UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- 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 ---------- 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. 2 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 ================ ================ ==================== 7 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. 10 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. 11 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