Mail Stop 04-07
March 22, 2005
Mr. Kevin S. Buchel
Chief Financial Officer
Napco Security Systems, Inc.
333 Bayview Avenue
Amityville, NW 11701
RE: Napco Security Systems, Inc.
Form 10-K for the fiscal year ended June 30, 2004
Filed September 27, 2004
Form 10-Q for the quarter ended September 30, 2004
Form 10-Q for the quarter ended December 31, 2004
File No. 000-10004
Dear Mr. Buchel:
We have reviewed your filings and have the following comments. We
have limited our review to only your financial statements and
related
disclosures and will make no further review of your documents. As
such, all persons who are responsible for the adequacy and
accuracy
of the disclosure are urged to be certain that they have included
all
information required pursuant to the Securities Exchange Act of
1934.
Where indicated, we think you should revise your documents in
response to these comments. If you disagree, we will consider
your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form 10-K for the year ended June 30, 2004
Item 7. Management`s Discussion and Analysis of Financial
Condition
and Results of Operations
1. Regulation S-K requires that management`s discussion and
analysis
of financial condition and results of operations (MD&A) provide
material historical, as well as prospective, textual disclosure to
enable investors to assess the financial condition and results of
operations of the registrant, with particular emphasis on the
registrant`s prospects for the future. Specifically, expected
future
operating performance should be discussed. Pease provide
additional
discussion of your financial condition and results of operations
on a
prospective basis. In that regard, refer to your discussion of
other
income/expense on page 16 of your December 31, 2004 form 10-Q
where
you mention a joint venture in the Middle East formed in April
2004.
Consider providing a discussion in MD&A on this joint venture, and
any others that you may be involved with and how they support your
overall short or long term strategic goals. Refer to our
interpretive
release issued in December 2003 regarding Management`s Discussion
and
Analysis that is available on our website at
http://www.sec.gov/rules/interp/33-8350.htm for additional
guidance.
2. Refer to discussion of Inventory on page 12 where you state
that
the $2,328,000 decrease in inventory which occurred between 2003
and
2004 was primarily the result of reductions in the Company`s
manufacturing overhead costs due, in part, to a favorable change
in
the exchange rate relating to the Company`s Dominican Republic
manufacturing facility as well as cost reductions of certain of
the
Company`s raw material costs. Please provide a comprehensive
discussion of the facts and circumstances concerning the charge to
inventory reserve of $1,035,000 in 2004 mentioned in Inventory
discussion on page FS-8.
Segment Reporting, page FS-13
3. Please identify for us your chief operating decision maker and
explain to us how this person is able to make reasonable
assessments
of performance and informed decisions about resource allocation by
only reviewing the Company`s results of operations on a
consolidated
basis. Does your CODM review any other information or do the
persons
who report to your CODM review any other information? If so,
explain
to us in detail.
4. In this regard, we note in MD&A you describe the Company`s
realignment of the burglar alarm products distribution network and
its shift in product mix towards higher gross margin products such
as
door locking devices and access control products. Tell us what
information was considered by management when making these
decisions.
Does management evaluate the Company`s performance by type of
product
or groups of products, method of distribution, or type of
customer?
5. Please provide an organizational chart of the Company that
identifies the various levels of management and summarizes their
responsibilities.
Note 5 - Income Taxes, pages FS-16 - FS-18
6. Please clarify if the IRS has specifically questioned the
Company`s qualification for the exemption provided in the recently
enacted Code provision and advise us. If so, disclose the amount
of
reasonably possible loss pursuant to paragraph 10 of SFAS 5 and
explain to us your consideration of SFAS 5 and SFAS 109 when
accounting for this matter. Also explain for readers the nature
and
significance of the IRS issuing a Revenue Procedure.
7. It appears that your removal of the $2,225,000 deferred tax
asset
and the elimination of the $2,913,000 valuation allowance resulted
in
a $688,000 increase in your net income. Please clarify your
disclosure and advise us. Also, your disclosure seems to suggest
that because of the issuance of the Revenue Procedure these
adjustments may have been made in error, please advise us and
clarify
your disclosures.
Note 7 - Stock Options, page FS-21
8. Refer to the first and last sentences of the last paragraph of
Note 7. Clarify for us whether you are referring to the same
"nonemployee directors" in the last sentence as you mention in the
first. In this regard, tell us in detail how your directors met
the
definition of employee per APB 25 such that their options would
not
trigger recognition of compensation expense. Include reference to
authoritative literature used as guidance.
Quarterly Results, page FS-25
9. We note in both 2003 and 2004 you began with a loss in the
first
quarter and ended with income in the fourth quarter. Tell us, and
in
future filings provide a MD&A discussion on, what contributed to
the
fluctuations in your Operating income (loss) from operations and
your
Income (loss) from continuing operations from quarter to quarter.
Specifically discuss whether specific events resulted in losses in
the first quarters of 2003 and 2004, and explain any operational
trends or seasonal fluctuations in your business.
* * * * *
As appropriate, please amend your Form 10-K and respond to
these comments within 10 business days or tell us when you will
provide us with a response. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please include a
cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Please
file your cover letter on EDGAR. Please understand that we may
have
additional comments after reviewing your responses to our
comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that
* the company is responsible for the adequacy and accuracy of the
disclosure in the filings;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filings; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filings or
in
response to our comments on your filings.
You may contact Kenya Wright, Staff Accountant, at (202)
824-
5446 or Robert S. Littlepage Jr., Accountant Branch Chief, at
(202)
942-1947 if you have questions regarding comments on the financial
statements and related matters. Please contact me at (202) 942-
1990
with any other questions.
Sincerely,
Larry Spirgel
Assistant Director
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Mr. Kevin S. Buchel
Napco Security Systems, Inc.
March 22, 2005
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