UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 [No Fee Required]
For the fiscal year ended June 30, 2005
or
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 [No Fee Required]
For the Transition period from _________ to _________
COMMISSION FILE NUMBER 0-10004
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NAPCO SECURITY SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-2277818
(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
333 BAYVIEW AVENUE,
AMITYVILLE, NEW YORK 11701
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(631) 842-9400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Each Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of December 31, 2004, the aggregate market value of the common stock of
Registrant held by non-affiliates based upon the last sale price of the stock on
such date was $ 74,355,947.
As of September 23, 2005, 8,779,906 shares of common stock of Registrant
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Registrant's
2005 Annual Meeting of Stockholders.
1
PART I
ITEM 1. BUSINESS.
NAPCO Security Systems, Inc. ("NAPCO" or the "Company") was incorporated in
December 1971 in the State of Delaware. Its executive offices are located at 333
Bayview Ave, NY 11701. It's telephone number is (631) 689-9400.
The Company is a diversified manufacturer of security products, encompassing
intrusion and fire alarms, building access control systems and electronic
locking devices. These products are used for commercial, residential,
institutional, industrial and governmental applications, and are sold worldwide
principally to independent distributors, dealers and installers of security
equipment.
PRODUCTS
Access Control Systems. Access control systems consist of one or more of the
following: various types of identification readers (e.g. card readers, hand
scanners, etc.), a control panel, a PC-based computer and electronically
activated door-locking devices. When an identification card or other identifying
information is entered into the reader, the information is transmitted to the
control panel/PC which then validates the data and determines whether to grant
access or not by electronically deactivating the door locking device. An
electronic log is kept which records various types of data regarding access
activity.
The Company designs, engineers and markets the software and control panels
discussed above. It also buys and resells various identification readers,
PC-based computers and various peripheral equipment for access control systems.
Alarm Systems. Alarm systems usually consist of various detectors, a control
panel, a digital keypad and signaling equipment. When a break-in occurs, an
intrusion detector senses the intrusion and activates a control panel via
hard-wired or wireless transmission that sets off the signaling equipment and,
in most cases, causes a bell or siren to sound. Communication equipment such as
a digital communicator may be used to transmit the alarm signal to a central
station or another person selected by a customer.
The Company manufactures and markets the following products for alarm
systems:
Automatic Communicators. When a control panel is activated by a signal from
an intrusion detector, it activates a communicator that can automatically
dial one or more pre-designated telephone numbers. If programmed to do so,
a digital communicator dials the telephone number of a central monitoring
station and communicates in computer language to a digital communicator
receiver, which prints out an alarm message.
Control Panels. A control panel is the "brain" of an alarm system. When
activated by any one of the various types of intrusion detectors, it can
activate an audible alarm and/or various types of communication devices.
For marketing purposes, the Company refers to its control panels by the
trade name, generally "Gemini(TM)" and "Magnum Alert(TM)" followed by a
numerical designation.
Combination Control Panels/Digital Communicators and Digital Keypad
Systems. A combination control panel, digital communicator and a digital
keypad (a plate with push button numbers as on a telephone, which
eliminates the need for mechanical keys) has continued to grow rapidly in
terms of dealer and consumer preference. Benefits of the combination format
include the cost efficiency resulting from a single microcomputer function,
as well as the reliability and ease of installation gained from the
simplicity and sophistication of micro-computer technology.
Door Security Devices. The Company manufactures a variety of exit alarm
locks including simple dead bolt locks, door alarms and
microprocessor-based electronic door locks with push button and card reader
operation.
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Fire Alarm Control Panel. Multi-zone fire alarm control panels, which
accommodate an optional digital communicator for reporting to a central
station, are also manufactured by the Company.
Area Detectors. The Company's area detectors are both passive infrared heat
detectors and combination microwave/passive infrared detectors that are
linked to alarm control panels. Passive infrared heat detectors respond to
the change in heat patterns caused by an intruder moving within a protected
area. Combination units respond to both changes in heat patterns and
changes in microwave patterns occurring at the same time.
PERIPHERAL EQUIPMENT
The Company also markets peripheral and related equipment manufactured by other
companies. Revenues from peripheral equipment have not been significant.
RESEARCH AND DEVELOPMENT
The Company's business involves a high technology element. A substantial amount
of the Company's efforts are expended to develop and improve the Products.
During the fiscal years ended June 30, 2005, 2004, and 2003, the Company
expended approximately $4,865,000, $4,254,000, and $4,516,000, respectively, on
Company-sponsored research and development activities conducted by its
engineering department. The Company intends to continue to conduct a significant
portion of its future research and development activities internally.
EMPLOYEES
As of June 30, 2005, the Company had approximately 860 full-time employees.
MARKETING
The Company's staff of 57 sales and marketing support employees located at the
Company's Amityville and United Kingdom offices sells and markets the Products
primarily to independent distributors and wholesalers of security alarm and
security hardware equipment. Management estimates that these channels of
distribution represented approximately 73% and 72% of the Company's total sales
for the fiscal year ended June 30, 2005 and 2004, respectively. The remaining
revenues are primarily from alarm installers and governmental institutions. The
Company's sales representatives periodically contact existing and potential
customers to introduce new products and create demand for those as well as other
Company Products. These sales representatives, together with the Company's
technical personnel, provide training and other services to wholesalers and
distributors so that they can better service the needs of their customers. In
addition to direct sales efforts, the Company advertises in technical trade
publications and participates in trade shows in major United States and European
cities. Some of the Company's products are marketed under the "private label" of
certain customers.
In the ordinary course of the Company's business the Company grants extended
payment terms to certain customers. Those customers have materially complied
with the extended payment terms.
COMPETITION
The security alarm products industry is highly competitive. The Company's
primary competitors are comprised of approximately 20 other companies that
manufacture and market security equipment to distributors, dealers, central
stations and original equipment manufacturers. The Company believes that no one
of these competitors is dominant in the industry. Certain of these companies
have substantially greater financial and other resources than the Company.
The Company competes primarily on the basis of the features, quality,
reliability and pricing of, and the incorporation of the latest innovative and
technological advances into, its Products. The Company also competes by offering
technical support services to its customers. In addition, the Company competes
on the basis of its expertise, its proven products, its reputation and its
ability to provide Products to customers on a
3
timely basis. The inability of the Company to compete with respect to any one or
more of the aforementioned factors could have an adverse impact on the Company's
business. Relatively low-priced "do-it-yourself" alarm system products have
become available in recent years and are available to the public at retail
stores. The principal components in the Company's products are integrated
circuits, printed circuit boards, microprocessors, sheet metal, plastic resin,
machined and cast metal components. The Company believes that these products
compete with the Company only to a limited extent because they appeal primarily
to the "do-it-yourself" segment of the market. Purchasers of such systems do not
receive professional consultation, installation, service or the sophistication
that the Company's Products provide.
RAW MATERIALS
The Company prepares specifications for component parts used in the Products and
purchases the components from outside sources or fabricates the components
itself. These components, if standard, are generally readily available; if
specially designed for the Company, there is usually more than one alternative
source of supply available to the Company on a competitive basis. The Company
generally maintains inventories of all critical components. The Company for the
most part is not dependent on any one source for its raw materials.
SALES BACKLOG
In general, orders for the Products are processed by the Company from inventory.
A sales backlog of approximately $438,000 and $469,000 existed as of June 30,
2005 and 2004, respectively. The Company does not generally have a material
backlog.
GOVERNMENT REGULATION
The Company's telephone dialers, microwave transmitting devices utilized in its
motion detectors and any new communication equipment that may be introduced from
time to time by the Company must comply with standards promulgated by the
Federal Communications Commission ("FCC") in the United States and similar
agencies in other countries where the Company offers such products, specifying
permitted frequency bands of operation, permitted power output and periods of
operation, as well as compatibility with telephone lines. Each new Product that
is subject to such regulation must be tested for compliance with FCC standards
or the standards of such similar governmental agencies. Test reports are
submitted to the FCC or such similar agencies for approval. Cost of compliance
with these regulations has not been material.
PATENTS AND TRADEMARKS
The Company has been granted several patents and trademarks relating to the
Products. While the Company obtains patents and trademarks as it deems
appropriate, the Company does not believe that its current or future success is
dependent on its patents or trademarks.
4
FOREIGN SALES
The revenues and identifiable assets attributable to the Company's domestic and
foreign operations for its last three fiscal years, are summarized in the
following table:
Financial Information Relating to Domestic and Foreign Operations
2005 2004 2003
------- ------- -------
(in thousands)
Sales to external customers(1):
Domestic $54,654 $48,626 $47,965
Foreign 10,575 9,467 9,375
------- ------- -------
Total Net Sales $65,229 $58,093 $57,340
======= ======= =======
Identifiable assets:
United States $41,753 $40,153 $39,005
Dominican Republic (2) 14,658 13,075 15,691
Other foreign countries 3,496 3,444 2,653
(1) All of the Company's sales occur in the United States and are shipped
primarily from the Company's facilities in the United States and United
Kingdom. There were no sales into any one foreign country in excess of 10%
of total Net Sales.
(2) Identifiable assets consist primarily of inventories and fixed assets
located at the Company's principal manufacturing facility in the Dominican
Republic.
ITEM 2. PROPERTIES.
The Company owns executive offices and production and warehousing facilities at
333 Bayview Avenue, Amityville, New York. This facility consists of a
fully-utilized 90,000 square foot building on a six acre plot. This six-acre
plot provides the Company with space for expansion of office, manufacturing and
storage capacities.
The Company's foreign subsidiary located in the Dominican Republic, NAPCO/Alarm
Lock Grupo International, S.A. (formerly known as NSS Caribe, S.A.), owns a
building of approximately 167,000 square feet of production and warehousing
space in the Dominican Republic. That subsidiary also leases the land associated
with this building under a 99-year lease expiring in the year 2092. As of June
30, 2005, a majority of the Company's products were manufactured at this
facility, utilizing U.S. quality control standards.
The Company's foreign subsidiary located in the United Kingdom, Napco Group
Europe Ltd, leases office space of approximately 800 square feet. This lease
expires in May 2008.
The Company's joint venture located in the United Arab Emiriates leases office
and warehouse space of approximately 1,100 square feet. This lease expires in
February 2006.
Management believes that these facilities are more than adequate to meet the
needs of the Company in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending or threatened material legal proceedings to which NAPCO or
its subsidiaries or any of their property is subject, except:
As previously reported, on or about August 27, 2001, a Complaint was filed
against NAPCO Security Group and Alarm Lock Systems, Inc. by Jose Ramirez and
Glenda Ramirez in the Supreme Court of State of New York, County of the Bronx.
The Complaint seeks fifteen million dollars ($15,000,000) in damages
5
on behalf of Mr. Ramirez based on theories including strict liability in tort,
negligence, breach of warranty, failure to warn, etc. The Complaint also seeks
damages in the amount of two million dollars ($2,000,000) on behalf of Ms.
Ramirez based on an allegation that she has been, and forever will be, "deprived
of the society, services, companionship consortium and support of" Mr. Ramirez
based on the personal injuries he suffered in a fire which purportedly occurred
on November 5, 1999. This case was consolidated with the related case concerning
the same incident, captioned Jose Ramirez and Glenda Ramirez v. Mark T. Miller,
Chelsea Gardens Owners Corp., Eichner Rudd Management Associates, Ltd., Napco
Security Group and Alarm Lock Systems, Inc., asserting the same claims against
the Company. The action is being defended by NAPCO's insurance company on behalf
of NAPCO. The Alarm Lock product in question has been tested and still functions
correctly, and the Company believes that action is without merit. NAPCO plans to
continue its vigorous defense of this action.
In the normal course of business, the Company is a party to claims and/or
litigation. Management believes that the settlement of such claims and/or
litigation, considered in the aggregate, will not have a material adverse effect
on the Company's financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
PRINCIPAL MARKET
NAPCO's Common Stock is traded on the NASDAQ Stock Market, National Market
System, under the symbol NSSC.
The tables set forth below reflect the range of high and low sales of the Common
Stock in each quarter of the past two fiscal years as reported by the NASDAQ
National Market System and as adjusted for the 2:1 stock split effective as of
April 2004 and the 20% stock dividend effective November 2004.
Quarter Ended Fiscal 2005
--------------------------------------------
Common Stock Sept. 30 Dec. 31 March 31 June 30
- ------------ -------- ------- ------------- -------
High $7.542 $13.38 $13.24 $10.52
Low $5.583 $7.342 $10.06 $ 8.77
Quarter Ended Fiscal 2004
--------------------------------------------
Common Stock Sept. 30 Dec. 31 March 31 June 30
- ------------ -------- ------- ------------- -------
High $4.062 $3.687 $7.129 $ 9.35
Low $3.632 $3.046 $3.004 $5.675
APPROXIMATE NUMBER OF SECURITY HOLDERS
The number of holders of record of NAPCO's Common Stock as of September 23, 2005
was 144 (such number does not include beneficial owners of stock held in nominee
name).
DIVIDEND INFORMATION
NAPCO has declared no cash dividends during the past two years with respect to
its Common Stock, and the Company does not anticipate paying any cash dividends
in the foreseeable future. Any cash dividends must be authorized by the
Company's primary lender.
EQUITY COMPENSATION PLAN INFORMATION
AS OF JUNE 30, 2005
NUMBER OF
SECURITIES
NUMBER OF REMAINING
SECURITIES TO BE WEIGHTED AVAILABLE FOR
ISSUED UPON AVERAGE EXERCISE FUTURE ISSUANCE
EXERCISE OF PRICE OF (EXCLUDING
OUTSTANDING OUTSTANDING SECURITIES REFLECTED
OPTIONS OPTIONS IN COLUMN a)
PLAN CATEGORY (a) (b) (c)
- ---------------------------------- ---------------- ---------------- --------------------
Equity compensation plans approved
by security holders: 744,240 $3.50 352,800
Equity compensation plans not
approved by security holders: -- -- --
---------------- ---------------- --------------------
Total 744,240 $3.50 352,800
================ ================ ====================
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ITEM 6. SELECTED FINANCIAL DATA.
The table below summarizes selected financial information. For further
information, refer to the audited consolidated financial statements and the
notes thereto beginning on page FS-1 of this report.
Fiscal Year Ended or at June 30
--------------------------------------------------------------
(In thousands, except share data)
2005 2004(1) 2003(1) 2002(1) 2001(1)
---------- ---------- ---------- ---------- ----------
Statement of earnings data:
Net Sales $ 65,229 $ 58,093 $ 57,340 $ 55,836 $ 54,771
Gross Profit 23,924 19,540 15,401 14,717 14,317
Income from Operations 8,910 6,065 2,225 2,817 1,859
Net Income 5,629 3,335 1,010 1,575(5) 251(2)
Cash Flow Data:
Net cash flows provided by
operating activities 7,205 $ 6,275 $ 6,482 $ 7,091 $ 1,326
Net cash flows used in
investing activities (658) (681) (752) (709) (8,283)
Net cash flows (used in)
provided by financing
activities (6,165) ($6,592) ($5,436) ($5,919) $ 5,610
Per Share Data:
Net earnings per common share:
Basic $ .66 $ .42 $ .13 $ .20 $ .03
Diluted $ .62 $ .39 $ .12 $ .19 $ .03
Weighted average common
shares outstanding:
Basic 8,562,000 7,958,000 7,974,000 8,045,000 8,326,000
Diluted 9,015,000 8,497,000 8,537,000 8,494,000 8,465,000
Cash Dividends declared per
common share (3) $ .00 $ .00 $ .00 $ .00 $ .00
Balance sheet data (4):
Working capital $ 31,017 $ 28,992 $ 28,843 $ 31,812 $ 33,232
Total assets 59,907 56,672 57,349 60,752 63,677
Long-term debt 1,950 6,400 14,100 16,588 21,567
Stockholders' equity 43,678 37,904 33,357 34,528 32,944
(1) Share and per share data have been restated to reflect the effect of a 2:1
stock split effective April
8
2004 and 20% stock dividend effective November 2004.
(2) Net income results for 2001 include Amortization Expense related to
goodwill. Effective July 2001 the Company adopted SFAS No. 141 which, among
other provisions, provides that those intangible assets that are classified
as Goodwill with indefinite lives are no longer amortized (see also Note 1
to the Consolidated Financial Statements).
(3) The Company has never paid a dividend on its common stock. It is the policy
of the Board of Directors to retain earnings for use in the Company's
business. Any dividends must be authorized by the Company's primary lender.
(4) Working capital is calculated by deducting Current Liabilities from Current
Assets.
(5) The Company eliminated a deferred tax asset and a related valuation
allowance in fiscal 2002. This had the effect of increasing net income by
$688,000 in fiscal 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company is a diversified manufacturer of security products, encompassing
intrusion and fire alarms, building access control systems and electronic
locking devices. These products are used for commercial, residential,
institutional, industrial and governmental applications, and are sold worldwide
principally to independent distributors, dealers and installers of security
equipment. International sales accounted for approximately 16% of our revenues
for fiscal year 2005.
The Company owns and operates manufacturing facilities in Amityville, New York
and the Dominican Republic. A significant portion of our operating costs are
fixed, and do not fluctuate with changes in customer demand or utilization of
our manufacturing capacity. As product demand rises and factory utilization
increases, the fixed costs are spread over increased output, which should
improve profit margins. Conversely, when sales decline our fixed costs are
spread over reduced levels, thereby decreasing margins.
In February 2004 the Company entered into a joint venture with an unrelated
company to sell security-related products, including those manufactured by the
Company, in the Middle East. The Company owns 51% of the newly formed company,
an LLC organized in New York, which has its main operations in the United Arab
Emirates. To date, revenues generated by this joint venture have been
immaterial.
The security market is characterized by constant incremental innovation in
product design and manufacturing technologies. Generally, the Company devotes
7-8% of revenues to research and development (R&D) on an annual basis. Products
resulting from our R&D investments in fiscal 2005 did not contribute materially
to revenue during this fiscal year, but should benefit the Company over future
years. In general, the new products introduced by the Company are initially
shipped in limited quantities, and increase over time. Prices and manufacturing
costs tend to decline over time as products and technologies mature.
ECONOMIC AND OTHER FACTORS
The post September 11 era has generally been characterized by a favorable
business climate for suppliers of electronic security products and services
versus the rather sluggish performance of most technology related sectors during
the similar period. Electronic security vendors, however, did not completely
escape the fallout from the broader downturn in capital spending in the economy.
The Company believes the security equipment market is likely to continue to
exhibit healthy growth, particularly in industrial sectors, due to ongoing
concerns over the adequacy of security safeguards.
9
SEASONALITY
The Company's fiscal year begins on July 1 and ends on June 30. Historically,
the end users of Napco's products want to install its products prior to the
summer; therefore sales of its products peak in the period April 1 through June
30, the Company's fiscal fourth quarter, and are reduced in the period July 1
through September 30, the Company's fiscal first quarter. To a lesser degree,
sales in Europe are also adversely impacted in the Company's first fiscal
quarter because of European vacation patterns, i.e., many distributors and
installers are closed for the month of August.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in conformity with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgments can be subjective and complex, and consequently actual results could
differ from those estimates. Our most critical accounting policies relate to
revenue recognition; concentration of credit risk; inventory; goodwill; and
income taxes.
REVENUE RECOGNITION
Revenues from merchandise sales are recorded at the time the product is shipped
or delivered to the customer pursuant to the terms of purchase. We report our
sales levels on a net sales basis, which is computed by deducting from gross
sales the amount of actual returns received and an amount established for
anticipated returns and allowances.
Our sales return accrual is a subjective critical estimate that has a direct
impact on reported net sales and income. This accrual is calculated based on a
history of gross sales and actual sales returns, as well as management's
estimate of anticipated returns and allowances. As a percentage of gross sales,
sales returns and allowances were 6%, 7% and 10% in fiscal 2005, 2004 and 2003,
respectively.
CONCENTRATION OF CREDIT RISK
An entity is more vulnerable to concentrations of credit risk if it is exposed
to risk of loss greater than it would have had it mitigated its risk through
diversification of customers. Such risks of loss manifest themselves
differently, depending on the nature of the concentration, and vary in
significance.
The Company had two customers (Customer A and B) with accounts receivable
balances that aggregated 35% and 31% of the Company's accounts receivable at
June 30, 2005 and 2004, respectively. Sales to neither of these customers
exceeded 10% of net sales in any of the past three years.
In the ordinary course of business, we have established an allowance for
doubtful accounts and customer deductions in the amount of $380,000 and $355,000
as of June 30, 2005 and 2004, respectively. Our allowance for doubtful accounts
is a subjective critical estimate that has a direct impact on reported net
earnings. This allowance is based upon the evaluation of accounts receivable
agings, specific exposures and historical trends.
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INVENTORY
We state our inventory at the lower of cost or fair market value, with cost
being determined on the first-in, first-out (FIFO) method. We believe FIFO most
closely matches the flow of our products from manufacture through sale. The
reported net value of our inventory includes finished saleable products,
work-in-process and raw materials that will be sold or used in future periods.
Inventory cost includes raw materials, direct labor and overhead.
We also record an inventory obsolescence reserve, which represents the
difference between the cost of the inventory and its estimated market value,
based on various product sales projections. This reserve is calculated using an
estimated obsolescence percentage applied to the inventory based on age,
historical trends and requirements to support forecasted sales. In addition, and
as necessary, we may establish specific reserves for future known or anticipated
events.
GOODWILL
Effective July 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and
Other Intangible Assets. These statements established accounting and reporting
standards for acquired goodwill and other intangible assets. Specifically, the
standards address how acquired intangible assets should be accounted for both at
the time of acquisition and after they have been recognized in the financial
statements. In accordance with SFAS No. 142, intangible assets, including
purchased goodwill, must be evaluated for impairment. Those intangible assets
that are classified as goodwill or as other intangibles with indefinite lives
are not amortized.
Impairment testing is performed in two steps: (i) the Company determines
impairment by comparing the fair value of a reporting unit with its carrying
value, and (ii) if there is an impairment, the Company measures the amount of
impairment loss by comparing the implied fair value of goodwill with the
carrying amount of that goodwill. The Company has performed its annual
impairment evaluation required by this standard and determined that the goodwill
is not impaired.
INCOME TAXES
Deferred income taxes are recognized for the expected future tax consequences of
temporary differences between the amounts reflected for financial reporting and
tax purposes. Net deferred tax assets are adjusted by a valuation allowance if,
based on the weight of available evidence, it is more likely than not that some
portion or all of the net deferred tax assets will not be realized. If the
Company determines that a deferred tax asset will not be realizable or that a
previously reserved deferred tax asset will become realizable, an adjustment to
the deferred tax asset will result in a reduction of, or increase to, earnings
at that time. The provision (benefit) for income taxes represents U.S. Federal,
state and foreign taxes. Through June 30, 2001, the Company's subsidiary in the
Dominican Republic, Napco/Alarm Lock Group International, S.A. ("Napco DR"), was
not subject to tax in the United States, as a result, no taxes were provided.
Effective July 1, 2001, the Company made a domestication election for Napco DR.
Accordingly, its income is subject to taxation in the United States on a going
forward basis.
In March 2003, Napco Security Systems, Inc. timely filed its income tax return
for the fiscal year ended June 30, 2002. This return included an election to
treat one of the Company's foreign subsidiaries, Napco DR, as if it were a
domestic corporation beginning July 1, 2001. This election was based on a then
recently enacted Internal Revenue Code ("Code") provision. As a result of this
election, Napco DR is treated, for Federal income tax purposes, as transferring
all of its assets to a domestic corporation in connection with an exchange.
Although this type of transfer usually results in the recognition of taxable
income to the extent of any untaxed earnings and profits, the Code provision
provides an exemption for applicable corporations. The Company qualifies as an
applicable corporation pursuant to this Code section, and based on this Code
exemption, the Company treated the transfer of approximately $27,000,000 of
Napco DR's untaxed earnings and profits as nontaxable.
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The Internal Revenue Service has issued a Revenue Procedure which is
inconsistent with the Code exemption described above. The Code is the actual
law; a Revenue Procedure is the IRS's interpretation of the law. The Code has a
higher level of authority than a Revenue Procedure. Management believes that it
has appropriately relied on the guidance in the Code when filing its income tax
return. If challenged, the Company believes that the potential liability would
range from $0 to $9,450,000. However, the Company also believes there are other
mitigating factors that would limit the amount of the potential liability, and
as a result, management accrued a liability of $2,243,000 as of June 30, 2002.
The Company's tax provision utilizes estimates made by management and as such,
is subject to change as described in Note 1 of the Consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash on hand combined with proceeds from operating activities
during fiscal 2005 were adequate to meet the Company's capital expenditure needs
and short and long-term debt obligations. The Company's primary internal source
of liquidity is the cash flow generated from operations. The primary source of
financing related to borrowings under a $18,000,000 secured revolving credit
facility. The Company expects that cash generated from operations and cash
available under the Company's bank line of credit will be adequate to meet its
short-term liquidity requirements. As of June 30, 2005, the Company's unused
sources of funds consisted principally of $1,178,000 in cash and approximately
$16,050,000 which represents the unused portion of its secured revolving credit
facility. The Company's management believes that current working capital, cash
flows from operations and its revolving credit agreement will be sufficient to
fund the Company's operations through at least the first quarter of fiscal 2007.
In May 2001, the Company amended its secured revolving credit agreement with its
primary bank. The Company's borrowing capacity under the amended agreement was
increased to $18,000,000. The amended revolving credit agreement is secured by
all the accounts receivable, inventory and certain other assets of Napco
Security Systems, Inc., a first and second mortgage on the Company's
headquarters in Amityville, New York and common stock of three of the Company's
subsidiaries. The revolving credit agreement bears interest at either the Prime
Rate less 1/4% or an alternate rate based on LIBOR as described in the
agreement. The revolving credit agreement, which previously had an expiration
date of July 2005, has been extended to September 2008. Any outstanding
borrowings must be repaid or refinanced on or before that time. The agreement
contains various restrictions and covenants including, among others,
restrictions on payment of cash dividends, restrictions on borrowings,
restrictions on capital expenditures, the maintenance of minimum amounts of
tangible net worth, and compliance with other certain financial ratios, as
defined in the agreement. As of June 30, 2005, the Company was not in compliance
with one of these covenants for which it has received the appropriate waiver
from its bank. In December 2004 the Company utilized a portion of this facility
to accelerate full repayment of its 2003 and 2000 term loans described below.
In January 2003, the Company repurchased 600,000 shares of its common stock from
two shareholders, unaffiliated with the Company, at $4.06 per share, a discount
from its then current trading price of $4.17. The transaction was approved by
the board of directors and the purchase price of $2,442,000 (including fees of
$5,000) was financed through the Company's revolving line of credit and a new
five (5) year term loan from its primary lender for $1,250,000. The Company
repaid the loan in full in December 2004.
The Company takes into consideration a number of factors in measuring its
liquidity, including the ratios set forth below:
2005 2004 2003
-------- -------- --------
Current Ratio 4.0 to 1 4.3 to 1 4.2 to 1
Sales to Receivables 3.0 to 1 2.9 to 1 3.3 to 1
Total debt to equity .04 to 1 .2 to 1 .5 to 1
12
As of June 30, 2005, the Company had no material commitments for purchases or
capital expenditures, except as discussed below.
On April 26, 1993, the Company's foreign subsidiary entered into a 99-year land
lease of approximately 4 acres of land in the Dominican Republic, at an annual
cost of approximately $288,000.
On July 27, 2000, the Company signed an Asset Purchase Agreement to acquire the
net assets of Continental Instruments, LLC ("Continental") for an purchase price
of $7,522,500 in cash, less subsequent purchase price adjustments of
approximately $460,000, plus future deferred payments of $1,700,000 in cash to
be paid over 24 months. The Company financed the transaction with borrowings
under a 60 Month Installment loan of $8,250,000. Continental designs and sells
access control and other security control systems to dealers and distributors
worldwide. The Company repaid the loan in full in December 2004.
Working Capital. Working capital increased by $2,025,000 to $31,017,000 at June
30, 2005 from $28,992,000 at June 30, 2004. The increase in working capital was
primarily the result of the increase in net income as partially offset by debt
reduction and an increase in accounts receivable and inventory. Working capital
is calculated by deducting Current Liabilities from Current Assets.
Accounts Receivable. Accounts Receivable increased by $1,972,000 to $21,899,000
at June 30, 2005 from $19,927,000 at June 30, 2004. This increase resulted
primarily from the granting of additional payment terms to certain of the
Company's burglar alarm customers as well as the increased sales during the
fourth quarter of fiscal 2005 as compared to the fourth quarter of fiscal 2004.
Inventory. Inventory increased by $1,648,000 to $16,242,000 at June 30, 2005 as
compared to $14,594,000 at June 30, 2004. The increase in inventory levels was
primarily the result of the Company's production planning for the increased
sales levels.
Accounts Payable, and Accrued Expenses. Accounts payable and accrued expenses
increased by $2,260,000 to $8,923,000 as of June 30, 2005 as compared to
$6,663,000 at June 30, 2004.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not maintain any off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations by fiscal
year:
Payments due by period
-----------------------------------------------------------------
Less than 1 More than 5
Contractual obligations Total year 1-3 years 3-5 years years
- ----------------------------------- ----------- ----------- ---------- ---------- -----------
Long-term debt obligations $ 1,950,000 -- -- $1,950,000 --
Land lease (87 years remaining) (1) 25,056,000 288,000 576,000 576,000 23,616,000
Operating lease obligations 154,000 86,000 68,000 -- --
Other long-term obligations 2,517,000 1,125,000 1,392,000 -- --
----------- ---------- ---------- ---------- -----------
Total $29,677,000 $1,499,000 $2,036,000 $2,526,000 $23,616,000
=========== ========== ========== ========== ===========
(1) see footnote 10 to the consolidated financial statements.
13
RESULTS OF OPERATIONS
FISCAL 2005 COMPARED TO FISCAL 2004
Fiscal year ended June 30,
-------------------------------
% Increase/
2005 2004 (decrease)
------- ------- -----------
Net sales $65,229 $58,093 12%
Gross profit 23,924 19,540 22%
Gross profit as a % of net sales 36.7% 33.6% 3.1%
Selling, general and administrative 15,014 13,475 11%
Income from operations 8,910 6,065 47%
Interest expense 224 420 (47)%
Other expense 58 109 (47)%
Provision for income taxes 3,227 2,201 47%
Net income 5,629 3,335 69%
Net Sales. Net sales in fiscal 2005 increased by 12% to $65,229,000 from
$58,093,000 in fiscal 2004. The Company's sales growth was primarily due to
increased sales of the Company's burglar alarm and door locking products. During
the quarter ended December 31, 2003, the Company began the process of realigning
its burglar alarm products distribution network which culminated in the
termination of a major burglar alarm distributor. The Company reallocated its
burglar alarm products business across its extensive national network of
independent distributors. The Company has seen the positive effects of this
realignment reflected in the increase in net sales as well as the increase in
gross profit as discussed below.
Gross Profit. The Company's gross profit increased $4,384,000 to $23,924,000 or
36.7% of net sales in fiscal 2005 as compared to $19,540,000 or 33.6% of net
sales in fiscal 2004. The increase in gross profit in both absolute dollars and
as a percentage of net sales was due primarily to the increased overhead
absorption associated with the increase in net sales, a decrease in the
Company's inventory obsolescence reserve resulting primarily from the increase
in net sales, increased margins resulting from the realignment of the Company's
burglar alarm products as well as cost reductions of certain of the Company's
raw material costs.
Expenses. Selling, general and administrative expenses as a percentage of net
sales remained relatively constant at 23% in both fiscal 2005 and fiscal 2004.
Interest expense for fiscal 2005 decreased by $196,000 to $224,000 from $420,000
for the same period a year ago. The decrease in interest expense is primarily
the result of the reduction of the Company's outstanding debt by $6,350,000
during fiscal 2005.
Other Expenses. Other expenses decreased $51,000 to $58,000 in fiscal 2005 as
compared to $109,000 in fiscal 2004.
Income Taxes. The Company's provision for income taxes increased by $1,026,000
to a provision of $3,227,000 in fiscal 2005 as compared to $2,201,000 in fiscal
2004. This increase in the provision for income taxes is primarily due to a
$3,092,000 increase in income before income taxes in fiscal 2005 as compared to
fiscal 2004. The increase in income before income taxes is due primarily to the
items discussed above.
14
FISCAL 2004 COMPARED TO FISCAL 2003
Fiscal year ended June 30,
-------------------------------
% Increase/
2004 2003 (decrease)
------- ------- -----------
Net sales $58,093 $57,340 1%
Gross profit 19,540 15,401 27%
Gross profit as a % of net sales 33.6% 26.9% 6.7%
Selling, general and administrative 13,475 13,176 2%
Income from operations 6,065 2,225 173%
Interest expense 420 727 (42)%
Other expense 109 (127) (186)%
Provision for income taxes 2,201 615 258%
Net income 3,335 1,010 230%
Net Sales. Net sales in fiscal 2004 increased by 1% to $58,093,000 from
$57,340,000 in fiscal 2004. The Company's sales growth was primarily due to
increased sales in the Company's door locking and access control products, as
partially offset by lower burglar alarm sales principally as a result of a major
distributor's introduction of its company-wide inventory reduction program,
which reduced its purchasing levels. During the quarter ended December 31, 2003,
the Company began the process of realigning its burglar alarm products
distribution network which culminated in the termination of the aforementioned
major burglar alarm distributor. The Company reallocated its burglar alarm
products business across its extensive national network of independent
distributors.
Gross Profit. The Company's gross profit increased $4,139,000 to $19,540,000 or
33.6% of net sales in fiscal 2004 as compared to $15,401,000 or 26.9% of net
sales in fiscal 2003. The increase in gross profit in both absolute dollars and
as a percentage of net sales was due primarily to the shift in product mix
towards higher margin products such as door locking devices and access control
products. Gross profit was also positively impacted by lower 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.
Expenses. Selling, general and administrative expenses increased by 2% to
$13,475,000, or 23% of net sales in fiscal 2004 from $13,176,000, or 23% of net
sales in fiscal 2003. This increase was due primarily to the increase in certain
variable selling expenses associated with the increase in net sales from fiscal
2003 to 2004.
Interest expense for fiscal 2004 decreased by $307,000 to $420,000 from $727,000
for the same period a year ago. The decrease in interest expense is primarily
the result of the Company reducing its outstanding debt by $7,700,000 during
fiscal 2004.
Other Expenses. Other expenses increased $236,000 to an expense of $109,000 in
fiscal 2004 as compared to income of $127,000 in fiscal 2003. This increase
resulted primarily from the Company settling litigation during the quarter ended
September 30, 2002 which it had initiated as the plaintiff and realized a gain
of approximately $210,000. This gain was recorded as Other Income during the
quarter ended September 30, 2002.
15
Income Taxes. The Company's provision for income taxes increased by $1,586,000
to a provision of $2,201,000 in fiscal 2004 as compared to $615,000 in fiscal
2003. This increase in the provision for income taxes is primarily due to a
$3,911,000 increase in income before income taxes in fiscal 2004 as compared to
fiscal 2003. The increase in income before income taxes is due primarily to the
items discussed above.
16
STOCK DIVIDEND AND STOCK SPLIT
In November 2004, the Company's Board of Directors approved a twenty percent
(20%) stock dividend of the Company's common stock payable to stockholders of
record on November 22, 2004. The effect of the stock dividend, which has been
accounted for similar to a stock split, has been retroactively reflected in all
share and per share data. The additional shares of 1,424,118 were distributed on
December 6, 2004. There is no net effect on total stockholders' equity as a
result of the stock dividend.
In March 2004, the Company's Board of Directors approved a two-for-one stock
split in the form of a 100% stock dividend of the Company's common stock payable
to stockholders of record on April 13, 2004. The additional shares were
distributed on April 27, 2004. The Company utilized all 2,871,056 of its shares
held as treasury stock as of April 27, 2004 plus an additional 609,260 shares in
paying this stock dividend. The cost of treasury stock was applied first to
additional paid-in capital (to the extent there was a positive balance), then
directly to retained earnings. All share and per share amounts (except par
value) have been retroactively adjusted to reflect the stock split. There was no
net effect on total stockholders' equity as a result of the stock split.
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K and the information incorporated by reference
may include "Forward-Looking Statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. The
Company intends the Forward-Looking Statements to be covered by the Safe Harbor
Provisions for Forward-Looking Statements. All statements regarding the
Company's expected financial position and operating results, its business
strategy, its financing plans and the outcome of any contingencies are
Forward-Looking Statements. The Forward-Looking Statements are based on current
estimates and projections about our industry and our business. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
or variations of such words and similar expressions are intended to identify
such Forward-Looking Statements. The Forward-Looking Statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those set forth or implied by any Forward-Looking Statements. For example,
the Company is highly dependent on its Chief Executive Officer for strategic
planning. If he is unable to perform his services for any significant period of
time, the Company's ability to continue growing could be adversely affected. In
addition, factors that could cause actual results to differ materially from the
Forward-Looking Statements include, but are not limited to, adverse tax
consequences of offshore operations, distribution problems, unforeseen
environmental liabilities and the uncertain military, political and economic
conditions in the world.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instrument is long-term debt (consisting of a
revolving credit and term loan facility) that provides for interest at a spread
below the prime rate. The Company is affected by market risk exposure primarily
through the effect of changes in interest rates on amounts payable by the
Company under this credit facility. At June 30, 2005, an aggregate principal
amount of approximately $1,950,000 was outstanding under the Company's credit
facility with a weighted average interest rate of approximately 5%. If principal
amounts outstanding under the Company's credit facility remained at this
year-end level for an entire year and the prime rate increased or decreased,
respectively, by 1% the Company would pay or save, respectively, an additional
$20,000 in interest that year.
Where appropriate, the Company requires that letters of credit be provided on
foreign sales. In addition, a significant number of transactions by the Company
are denominated in U.S. dollars. As such, the Company has shifted foreign
currency exposure onto many of its foreign customers. As a result, if exchange
rates move against foreign customers, the Company could experience difficulty
collecting unsecured accounts receivable, the cancellation of existing orders or
the loss of future orders. The foregoing could materially adversely affect the
Company's business, financial condition and results of operations. In addition,
the Company transacts certain sales in Europe in British Pounds Sterling,
therefore exposing itself to a certain amount of foreign currency risk.
Management believes that the amount of this exposure is immaterial. We are also
exposed to foreign currency risk relative to the Dominican Peso
17
("RD$"), the local currency of the Company's production facility in the
Dominican Republic. The result of a 10% strengthening in the U.S. dollar to our
RD$ expenses would result in an annual decrease in income from operations of
approximately $260,000.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
a. Financial Statements: Financial statements required pursuant to this Item
are presented on pages FI-1 through FI-25 of this report as follows:
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
AS OF JUNE 30, 2005 AND 2004
Page
----
Report of Independent Registered Public Accounting Firm................ F-1
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2005 and 2004.......... F-2
Consolidated Statements of Income for the Fiscal Years Ended
June 30, 2005, 2004 and 2003.................................... F-4
Consolidated Statements of Stockholders' Equity for the Fiscal
Years Ended June 30, 2005, 2004 and 2003........................ F-5
Consolidated Statements of Cash Flows for the Fiscal Years
Ended June 30, 2005, 2004 and 2003.............................. F-6
Notes to Consolidated Financial Statements, June 30, 2005......... F-8
Schedules:
II. Valuation and Qualifying Accounts.................................. FS-24
b. Supplementary Financial Data....................................... FS-25
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee of the
Board of Directors and Stockholders
Napco Security Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Napco Security
Systems, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of
June 30, 2005 and 2004, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 2005. Our audits also included the financial statement schedule
as of and for the years ended June 30, 2005, 2004 and 2003 listed in the Index
at Item 15. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Napco
Security Systems, Inc. and subsidiaries as of June 30, 2005 and 2004, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended June 30, 2005, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ MARCUM & KLIEGMAN LLP
----------------------------------------
Melville, New York
September 14, 2005
F-1
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2005 and 2004
(In Thousands, Except Share Data)
ASSETS
2005 2004
------- -------
CURRENT ASSETS
Cash and cash equivalents $ 1,178 $ 796
Accounts receivable, less reserve for doubtful
accounts of $380 and $355, respectively 21,899 19,927
Inventories 16,242 14,594
Prepaid expenses and other current assets 799 760
Deferred income taxes 1,356 1,763
------- -------
Total Current Assets 41,474 37,840
Property, plant and equipment, net 8,533 8,987
Goodwill, net 9,686 9,686
Other assets 214 159
------- -------
TOTAL ASSETS $59,907 $56,672
======= =======
See accompanying notes to consolidated financial statements.
FS-2
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2005 and 2004
(In Thousands, Except Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2005 2004
------- -------
CURRENT LIABILITIES
Current portion of long-term debt $ -- $ 1,900
Accounts payable 5,249 3,789
Accrued expenses 1,156 963
Accrued salaries and wages 2,518 1,911
Accrued income taxes 1,534 285
------- -------
Total Current Liabilities 10,457 8,848
Long-term debt, net of current portion 1,950 6,400
Accrued income taxes 2,243 2,243
Deferred income taxes 1,579 1,277
------- -------
Total Liabilities 16,229 18,768
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (1)
Common stock, par value $0.01 per share; Authorized
21,000,000 shares; issued and outstanding 8,655,110
and 8,503,670 shares, respectively 87 85
Additional paid-in capital 11,628 11,381
Retained earnings 31,963 26,438
------- -------
TOTAL STOCKHOLDERS' EQUITY 43,678 37,904
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $59,907 $56,672
======= =======
(1) The 20% stock dividend declared on November 8, 2004 (see Note 1), has been
retroactively reflected in Stockholders' Equity.
See accompanying notes to consolidated financial statements.
FS-3
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2005, 2004, and 2003
(In Thousands, Except Share and Per Share Data)
2005 2004 2003
---------- ---------- ----------
Net sales $ 65,229 $ 58,093 $ 57,340
Cost of sales 41,305 38,553 41,939
---------- ---------- ----------
Gross Profit 23,924 19,540 15,401
Selling, general, and administrative expenses 15,014 13,475 13,176
---------- ---------- ----------
Operating Income 8,910 6,065 2,225
---------- ---------- ----------
Other income (expense):
Interest expense, net (224) (420) (727)
Other, net (58) (109) 127
---------- ---------- ----------
(282) (529) (600)
---------- ---------- ----------
Income Before Income Taxes 8,628 5,536 1,625
Minority interest in loss of subsidiary 228 -- --
Provision for income taxes 3,227 2,201 615
---------- ---------- ----------
Net Income $ 5,629 $ 3,335 $ 1,010
========== ========== ==========
Earnings per share: (1)
Basic $ .66 $ 0.42 $ .13
Diluted $ .62 $ 0.39 $ .12
Weighted average number of shares outstanding: (1)
Basic 8,562,211 7,958,400 7,974,400
Diluted 9,014,962 8,497,200 8,536,800
(1) The 20% stock dividend declared on November 8, 2004 (see Note 1), has been
retroactively reflected in all 2004 and2003 share and per share data.
See accompanying notes to consolidated financial statements.
FS-4
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (1)
Years Ended June 30, 2005, 2004 and 2003
(In Thousands, Except Share Data)
Common stock Treasury Stock
------------------ Additional ------------------
Number of Paid-in Retained Number of
Shares Amount Capital Earnings Shares Amount Total
--------- ------ ---------- -------- --------- ------ -------
BALANCE - June 30, 2002 6,766,392 68 -- 34,460 -- -- 34,528
Retroactive effect of 20% stock dividend
Effective November 2004 1,353,278 13 11,236 (11,250) -- -- (1)
--------- --- ------- -------- --- --- -------
BALANCE - June 30, 2002 as adjusted 8,119,670 81 11,236 23,210 -- -- 34,527
Purchase of treasury shares (600,000) (6) -- (2,437) -- -- (2,443)
Exercise of employee stock options 157,200 2 -- 260 -- -- 262
Net income -- -- -- 1,010 -- -- 1,010
--------- --- ------- -------- --- --- -------
BALANCE - June 30, 2003 7.676.870 77 11,236 22,043 -- -- 33,356
Exercise of employee stock options,
July 1, 2003 to April 27, 2004 728,208 7 -- 956 -- -- 963
Tax benefit in connection
with exercise of stock options -- -- -- 104 -- -- 104
Exercise of employee stock options,
April 28, 2004 to June 30, 2004 98,592 1 145 -- -- -- 146
Net income -- -- -- 3,335 -- -- 3,335
--------- --- ------- -------- --- --- -------
BALANCE - June 30, 2004 8,503,670 $85 $11,381 $ 26,438 -- $-- $37,904
Exercise of employee stock options 151,440 2 247 -- -- -- 249
Net income -- -- -- 5,629 -- -- 5,629
Adjustment to tax benefit on exercise
of stock options -- -- -- (104) -- -- (104)
--------- --- ------- -------- --- --- -------
BALANCE - June 30, 2005 8,655,110 $87 11,628 $ 31,963 -- $-- $43,678
========= === ======= ======== === === =======
(1) Restated to reflect the effect of a 20% stock dividend effective November
2004.
See accompanying notes to consolidated financial statements.
FS-5
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2005, 2004, and 2003
(In Thousands)
2005 2004 2003
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,629 $ 3,335 $ 1,010
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,156 1,189 1,294
Provision for doubtful accounts 43 140 16
Deferred income taxes 709 (49) 173
Tax adjustment in connection with exercise
of stock options (104) 104 --
Changes in operating assets and liabilities:
Accounts receivable (2,014) (2,642) 872
Inventories (1,648) 2,328 2,041
Prepaid expenses and other current assets (39) (235) 366
Other assets (35) 90 (90)
Accounts payable, accrued expenses, accrued
salaries and wages, and accrued income taxes 3,508 2,015 800
------- ------- -------
Net Cash Provided By Operating Activities 7,205 6,275 6,482
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment (658) (681) (752)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (9,700) (8,700) (7,505)
Proceeds from long-term debt 3,350 1,000 4,250
Purchase of treasury shares -- -- (2,442)
Proceeds from exercise of employee stock options 249 1,108 261
Loan costs paid (64) -- --
------- ------- -------
Net Cash Used In Financing Activities (6,165) (6,592) (5,436)
------- ------- -------
Net Increase (Decrease) In Cash and
Cash Equivalents 382 (998) 294
CASH AND CASH EQUIVALENTS - Beginning 796 1,794 1,500
------- ------- -------
CASH AND CASH EQUIVALENTS - Ending $ 1,178 $ 796 $ 1,794
------- ------- -------
See accompanying notes to consolidated financial statements.
FS-6
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2005, 2004, and 2003
(In Thousands)
2005 2004 2003
------ ---- ----
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net $ 217 $427 $733
Income taxes paid $1,366 $106 $ 15
See accompanying notes to consolidated financial statements.
FS-7
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Napco Security Systems, Inc. and subsidiaries (the "Company") is engaged
principally in the development, manufacture, and distribution of security
alarm products and door security devices for commercial and residential
use.
Principles of Consolidation
The consolidated financial statements include the accounts of Napco
Security Systems, Inc. and all of its wholly-owned subsidiaries. The
Company has also consolidated a 51%-owned joint venture. The 49% interest,
held by a third party, is reflected as minority interest. All intercompany
balances and transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent gains and
losses at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Critical estimates
include management's judgments associated with revenue recognition,
concentration of credit risk, inventories, goodwill and income taxes.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include approximately $419,000 and $308,000 of
short-term time deposits at June 30, 2005 and 2004, respectively. The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
The Company has cash balances in banks in excess of the maximum amount
insured by the FDIC as of June 30, 2005 and 2004.
Accounts Receivable
Accounts receivable is stated net of the allowance for doubtful accounts of
$380,000 and $355,000 as of June 30, 2005 and June 30, 2004, respectively.
Our allowance for doubtful accounts is a subjective critical estimate that
has a direct impact on reported net earnings. This allowance is based upon
the evaluation of accounts receivable agings, specific exposures and
historical trends.
Inventories
Inventories are valued at the lower of cost or fair market value, with cost
being determined on the first-in, first-out (FIFO) method. The reported net
value of inventory includes finished saleable products, work-in-process and
raw materials that will be sold or used in future periods. Inventory cost
includes raw materials, direct labor and overhead.
In addition, the Company records an inventory obsolescence reserve, which
represents the difference between the cost of the inventory and its
estimated market value, based on various product sales projections. This
reserve is calculated using an estimated obsolescence percentage applied to
the inventory based on age, historical trends and requirements to support
forecasted sales. For the fiscal years 2005, 2004 and 2003,
charges/(recoveries) and balances in these reserves amounted to $(517,000)
and $1,518,000; $1,035,000 and $2,035,000; $300,000 and $1,000,000;
respectively. In addition, and as necessary, the Company may establish
specific reserves for future known or anticipated events.
FS-8
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business and Summary of Significant Accounting Policies,
continued
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost less accumulated
depreciation. Expenditures for maintenance and repairs are charged to
expense as incurred; costs of major renewals and improvements are
capitalized. At the time property and equipment are retired or otherwise
disposed of, the cost and accumulated depreciation are eliminated from the
asset and accumulated depreciation accounts and the profit or loss on such
disposition is reflected in income.
Depreciation is recorded over the estimated service lives of the related
assets using primarily the straight-line method. Amortization of leasehold
improvements is calculated by using the straight-line method over the
estimated useful life of the asset or lease term, whichever is shorter.
Goodwill
The Company accounts for goodwill in accordance with Statement of Financial
Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No.
142, Goodwill and Other Intangible Assets. These statements established
accounting and reporting standards for acquired goodwill and other
intangible assets. Specifically, the standards address how acquired
intangible assets should be accounted for both at the time of acquisition
and after they have been recognized in the financial statements. In
accordance with SFAS No. 142, intangible assets, including purchased
goodwill, must be evaluated for impairment on a annual basis. Those
intangible assets that are classified as goodwill or as other intangibles
with indefinite lives are not amortized.
Impairment testing is performed in two steps: (i) the Company determines
impairment by comparing the fair value of a reporting unit with its
carrying value, and (ii) if there is an impairment, the Company measures
the amount of impairment loss by comparing the implied fair value of
goodwill with the carrying amount of that goodwill. The Company has
performed its annual impairment evaluation required by this standard and
determined that the goodwill is not impaired.
FS-9
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business and Summary of Significant Accounting Policies,
continued
Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets in question may not be
recoverable. An impairment would be recorded in circumstances where
undiscounted cash flows expected to be generated by an asset are
less than the carrying value of that asset.
Revenue Recognition
In accordance with SEC Staff Accounting Bulletin Topic 13, Revenue
Recognition, the Company recognizes revenue when the following
criteria are met: (i) persuasive evidence of an agreement exists,
(ii) there is a fixed and determinable price for the Company's
product, (iii) shipment and passage of title occurs, and (iv)
collectibility is reasonably assured. Revenues from merchandise
sales are recorded at the time the product is shipped or delivered
to the customer pursuant to the terms of the sale. The Company
reports its sales levels on a net sales basis, with net sales being
computed by deducting from gross sales the amount of actual sales
returns and the amount of reserves established for anticipated sales
returns.
Advertising and Promotional Costs
Advertising and promotional costs are included in "Selling, General
and Administrative" expenses in the consolidated statements of
income and are expensed as incurred. Advertising expense for the
fiscal years ended June 30, 2005, 2004 and 2003 was $1,255,000,
$1,030,000 and $1,128,000, respectively.
Research and Development Costs
Research and development costs incurred by the Company are charged
to expense in the year incurred. Company-sponsored research and
development costs of $4,865,000, $4,254,000 and $4,516,000 were
charged to expense for the fiscal years ended June 30, 2005, 2004
and 2003, respectively and are included in "Cost of Sales" in the
consolidated statements of income.
Income Taxes
Deferred income taxes are recognized for the expected future tax
consequences of temporary differences between the amounts reflected for
financial reporting and tax purposes. Net deferred tax assets are adjusted
by a valuation allowance if, based on the weight of available evidence, it
is more likely than not that some portion or all of the net deferred tax
assets will not be realized. If the Company determines that a deferred tax
asset will not be realizable or that a previously reserved deferred tax
asset will become realizable, an adjustment to the deferred tax asset will
result in a reduction of, or increase to, earnings at that time. The
provision (benefit) for income taxes represents U.S. Federal, state and
foreign taxes. Through June 30, 2001, the Company's subsidiary in the
Dominican Republic, Napco/Alarm Lock Group International, S.A. ("Napco
DR"), was not subject to tax in the United States, as a result, no taxes
were provided. Effective July 1, 2001, the Company made a domestication
election for Napco DR. Accordingly, its income is subject to taxation in
the United States on a going forward basis.
FS-10
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business and Summary of Significant Accounting
Policies, continued
Stock Dividend and Stock Split
In November 2004, the Company's Board of Directors approved a twenty
percent (20%) stock dividend of the Company's common stock payable
to stockholders of record on November 22, 2004. The effect of the
stock dividend, which has been accounted for similar to a stock
split, has been retroactively reflected in all share and per share
data. The additional shares of 1,424,118 (on a pre-dividend
basis)were distributed on December 6, 2004. There is no net effect
on total stockholders' equity as a result of the stock dividend.
In March 2004, the Company's Board of Directors approved a
two-for-one stock split in the form of a 100% stock dividend of the
Company's common stock payable to stockholders of record on April
13, 2004. The additional shares were distributed on April 27, 2004.
The Company utilized all 2,871,056 (on a pre-split basis) of its
shares held as treasury stock as of April 27, 2004 plus an
additional 609,260 (on a pre-split basis) shares in paying this
stock dividend. The cost of treasury stock was applied first to
additional paid-in capital (to the extent there was a positive
balance), then directly to retained earnings. All share and per
share amounts (except par value) have been retroactively adjusted to
reflect the stock split. There was no net effect on total
stockholders' equity as a result of the stock split.
Earnings Per Share
The Company follows the provisions of SFAS No. 128, Earnings Per
Share. Basic net income per common share (Basic EPS) is computed by
dividing net income by the weighted average number of common shares
outstanding. Diluted net income per common share (Diluted EPS) is
computed by dividing net income by the weighted average number of
common shares and dilutive common share equivalents and convertible
securities then outstanding. SFAS No. 128 requires the presentation
of both Basic EPS and Diluted EPS on the face of the consolidated
statements of income.
The following provides a reconciliation of information used in
calculating the per share amounts for the fiscal years ended June 30
(in thousands, except per share data):
Net income Weighted Average Shares Net income per share
------------------------ ----------------------- -----------------------
2005 2004 2003 2005 2004 2003 2005 2004 2003
------ ------ ------ ----- ----- ----- ----- ------ ------
Basic EPS: $5,629 $3,335 $1,010 8,562 7,958 7,974 $ .66 $ 0.42 $ 0.13
Effect of Dilutive
Securities:
Employee stock
options -- -- -- 453 539 563 (.04) (0.03) (0.01)
------ ------ ------ ---- ----- ----- ----- ------ ------
Diluted EPS: $5,629 $3,335 $1,010 9,015 8,497 8,537 $ .62 $ 0.39 $ 0.12
====== ====== ====== ===== ===== ===== ===== ====== ======
Options to purchase 0, 12,000 and 67,200 shares of common stock for
the three fiscal years ended June 30, 2005, 2004 and 2003,
respectively, were not included in the computation of Diluted EPS
because the exercise prices exceeded the average market price of the
common shares for the respective periods and, accordingly, their
inclusion would be anti-dilutive. These options were still
outstanding at the end of the respective periods.
Stock-Based Compensation
The Company accounts for stock-based compensation under the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
Accordingly, the Company has elected to continue to apply the
intrinsic value method of accounting set forth in Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, while providing the required pro forma disclosures as
if the fair value method of SFAS No. 123 had been applied.
FS-11
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business and Summary of Significant Accounting
Policies, continued
Under the intrinsic value method, no compensation expense is
recognized if the exercise price of the Company's employee stock
options equals or exceeds the market price of the underlying stock
on the date of grant. Accordingly, no compensation cost has been
recognized on options granted to employees. SFAS No. 123, requires
that the Company provide pro forma information regarding net
earnings and net earnings per common share as if compensation cost
for the Company's stock option programs had been determined in
accordance with the fair value method prescribed therein. The
Company adopted the disclosure portion of SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure requiring
quarterly SFAS No. 123 pro forma disclosure. The following table
illustrates the effect on net earnings and earnings per common share
as if the fair value method had been applied to all outstanding
awards in each period presented:
Year Ended June 30,
2005 2004 2003
------ ------ ------
(In thousands, except
per share data)
Net income, as reported $5,629 $3,335 $1,010
Deduct: Total stock-based employee compensation
expense determined under fair value method for
all awards, net of related tax effects 227 210 329
------ ------ ------
Pro forma net income $5,402 $3,125 $ 681
====== ====== ======
Earnings per common share (1):
Net earnings per common share - Basic, as reported $ .66 $ .42 $ 0.13
====== ====== ======
Net earnings per common share - Basic, pro forma $ .63 $ .39 $ 0.09
====== ====== ======
Net earnings per common share - Diluted, as reported $ .62 $ .39 $ 0.12
====== ====== ======
Net earnings per common share - Diluted, pro forma $ .60 $ .37 $ 0.08
====== ====== ======
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the
following assumptions:
2004 2003
------- -------
Risk-free interest rates 4.70% 2.71%
Expected lives 5 years 5 years
Expected volatility 48% 42%
Expected dividend yields 0% 0%
(1) Information reflects stock dividend and stock split discussed above.
FS-12
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business and Summary of Significant Accounting Policies,
continued
Foreign Currency
All assets and liabilities of foreign subsidiaries are translated
into U.S. Dollars at fiscal year-end exchange rates. Income and
expense items are translated at average exchange rates prevailing
during the fiscal year. The realized and unrealized gains and losses
associated with foreign currency translation, as well as related
other comprehensive income, were not material for the three years
ended June 30, 2005.
Comprehensive Income
The Company follows the provisions of SFAS No. 130, Reporting
Comprehensive Income, which established rules for the reporting of
comprehensive income and its components. For the fiscal years ended
June 30, 2005, 2004 and 2003, the Company's operations did not give
rise to material items includable in comprehensive income, which
were not already included in net income. Accordingly, the Company's
comprehensive income is the same as its net income for all periods
presented.
Segment Reporting
The Company follows the provisions of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. Pursuant to
this pronouncement, the reportable operating segments are determined
based on the Company's management approach. The management approach,
as defined by SFAS No. 131, is based on the way that the chief
operating decision maker organizes the segments within an enterprise
for making operating decisions and assessing performance. The
Company's results of operations are reviewed by the chief operating
decision maker on a consolidated basis and the Company operates in
only one segment. The Company has presented required geographical
data in Note 11, and no additional segment data has been presented.
Fair Value of Financial Instruments
The Company calculates the fair value of financial instruments and
includes this additional information in the notes to the financial
statements where the fair value is different than the book value of
those financial instruments. When the fair value approximates book
value, no additional disclosure is made. The Company uses quoted
market prices whenever available to calculate these fair values.
When quoted market prices are not available, the Company uses
standard pricing models for various types of financial instruments
which take into account the present value of estimated future cash
flows. At June 30, 2005 and 2004, management of the Company believes
the carrying value of all financial instruments approximated fair
value.
Shipping and Handling Revenues and Costs
Emerging Issues Task Force (EITF) Issue No. 00-10, Accounting for
Shipping and Handling Revenues and Costs requires that all shipping
and handling billed to customers should be reported as revenue and
the costs associated with these revenues may be classified as either
cost of sales, or selling, general, and administrative costs, with
footnote disclosure as to classification of these costs. The Company
records the amount billed to customers in net sales and classifies
the costs associated with these revenues in cost of sales.
FS-13
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business and Summary of Significant Accounting
Policies, continued
Derivative Instruments and Hedging Activities
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities provides
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as amended,
requires the recognition of all derivative instruments as either
assets or liabilities in the balance sheet measured at fair value.
In October 2000, the Company entered into an interest rate swap to
maintain the value-at-risk inherent in its interest rate exposures.
This financial instrument expired in October 2002. This transaction
met the requirements for cash flow hedge accounting, as the
instrument was designated to a specific debt balance. Accordingly,
any gain or loss associated with the difference between interest
rates was included as a component of interest expense. The Company
does not hold or enter into derivative financial instruments for
trading or speculative purposes.
New Accounting Pronouncement
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43,
Chapter 4". SFAS 151 clarifies that abnormal inventory costs such as
costs of idle facilities, excess freight and handling costs, and
wasted materials (spoilage) are required to be recognized as current
period costs. The provisions of SFAS 151 are effective for fiscal
2006. Management is currently evaluating the provisions of SFAS 151
and does not expect adoption will have a material impact on the
Company's financial position, results of operations or cash flows.
In December 2004, the FASB finalized SFAS No. 123R "Share-Based
Payment" ("SFAS 123R"), amending SFAS No. 123, effective beginning the
Company's first quarter of fiscal 2006. SFAS 123R will require the
Company to expense stock options based on grant date fair value in
its financial statements. Further, the adoption of SFAS 123R will
require additional accounting related to the income tax effects and
additional disclosure regarding the cash flow effects resulting from
share-based payment arrangements. The effect of expensing stock
options on the Company's results of operations using a Black-Scholes
option-pricing model is presented in Note 1. The adoption of SFAS
123R will have no effect on the Company's cash flows or financial
position, but will have an adverse impact on results of operations.
In December 2004, the FASB issued FASB Staff Position No. SFAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provisions within the American Jobs Creation Act of
2004", ("SFAS 109-2"). The American Jobs Creation Act introduces a
special one-time dividends received deduction on the repatriation of
certain foreign earnings to a U.S. taxpayer ("repatriation
provision"), provided certain criteria are met. SFAS 109-2
provides accounting and disclosure guidance for the repatriation
provision. The provisions of SFAS 109-2 will not have a material
impact on the Company's tax provision and financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment of APB Opinion No. 29". This
statement amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of
SFAS No. 153 are effective for the Company's fiscal year ending June
2006. The adoption of FAS No. 153 is not expected to have a material
impact on the Company's consolidated financial position, liquidity
or results of operations.
FS-14
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Errors Corrections, a replacement of APB Opinion No. 20 and FAS No.
3". This statement applies to all voluntary changes in accounting
principle, and changes the requirements for accounting for and
reporting of a change in accounting principle. SFAS No. 154 requires
retrospective application to prior periods' financial statements of
a voluntary change in accounting principle unless it is impractical.
APB Opinion No. 20 previously required that most voluntary changes
in accounting principle to be recognized by including in net income
of the period of the change the cumulative effect of changing to the
new accounting principle. SFAS No. 154 improves the financial
reporting because its requirements enhance the consistency of the
financial reporting between periods. During the reporting period, the
Company did not have any accounting changes or error corrections.
NOTE 2 - Business and Credit Concentrations
The Company had two customers (Customer A and B) with accounts
receivable balances that aggregated 35% and 31% of the Company's
accounts receivable at June 30, 2005 and 2004, respectively. Sales
to neither of these customers exceeded 10% of net sales in any of
the past three years.
The Company had a third customer (Customer C) whose sales accounted for 0%,
1% and 19% of the Company's net sales in fiscal 2005, 2004 and 2003. During
the past three fiscal years no other customer represented more than 10% of
the Company's net sales. The Company terminated its relationship with
Customer C in fiscal 2004.
NOTE 3 - Inventories
Inventories consist of the following:
June 30
-----------------
2005 2004
------- -------
(In thousands)
Component parts $10,740 $ 9,423
Work-in-process 1,697 1,352
Finished products 3,805 3,819
------- -------
$16,242 $14,594
======= =======
NOTE 4 - Property, Plant, and Equipment
Property, plant and equipment consist of the following:
June 30
----------------- Useful Life
2005 2004 In years
------- ------- -------------------------
(In thousands)
Land $ 904 $ 904 --
Buildings 8,911 8,911 30 to 40
Molds and dies 4,563 4,438 3 to 5
Furniture and fixtures 1,401 1,334 5 to 10
Machinery and equipment 12,780 12,314 7 to 10
Shorter of the lease term
Leasehold improvements 191 191 or life of asset
------- -------
28,750 28,092
Less: accumulated depreciation
and amortization 20,217 19,105
--------- -------
$ 8,533 $ 8,987
========= =======
Depreciation and amortization expense on property, plant, and
equipment was approximately $1,112,000, $1,159,000 and $1,254,000 in
fiscal 2005, 2004 and 2003, respectively.
FS-15
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - Income Taxes
Provision (benefit) for income taxes consists of the following:
For the Years Ended June 30
---------------------------
2005 2004 2003
------ ------ ----
(In thousands)
Current income taxes:
Federal $2,496 $2,250 $428
State 5 -- --
Foreign 17 -- 15
------ ------ ----
2,518 2,250 443
Deferred income tax expense (benefit) 709 (49) 172
------ ------ ----
Provision for income taxes $3,227 $2,201 $615
====== ====== ====
The difference between the statutory U.S. Federal income tax rate and the
Company's effective tax rate as reflected in the consolidated statements of
income is as follows (dollars in thousands):
For the Years Ended June 30
------------------------------------------------------
2005 2004 2003
---------------- ---------------- ----------------
% of % of % of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
------ ------- ------ ------- ------ -------
Tax at Federal statutory rate $3,011 34.0% $1,882 34.0% $553 34.0%
Increases (decreases) in
taxes resulting from:
Meals and entertainment 60 .7 54 1.0 55 3.4
State income taxes, net of
Federal income tax benefit 3 -- 97 1.7 -- --
Foreign source income
and taxes (2) -- 19 1.1
Valuation allowance -- -- (97) (1.7) -- --
Other, net 155 1.7 265 4.8 (12) (.7)
------ ---- ------ ---- ---- ----
Provision for income taxes $3,227 36.4% $2,201 39.8% $615 37.8%
====== ==== ====== ==== ==== ====
FS-16
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - Income Taxes, continued
Deferred tax assets and deferred tax liabilities at June 30, 2005 and 2004
are as follows (in thousands):
Current Long-Term
Deferred Tax Assets Deferred Tax Assets
(Liabilities) (Liabilities)
------------------- -------------------
2005 2004 2005 2004
------ ------ ------- -------
Accounts receivable $ 67 $ 105 $ -- $ --
Inventories 1,020 1,229 -- --
Accrued liabilities 269 249 -- --
State net operating loss carryforward 354 97 -- --
Goodwill -- -- (798) (509)
Property, plant and equipment -- -- (824) (768)
Alternative minimum tax credit -- 167 43 --
Other -- 13 -- --
------ ------ ------- -------
1,710 1,860 (1,579) (1,277)
Valuation allowance (354) (97) -- --
------ ------ ------- -------
Net deferred taxes $1,356 $1,763 $(1,579) $(1,277)
====== ====== ======= =======
In March 2003, Napco Security Systems, Inc. timely filed its income tax
return for the fiscal year ended June 30, 2002. This return included an
election to treat one of the Company's foreign subsidiaries, Napco DR, as
if it were a domestic corporation beginning July 1, 2001. This election was
based on a then recently enacted Internal Revenue Code ("Code") provision.
As a result of this election, Napco DR is treated, for Federal income tax
purposes, as transferring all of its assets to a domestic corporation in
connection with an exchange. Although this type of transfer usually results
in the recognition of taxable income to the extent of any untaxed earnings
and profits, the Code provision provides an exemption for applicable
corporations. The Company qualifies as an applicable corporation pursuant
to this Code section, and based on this Code exemption, the Company treated
the transfer of approximately $27,000,000 of Napco DR's untaxed earnings
and profits as nontaxable.
The Internal Revenue Service has issued a Revenue Procedure which is
inconsistent with the Code exemption described above. The Code is the
actual law; a Revenue Procedure is the IRS's interpretation of the law. The
Code has a higher level of authority than a Revenue Procedure. Management
believes that it has appropriately relied on the guidance in the Code when
filing its income tax return. If challenged, the Company believes that the
potential liability would range from $0 to $9,450,000. However, the Company
also believes there are other mitigating factors that would limit the
amount of the potential liability, and as a result, management accrued a
liability of $2,243,000 as of June 30, 2002. The Company's tax provision
utilizes estimates made by management and as such, is subject to change as
described in Note 1 of the Consolidated financial statements.
FS-17
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Long-Term Debt
Long-term debt consists of the following:
June 30
---------------
2005 2004
------ ------
(In thousands)
Revolving credit and term loan facility (a) $1,950 $5,713
Term loan (b) -- 1,650
Term loan (c) -- 937
------ ------
1,950 8,300
Less: current portion of long-term debt -- 1,900
------ ------
$1,950 $6,400
====== ======
(a) In May 2001, the Company amended its secured revolving credit
agreement with its primary bank. The Company's borrowing capacity
under the amended agreement was increased to $18,000,000. The amended
revolving credit agreement is secured by all the accounts receivable,
inventory, the Company's headquarters in Amityville, New York and
certain other assets of Napco Security Systems, Inc. and the common
stock of three of the Company's subsidiaries. The revolving credit
agreement bears interest at either the Prime Rate less 1/4% or an
alternate rate based on LIBOR as described in the agreement. At June
30, 2005, the interest rate on this debt was 4.7%. The revolving
credit agreement which was to expire in July 2005 was subsequently
extended to September 2008 and any outstanding borrowings are to be
repaid or refinanced on or before that time. The agreement contains
various restrictions and covenants including, among others,
restrictions on payment of dividends, restrictions on borrowings,
restrictions on capital expenditures, the maintenance of minimum
amounts of tangible net worth, and compliance with other certain
financial ratios, not as defined in the agreement. As of June 30,
2005, the Company was not in compliance with one of these covenants
for which it has received an appropriate waiver from its bank.
(b) On July 27, 2000, the Company entered into a five year $8,250,000
secured term loan with its primary bank in connection with the
acquisition of Continental Instruments Systems, LLC. Under the
agreement, the loan was to be repaid in 60 equal monthly installments
of $137,500, plus interest. The agreement contained various
restrictions and covenants including, among others, restrictions on
payment of dividends, restrictions on borrowings, restrictions on
capital expenditures, the maintenance of minimum amounts of tangible
net worth, and compliance with other certain financial ratios, as
defined in the agreement. In December 2004, the Company accelerated
full repayment of this secured term loan and the treasury stock
repurchase term loan described in paragraph (c) below.
FS-18
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Long-Term Debt, continued
(c) In connection with the treasury stock repurchase described in Note 8,
the Company entered into a five year $1,250,000 term loan from its
primary bank. Under this agreement, the loan was to be repaid in 60
equal monthly installments of $20,833, plus interest at a variable
rate as defined. In December 2004, the Company repaid this loan in
full.
Maturities of long-term debt are as follows:
Year Ending
June 30, Amount
- ----------- ------
(In thousands)
2006 $ --
2007 --
2008 --
2009 1,950
------
Total $1,950
======
NOTE 7 - Stock Options
In November 1992, the stockholders approved a 10-year extension of the
already-existing 1982 Incentive Stock Option Plan (the 1992 Plan). The 1992
Plan authorized the granting of awards, the exercise of which would allow
up to an aggregate of approximately 1,958,400 shares of the Company's
common stock to be acquired by the holders of such awards. The 1992 Plan
terminated in October 2002. As of June 30, 2005, there were 200,640 stock
options granted to employees of which 173,760 were exercisable.
In December 2002, the stockholders approved the 2002 Employee Stock Option
Plan (the 2002 Plan). The 2002 Plan authorizes the granting of awards, the
exercise of which would allow up to an aggregate of 816,000 shares of the
Company's common stock to be acquired by the holders of such awards. Under
the 2002 Plan, the Company may grant stock options, which are intended to
qualify as incentive stock options (ISOs), to key employees. Any plan
participant who is granted ISOs and possesses more than 10% of the voting
rights of the Company's outstanding common stock must be granted an option
with a price of at least 110% of the fair market value on the date of
grant.
FS-19
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - Stock Options, continued
Under the 2002 Plan, stock options have been granted to key employees with
a term of 10 years at an exercise price equal to the fair market value on
the date of grant and are exercisable in whole or in part at 20% per year
from the date of grant. At June 30, 2005, 486,000 stock options were
granted, 328,800 stock options were available for grant, and 266,160 stock
options were exercisable under this plan.
The following table reflects activity under the 1992 and 2002 Plans for the
fiscal years ended:
June 30
--------------------------------------------------------------------
2005 2004 2003
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------- -------- ---------- -------- ---------- --------
Outstanding at beginning of year 838,080 $3.28 1,541,280 $2.18 1,340,880 $1.58
Granted -- -- 124,800 4.48 386,400 4.08
Exercised (151,440) 1.64 (826,800) 1.34 (157,200) 1.66
Forfeited -- -- (1,200) 2.71 (7,200) 1.62
Canceled/lapsed -- -- -- -- (21,600) 1.62
--------- ----- ---------- ----- ---------- -----
Outstanding at end of year 686,640 $3.65 838,080 $3.28 1,541,280 $2.18
========= ===== ========== ===== ========== =====
Exercisable at end of year 439,920 $2.78 441,120 $2.78 1,020,480 $1.63
========= ===== ========== ===== ========== =====
Weighted average fair value of
options granted $ n/a $ 2.54 $ 1.63
The following table summarizes information about stock options outstanding
at June 30, 2005:
Options outstanding Options exercisable
------------------------------------ ----------------------
Weighted
Number average Weighted Number Weighted
outstanding remaining average exercisable average
Range of exercise at June 30, contractual exercise at June 30, exercise
prices 2005 life price 2005 price
- ----------------- ----------- ----------- -------- ----------- --------
$1.62 to $1.65 8,160 0.03 $1.61 8,160 $1.61
$1.66 to $2.65 132,480 0.88 2.13 117,600 2.11
$2.66 to $4.70 546,000 7.34 4.05 314,160 3.96
------- ---- ----- ------- -----
686,640 6.01 3.65 439,920 $2.78
======= ==== ===== ======= =====
FS-20
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - Stock Options, continued
In September 2000, the stockholders approved a 10 year extension of the
already existing 1990 nonemployee stock option plan (the 2000 Plan) to
encourage nonemployee directors and consultants of the Company to invest in
the Company's stock. The 2000 Plan provides for the granting of
nonqualified stock options, the exercise of which would allow up to an
aggregate of 120,000 shares of the Company's common stock to be acquired by
the holders of the stock options. The 2000 Plan provides that the option
price will not be less than 100% of the fair market value of the stock at
the date of grant. Options are exercisable at 20% per year and expire five
years after the date of grant. The Company has adopted SFAS No. 123 to
account for stock-based compensation awards granted to nonemployee
consultants, under which a compensation cost is recognized for the fair
value of the options granted as of the date of grant. Under this plan, as
of June 30, 2005, 2004 and 2003, 96,000 options were granted to directors
with a weighted average exercise price of $1.72 and a weighted average
remaining contractual life at June 30, 2005 of 0.24 years. There were
38,400 options exercised under the 2000 Plan during the year ended June 30,
2004. There were no other options exercised, cancelled, or forfeited under
this plan during the years ended June 30, 2005, 2004 and 2003. As of June
30, 2005, 2004 and 2003, respectively, 57,600, 38,400 and 57,600 stock
options were exercisable under this plan. No compensation expense was
recorded for stock options granted to directors.
NOTE 8 - Stock Purchase
In January 2003, the Company repurchased 600,000 shares of its common stock
from two stockholders, unaffiliated with the Company, at $4.06 per share, a
discount from its then current trading price of $4.17. The transaction was
approved by the Board of Directors and the purchase price of $2,442,000
(including fees of $5,000), was financed through the Company's revolving
line of credit and a new five year term loan from its primary bank for
$1,250,000. The term loan was being repaid in 60 equal monthly installments
commencing on April 30, 2003. In December 2004, the Company repaid this
term loan in full.
NOTE 9 - 401(k) Plan
The Company maintains a 401(k) plan covering all U.S. employees with one or
more years of service. The plan is qualified under Sections 401(a) and
401(k) of the Internal Revenue Code. The Company provides for matching
contributions of 50% of the first 2% of employee contributions. Company
contributions to the plan totaled approximately $80,000, $73,000, and
$73,000 for the fiscal years ended 2005, 2004 and 2003, respectively.
FS-21
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - Commitments and Contingencies
Leases
The Company is committed under various operating leases, which do not
extend beyond fiscal 2010. Minimum lease payments through the expiration
dates of these leases, with the exception of the land lease referred to
below, are as follows:
Year Ending
June 30, Amount
- ----------- --------
2006 $ 86,000
2007 53,000
2008 15,000
2009 --
2010 --
--------
Total $154,000
========
Rent expense, with the exception of the land lease referred to below,
totaled approximately $138,000, $192,000 and $321,000 for the fiscal years
ended June 30, 2005, 2004 and 2003, respectively.
Land Lease
On April 26, 1993, one of the Company's foreign subsidiaries entered into a
99 year lease for approximately four acres of land in the Dominican
Republic, at an annual cost of approximately $288,000, on which the
Company's principal production facility is located.
Letters of Credit
At June 30, 2005, the Company was committed for approximately $299,000
under open commercial letters of credit.
Litigation
In August 2001, the Company became a defendant in a product related
lawsuit, in which the plaintiff seeks damages of approximately $17,000,000.
This action is being defended by the Company's insurance company on behalf
of the Company. Management believes that the action is without merit and
plans to have this action vigorously defended.
In December 2004, the Company became a defendant in a product related
lawsuit, in which the plaintiff seeks damages of approximately $1,500,000.
This action is being defended by the Company's insurance company on behalf
of the Company. Management believes that the action is without merit and
plans to have this action vigorously defended.
In the normal course of business, the Company is a party to claims and/or
litigation. Management believes that the settlement of such claims and/or
litigation, considered in the aggregate, will not have a material adverse
effect on the Company's financial position and results of operations.
FS-22
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 Commitments and Contingencies, continued
Employment Agreements
As of June 30, 2005, the Company was obligated under four employment
agreements and one severance agreement. Compensation under the agreements
includes annual salaries approximating $1,125,000. The employment
agreements provide for annual bonuses based upon sales and profits, or a
formula to be determined by the Board of Directors, and various severance
payments as defined in each agreement. One agreement, with current annual
compensation of $471,000, includes additional compensation of 100,000 stock
options that vest 20% per year or upon a change in control, as defined, and
a termination payment in an amount equal to 299% of the average of the
prior five calendar year's compensation, subject to certain limitations, as
defined. The employment agreements expire at various times through June
2008.
NOTE 11 - Geographical Data
The Company is engaged in one major line of business: the development,
manufacture, and distribution of security alarm products and door security
devices for commercial and residential use. Sales to unaffiliated customers
are primarily shipped from the United States. The Company has customers
worldwide with major concentrations in North America, Europe, and South
America.
The Company observes the provisions of SFAS No. 131. The following
represents selected consolidated geographical data for the fiscal years
ended June 30, 2005, 2004, and 2003:
2005 2004 2003
------- ------- -------
(In thousands)
Sales to external customers(1):
Domestic $54,654 $48,626 $47,965
Export 10,575 9,467 9,375
------- ------- -------
$65,229 $58,093 $57,340
======= ======= =======
Identifiable assets:
United States $41,753 $40,153 $39,005
Foreign(2) 18,154 16,519 18,344
------- ------- -------
$59,907 $56,672 $57,349
======= ======= =======
(1) All of the Company's sales occur in the United States and are shipped
primarily from the Company's facilities in the United States and United
Kingdom. There were no sales into any one foreign country in excess of 10%
of total net sales.
(2) Foreign identifiable assets consist primarily of inventories and fixed
assets, which are located at the Company's principal manufacturing facility
in the Dominican Republic.
FS-23
SCHEDULE II
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended June 30, 2005, 2004, and 2003
(In Thousands)
Column A Column B Column C Column D Column E
- -------------------------------------- ------------ ---------- ------------ ----------
Balance at Charged to Deductions/ Balance at
beginning of costs and (recoveries) end of
Description period expenses (1) period
- -------------------------------------- ------------ ---------- ------------ ----------
For the year ended June 30, 2003:
Allowance for doubtful accounts
(deducted from accounts receivable) $393 $ 16 $194 $215
For the year ended June 30, 2004:
Allowance for doubtful accounts
(deducted from accounts receivable) $215 $140 $ -- $355
For the year ended June 30, 2005:
Allowance for doubtful accounts
(deducted from accounts receivable) $355 $ 43 $ 18 $380
(1) Deductions relate to uncollectible accounts charged off to valuation
accounts, net of recoveries.
FS-24
b. Supplementary Financial Data
QUARTERLY RESULTS
The following table sets forth unaudited financial data for each of the
Company's last eight fiscal quarters (in thousands except for per share data).
Fiscal Year Ended June 30, 2005
---------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Net Sales $13,440 $16,019 $15,743 $20,027
Gross Profit 4,273 4,918 5,096 9,637
Income from Operations 901 1,450 1,673 4,886
Net Income 513 872 1,013 3,231
Net Income Per Share
Basic EPS .06 .10 .12 .38
Diluted EPS .06 .10 .11 .35
Fiscal Year Ended June 30, 2004
---------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Net Sales $9,835 $14,629 $14,742 $18,887
Gross Profit 2,983 4,552 4,622 7,383
Income (Loss) from Operations (294) 1,247 1,259 3,853
Net Income (Loss) (282) 728 734 2,155
Net Income (Loss) Per Share*
Basic EPS (.04)* .09 .09 .28
Diluted EPS (.04)* .09 .09 .25
* Restated to reflect 20% stock dividend reported in the first fiscal quarter
of 2005.
FS-25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 304(B)
FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROL AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management to allow timely decisions regarding required disclosure.
Management necessarily applied its judgment in assessing the costs and benefits
of such controls and procedures, which, by their nature, can provide only
reasonable assurance regarding management's control objectives.
At the conclusion of the period ended June 30, 2005, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective in alerting them in a timely manner to information relating to the
Company required to be disclosed in this report.
Our independent registered accounting firm Marcum & Kliegman, LLP ("MK"),
informed us and our Audit Committee of the Board of Directors that in connection
with their audit of our financial results for the fiscal year ended June 30,
2005, MK had discovered conditions which they deemed to be significant
deficiencies, (as defined by standards established by the Public Company
Accounting Oversight Board) in our financial statement closing process. A
significant deficiency is a control deficiency where there is more than a remote
likelihood that a misstatement of the company's annual or interim financial
statements that is more than inconsequential will not be prevented or detected.
The significant deficiencies related to the timely performance of processes and
procedures for the period end closing process and its review by internal
accounting personnel. Management has informed MK and the Audit Committee that it
will modify its controls over the financial statement closing process to prevent
reoccurrences of this deficiency and will continue to monitor the effectiveness
of these actions and will make any other changes or take such additional actions
as management determines to be appropriate.
During the fourth quarter of 2005, there were no changes in the Company's
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting except as described above. Management does not believe that
the above significant deficiencies affected the results of the fiscal year ended
June 30, 2005 or any prior period.
ITEM 9B. OTHER INFORMATION
None
PART III
The information called for by Part III is hereby incorporated by reference from
the information set forth and under the headings "Election of Directors",
"Corporate Governance and Board Matters", "Executive Compensation", "Beneficial
Ownership of Common Stock" and "Principal Accountant Fees" in the Company's
definitive proxy statement for the 2005 Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this Annual Report
on Form 10-K.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)1. Financial Statements
The following consolidated financial statements of NAPCO Security Systems, Inc.
and its subsidiaries are included in Part II, Item 8:
Page
-----
Report of Independent Registered Public Accounting Firm FS-1
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2005 and 2004
Consolidated Statements of Income for the Fiscal Years Ended June 30,
2005, 2004 and 2003
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended June 30, 2005, 2004 and 2003
21
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 2005, 2004 and 2003
Notes to Consolidated Financial Statements, June 30, 2005
(a)2. Financial Statement Schedules
The following consolidated financial statement schedules of NAPCO Security
Systems, Inc. and its subsidiaries are included in Part II, Item 8:
Page
-----
II: Valuation and Qualifying Accounts FS-24
Schedules other than those listed above are omitted because of the absence of
the conditions under which they are required or because the required information
is shown in the consolidated financial statements and/or notes thereto.
22
(a)3 and (b). Exhibits
Management Contracts designated by asterisk.
Exhibit No. Title
- ----------- -----
Ex-3.(i) Amended and Restated Certificate of Incorporation Exhibit 3.(I) to Report on
Form 10-Q for the fiscal
quarter ended December
31, 2001
Ex-3.(ii) Amended and Restated By-Laws Exhibit 3.(ii) to Report on
Form 10-K for the fiscal year
ended June 30, 2004
Ex-10.A (i) Amended and Restated 1992 Incentive Stock E-1
Option Plan
Ex-10.A (ii) 2002 Employee Stock Option Plan Exhibit 10.Y to Report on
Form 10-Q for the fiscal
quarter ended December 31,
2002
*Ex-10.B 2000 Non-Employee Stock Option Plan Exhibit 10.B to Report on
Form 10-K for fiscal year
ended June 30, 2001
Ex-10.C Loan and Security Agreement with Marine Midland Exhibit 10-C to Report on
Bank dated as of May 12, 1997 Form 10-K for the fiscal year
ended June 30, 2004
Ex-10.D Revolving Credit Note #1 to Marine Midland Bank Exhibit 10-D to Report
dated as of May 12, 1997 on Form 10-K for the
fiscal year ended June
30, 2004
Ex-10.E Revolving Credit Note #2 to Marine Midland Bank Exhibit 10-E to Report
dated as of May 12, 1997 on Form 10-K for the
fiscal year ended June
30, 2004
Ex-10.F Promissory Note to Marine Midland Bank dated as Exhibit 10-F to Report
of May 12, 1997 on Form 10-K for the
fiscal year ended June
30, 2004
Ex-10.G Amendment No.1 to the Loan and Security Agreement Exhibit 10-G to Report
with Marine Midland Bank dated as of May 28, 1998 on Form 10-K for the
fiscal year ended June
30, 2004
Ex-10.H Term Loan Note to Marine Midland Bank dated as Exhibit 10-H to Report
of May 28, 1998 on Form 10-K for the
fiscal year ended June
30, 2004
*Ex-10.I Amended and Restated Employment Agreement with Exhibit 10.I to Report
Richard Soloway on Form 10-K for fiscal
year ended June 30, 2003
*Ex-10.J Employment Agreement with Jorge Hevia E-6
Ex-10.K Amendment No. 2 to the Loan and Security E-8
Agreement with HSBC Bank dated as of June 30,
1999
*Ex-10.L Employment Agreement with Michael Carrieri E-10
*Ex-10.M Indemnification Agreement dated August 9, 1999 E-16
23
Ex-10.O Amendment No. 4 to Loan and Security Agreement E-21
Ex-10.P Amendment No. 8 to Loan and Security Agreement Exhibit 10.W to Report
on Form 10-K for fiscal
year ended June 30,
2001
Ex-10.Q Note Modification Agreement Exhibit 10.X to Report
on Form 10-K for fiscal
year ended June 30,
2001
Ex-10.R Amendment No. 10 to the Loan and Security Exhibit 10.R to Report
Agreement on Form 10-K for fiscal
year ended June 30,
2003
Ex-10.S Amendment No. 3 to the Loan and Security Exhibit 10-S to Report
Agreement on Form 10-K for the
fiscal year ended June
30, 2004
Ex-10.T Amendment No. 9 to the Loan and Security Exhibit 10-T to Report
Agreement on Form 10-K for the
fiscal year ended June
30, 2004
Ex-10.U Amendment No. 11 to the Loan and Security Exhibit 10-U to Report
Agreement on Form 10-K for the
fiscal year ended June
30, 2004
Ex-10.V Amendment No. 12 to the Loan and Security Exhibit 10-V to Report
Agreement on Form 10-K for the
fiscal year ended June
30, 2004
Ex-10.W Amendment No. 13 to the Loan and Security Exhibit 10-W to Report
Agreement on Form 10-K for the
fiscal year ended June
30, 2004
Ex-14.0 Code of Ethics Exhibit 14.0 to Report
on Form 10-K for the
fiscal year ended June
30, 2003
Ex-21.O Subsidiaries of the Registrant E-34
Ex-23.1 Consent of Independent Auditors E-35
Ex-31.1 Section 302 Certification of Chief Executive E-36
Officer
Ex-31.2 Section 302 Certification of Chief Financial E-37
Officer
Ex-32.1 Certification of Chief Executive Officer E-38
Pursuant to 18 USC Section 1350 and Section 906 of
Sarbanes - Oxley Act of 2002
Ex-32.2 Certification of Chief Financial Officer E-39
Pursuant to 18 USC Section 1350 and Section 906 of
Sarbanes - Oxley Act of 2002
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
September 29, 2005
NAPCO SECURITY SYSTEMS, INC.
(Registrant)
By: /s/ RICHARD SOLOWAY
------------------------------------
Richard Soloway
Chairman of the Board of
Directors, President and Secretary
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ RICHARD SOLOWAY Chairman of the Board of Directors, September 29, 2005
- ------------------------- President and Secretary
Richard Soloway (Principal Executive Officer)
and Director
/s/ KEVIN S. BUCHEL Senior Vice President September 29, 2005
- ------------------------- of Operations and Finance
Kevin S. Buchel and Treasurer
(Principal Financial and
Accounting Officer) and Director
/s/ PAUL STEPHEN BEEBER Director September 29, 2005
- -------------------------
Paul Stephen Beeber
/s/ RANDY B. BLAUSTEIN Director September 29, 2005
- -------------------------
Randy B. Blaustein
/s/ ARNOLD BLUMENTHAL Director September 29, 2005
- -------------------------
Arnold Blumenthal
/s/ DONNA SOLOWAY Director September 29, 2005
- -------------------------
Donna Soloway
/s/ ANDREW J. WILDER Director September 29, 2005
- -------------------------
Andrew J. Wilder
25