL.
4
CORPORATE GOVERNANCE AND BOARD MATTERS
INDEPENDENCE OF DIRECTORS
The Board currently consists of seven directors, four of whom the Board
has affirmatively determined have no relationship with the Company or its
subsidiaries which would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director and are independent as defined
by the applicable NASDAQ Listing Standards. The four independent directors are
Paul Stephen Beeber, Randy B. Blaustein, Arnold Blumenthal and Andrew J. Wilder.
BOARD STRUCTURE AND COMMITTEE COMPOSITION
The Board maintains three standing committees: Audit, Compensation/Stock
Option, and Nominating. Each Committee is composed entirely of independent
directors as defined in the applicable NASDAQ Listing Standards.
During fiscal 2004, the Board held four meetings. Each director attended
at least 75% of all Board meetings and meetings of committees of which such
director was a member.
Directors are expected to attend the Company's annual meetings of
stockholders. All directors attended the last annual meeting of stockholders on
April 16, 2004.
NAPCO maintains an investors section on its website,
www.napcosecurity.com, setting forth the Company's committee charters for the
Audit and Nominating Committees.
AUDIT COMMITTEE
The Audit Committee has been established in accordance with Section
3(a)(58)A of the Securities Exchange Act of 1934 as amended. The Audit Committee
is responsible for retaining, evaluating and, if appropriate, recommending the
termination of the Company's independent auditors. The Audit Committee assists
the Board in oversight of (1) the integrity of the Company's financial
statements, (2) the Company's independent auditor's qualifications and
independence, and (3) the performance of the Company's internal audit function
and independent auditors. In addition, the Committee renders its report for
inclusion in the Company's annual proxy statement.
The Audit Committee has the authority to obtain advice and assistance
from, outside legal, accounting or other advisors as the Audit Committee deems
necessary to carry out its duties. The Audit Committee held four meetings in
fiscal year 2004. The current members of the Audit Committee are Andrew J.
Wilder (Chairman), Paul Stephen Beeber (who replaced Randy B. Blaustein on March
3, 2004) and Arnold Blumenthal, each of whom meets the NASDAQ Listing Standards
for the independence of audit committee members. The Board has determined that
Andrew Wilder is an audit committee financial expert.
The report of the Audit Committee is included in this proxy statement on
page 7. The charter of the Audit Committee adopted in April 2004 is included in
this proxy statement as Appendix A.
5
COMPENSATION/STOCK OPTION COMMITTEE
The Compensation/Stock Option Committee assists the Board in discharging
its responsibilities relating to compensation of the Company's chief executive
officer and other executives. The Committee determines individuals to be granted
options under the Employee Stock Option Plan and Non Employee Stock Option Plan,
the number of options awarded and the term of the options and interprets
provisions of such plans. The Committee also renders its report on executive
compensation for inclusion in the Company's annual proxy statement. The current
members of the Compensation Committee are Randy B. Blaustein (Chairman), Andrew
J. Wilder, and Arnold Blumenthal.
The Compensation/Stock Option Committee held four meetings in fiscal year
2004. The report of the Compensation/Stock Option Committee is included in this
proxy statement on page 12.
NOMINATING COMMITTEE
The Nominating Committee reviews and makes recommendation to the Board
regarding potential candidates for nomination as director.
The Nominating Committee held one meeting in fiscal year 2004. The current
members of the Nominating Committee are Arnold Blumenthal (Chairman), Andrew J.
Wilder and Randy B. Blaustein.
NOMINATION OF DIRECTORS
The Nominating Committee considers candidates for director nominees
proposed by directors, the Chief Executive Officer and stockholders. Potential
candidates are screened and interviewed by the Nominating Committee. All members
of the Board may interview the final candidates. The same identifying and
evaluating procedures apply to all candidates for director nomination, including
candidates submitted by stockholders.
The Company's general criteria for the nomination of director candidates,
include the following:
- the candidates' personal and professional ethics, integrity and values,
- mature judgment,
- management, accounting or finance, industry and technical knowledge,
- demonstrated skills in his/her area of present or past professional, business
responsibility,
- an ability to work effectively with others,
- sufficient time to devote to the affairs of the Company and
- freedom from conflicts of interest.
STOCKHOLDER NOMINEES
The Nominating Committee will consider nominations submitted by
stockholders. Any stockholder nominations proposed for consideration by the
Nominating Committee should include the nominee's name and qualifications for
Board membership and should be addressed to:
6
Chair
Nominating Committee
c/o Secretary
Napco Security Systems, Inc.
333 Bayview Ave.
Amityville, NY 11701
COMMUNICATIONS WITH THE BOARD
You can contact any Director by writing to such Director:
c/o Secretary
Napco Security Systems, Inc.
333 Bayview Ave.
Amityville, NY 11701
The Secretary will promptly forward any communication unaltered to the
Director.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors hereby reports as follows:
1. The Audit Committee has reviewed and discussed the Company's audited
financial statements for the fiscal years ended June 30, 2004 and
2003 with the Company's management and representatives of Marcum &
Kliegman LLP ("M & K");
2. The Audit Committee has discussed with M&K the matters required to
be discussed by SAS 61, as modified or supplemented; and
3. The Audit Committee has received the written disclosures and letter
from M&K required by Independence Standards Board Standard No. 1 and
discussed M&K's independence with representatives of M&K.
Based on the review and discussions referred to above, the Audit Committee
recommended to the Board of Directors that the audited financial statements for
the fiscal years ended June 30, 2004 and 2003 be included in the Company's
annual report on Form 10-K for the fiscal year ended June 30, 2004 filed with
the Securities and Exchange Commission.
Date: October 18, 2004
THE AUDIT COMMITTEE:
Andrew J. Wilder
Paul Stephen Beeber
Arnold Blumenthal
7
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 attended in person
or by telephone conference call. Mr. Wilder, who is chairman of the Audit
Committee, receives $2,000 for attending each Audit Committee meeting. For the
fiscal year ended June 30, 2004, Mr. Beeber, Mr. Blaustein, Mr. Blumenthal, Ms.
Soloway and Mr. Wilder received $2,000, $8,000, $8,000, $4,000 and $12,000,
respectively in director's fees and committee fees.
During the fiscal year ended June 30, 2004, the Company retained Mr.
Blaustein as special counsel for certain general business and tax related
matters. Fees for such services were $10,800.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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 L. Soloway was one day late filing one Form 4
reporting one transaction and Jorge Hevia was late filing two Forms 4, each as
to one transaction.
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 L. Soloway and Donna A. 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
Name and Age and Five-Year Employment History
------------ --------------------------------
Richard L. Soloway......... Chairman of the Board of Directors since October 1981; President since 1998; and
(58) Secretary since 1975.
Kevin S. Buchel............ Senior Vice President of Operations and Finance since April 1995; Treasurer since
(51) May 1998.
Jorge Hevia................ Senior Vice President of Corporate Sales and Marketing since May 1999; Vice
(46) President of Corporate Sales and Marketing since October 1998.
Michael Carrieri........... Senior Vice President of Engineering Development since May 2000; Vice President of
(46) Engineering Development from September 1999 to May 2000.
8
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 who received
compensation in excess of $100,000 and were serving at the end of fiscal year
2004.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Name and Principal Fiscal Other Annual Options/ All Other
Position Year Salary Bonus Compensation (1) SARS Compensation (2)
-------- ---- ------ ----- ---------------- ---- ----------------
Richard L. Soloway, 2004 $457,070 (3) $27,606 50,000/0 $ 872
Chairman of the 2003 $448,479 $75,000 $27,455 125,000/0 $ 838
Board of Directors, 2002 $450,637 $75,000 $22,433 25,000/0 $ 784
President and
Secretary
Kevin S. Buchel, 2004 $197,061 $61,875 $ 6,738 10,000/0 $1,754
Senior Vice 2003 $183,196 $33,525 $ 6,738 5,000/0 $1,811
President of 2002 $185,842 $33,525 $ 6,690 10,000/0 $1,678
Operations and
Finance and Treasurer
Jorge Hevia, Senior 2004 $212,230 $61,875 $ 7,290 10,000/0 $2,242
Vice President of 2003 $202,230 $33,525 $ 7,200 5,000/0 $1,903
Corporate Sales and 2002 $192,269 $33,525 $ 7,260 10,000/0 $1,816
Marketing
Michael Carrieri, 2004 $193,163 $43,312 $ 6,090 10,000/0 $2,124
Senior Vice 2003 $183,999 $23,467 $ 5,250 5,000/0 $1,820
President of 2002 $175,269 $23,467 $ 60 10,000/0 $1,671
Engineering
Development
(1) Messrs. Soloway, Buchel, Hevia and Carrieri received $8,079, $8,073,
$7,040; $138,$138, $90; $90, $60, $60; and $90, $90, and $60, respectively
for health and life insurance for fiscal years 2004, 2003 and 2002.
Messrs. Soloway, Buchel, Hevia and Carrieri received $19,527, $19,382,
$15,393; $6,600, $6,600, $6,600; $7,200, $7,200, $7,200; $6,000, $5,250,
and $0, respectively, for automobile expenses for fiscal years 2004, 2003
and 2002.
(2) Company 401(k) Plan Contributions.
(3) Mr. Soloway's bonus for the 2004 fiscal year has not been determined as of
the date of this Proxy Statement.
9
OPTION GRANTS, OPTION EXERCISES AND OUTSTANDING OPTIONS
The following tables summarize option grants and exercises during fiscal
2004 to or by the named executive officers and the value of the fiscal 2004
granted options, if any, held by such persons at the end of fiscal 2004
OPTION GRANTS IN LAST FISCAL YEAR(1)
Percent of Potential Realizable Value at
Total Options Assumed
Granted to Exercise or Annual Rates of Stock Price
Options Employees in Base Price Expiration Appreciation for Option Term (2)
Name Granted Fiscal Year ($/Sh) Date 5% ($) 10% ($)
---- ------- ----------- ------ ---- ------ -------
Richard L. Soloway 50,000 48% $5.645 3/19/14 $135,750 $383,250
Kevin S. Buchel 10,000 10% $ 5.13 3/19/14 $ 32,300 $ 81,800
Jorge Hevia 10,000 10% $ 5.13 3/19/14 $ 32,300 $ 81,800
Michael Carrieri 10,000 10% $ 5.13 3/19/14 $ 32,300 $ 81,800
(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.
AGGREGATED OPTION EXERCISES IN LAST-YEAR AND FY-END OPTION VALUES
Value of Unexercised In-
Shares Acquired Number of Unexercised the-Money Options at FY-
on Exercise Value Realized Options at FY-End (#) End ($)
Name (#) ($) Exerciseable/Unexerciseable Exerciseable/Unexerciseable
---- --- --- --------------------------- ---------------------------
Richard L. Soloway 450,000 $1,541,700 220,000 / 230,000 $800,150 / $621,850
Kevin S. Buchel 40,000 $ 194,000 38,000 / 22,000 $ 189,230 / $71,740
Jorge Hevia 63,200 $ 399,580 38,000 / 22,000 $ 189,230 / $71,740
Michael Carrieri 50,000 $ 326,020 18,000 / 22,000 $ 71,060 / $71,740
10
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Richard L. Soloway, Jorge Hevia
and Michael Carrieri. 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 years' compensation,
subject to certain limitations. Mr. Hevia's agreement was extended during fiscal
2004, from October 2004 through October 2006. The agreement provides for annual
salaries of $215,000, $225,750 and $237,037 during fiscal 2004, 2005 and 2006,
respectively as well as certain bonus provisions based on sales and profits. Mr.
Carrieri's agreement was extended during fiscal 2004, from August 2004 through
August 2006. The agreement provides for annual salaries of $194,481, $204,205
and $214,415.00 during fiscal 2004, 2005 and 2006, respectively as well as
certain bonus provisions 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.
COMPENSATION/STOCK OPTION COMMITTEE REPORT
The Compensation/Stock Option Committee approves the compensation for the
CEO and other executive officers and establishes the policies that govern the
Company's executive compensation program.
COMPENSATION POLICY FOR EXECUTIVE OFFICERS
The Committee's policy is that the Company's executive officers should (i)
be paid a salary commensurate with their responsibilities, (ii) receive
short-term incentive compensation in the form of a bonus tied to the Company's
sales and earnings, and (iii) receive long-term incentive compensation in the
form of stock options granted from time to time.
The policy with respect to the salary of the executive officers, other
than the CEO, is that such salaries should be in an amount recommended by the
CEO, and the 2004 fiscal year salaries of such executive officers are in the
amounts so recommended. The considerations entering into the determination by
the CEO of the salary recommendation for each named executive officer other than
the CEO, were the CEO's subjective evaluations of the ability and past
performance of the executive and the CEO's judgment of the executive's potential
for enhancing the profitability of the Company.
In addition, the Committee's policy is that executive officers, other than
the CEO, should receive short term incentive compensation in the form of bonuses
targeted to the Company's sales and earnings. A bonus for an executive officer
is based upon the Company achieving certain targeted sales and earnings and the
executive's position and the extent to which the executive could contribute to
the Company's performance. For fiscal 2004, bonuses were earned by such
executive officers based upon the Company achieving the targeted sales and
earnings.
The Committee's policy is generally to grant options to such executives
and other key employees under the Company's Stock Option Plans after
consideration of the amounts recommended by the CEO.
11
The recommendations of the CEO for option grants reflect the subjective judgment
of the CEO of the performance of such executives and the potential benefit to
the Company from the grant of this form of incentive compensation.
Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to public companies for compensation over $1,000,000
paid to the CEO and other named executive officers. Because of the range of
compensation paid to its executive officers, the Committee has not established
any policy regarding annual compensation to such executive officers in excess of
$1,000,000.
COMPENSATION OF THE CEO IN 2004
For fiscal 2004, Mr. Soloway's salary was based upon the employment
agreement between the Company and Mr. Soloway which became effective June 26,
2003. As of the date of this report, no determination as to Mr. Soloway's bonus
for the 2004 fiscal year as been made by the Committee. Mr. Soloway's bonus for
fiscal year 2003 was based upon, but not limited to, such performance indicators
as net sales, EBITDA, net income and various financial ratios and the Committee
anticipates his bonus for fiscal year 2004 will also be based upon, but not
limited to, such performance indicators. The Committee believes that granting
the CEO stock options best aligns his interests with those of the Company's
stockholders.
Date: October 18, 2004
THE COMPENSATION/STOCK
OPTION COMMITTEE:
Randy B. Blaustein
Andrew J. Wilder
Arnold Blumenthal
12
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table, together with the accompanying footnotes, sets forth
information as of October 25, 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.
Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership (1) Common Stock (2)
---------------- ------------------------ ----------------
Richard L. Soloway 2,408,652 32.8
c/o the Company
333 Bayview Avenue
Amityville, NY 11701
Kevin S. Buchel 132,802 1.9
Jorge Hevia 107,200 1.5
Michael Carrieri 74,000 1.0
Andrew J. Wilder 40,600 0.6
Randy B. Blaustein 40,000 0.6
Donna A. Soloway 10,800 0.2
Paul Stephen Beeber 2,000 --
Arnold Blumenthal -- --
Dimensional Fund 436,200 6.2
Advisors, Inc. (3)
All executive officers and 2,816,054 (4) 37.5
directors as a group (9 in
number)
(1) This number includes the number of shares that a person has a right to
acquire within sixty (60) days (Soloway - 252,500, Buchel - 44,000, Hevia
- 44,000, Carrieri - 24,000, Wilder - 40,000, and Blaustein - 8,000).
(2) Percentages for each person or the group are computed on the basis of
7,090,592 shares of Common
13
Stock outstanding on October 25, 2004, plus the number of shares that such
person or group has the right to acquire 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.
(3) Based on information set forth in Form 13F filed with the Securities and
Exchange Commission by Dimensional Fund Advisors Inc., 1299 Ocean Avenue,
Santa Monica, CA 90401 ("DFAI") reporting beneficial ownership and sole
voting power as of September 30, 2004 as to 436,200 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.
(4) This number of shares includes (i) 2,403,554 shares as to which officers
and directors have sole voting and investment power, and (ii) 412,500
shares that officers and directors have the right to acquire within sixty
(60) days.
14
COMPARISON OF TOTAL SHAREHOLDER RETURN
The following graph sets forth the Company's total shareholder return index as
compared to the NASDAQ index and a NASDAQ electronic component stock industry
index.
[PERFORMANCE CHART]
ACTUAL: INDEXED:
------- --------
Peer Peer
Fiscal Year NAPCO NASDAQ Group* Fiscal Year NAPCO NASDAQ Group*
----------- ----- ------ ------ ----------- ----- ------ ------
Jun-00 1.844 1,331.610 21.602 Jun-00 100.000 100.000 100.000
Jun-01 2.395 723.050 23.738 Jun-01 46.732 115.328 60.358
Jun-02 3.550 492.540 13.835 Jun-02 69.268 78.561 35.178
Jun-03 4.730 546.880 12.930 Jun-03 92.293 87.229 32.877
Jun-04 7.440 689.280 19.773 Jun-04 403.471 51.763 91.533
*The Peer Group consists of:
American Medical Alert Corp.
Honeywell, Inc.
Tyco International Ltd.
Vicon Industries, Inc.
15
THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS
On December 15, 2003, the Company engaged Marcum & Kliegman LLP ("M&K") as
the independent public accountants for the Company and its subsidiaries
replacing KPMG LLP, who were dismissed on the same day. The Board of Directors
had previously appointed KPMG LLP as the independent accountants for the Company
and its subsidiaries for its 2003 fiscal year. The change was approved by the
Company's audit committee and Board of Directors. The Company had not consulted
with M&K during its two most recent fiscal years nor during any subsequent
interim period prior to its appointment as auditor for the fiscal year 2003
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 Company's consolidated financial statement or regarding 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.
KPMG LLP was engaged as the Company's independent accountants on July 9,
2002. KPMG LLP's report on the Company'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. During the
Company's 2002 fiscal year and the subsequent interim period preceding the date
of termination, there were no disagreements between the Company and KPMG LLP on
any matter of accounting principles or practices, financial statement
disclosures or auditing scope or procedures, nor were there any "reportable
event" within the meaning of Item 304(a)(1)(v) of Regulation S-K. The audit of
the Company's fiscal 2003 financial statements, which was begun by KPMG LLP, was
not completed.
On July 9, 2002 the Board of Directors of Company dismissed Arthur
Andersen LLP ("Andersen") as its independent public accountants and appointed
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 and 2000 and through the date
of dismissal, 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
of engagement of KPMG, 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.
The Company provided Andersen with a copy of the Company's annual report
on Form 10-K for the year ended June 30, 2002 and requested that Andersen
furnish a letter addressed to the Securities and Exchange Commission stating
whether it agrees with the statements made by the Company in such report, and if
not, stating the respects in which it does not agree. Andersen had indicated to
the Company that Andersen no longer issues such letters.
16
M&K has been retained for fiscal year 2005. A representative of M&K will
be present at the Annual Meeting to make a statement if he desires and to
respond to appropriate questions presented at the Meeting.
PRINCIPAL ACCOUNTANT FEES
The fees billed by the Company's independent auditors for professional
services for 2004 and 2003 fiscal years were as follows:
Fiscal Year 2004 Fiscal Year 2003
---------------- ----------------
M&K KPMG (2) M&K (3)
--- -------- -------
Audit Fees $82,500 $237,000 $150,000
Audit Related Fees 0 0 0
Tax Fees 0 0 0
All Other Fees (1) $ 7,500 $ 15,000 0
(1) Includes services related to the audit of the Company's employee
benefit plan.
(2) The Company has paid $70,000 to KPMG for professional services for
fiscal year 2003.
(3) The Company was billed $150,000 by M&K for professional services
rendered for the audit of the Company's financials for fiscal years
2003 and 2002.
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. In fiscal year 2004 100% of "All Other Fees" were
approved by the Audit Committee.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITORS
The Audit Committee specifically pre-approves all audit and permissible
non-audit services provided by the independent auditors. These services may
include audit services, audit-related services, tax services and other services.
Pre-approval may be provided for up to one year. Each pre-approval is detailed
as to the particular service or category of services and is generally subject to
a specific budget. The independent auditors and management are required to
periodically report to the Audit Committee regarding the services provided by
the independent auditors in accordance with this pre-approval, and the fees for
the services performed to date.
17
SUBMISSION OF FUTURE STOCKHOLDER PROPOSALS
AND NOMINATION OF DIRECTORS
From time to time stockholders present proposals that may be proper
subjects for inclusion in the Proxy Statement and for consideration at an annual
meeting. Stockholders who intend to present proposals at the 2005 Annual
Meeting, and who wish to have such proposals included in the Company's Proxy
Statement for the 2005 Annual Meeting, must be certain that such proposals are
received by the Company's Secretary at the Company's executive offices, 333
Bayview Avenue, Amityville, New York 11701 not later than June 27, 2005. Such
proposals must meet the requirements set forth in the rules and regulations of
the Securities and Exchange Commission in order to be eligible for inclusion in
the Proxy Statement. Stockholders who intend to present a proposal at the 2005
Annual Meeting but who do not wish to have such proposal included in the
Company's Proxy Statement for such meeting must be certain that notice of such
proposal is received by the Company's Secretary at the Company's executive
offices not later than September 10, 2005.
Pursuant to the Company's by-laws, any nominations for director by a
stockholder must be delivered or mailed to and received by the principal
executive offices of the Company not less than sixty (60) days prior to the date
of meeting.
EXPENSES OF SOLICITATION
The Company will bear all costs in connection with the solicitation by the
Board of Directors of proxies of the Meeting. The Company intends to request
brokerage houses, custodial nominees and others who hold stock in their names to
solicit proxies from the persons who beneficially own such stock. The Company
will reimburse brokerage houses, custodial nominees and others for their
out-of-pocket expenses and reasonable clerical expenses. It is estimated that
these expenses will be nominal. In addition, officers and employees of the
Company may solicit proxies personally or by telephone, telegram or letter; they
will receive no extra compensation for such solicitation.
Dated: October 25, 2004 By Order of: The Board of Directors
Richard L. Soloway
Secretary
18
APPENDIX A
NAPCO SECURITY SYSTEMS, INC.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
I. PURPOSE
The purposes of the Audit Committee shall be:
A. To fulfill the Board's oversight responsibility to the shareholders,
potential shareholders, the investment community, and others
relating to: integrity of the Company's financial statements and the
financial reporting process; the systems of internal accounting and
financial reporting controls; the performance of the Company's
independent auditors; the independent auditor's qualifications and
independence; annual independent audit of the Company's financial
statements, and the Company's compliance with legal and regulatory
requirements. In so doing, it is the responsibility of the Committee
to maintain free and open communication between the Committee,
independent auditors and management of the Company; and
B. To prepare the report for inclusion in the Company's annual proxy
statement in accordance with applicable law.
II. STRUCTURE AND OPERATIONS
A. Composition and Qualification
The Audit Committee shall be comprised of three or more members of
the Board of Directors. The members of the Audit Committee shall
meet the independence, experience and knowledge requirements of the
NASDAQ Stock Market, as finally adopted, and the Sarbanes-Oxley Act
of 2002 (the "Act"), as appropriate, including the rules and
regulations promulgated by the Securities and Exchange Commission to
implement the Act. Audit committee members shall not simultaneously
serve on the audit committees of more than two other public
companies.
B. Appointment and Removal
The members of the Audit Committee shall be appointed by the Board
on the recommendation of the Nominating Committee and shall serve
until such member's successor is duly elected and qualified or until
such member's earlier resignation or removal. Vacancies shall be
filled in a similar manner. Audit Committee members may be removed
with or without cause by the majority vote of the directors then in
office.
C. Chairman
Unless the Chairman is elected by the full Board of Directors, the
members of the Committee shall designate a Chairman by the majority
vote of the full Committee membership. The Chairman will chair all
regular sessions of the Committee and, in consultation with the
other Committee members, set the agendas for Committee meetings. The
Chairman shall ensure that such agendas are circulated to the other
Committee members in advance of each meeting.
D. Delegation to Subcommittees
The Audit Committee may form and delegate authority to
subcommittees, including the authority to grant preapprovals of
audit and permitted non-audit services, provided that decisions of
such subcommittee to grant preapprovals shall be presented to the
full Audit Committee at its next scheduled meeting. Any subcommittee
shall consist of one or more members of the Audit Committee.
III. MEETINGS
The Audit Committee shall meet at least quarterly or more frequently as
circumstances dictate. The Chairman of the Committee shall call meetings of the
Audit Committee. A majority of the members of the Audit Committee present in
person or by means of a conference telephone or other communications equipment
by means of which all persons participating in the meeting can hear each other
shall constitute a quorum.
The Audit Committee shall meet periodically with management and the
independent auditor in separate executive sessions. The Audit Committee may
request any officer or employee of the Company or the Company's outside counsel
or independent auditor to attend a meeting of the Committee or to meet with any
members of, or consultants to, the Committee.
The Audit Committee shall make reports to the Board of Director after each
of its meetings, or as it deems necessary. The report to the Board of Directors
may take the form of an oral or written report by the Chairman or any other
member of the Audit Committee designated by the Audit Committee to make such
report. The Audit Committee shall maintain minutes or other records of meeting
and activities of the Audit Committee.
IV. RESPONSIBILITIES AND DUTIES
The functions listed below shall be principal activities of the Audit
Committee in carrying out its responsibilities outlined in Section I of this
Charter. However the Committee may carry out additional functions and adopt
additional policies and procedure as may be appropriate in light of changing
business, legislative, regulatory, legal or other conditions. The Committee
shall also carry out any other responsibilities and duties delegated to it by
the Board of Directors related to its purposes as outlined in this Charter.
The following are within the authority of the Audit Committee:
Independent Auditor
1. Sole authority to appoint and terminate independent auditor and to approve
in advance all audit engagement fees and terms.
2. Inform the independent auditor that such firm shall report directly to the
Audit Committee.
3. Oversee the work of the independent auditor for the purpose of preparing
or issuing an audit report or related work, including resolution of
disagreements between management and the independent auditor regarding
financial reporting.
4. Review and approve in advance, in its sole discretion, all auditing
services and permitted non-audit services, including fees and terms, to be
performed for the Company by its independent auditor, subject to the de
minimus exceptions for non-audit services described in Section 10A(i)(1)B
of the Exchange Act which are approved by the Audit Committee prior to
completion of the audit.
5. Review, at least annually, the qualifications, performance and
independence of the independent auditors, including considering whether
the auditor's quality controls are adequate and the provision of permitted
non-audit services is compatible with maintaining the auditor's
independence. The Audit Committee shall present its conclusions with
respect to the independent auditor to the Board of Directors of the
Company. In conducting its review and evaluation, the Committee should:
(a) Obtain and review a report by the independent auditor describing (i)
the independent auditor's internal quality-control procedures; (ii)
any material issues raised by the most recent internal
quality-control review, or peer review, of the independent auditor,
or by any inquiry or investigation by governmental or professional
authorities, within the preceding five years, respecting one or more
independent audits carried out by the auditing firm, and any steps
taken to deal with any such issues, and (iii) to assess the
auditor's independence, all relationships between the independent
auditor and the Company.
(b) Evaluate the lead partner (having primary responsibility for the
audit) of the independent audit team.
(c) Ensure the rotation of the lead partner, the audit partner
responsible for reviewing the audit, and other audit partners, as
required by law, and consider whether there should be regular
rotation of the audit firm itself.
(d) Obtain from the independent auditor assurance that (i) the
independent auditor is not providing any prohibited non-audit
services as provided in the Act and the rules implementing the Act,
and (ii) that the independent auditor will be in compliance with the
restrictions on audit partner compensation on a timely basis.
(e) Take into account the opinions of management.
6. Meet with the independent auditor prior to the audit to review the scope,
planning and staffing of the audit.
Financial Reporting
7. Discuss and review with management and the independent auditor the annual
audited financial statements and quarterly financial statements, including
disclosures made in "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
8. Review and discuss with management and the independent auditor:
(a) major issues regarding accounting principles and financial statement
preparation, including any significant changes in the Company's
selection or application of accounting principles, any major issues
as to the adequacy of the Company's internal controls and any
special steps adopted in light of material control deficiencies.
(b) analyses prepared by the independent auditor and/or management
setting forth significant reporting issues and judgments made in
connection with the preparation of the financial statements,
including analysis of the effects of alternative generally accepted
accounting principles methods on the financial statements of the
Company.
9. Prior to filing of the audit report with the Securities and Exchange
Commission and more frequently as otherwise may be necessary or desirable
and review and discuss reports from the independent auditors on:
(a) All critical accounting policies and practices to be used.
(b) All alternative treatments of financial information within generally
accepted accounting principles related to material items that have
been discussed with management, ramifications of the use of such
alternative disclosures and treatments, and the treatment preferred
by the independent auditor.
(c) Other material written communications between the independent
auditor and management, such as any management letter or schedule of
unadjusted differences.
10. Make recommendations to the Board as to whether the audited financial
statements should be included in the Company's Form 10-K.
11. Review disclosures made to the Audit Committee by the Company's CEO and
CFO during their certification process for the Form 10-K and Form 10-Q
about any significant deficiencies in the design or operation of internal
controls or material weaknesses therein and any fraud involving management
or other employees who have a significant role in the Company's internal
controls.
12. Discuss with management and the independent auditor the effect on the
Company's financial statements of off-balance sheet arrangements including
contractual obligations and contingent liabilities and commitments
relating to off-balance sheet arrangements and regulatory and accounting
initiatives.
13. Discuss with the independent auditor the matters required to be discussed
by Statement on Auditing Standards No. 61 relating to the conduct of the
audit and review with the independent auditor (a) any audit problems or
other difficulties encountered by the auditor in the course of the audit
process, including any restrictions on the scope of the independent
auditor's activities or on access to requested information, and any
significant disagreements with management and (b) management's responses
to such matters. Without excluding other possibilities, the Audit
Committee may wish to review with the independent auditor (i) any
accounting adjustments that were noted or proposed by the auditor but were
"passed" (as immaterial or otherwise), (ii) any communications between the
audit team and the audit firm's national office respecting auditing or
accounting issues presented by the engagement and (iii) any "management"
or "internal control" letter issued, or proposed to be issued, by the
independent auditor to the Company.
Compliance/General Responsibilities
14. Obtain from the independent auditor assurance that there are no matters
concerning which the Audit Committee needs to be informed by the
independent auditor pursuant to Section 10A(b) of the Exchange Act.
15. Review and make a decision whether to approve any related party
transactions.
16. Recommend to the Board policies for the Company's hiring of employees or
former employees of the independent auditor who participated in any
capacity in an audit of the Company.
17. Discuss with management the Company's policies with respect to risk
assessment and risk management policies and the Company's major financial
risk exposures and the steps management has taken to monitor and control
such exposures.
18. Establish procedures for the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal
accounting controls or auditing matters, and the confidential, anonymous
submission by employees of concerns regarding questionable accounting or
auditing matters.
Evaluation
19. Review and evaluate the adequacy of this Charter annually and recommend to
the Board any changes deemed appropriate by the Audit Committee.
20. Review its own performance annually.
V. COMMITTEE RESOURCES
The Audit Committee shall have the authority, to the extent it deems
necessary or appropriate, to retain independent legal, accounting or other
advisors. The Audit Committee shall have the sole authority to approve the fees
payable to such advisors and any other terms of retention, such fees to be borne
by the Company.
VI. LIMITATION OF AUDIT COMMITTEE'S ROLE
While the Audit Committee has the responsibilities and powers set forth in
this Charter, it is not the duty of the Audit Committee to plan or conduct
audits or to determine that the Company's financial statements and disclosures
are complete and accurate and are in accordance with generally accepted
accounting principles and applicable rules and regulations. These are the
responsibilities of management and the independent auditor.
NAPCO SECURITY SYSTEMS, INC.
333 Bayview Avenue
Amityville, New York 11701
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of NAPCO SECURITY SYSTEMS, INC. hereby appoints
Messrs. Richard L. Soloway and Kevin S. Buchel, and each or either of them, the
proxy or proxies of the undersigned, with full power of substitution, to vote as
specified on the reverse side all shares of Common Stock of said Company which
the undersigned is entitled to vote at the Annual Meeting of Stockholders of
said Company, to be held on Monday, December 13, 2004 and at all adjournments of
such Meeting, with all powers the undersigned would possess if personally
present.
This Proxy will be voted as specified. IF NO SPECIFICATION IS MADE, THE
PROXY WILL BE VOTED FOR THE ELECTION OF THE TWO (2) DIRECTORS (ITEM 1); AND AS
TO ANY OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING, THIS PROXY WILL BE
VOTED IN THE DISCRETION AND IN THE BEST JUDGMENT OF THE PROXIES. This Proxy may
be revoked at any time prior to the voting thereof.
(Please date and sign on the reverse side.)
1
PROXY
The Board of Directors recommends a Vote FOR Item 1.
Item 1. Election of Two Directors:
Richard L. Soloway
FOR [ ] WITHHOLD [ ]
Kevin S. Buchel
FOR [ ] WITHHOLD [ ]
Dated:__________ __________________________
Signature or Signatures
Please sign exactly as your name
appears at the left. Executors,
administrators, trustees,
guardians, attorneys and agents
should give their full titles
and submit evidence of
appointment unless previously
furnished to the Company or
its transfer agent.
2