Appendix B
NAPCO SECURITY SYSTEMS, INC.
2002 EMPLOYEE STOCK OPTION PLAN
-------------------------------
1. Purpose of the Plan. This 2002 Employee Stork Option Plan (hereinafter
referred to as the ""Plan") is intended to encourage ownership of stock of Napco
Security Systems, Inc. (hereinafter referred to as the "Corporation") by key
employees of the Corporation and its subsidiaries, if any, to attract and retain
high caliber personnel upon whose judgment, skill and initiative the success of
the Company is dependent and to provide additional incentive for them to promote
the success of the Corporation. As used in the Plan, the term "subsidiary" shall
have the same meaning as the term "subsidiary corporation" defined in Section
424(f) of the Internal Revenue Code of 1986, as amended (the "Code"). Options
granted to employees under the Plan may be either incentive stock options
("Incentive Stock Options"), within the meaning of Section 422(b) of the Code,
or options that do not constitute Incentive Stock Options.
2. Scope of the Plan. Three Hundred Forty Thousand (340,000) shares of the
Corporation's Common Stock, par value $.01 per share (hereinafter referred to as
"Common Stock"), shall be available and reserved for issue under the Plan
subject, however, to the provisions of Section 11 hereof. Shares issued under
the Plan may be, in whole or in part, as determined by the Committee, authorized
but unissued shares of Common Stock or treasury shares. If an option should
expire or terminate for any reason without having been exercised in full, the
unpurchased shares that were subject thereto shall, unless the Plan shall have
terminated, become available for other options under the Plan. Common Stock
shall not be issued in respect of an option granted under the Plan unless the
exercise of such option and the issuance and delivery of shares of Common Stock
pursuant thereto shall comply with all relevant provisions of law, including the
Securities Act of 1933, as amended, the rules and regulations thereunder, the
Securities Exchange Act of 1934, as amended, the rules and regulations
thereunder, and the requirements of any stock exchange upon which the Common
Stock may then be listed.
3. Administration of the Plan. The Plan shall be administered by the
Compensation/Stock Option Committee (hereinafter sometimes referred to as the
"Committee") of the Board of Directors of the Corporation. The Committee shall
be composed of two or more persons who shall be designated by the Board to
administer the Plan. Each member of the Committee, while serving as such, shall
be a member of the Board and shall be a "non-employee director" within the
meaning of Rule 16b-3 under the Securities and Exchange Act of 1934.
(a) The Committee shall have the full power to grant options under
the Plan, to construe and interpret the Plan, and to establish
rules and regulations and perform all other acts it believes
reasonable and proper, including the authority to delegate
responsibilities to others to assist in administering the Plan.
(b) The determination of those eligible to receive options, and the
amount, type and terms and conditions of each Stock Option shall
rest in the sole discretion of the Committee, subject to the
provisions of the Plan.
4. Eligibility. Options may be granted only to valued key employees
(including officers and directors who are employees) of the Corporation or any
subsidiary; provided, however, that no option shall be granted hereunder to any
person who owns more than 10% of the Common Stock determined in accordance with
the provisions of Section 422(b)(6) of the Code unless the Option meets the
requirements of Section 422(c)(5) of the Code.
B-1
5. Option Price. The purchase price to be paid for Common Stock issued
pursuant to the exercise of any option granted under the Plan shall be not less
than the fair market value of such stock on the date the option is granted as
provided in Section 13 hereof (but in no event less than the par value of the
Common Stock), and shall not thereafter be subject to reduction except as
provided in Section 11 hereof; provided, however, that the purchase price to be
paid for Common Stock issued pursuant to an option granted to an individual who,
at the time of grant, owns stock possessing more than ten percent of the total
combined voting power of all classes of stock of the Corporation or its
subsidiaries, as described in Section 422(b)(6) of the Code, shall, as provided
by Section 422(c)(5) of the Code, be not less than 110% of the fair market value
of the Common Stock. For purposes under the Plan, the fair market value of a
share of Stock on a particular date shall be equal to the last reported sales
price of the Common Stock (i) reported by the National Market System of NASDAQ
on that date or (ii) if the Common Stock is listed on a national stock exchange,
reported on the stock exchange composite tape on that date; or, in either case,
if no prices are reported on that date, on the last preceding date on which such
price of the Common Stock is so reported. If the Common Stock is traded over the
counter at the time a determination of its fair market value is required to be
made hereunder, its fair market value shall be deemed to be equal to the average
between the reported high and low or closing bid and asked prices of Common
Stock on the most recent date on which Common Stock was publicly traded. In the
event Common Stock is not publicly traded at the time a determination of its
value is required to be made hereunder, the determination of its fair market
value shall be made by the Committee in such manner as it deems appropriate.
6. Term of Options. The Committee shall establish the term of any option
granted under the Plan provided however that no option shall be exercisable
after the expiration of 10 years from the date of grant of the option.
7. Non-Transferability of Options. An option granted under the Plan shall
by its terms not be transferable and an option may be exercised, during the
lifetime of the holder of the option, only by such holder; provided however, an
option may be transferred by will or the laws of descent and distribution, to
the estate of a deceased employee, and such option may be exercised by the
estate's legal representative within three (3) months of the date of death. More
particularly, but without limiting the generality of the foregoing, and subject
to the preceding sentence, an option may not be assigned, transferred, pledged,
or hypothecated in any way (whether by operation of law or otherwise), and will
not be subject to execution, attachment or similar process. Any attempted
assignment, transfer, pledge, hypothecation or other disposition of any option
contrary to the provisions of the Plan, and any levy of any attachment or
similar process upon an option wi11 be null and void and without effect.
8. Annual Limitation on Options Granted. To the extent that the aggregate
fair market value of stock with respect to which incentive stock options
(determined without regard to this subsection) are exercisable for the first
time by any individual during any calendar year (under all plans of the
Corporation and its subsidiaries) exceeds One Hundred Thousand Dollars
($100,000) (or such other limit as may be in effect from time to time under the
Code), such options shall be treated as options which are not incentive stock
options.
9. Exercise of Options. Except as hereinafter provided in this Section 9
and in Section 10, options may be exercised within the year of grant with
respect to no more than twenty percent (20%) of the total number of shares of
Common Stock subject to such grant. Thereafter, during each succeeding year
beginning on an anniversary date, options with respect to an additional twenty
percent (20%) of the total number of shares subject to a grant may be exercised.
However, no option shall be exercisable after the expiration of the term of the
option. Moreover, except as provided herein, an option shall not be exercisable
unless the holder thereof shall, at the time of exercise, be an employee of the
Corporation or a subsidiary.
Notwithstanding anything herein to the contrary, such holder's options will
vest and become immediately exercisable in full upon a change in control. For
purposes of this Plan, a "change in control" shall mean:
B-2
(i) either (x) any merger or consolidation of the Corporation into or
with another corporation, (y) the acquisition by another person. group or
entity after the date hereof of beneficial ownership of more than 25% of
the Common Stock of the Corporation (such person, group or entity
reporting, or being required to report, the acquisition pursuant to Section
13 of the Securities Exchange Act of 1934. or (z) the commencement of a
non-issuer tender offer seeking to acquire more than 25"U of the Common
Stock of the Corporation, or
(ii) any sale by the Corporation of substantially all of the assets and
business of the Corporation for cash, stock, or any combination thereof,
unless, immediately after such sale, the holders of Common Stock of the
Corporation immediately prior to such sale own more than 50% or more of the
voting capital stock of the acquiring corporation or, if the acquiring
person or entity is not a corporation, more than 50% of the voting equity
interests of such acquiring person or entity, or
(iii) if a majority of Corporation's Board of Directors consists of
individuals who were not Incumbent Directors. "Incumbent Directors" shall
mean directors who either (A) are directors of the Corporation as of the
date hereof, or (B) are elected, or nominated for election, to the Board
with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such election or nomination.
The purchase price of any shares as to which an option shall be exercised
shall be paid in full at the time of exercise. Payment may be made:
(i) in United States dollars by good check, bank draft or money order
payable to the order of the Corporation; or
(ii) at the discretion of the Committee as set forth in the Option
grant or at any time prior to the exercise by an Option holder by the
transfer to the Corporation of shares of Common Stock owned by the holder
of the option having an aggregate fair market value on the date of exercise
equal to the purchase price or the portion thereof being paid; or
(iii) at the discretion of the Committee and subject to any
restrictions or conditions as it deems appropriate (including any
restrictions as may be set forth in Rule 16b-3 under the Securities and
Exchange Act of 1934), by electing to have the Corporation withhold from
the shares issuable on exercise of the option such number of shares of
Common Stock as shall have an aggregate fair market value on the date of
exercise equal to the purchase price or the portion thereof being paid; or
above. (iv) at the discretion of the Committee by a combination of (i) and
(ii) or (i) and (iii)
The Committee shall determine the procedures for the use of Common Stock in
payment of the purchase price and may impose such limitations and prohibitions
on such use as it deems appropriate.
The holder of an option shall not have any of the rights of a stockholder
with respect to the shares covered by his option until such shares shall have
been issued to him (as evidenced by the appropriate entry on the books of a duly
authorized transfer agent of the Corporation) upon the purchase of such shares
upon exercise of the option.
Any holder who disposes of shares of Common Stock acquired on the exercise
of an Incentive Stock Option by sale or exchange either (a) within two years
after the date of the grant of the Option under which such shares were acquired
or (b) within one year after the acquisition of such shares, shall notify the
Corporation in writing of such disposition and of the amount realized upon such
disposition promptly after the disposition.
B-3
10. Exercise Upon Cessation of Relationship With Corporation. Except as
provided in Sections 7 and 9 above, the right of a holder of an option to
exercise such option shall terminate immediately upon voluntary termination of
service as an employee or dismissal. disability, retirement, death or otherwise.
Option agreements may contain such provisions as the Committee shall approve
with reference to the effect of approved leaves of absence.
11. Adjustments. (a) In the event of a recapitalization, stock split, stock
combination, stock dividend, exchange of shares, or a change in the corporate
structure or shares of the Corporation, or similar event, the Board of Directors
upon recommendation of the Committee shall make appropriate adjustments in the
kind or number of shares which may be issued upon exercise of options and in the
kind or number of shares issuable upon exercise of options theretofore granted
and in the exercise price of such options.
(b) If the Corporation shall be a party to a merger or consolidation or
shall sell substantially all its assets, each outstanding option shall pertain
and apply to the securities and/or property which a holder of the number of
shares of Common Stock subject to the option immediately prior to such merger,
consolidation, or sale of assets would be entitled to receive in such merger,
consolidation or sale of assets.
12. Effectiveness of the Plan. The Plan shall become effective as of
October 24, 2002, but shall be subject to approval by the holders of Common
Stock at a meeting of stockholders of the Corporation duly called and held no
later than twelve months after the date of adoption of the Plan by the Board of
Directors.
13. Time of Granting Options. The date of grant of an option under the Plan
shall, for all purposes, be the date on which the Board of Directors makes the
determination granting such option; and no grant shall be deemed effective under
the Plan prior to such date. Notice of the determination shall be given to each
employee to whom an option is so granted within a reasonable time after the date
of such grant.
14. Termination and Amendment of the Plan. The Plan shall terminate ten
(10) years from the date on which it is adopted by the Board of Directors. Prior
thereto, the Board of Directors may terminate the Plan at any rime; provided,
however, that any such termination shall not affect any options then outstanding
under the Plan. No options under the Plan may be granted after termination of
the Plan.
The Board of Directors from time to time may make such modifications or
amendments of the Plan and, with the consent of the holder of an option, of the
terms and conditions of his option, as it shall deem advisable, but may not,
without further approval of the stockholders of the Corporation, except as
provided in Section 11 hereof (a) increase the maximum number of shares which
shall be available and reserved for issue under the Plan, or (b) change the
employees or class of employees eligible to receive options, or (c) extend the
term of the Plan beyond the period provided in this paragraph.
Neither the termination nor any modification or amendment of the Plan
shall, without the consent of the holder of an option theretofore granted under
the Plan, adversely affect the rights of such holder with respect to such
option.
15. Section 16 of the Securities Exchange Act of 1934. It is intended that
the Plan and any grant of an option made to a person subject to Section 16 of
the 1934 Act meet all requirements of Rule 16b-3. If any provision of the Plan
or any such option would disqualify the Plan or such option under, or would
otherwise not comply with, Rule I6b-3, such provision or option shall be
construed or deemed amended to conform to Rule 16b-3.
Dated as of: October 24, 2002
NAPCO SECURITY SYSTEMS, INC.
By: /s/ Richard Soloway
Richard Soloway, President
ATTEST:
By: /s/ Kevin S. Buchel
Kevin S. Buchel, Senior Vice President
B-4