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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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, 2003
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 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 [ ] No [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
[ ] Yes [X] No
As of December 31, 2002, the aggregate market value of the stock based upon the
last sale price of the stock on such date held by non-affiliates was
$16,757,522. As of January 15, 2004 3,207,616 shares of common stock were
outstanding.
Documents Incorporated by Reference: None.
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. [ ]
PART I
ITEM 1. BUSINESS.
NAPCO Security Systems, Inc. ("NAPCO") was incorporated in December
1971 in the State of Delaware for the purpose of acquiring National Alarm
Products Co., Inc., a New Jersey corporation founded in 1969 ("National"). In
December 1971, NAPCO issued an aggregate of 300,000 shares of its common stock,
par value $.01 per share ("Common Stock"), to the stockholders of National in
exchange for all of the issued and outstanding capital stock of National, after
which National was merged into NAPCO.
NAPCO and its subsidiaries (collectively, the "Company") are engaged in
the development, manufacture, distribution and sale of security alarm products
and door security devices (the "Products") for commercial and residential
installations.
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
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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.
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, 2003, 2002, and 2001, the
Company expended approximately $4,516,000, $4,239,000 and $4,220,000,
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, 2003, the Company had approximately 874 full-time
employees.
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Marketing and Major Customers
The Company's staff of 59 sales and marketing support employees located
at the Company's Amityville and United Kingdom offices sells and markets the
Products directly to independent distributors and wholesalers of security alarm
and security hardware equipment. Management estimates that these channels of
distribution represented approximately 76% and 80% of the Company's total sales
for the fiscal year ended June 30, 2003 and 2002, respectively. 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.
Sales to one distributor customer unaffiliated with the Company
(Customer A) accounted for approximately 19%, 17%, and 18% of the Company's
total sales for the fiscal years ended June 30, 2003, 2002, and 2001,
respectively (see Note 3 to Consolidated Financial Statements). During the
second quarter of fiscal 2004, the Company began the process of realigning its
burglar alarm products distribution network which culminated in the termination
of this distributor customer. The Company reallocated its burglar alarm products
business across its extensive national network of independent distributors. The
Company therefore does not believe that the termination of this distributor
customer will have a material adverse effect on its business.
The Company had two customers (Customers A and B) with accounts
receivable balances that aggregated 44% and 43% of the Company's accounts
receivable at June 30, 2003 and 2002 respectively. There were no accounts
receivable due from Customer A referred to in the previous paragraph at the time
the relationship with such distributor customer was terminated.
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 may
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 without delay. 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
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products have become available in recent years and are available to the public
at retail stores. 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 and Sales Backlog
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.
In general, orders for the Products are processed by the Company from
inventory. A sales backlog of approximately $226,000 existed as of June 30,
2003. This compared to a sales backlog of approximately $1,055,000 a year ago.
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 of the Company 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.
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.
-5-
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 tabulation:
Financial Information Relating to
Domestic and Foreign Operations
2003 2002 2001
------- ------- -------
(in thousands)
Sales to external customers(1):
Domestic $47,965 $46,652 $44,819
Foreign 9,375 9,184 9,952
------- ------- -------
Total Net Sales 57,340 55,836 54,771
Identifiable assets:
United States $39,005 $40,955 $38,282
Dominican Republic(2) 15,691 17,035 21,187
Other foreign countries 2,653 2,762 4,208
- -------------------
(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 completed construction on this
facility in 1988 with the proceeds from industrial revenue bonds that have since
been retired. The Company also leased approximately 3,000 square feet of
warehouse space in Sparks, Nevada. This lease was terminated by the Company
during fiscal 2003.
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, 2003, 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 and warehouse space of approximately 10,000
square feet. This lease expires in June 2010.
Management believes that these facilities are more than adequate to
meet the needs of the Company in the foreseeable future.
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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 five-count
Verified 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 Verified Complaint seemingly seeks fifteen
million dollars ($15,000,000) in damages on behalf of Mr. Ramirez based on
theories including strict liability in tort, negligence, breach of warranty,
failure to warn, etc. The Verified 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Principal Market
NAPCO's Common Stock became publicly traded in the over-the-counter
("OTC") market in 1972. In December 1981, the Common Stock was approved for
reporting by the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") under the symbol "NSSC", and in November 1984 the Common Stock
was designated by NASDAQ as a National Market System Security.
-7-
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.
Quarter Ended
-------------
Fiscal 2003 Fiscal 2004
----------- -----------
Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- ------- -------- -------
Common Stock
High $9.24 $10.19 $10.20 $9.47 $9.75 $8.95
Low $5.58 $ 8.60 $ 7.61 $7.50 $8.55 $7.25
Quarter Ended
Fiscal 2002
Sept. 30 Dec. 31 March 31 June 30
-------- ------- -------- -------
Common Stock
High $5.95 $6.91 $5.99 $7.22
Low $4.75 $5.00 $5.16 $5.62
Approximate Number of Security Holders
The number of holders of record of NAPCO's Common Stock as of January
16, 2004 was 161 (such number does not include beneficial owners of stock held
in nominee name).
Dividend Information
NAPCO has declared no cash dividends during the past three years with
respect to its Common Stock, and the Company does not anticipate paying any cash
dividends in the foreseeable future. Any dividends must be authorized by the
Company's primary lender.
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ITEM 6. SELECTED FINANCIAL DATA.
The table below summarizes selected financial information. For further
information, refer to the audited consolidated financial statements and the
notes thereto beginning on page FS-1 of this report.
Fiscal Year Ended or at June 30
-----------------------------------------------------------------------
(In thousands, except share data)
2003* 2002*(1) 2001* 2000 1999
---- ---- ---- ---- ----
(Restated)
Statement of Earnings Data:
Net Sales $ 57,340 $ 55,836 $ 54,771 $ 53,946 $ 50,875
Gross Profit 15,401 14,717 14,317 13,198 11,777
Income from Operations 2,225 2,817 1,859 3,122 1,911
Net Income(4) 1,010 1,575 251 2,010 2,493
Cash Flow Data:
Net cash flows provided by $ 6,482 $ 7,091 $ 1,326 $ 2,822 $ 2,926
operating activities
Net cash flows used in investing (752) (709) (8,283) (1,221) (1,050)
activities
Net cash flows (used in) provided by (5,436) (5,919) 5,610 (1,447) (1,635)
financing activities
Per Share Data:
Net earnings per common share:
Basic $ .30 $ .47 $ .07 $ .57 $ .71
Diluted $ .28 $ .45 $ .07 $ .57 $ .71
Weighted average common shares outstanding:
Basic 3,332,000 3,342,000 3,464,000 3,495,000 3,493,000
Diluted 3,584,000 3,492,000 3,527,000 3,513,000 3,512,000
Cash Dividends declared per common share (2) $ .00 $ .00 $ .00 $ .00 $ .00
- -------------
* includes results of Continental Instruments, LLC which was acquired in July,
2000.
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Fiscal Year Ended or at June 30
------------------------------------------------------------------
(In thousands, except share data)
2003 2002(1) 2001 2000 1999
---- ---- ---- ---- ----
(Restated)
Balance Sheet Data(3):
Working capital $28,843 $31,812 $33,232 $35,280 $34,920
Total assets 57,349 60,752 63,677 55,529 55,787
Long-term debt 14,100 16,588 21,567 16,183 17,241
Stockholders' equity 33,357 34,528 32,944 33,359 31,328
- ---------------------
(1) See footnote 1 to consolidated financial statements.
(2) 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.
(3) Working capital is calculated by deducting Current Liabilities from Current
Assets.
(4) Net income results through 2001 included Amortization Expense related to
goodwill. See note 1 to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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. 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
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of gross sales, sales returns and allowances were 10%, 7% and 8% in fiscal 2003,
2002 and 2001, 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.
We had one major distributor customer that accounted for approximately
$11,117,000 or 19%, of our consolidated net sales in fiscal 2003 and $3,787,000
or 22%, of our accounts receivable at June 30, 2003. This distributor customer
sells products primarily within North America to several thousand alarm dealers.
During the second quarter of fiscal 2004, the Company began the process of
realigning its burglar alarm products distribution network which culminated in
the termination of this distributor customer. The Company reallocated its
burglar alarm products business across its extensive national network of
independent distributors to improve service to its alarm dealers. The Company
therefore does not believe that the termination of this distributor customer
will have a material adverse effect on net sales, cash flows, and/or financial
condition. There were no accounts receivable due from this distributor customer
at the time the relationship with such distributor customer was terminated.
A second major customer accounted for approximately $3,878,000, or 22%
of our accounts receivable at June 30, 2003.
In the ordinary course of business, we have established an allowance
for doubtful accounts and customer deductions in the amount of $215,000 and
$393,000 as of June 30, 2003 and 2002, respectively. Our allowance for doubtful
accounts is a subjective critical estimate that has a direct impact on reported
net earnings. This reserve is based upon the evaluation of accounts receivable
agings, specific exposures and historical trends.
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.
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GOODWILL
Goodwill is calculated as the excess of the cost of purchased
businesses over the value of their underlying net assets. Commencing July 1,
2001, goodwill is no longer amortized.
In June 2001, Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets" were issued. These Statements establish financial 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. The provisions of SFAS No. 141 apply to
all business combinations initiated after June 30, 2001. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001; however, early
application is permitted for entities with fiscal years beginning after March
15, 2001. The Company adopted this standard effective July 1, 2001 and,
accordingly, those intangible assets that will continue to be classified as
goodwill or as other intangibles with indefinite lives are no longer being
amortized. This resulted in the exclusion of approximately $503,000 in
amortization expense for the fiscal years ending June 30, 2003 and June 30,
2002. In accordance with SFAS No. 142, intangible assets, including purchased
goodwill, will be evaluated periodically for impairment.
On an annual basis, we test goodwill and other intangible assets for
impairment. To determine the fair value of these intangible assets, there are
many assumptions and estimates used that directly impact the results of the
testing. We have the ability to influence the outcome and ultimate results based
on the assumptions and estimates we choose. To mitigate undue influence, we use
industry accepted valuation models and set criteria that are reviewed and
approved by various levels of management. Additionally, we evaluate our recorded
goodwill with the assistance of a third-party valuation firm.
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. 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,
and as a result, no taxes were provided. Effective July 1, 2001, the Company
made a domestication election for Napco DR. Accordingly, its income will be
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 as if it were a domestic
corporation beginning July 1, 2001. This election is based on a recently enacted
Internal Revenue Code ("Code") provision. As a result of this election, this
subsidiary 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
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recently enacted Code provision provides an exemption for applicable
corporations. The Company qualifies as an applicable corporation per this Code
section, and based on this Code exemption, the Company's tax return treated the
transfer of approximately $27,000,000 of this subsidiary's untaxed earnings and
profits as nontaxable.
The Internal Revenue Service has issued a Revenue Procedure that is
inconsistent with the Code exemption described above. Management believes that
it has appropriately relied on the guidance in the Code when filing its income
tax return. Nevertheless, as of June 30, 2002, the Company has removed the
$2,225,000 deferred tax asset related to its net operating loss carryforward
("NOL") of $6,545,000. The NOL would have expired through 2017. As a result of
the utilization of the NOL for book purposes, the Company has also eliminated
the valuation reserve of $2,913,000 during the year ended 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 to the Consolidated Financial
Statements.
Liquidity and Capital Resources
The Company's cash on hand combined with proceeds from operating
activities during fiscal 2003 were adequate to meet the Company's capital
expenditure needs and short and long-term debt obligations. 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. The Company's primary internal source of
liquidity is the cash flow generated from operations. As of June 30, 2003, the
Company's unused sources of funds consisted principally of $1,794,000 in cash
and approximately $6,487,000 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 2005.
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 will expire in January, 2005 and any
outstanding borrowings are to be repaid or refinanced on or before that time.
The Company plans to refinance this agreement prior to its expiration. 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, as defined in the
agreement. During fiscal 2003, at certain dates the Company was not in
compliance with certain covenants, but received waivers and amendments from its
bank. As of June 30, 2003, the Company was not in compliance with one covenant
related to the agreement described above for which it has received a waiver
from its bank.
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In May of 1998 the Company repurchased 889,576 shares of Napco common
stock for $5.00 per share from one of its co-founders, Kenneth Rosenberg. $2.5
million was paid at closing with the balance of the purchase price to be paid
over a four (4) year period pursuant to an interest-bearing note. The portion of
the purchase price paid at closing was financed by the Company's primary bank
and was repaid over a five (5) year period. At the closing, Mr. Rosenberg
retired as President and Director of the Company but is available to the Company
pursuant to a consulting agreement. The repurchase agreement also provides that
Mr. Rosenberg will not compete with the Company for a ten (10) year period.
In November 2000 the Company adopted a stock repurchase program. As
amended, this program authorizes the Company to repurchase up to 205,000 shares
of its common stock. As of June 30, 2003 the Company had repurchased 202,605
shares under this program.
In January 2003, the Company repurchased 250,000 shares of its common
stock from two shareholders, unaffiliated with the Company, at $9.75 per share,
a discount from its then current trading price of $10.01. The transaction was
approved by the board of directors and the purchase price of $2,437,500 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. This term loan is being repaid
in 60 equal monthly installments commencing on April 30, 2003.
The Company takes into consideration a number of factors in measuring
its liquidity, including the ratios set forth below:
2003 2002 2001
---- ---- ----
Current Ratio 4.2 to 1 4.5 to 1 4.7 to 1
Sales to Receivables 3.3 to 1 3.0 to 1 3.2 to 1
Total Debt to Equity .5 to 1 .6 to 1 .8 to 1
As of June 30, 2003, 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.
-14-
The acquisition described above has been accounted for as a purchase
and was valued based on management's estimate of the fair value of the assets
acquired and liabilities assumed. Costs in excess of net assets acquired of
approximately $7,768,000 have been allocated to goodwill.
Working Capital. Working capital decreased by $2,969,000 to $28,843,000
at June 30, 2003 from $31,812,000 at June 30, 2002. The decrease in working
capital was primarily the result of debt reduction and purchase of treasury
stock, as well as the reduction in inventory and in Accounts Receivable as of
June 30, 2003 as compared to June 30, 2002. These reductions resulted primarily
from Company's improved management of its inventory and the reduction in
Accounts Receivable as discussed below. Working capital is calculated by
deducting Current Liabilities from Current Assets.
Accounts Receivable. Accounts Receivable decreased by $888,000 to
$17,425,000 at June 30, 2003 from $18,313,000 at June 30, 2002. This decrease
resulted primarily from the timing of payments from some of the Company's
customers and the decrease in 4th quarter sales in fiscal 2003 as compared to
the same period in fiscal 2002.
Inventory. Inventory decreased by $2,041,000 to $16,922,000 at June 30,
2003 as compared to $18,963,000 at June 30, 2002. The decrease in inventory
levels was primarily the result of the Company's improvement in production and
delivery scheduling.
Accounts Payable and Accrued Expenses. Accounts payable and accrued
expenses increased by $177,000 to $5,186,000 as of June 30, 2003 as compared to
$5,009,000 at June 30, 2002. This increase was due primarily to the timing of
component part purchases closer to year end during fiscal 2003 as compared to
fiscal 2002.
Results of Operations
Fiscal 2003 Compared to Fiscal 2002
Net Sales. Net sales in fiscal 2003 increased by 3% to $57,340,000 from
$55,836,000 in fiscal 2002. The Company's sales growth was due primarily to
increased domestic sales volume in the Company's burglar alarm product line.
Gross Profit. The Company's gross profit increased $684,000 to
$15,401,000 or 26.9% of net sales in fiscal 2003 as compared to $14,717,000 or
26.4% of net sales in fiscal 2002. The increase in gross profit in both absolute
dollars and as a percentage of net sales was due primarily to the increase in
sales as discussed above. Gross profit was also positively impacted by cost
reductions of certain of the Company's raw material costs.
Expenses. Selling, general and administrative expenses increased by 11%
to $13,176,000, or 23% of net sales in fiscal 2003 from $11,900,000, or 21% of
net sales in fiscal 2002. This increase was due primarily to additional
investment in the Company's sales force, primarily in the international and
access control areas.
-15-
Other Expenses. Other expenses decreased $858,000 to $600,000 in fiscal
2003 as compared to $1,458,000 in fiscal 2002. This decrease was due primarily
to the decrease in interest expense resulting from the Company's continued
reduction of the outstanding principal on its outstanding debt as well as a
decline in interest rates available to the Company. In addition, during the
quarter ended September 30, 2002, the Company settled litigation 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.
Income Taxes. Benefit for income taxes changed by $831,000 to a
provision of $615,000 in fiscal 2003 as compared to a benefit of $216,000 in
fiscal 2002. The current year income tax provision relates primarily to the
Company electing to treat its main foreign subsidiary as a U.S. Company for book
and tax purposes.
Prior Period Adjustment
The Company's financial statements for the year ended June 30, 2002
have been restated to reflect an adjustment of its income tax provision related
to the taxation of one of the Company's foreign subsidiaries, Napco DR. As
further described in Note 6 to The Consolidated Financial Statements, in March
2003, the Company made an election with the filing of its income tax return for
the fiscal year ended June 30, 2002. As a result, the tax provision and related
deferred tax balance sheet accounts have been restated. See Note 1 to the
Consolidated Financial Statements.
Fiscal 2002 Compared to Fiscal 2001
Net Sales. Net sales in fiscal 2002 increased by 2% to $55,836,000 from
$54,771,000 in fiscal 2001. The Company's sales growth was due primarily to
increased sales in the Company's Continental access control product line, which
was acquired in July 2000.
Gross Profit. The Company's gross profit increased $400,000 to
$14,717,000 or 26.4% of net sales in fiscal 2002 as compared to $14,317,000 or
26.1% of net sales in fiscal 2001. The increase in gross profit in both absolute
dollars and as a percentage of net sales was due primarily to the increase in
sales of the Continental access control products as well the positive shift in
product mix due to the higher margins associated with, in general, the
Continental product lines. Gross profit was also positively impacted by cost
reductions of certain of the Company's raw material costs.
Expenses. Selling, general and administrative expenses decreased by 5%
to $11,900,000 in fiscal 2002 from $12,458,000 in fiscal 2001. This decrease was
due primarily to the elimination of approximately $503,000 of amortization
expense relating to Goodwill as described above.
Other Expenses. Other expenses decreased $175,000 to $1,458,000 in
fiscal 2002 as compared to $1,633,000 in fiscal 2001. This decrease was due
primarily to the decrease in interest expense resulting from the Company's
continued reduction of the outstanding principal on its outstanding debt. Other
income in fiscal 2001 included an insurance settlement of approximately
$175,000.
Income Taxes. Benefit for income taxes changed by $191,000 to a benefit
of $216,000 in fiscal 2002 as compared to a benefit of $25,000 in fiscal 2001.
The current year income tax benefit relates primarily to the Company's foreign
operations in the Dominican Republic. The prior year income tax benefit of
$25,000 related primarily to revisions to the Company's estimated valuation
allowance on deferred income taxes.
-16-
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. Factors that
could cause actual results to differ materially from the Forward-Looking
Statements include, but are not limited to, inability to refinance, adverse tax
consequences of offshore of operations, distribution problems, unforeseen
environmental liabilities and the uncertain military, political and economic
conditions in the world. These and other risks are detailed in Part I, Item 1
and elsewhere in this Form 10-K. The Company assumes no obligation to update
publicly the Forward-Looking Statements contained herein, whether as a result of
new information, future events or otherwise, except as may be required by law.
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. A significant rise in
the prime rate could materially adversely affect the Company's business,
financial condition and results of operations. At June 30, 2003, an aggregate
principal amount of approximately $15,000,000 was outstanding under the
Company's credit facility and term loans with a weighted average interest rate
of approximately 4%. 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 $150,000 in interest that year. In October 2000, the
Company entered into an interest rate swap to maintain the value-at-risk
inherent in its interest rate exposures. This instrument expired on October 30,
2002.
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 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 have a material adverse affect on
the Company's business, financial condition and results of operations.
-17-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
a. Financial Statements
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS OF CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2003 AND 2002
Page
------
Independent Auditors' Report.................................... FS-1
Report of Independent Public Accountants........................ FS-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2003 and 2002...... FS-4
Consolidated Statements of Income for the Fiscal Years
Ended June 30, 2003, 2002 and 2001............................ FS-6
Consolidated Statements of Stockholders' Equity for the
Fiscal Years Ended June 30, 2003, 2002 and 2001............... FS-7
Consolidated Statements of Cash Flows for the Fiscal Years
Ended June 30, 2003, 2002 and 2001............................ FS-8
Notes to Consolidated Financial Statements, June 30, 2003..... FS-10
Schedules:
II. Valuation and Qualifying Accounts........................... FS-30
-18-
b. Supplementary Financial Data
Quarterly Results
The following table sets forth unaudited financial data for each of the
Company's last eight fiscal quarters as restated and as previously reported (see
footnote 1 to the consolidated financial statements). The first three quarters
of fiscal 2003 were restated to properly allocate the tax provision recorded in
the fourth quarter of 2003 to the proper periods (in thousands except for per
share data).
Fiscal Year Ended June 30, 2003
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net Sales $11,725 $13,859 $13,406 $18,350
Gross Profit 3,048 3,569 3,496 5,288
Income (Loss) from Operations (233) 424 9 2,025
Net Income (Loss) (183) 145 (136) 1,184
Net Income (Loss) Per Share:
Basic EPS (.05) .04 (.04) .37
Diluted EPS (.05) .04 (.04) .34
As Previously Reported, if restated
Net Income (Loss) Per Share (287) 219 (206) --
Basic EPS (.08) .06 (.06) --
Diluted EPS (.08) .06 (.06) --
Fiscal Year Ended June 30, 2002
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net Sales $10,083 $13,308 $13,321 $19,124
Gross Profit 2,756 3,321 3,460 5,180
Income (Loss) from Operations (187) 549 547 1,908
Net Income (Loss) (596) 124 207 1,840
Net Income (Loss) Per Share
Basic EPS (.17) .04 .06 .55
Diluted EPS (.17) .04 .06 .52
As Previously Reported, if restated
Net Income (Loss) Per Share -- -- -- 1,606
Basic EPS -- -- -- .47
Diluted EPS -- -- -- .45
-19-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 9, 2002 the Board of Directors of Napco Security Systems, Inc.
(the "Company") dismissed Arthur Andersen LLP ("Andersen") as its independent
public accountants and appointed KPMG LLP ("KPMG") to serve as its independent
public accountants. These actions were taken at the recommendation of the
Company's Audit Committee. Andersen had served as the Company's independent
public accountants since 1993. None of Andersen's reports on the Company's
consolidated financial statements for the fiscal years ended June 30, 2001 and
2000 contained an adverse opinion or disclaimer of opinion, nor was any such
report qualified or modified as to uncertainty, audit scope or accounting
principles. During the fiscal years ended June 30, 2001, 2000 and 1999 and
through the date hereof, there were no disagreements between the Company and
Andersen on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which, if not resolved to
Andersen's satisfaction, would have caused them to make reference to the subject
matter in connection with their report on the Company's consolidated financial
statements for such years; and there were no reportable events as defined in
Item 304(a)(1)(v) of Regulation S-K. During the fiscal years ended June 30, 2001
and 2000 and through the date hereof, the Company did not consult KPMG with
respect to either (i) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's consolidated financial statements, or (ii)
any matter that was either the subject of a disagreement, within the meaning of
Item 304(a)(1)(iv) of Regulation S-K, or any "reportable event," as that term is
defined in Item 304(a)(1)(v) of Regulation S-K. We provided Andersen with a copy
of our report on Form 8-K on our change in independent accountants and requested
that Andersen furnish us with a letter addressed to the Securities and Exchange
Commission stating whether it agrees with the statements made by us in this
report, and if not, stating the respects in which it does not agree. Andersen
has indicated to the Company that Andersen no longer issues such letters.
On December 15, 2003, the Registrant engaged Marcum & Kliegman LLP
("New Accountant") as the Registrant's principal independent accountants to
audit its consolidated financial statements, replacing KPMG LLP (the "Former
Accountants") as the Registrant's independent auditors, who were dismissed on
the same day. The change was approved by the Registrant's audit committee and
board of directors. The Registrant has not consulted with Marcum & Kliegman LLP
during its two most recent fiscal years nor during any subsequent interim period
prior to its appointment as auditor for the fiscal year 2003 and 2002 audits
regarding the application of accounting principles to a specified transaction
either completed or proposed, or the type of audit opinion that might be
rendered on the Registrant's consolidated financial statements.
The Former Accountants' report on the Registrant's financial statements
for fiscal 2002 did not contain any adverse opinion or disclaimer of opinion and
was not qualified as to uncertainty, audit scope or accounting principles.
KPMG LLP was engaged as the Company's independent accountants on July
9, 2002. During the Registrant's 2002 fiscal year and the subsequent interim
period preceding the date of
-20-
termination, there were no disagreements between the Registrant and the Former
Accountants on any matter of accounting principles or practices, financial
statement disclosures or auditing scope or procedures, nor were there any
"Reportable Events" within the meaning of Item 304(a)(1)(v) of Regulation S-K.
The audit of the Registrant's fiscal 2003 financial statements, which was begun
by KPMG LLP, was not completed. In performing its audit of the fiscal 2003
financial statements, KPMG LLP identified an international tax matter concerning
the Registrant's Dominican Republic subsidiary and at the time of their
dismissal, such matter was still unresolved.
ITEM 9A. CONTROL AND PROCEDURES
At the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the Company's disclosure controls and procedures pursuant
to Exchange Act Rule 13 a - 15(e). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. During the fourth quarter of
2003, there were no changes in the Company's internal control over financial
reporting that have materially affected, or are reasonable likely to materially
affect, the Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Board of Directors is divided into three classes. One class will
stand for election for a three-year term at the next Annual Meeting of
Stockholders. The terms of the other two classes of continuing directors do not
expire until the Annual Meetings of Stockholders after fiscal year end 2004 and
2005, respectively. The names of, and certain information concerning, the
nominees of the Board of Directors and such other directors are set forth below:
Principal Occupation;
Five-Year Employment History and
Name and Age Other Directorships Since
------------ ------------------- -----
Directors to serve until next
Annual Meeting of Stockholders:
Randy B. Blaustein Principal of R.B. Blaustein & Co. since 1985
(52) December 2000; Partner of Blaustein,
Greenberg & Co. July 1991 - November 2000;
Attorney engaged as a sole practitioner
since October 1980, specializing in
business and tax matters, and author of
six books and numerous articles.
-21-
Donna Soloway Board of Directors Security Industry 2001
(55) Association (SIA); Chair of Awards
Committee since 1993; Director and
Secretary of SAINTS (Safety, Awareness
and Independence Now Through Security)
Foundation, Inc.; and Monthly Columnist
for SECURITY DEALER magazine since 1992.
Ms. Soloway is the wife of Richard
Soloway, the Chairman and President of the
Company.
Directors to serve until Annual
Meeting of Stockholders
following fiscal year end 2004:
Richard Soloway Chairman of the Board of Directors since 1972
(57) October 1981; President since 1998;
Secretary since 1975.
Kevin S. Buchel Senior Vice President of Operations 1998
(51) and Finance since April 1995; Treasurer
since May 1998.
Nominees to serve until Annual
Meeting of Stockholders
following fiscal year end 2005:
Andrew J. Wilder Officer of Israeloff, Trattner & Co., 1995
(52) independent certified public accountants,
since 1990.
Arnold Blumenthal Mr. Blumenthal has been Publisher of 2001
(76) SECURITY DEALER magazine at Cygnus
Business Media, Inc. since 1978.
During the fiscal year ended June 30, 2003, the Company retained Mr.
Blaustein as special counsel for certain general business and tax related
matters. Fees for such services were $9,200.
During fiscal 2003, there were 4 meetings of the Board of Directors.
Each of the directors attended all of the meetings.
CODE OF ETHICS
The company has adopted a Code of Ethics that applies to its employees
and directors, including the Company's principal executive officer, principal
financial officer, principal
-22-
accounting officer or controller, and persons performing similar functions. A
copy is filed as Exhibit 14.0 to this Form 10-K.
COMPENSATION OF DIRECTORS
The directors who are not officers receive $1,000 for each Board of
Directors meeting and $1,000 for each Audit Committee meeting that they attend
in person or by telephone conference call, except Mr. Wilder is chairman of the
Audit Committee and receives $2,000 for attending each Audit Committee meeting.
For the fiscal year ended June 30, 2003, Mr. Blaustein, Mr. Wilder, Mr.
Blumenthal and Ms. Soloway received $8,000, $12,000, $8,000 and $4,000,
respectively in director's fees and committee fees.
COMPLIANCE WITH SECTION 16
Based solely on a review of the Forms 3, 4 and 5 furnished to the
Company with respect to the most recent fiscal year and written representations
of the reporting person (as defined below), no person, who at any time during
such fiscal year, was an officer, director, beneficial owner of more than ten
(10%) percent of any class of equity securities of the Company or any other
person subject to Section 16 of the Securities Exchange Act of 1934 ("reporting
person"), failed to file on a timely basis one or more reports during such
fiscal year except that Richard Soloway was late on filing one Form 4 due to a
delay in obtaining certain necessary codes for EDGAR filing.
INFORMATION CONCERNING EXECUTIVE OFFICERS
Each executive officer of the Company holds office until the annual
meeting of the Board of Directors and his successor is elected and qualified, or
until his earlier death, resignation, or removal by the Board. There are no
family relationships between any director or officer of the Company, except
Richard Soloway and Donna Soloway, his wife. The following table sets forth as
of the date hereof the names and ages of all executive officers of the Company,
all positions and offices with the Company held by them, the period during which
they have served in these positions and, where applicable, their positions in
any other organizations during the last five years.
Position and Office with the
Company, Term of Office and
Name and Age Five-Year Employment History
- ------------ ----------------------------
Richard Soloway Chairman of the Board of Directors since October 1981;
(57) President Since 1998; and Secretary since 1975.
Kevin S. Buchel Senior Vice President of Operations and Finance since
(51) April 1995; Treasurer since May 1998.
Jorge Hevia Senior Vice President of Corporate Sales and Marketing
(45) since May 1999; Vice President of Corporate Sales and
Marketing since October 1998; Vice President of National
Sales of Schieffelin and Somerset Company from December
1993 to October 1998.
-23-
Michael Carrieri Senior Vice President of Engineering Development since
(46) May 1, 2000; Vice President of Engineering Development
since September, 1999; Vice President of Engineering of
Chyron Corp. April 1998 to August 1999; Vice President of
Engineering of Boundless Technologies from February
1990 until March 1998.
-24-
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation information for the
President and Chief Executive Officer of the Company and for each of the
Company's three most highly compensated other executive officers serving at the
end of fiscal year 2003.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
---------------------------------- ------------------------------------
Other Annual Restricted LTIP All Other
Name and Principal Position Fiscal Year Salary Bonus Compensation(1) Stock Awards Options/SARS Payouts Compensation(2)
- --------------------------- ----------- -------- ------- --------------- ------------ ------------ ------- ---------------
Richard Soloway, Chairman of 2003 $443,457 $75,000 $27,455 125,000/0 $ 838
the Board of Directors, 2002 $450,637 - $22,433 - 25,000/0 - $ 784
President, Secretary 2001 $432,134 $50,000 $11,990 - 50,000/0 - $ 734
- --------------------------------------------------------------------------------------------------------------------------------
Kevin S. Buchel, Senior Vice 2003 $183,196 $33,525 $ 6,738 5,000/0 $1,811
President of Operations and 2002 $185,842 $30,000 $ 6,690 - 10,000/0 - $1,678
Finance and Treasurer 2001 $152,949 $60,000 $ 6,291 - - - $1,908
- --------------------------------------------------------------------------------------------------------------------------------
Jorge Hevia, Senior Vice 2003 $202,230 $33,525 $ 7,200 5,000/0 $1,903
President of Corporate Sales 2002 $192,269 $10,000 $ 7,260 - 10,000/0 - $1,816
and Marketing 2001 $182,308 $20,000 $ 7,081 - - - $2,015
- --------------------------------------------------------------------------------------------------------------------------------
Michael Carrieri, 2003 $183,999 $23,467 $5,250 5,000/0 $1,820
Senior Vice President of 2002 $175,269 $17,500 $ 60 - 10,000/0 - $1,671
Engineering Development 2001 $166,953 $35,000 $ 61 - - - $1,902
- --------------------------------------------------------------------------------------------------------------------------------
(1) Messrs. Soloway, Buchel, Hevia and Carrieri received $8,073, $7,040, $6,367;
$138, $90, $91; $60, $60, $61; $90, $60 and $61, respectively for health and
life insurance for fiscal years 2003, 2002 and 2001. Messrs. Soloway, Buchel,
Hevia and Carrieri received $19,382, $15,393, $5,623; $6,600, $6,600, $6,200;
$7,200, $7,200, $7,020; $5,250, $0, and $0, respectively, for automobile
expenses for fiscal years 2003, 2002 and 2001.
(2) Company 401(k) Plan Contributions.
-25-
OPTION GRANTS, OPTION EXERCISES AND OUTSTANDING OPTIONS
The following tables summarize option grants and exercises during
fiscal 2003 to or by the named executive officers and the value of the fiscal
2003 granted options, if any, held by such persons at the end of fiscal 2003.
OPTION GRANTS IN LAST FISCAL YEAR(1)
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Option Term(2)
------------------------
Individual Grants
Percent of
Total Options
Granted to Employees Exercise or
Options in Base Price Expiration
Name Granted Fiscal Year ($/Sh) Date 5% ($) 10% ($)
---- ------- ----------- ------ ---- ------ -------
Richard Soloway 25,000 16% $ 9.65 2/27/13 $116,000 $ 327,500
100,000 62% $10.16 6/26/13 $489,000 $1,381,000
Kevin S. Buchel 5,000 3% $ 9.50 12/20/12 $ 29,850 $ 75,700
Jorge Hevia 5,000 .3% $ 9.50 12/20/12 $ 29,850 $ 75,700
Michael Carrieri 5,000 .3% $ 9.50 12/20/12 $ 29,850 $ 75,700
- -------
(1) Options generally become exercisable in cumulative annual installments of
20% commencing on the date of grant. Options generally terminate upon the
earlier of the cessation of employment with the Company or the tenth anniversary
of the date of the grant.
(2) Amounts represent hypothetical gains that could be achieved for options if
exercised at the end of the option term. These gains are based on assumed rates
of stock price appreciation of 5% and 10% annually from the date options are
granted.
-26-
AGGREGATED OPTION EXERCISES IN LAST YEAR AND FY-END OPTION VALUES
Value of
Number of Unexercised
Unexercised In-the-Money
Shares Options at Options at
Acquired Value FY-End (#) FY-End ($)
on Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
---- ----------- -------- --------------- -------------------
Richard Soloway - - 290,000/135,000 $1,625,150/$144,600
Kevin S. Buchel 15,000 $44,475 29,000/16,000 $ 165,976/$60,794
Jorge Hevia 5,000 $24,300 40,600/16,000 $ 229,312/$60,794
Michael Carrieri - - 25,000/15,000 $ 141,136/$54,584
-27-
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Richard Soloway and Jorge
Hevia. The agreement with Mr. Soloway, entered into on June 26, 2003 for a five
year period, provides for an annual salary of $453,235 as adjusted by inflation,
certain incentive compensation if earned according to a formula to be determined
by the Board of Directors, and 100,000 stock options that vest 20% per year or
upon a change in control, as defined in the agreement. In addition, if during
the term there should be a change in control, then the employee shall be
entitled to terminate the term and his employment thereunder, and the employer
shall pay the employee, as a termination payment, an amount equal to 299% of the
average of the prior five calendar year's compensation, subject to certain
limitations. Mr. Hevia's agreement, which is for a two-year period, provides for
an annual salary of $215,000 with certain bonus provisions, including those
based on sales and profits. During fiscal year 2003 Michael Carrieri had an
agreement that provided for an annual salary of $194,481 with certain bonus
provisions including those based on sales and profits. In addition, the Company
has a severance agreement with Kevin S. Buchel providing for payments equal to
nine months of salary and six months of health insurance in the event of a
non-voluntary termination of employment without cause.
-28-
EQUITY COMPENSATION PLAN INFORMATION
As of June 30, 2003
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED UPON WEIGHTED AVERAGE FUTURE ISSUANCE (EXCLUDING
EXERCISE OF EXERCISE PRICE OF SECURITIES REFLECTED IN
OUTSTANDING OPTIONS OUTSTANDING OPTIONS COLUMN a)
PLAN CATEGORY (a) (b) (c)
-------------- ------------------- ------------------- --------------------------
Equity compensation plans approved
by security holders:
1992 Employee Stock Option Plan 491,200 $3.76 0
2000 Non-employee Stock Option Plan 40,000 $4.13 10,000
$9.91 189,000
2002 Employee Stock Option 151,000
Plan
Equity compensation plans not
approved by security holders:
None - - -
Total 682,200 $5.14 199,000
-29-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table, together with the accompanying footnotes, sets
forth information as of January 16, 2004 regarding the beneficial ownership (as
defined by the Securities and Exchange Commission) of Common Stock of the
Company of (a) each person known by the Company to own more than five percent of
the Company's outstanding Common Stock, (b) each director of the Company (c)
each executive officer named in the Summary Compensation Table, and (d) all
executive officers and directors of the Company as a group. Except as otherwise
indicated, the named owner has sole voting and investment power over shares
listed.
30
Amount and Nature
of beneficial Percent of
Beneficial Owner Ownership Common Stock [a]
- ---------------- --------- ----------------
Richard Soloway
c/o the Company
333 Bayview Avenue
Amityville, NY 11701 1,229,976 [b] 33.6%
Dimensional Fund 226,650 [c] 6.2%
Advisors, Inc.
Kevin S. Buchel 69,001 [b] 1.9%
Jorge Hevia 54,600 [b] 1.5%
Randy B. Blaustein 38,500 [b] 1.1%
Michael Carrieri 33,000 [b] .9%
Andrew J. Wilder 16,300 [b] .4%
Donna Soloway 5,400 .1%
All executive officers and 1,446,777 [d] 39.5%
directors as a group (7 in number)
- ----------------
[a] Percentages are computed on the basis of 3,658,616 shares, which consists of
3,207,616 shares of Common Stock outstanding on January 16, 2004, plus 451,600,
the number of shares that a person has the right to acquire directly or
indirectly within sixty (60) days. Except as otherwise noted, persons named in
the table and footnotes have sole voting and investment power with respect to
all shares of Common Stock reported as beneficially owned by them.
[b] This number includes the number of shares that a person has a right to
acquire directly or indirectly within sixty (60) days (Soloway - 310,000, Buchel
- - 38,000, Hevia - 38,000, Blaustein - 16,000, Carrieri - 33,000, and Wilder -
16,000).
[c] Based on information from Securities and Exchange as of September 30, 2003,
a form 13F was filed with the SEC by Dimensional Fund Advisors Inc., 1299 Ocean
Avenue, Santa Monica, CA 90401 ("DFAI") reporting beneficial ownership and sole
voting power as to 226,650 shares of Common Stock of the Company, owned by
advisory clients. As to all of such shares, DFAI disclaims beneficial ownership
of all such securities.
[d] This number of shares includes (i) 995,777 shares as to which officers and
directors have sole voting and investment power, and (ii) 451,000 shares that a
person has the right to acquire directly or indirectly within sixty (60) days.
31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fiscal Year 2003 Fiscal Year 2002
---------------- ----------------
KPMG M&K KPMG M&K
---- --- ---- ---
Audit Fees(1)
Billed $237,000 $142,500 $87,000 (1)
Paid $ 70,000 $ 89,000 $87,000 (1)
Audit Related Fees(2) - - - -
Tax Fees(3) - - - -
All Other Fees(4)
Billed $ 15,000 $ 0 $15,000 $ 0
Paid $ 15,000 $ 0 $15,000 $ 0
- --------------------
(1)Audit Fees. The Company was billed $237,000 and paid $70,000 to date
and was billed and paid $87,000 to KPMG LLP ("KPMG") for professional services
rendered for the audit of the Company's financial statements for fiscal years
2003 and 2002, respectively. The Company is expected to be billed $142,500 by
Marcum & Kliegman LLP ("M&K") for professional services rendered for the audit
of the Company's financial statements for fiscal years 2003 and 2002.
(2)Audit Related Fees. There were no fees paid by the Company to KPMG
or M&K for professional services for assurance and related services by the
principal accountant that are currently related to the performance of the audit
or review of Napco's financial statements and are not reported under Item
9(e)(i) of Schedule 14 A in fiscal years 2003 and 2002, respectively.
(3)Tax Fees. There were no fees paid by the Company to KPMG or M&K for
professional services rendered by the principal accountants for tax compliance,
tax advice and tax planning for fiscal years 2003 and 2002, respectively.
(4)All Other Fees. The Company was billed and paid approximately
$15,000 and $15,000 to KPMG for services other than those described above,
including services related to the audit of the company's employee benefit plan
and reporting by the Company and its subsidiaries to the Securities and Exchange
Commission for fiscal years 2003 and 2002, respectively. The
32
Company was not billed by M&K for services other than those described above,
including services related to the audit of the company's employee benefit plan
and reporting by the Company and its subsidiaries to the Securities and Exchange
Commission for fiscal years 2003 and 2002, respectively.
The Audit Committee has considered whether the provision of the
services described above under the headings "Audit Related Fees", "Tax Fees" and
"All Other Fees" is compatible with maintaining the auditor's independence and
determined that it is. All of the services described in Items 9(e)(2) through
9(e)(4) of Schedule 14A were approved by the Audit Committee pursuant to
paragraph c(7)(i)(C) of Rule 2-01 of Regulation S-X.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(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
----
Independent Auditors' Report........................................................................ FS-1
Report of Independent Public Accountants as of June 30, 2003 and 2002 and for each of the
3 Years in the Period Ended June 30, 2003........................................................... FS-3
Consolidated Balance Sheets as of June 30, 2003 and 2002............................................ FS-4
Consolidated Statements of Income for the Years Ended June 30, 2003, 2002 and 2001.................. FS-6
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2003, 2002
and 2001............................................................................................ FS-7
Consolidated Statements of Cash Flows for the Years Ended June 30, 2003, 2002 and 2001.............. FS-8
Notes to Consolidated Financial Statements, June 30, 2003, 2002 and 2001............................ FS-10
33
(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:
II: Valuation and Qualifying Accounts.............................................................. FS-30
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.
(a)3 and (c). Exhibits
Management Contracts designated by asterisk.
Exhibit
No. Title
- ------- -----
Ex-3.(i) Articles of Incorporation, as amended................................... Exhibit 3(I) to Report
on Form 10-Q for
fiscal year ended
December 31, 2001
Ex-3.(ii) Amended and Restated By-Laws............................................ Exhibit 3.(ii) to Report
on Form 10-K for fiscal
year ended June 30, 1999
*Ex-10.A (i) Amended and Restated 1992 Incentive Stock Option Plan................... Exhibit 10.A to Report
on Form 10-K for fiscal
year ended June 30, 2001
*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, 2003
34
*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 Bank dated as of
May 12, 1997............................................................ Exhibit 10.I to Rpt. on
Form 10K for fiscal year
ended June 30, 1997
Ex-10.D Revolving Credit Note #1 to Marine Midland Bank dated as of
May 12, 1997............................................................ Exhibit 10.J to Report on
Form 10-K for Fiscal year
ended June 30, 1997
Ex-10.E Revolving Credit Note #2 to Marine Midland Bank dated as of
May 12, 1997............................................................ Exhibit 10.K to Report on
Form 10-K for fiscal year
ended June 30, 1997
Ex-10.F Promissory Note to Marine Midland Bank dated as of May
12, 1997................................................................ Exhibit 10-L to Report on
Form 10-K for fiscal year
ended June 30, 1997
Ex-10.G Amendment No. 1 to the Loan and Security Agreement with Marine
Midland Bank dated as of May 28, 1998................................... Exhibit 10-M to Report in
Form 10-K for fiscal year
ended June 30, 1998
Ex.-10.H Term Loan Note to Marine Midland Bank dated as of May 28, 1998.......... Exhibit 10-N to Report in
Form 10-K For fiscal year
ended June 30, 1998
35
*Ex-10.I Amended and Restated Employment Agreement with Richard Soloway.......... E-1
*Ex-10.J Employment Agreement with Jorge Hevia.................................. Exhibit 10.R to Report in
Form 10-Q for period ended
March 31, 2001
Ex-10.K Amendment No. 2 to the Loan and Security Agreement with HSBC
Bank dated as of June 30,2001........................................... Exhibit 10.S to Report on
Form 10-K for fiscal year
ended June 30, 2001
*Ex-10.L Employment Agreement with Michael Carrieri.............................. Exhibit 10.U to Report on
Form 10-Q For fiscal quarter
ended September 30, 2001
*Ex-10.M Indemnification Agreement dated August 9, 2001.......................... Exhibit 10.T to Report on
Form 10-K For fiscal year
ended June 30, 2001
Ex-10.N Asset Purchase Agreement................................................ Exhibit 2.1 to Report on
Form 8-K Filed July
27, 2002
Ex-10.O Amendment No. 4 to Loan and Security Agreement.......................... Exhibit 10.V to Report on
Form 8-K Filed July 27, 2002
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.W to Report on
Form 10-K for fiscal year
ended June 30, 2001
Ex-10.R Amendment No. 10 to the Loan and Security Agreement..................... E-11
36
Ex-14.0 Code of Ethics.......................................................... E-17
Ex-21.0 Subsidiaries of the Registrant.......................................... E-18
Ex-23.1 Consent of Independent Auditors......................................... E-19
Ex-23.2 Notice regarding consent of Arthur Andersen LLP......................... E-20
Ex-24.1 Power of Attorney....................................................... E-21
Ex-31.1 Section 302 Certification of Chief Executive Officer.................... E-22
Ex-31.2 Section 302 Certification of Chief Financial Officer.................... E-23
Ex-32.1 Certification of Chief Executive Officer Pursuant to 18 USC
Section 1350 and Section 906 of Sarbanes - Oxley Act of 2002............ E-24
Ex-32.2 Certification of Chief Financial Officer Pursuant to 18 USC
Section 1350 and Section 906 of Sarbanes - Oxley Act of 2002............ E-25
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended June
30, 2003.
37
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.
February 5, 2004
NAPCO SECURITY SYSTEMS, INC.
(Registrant)
By: /s/ RICHARD SOLOWAY By: /s/ KEVIN S. BUCHEL
------------------------------------- ----------------------------
Richard Soloway Kevin S. Buchel
Chairman of the Board of Senior Vice President of
Directors, President and Secretary Operations and Finance
(Principal Executive Officer) and Treasurer
(Principal Financial and
Accounting 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 February 5, 2004
- --------------------------- Board of Directors
Richard Soloway
/s/ KEVIN S. BUCHEL
- ---------------------------
Kevin S. Buchel Director February 5, 2004
/s/ RANDY B. BLAUSTEIN
- ---------------------------
Randy B. Blaustein Director February 5, 2004
/s/ARNOLD BLUMENTHAL
- ---------------------------
Arnold Blumenthal Director February 5, 2004
/s/DONNA SOLOWAY
- ---------------------------
Donna Soloway Director February 5, 2004
/s/ANDREW J. WILDER
- ---------------------------
Andrew J. Wilder Director February 5, 2004
38
NAPCO SECURITY SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
June 30, 2003 and 2002
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
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, 2003 and 2002, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended. In connection
with our audit of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. 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. The 2001 consolidated financial statements and
financial statement schedule of Napco Security Systems, Inc. as listed in the
accompanying index were audited by other auditors who have ceased operations.
Those auditors expressed an unqualified opinion on those financial statements
and financial statement schedule, before the revision included in Note 1 to the
financial statements, in their report dated September 28, 2001.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 2003 and 2002 financial statements referred to above present
fairly, in all material respects, the financial position of Napco Security
Systems, Inc. and subsidiaries as of June 30, 2003 and 2002, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, the related 2003 and 2002 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.
FS-1
As discussed above, the 2001 consolidated financial statements of Napco Security
Systems, Inc. as listed in the accompanying index, were audited by other
auditors who have ceased operations. As described in Note 1, these consolidated
financial statements have been revised to include the transitional disclosures
required by Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets", which was adopted by the Company as of July 1, 2001.
In our opinion, the disclosures for 2001 in Note 1 are appropriate. However, we
were not engaged to audit, review, or apply any procedures to the 2001 financial
statements of the Company other than with respect to such disclosures and,
accordingly, we do not express an opinion or any other form of assurance on the
2001 consolidated financial statements taken as a whole.
As discussed in Note 1, the Company's financial statements for the year ended
June 30, 2002 have been restated to reflect an adjustment of its income tax
provision related to the taxation of the Company's foreign subsidiary.
/s/ Marcum & Kliegman LLP
Woodbury, New York
January 26, 2004
FS-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Napco Security Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Napco Security
Systems, Inc. (a Delaware corporation) and subsidiaries as of June 30, 2001 and
2000, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three fiscal years in the period ended June 30,
2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes 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 financial statements referred to above present fairly, in
all material respects, the financial position of Napco Security Systems, Inc.
and subsidiaries as of June 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended June 30, 2001 in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
index to consolidated financial statements are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic consolidated financial statements. These schedules have been
subjected to the auditing procedures applied in our audits of the basic
consolidated financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Melville, New York
September 28, 2001
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with our filing on Form 10-K for the fiscal year ended June 30, 2001.
This audit report has not been reissued by Arthur Andersen LLP in connection
with this filing on Form 10-K. See Exhibit 23.2 for further discussion.
FS-3
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2003 and 2002
(In Thousands, Except Share Data)
ASSETS
2003 2002
------------------------------
(Restated-Note 1)
CURRENT ASSETS
Cash and cash equivalents $ 1,794 $ 1,500
Accounts receivable, less reserve for doubtful accounts
of $215 and $393, respectively 17,425 18,313
Inventories 16,922 18,963
Prepaid expenses and other current assets 525 913
Deferred income taxes 1,253 1,184
------- -------
Total Current Assets 37,919 40,873
Property, plant and equipment, net 9,466 9,964
Goodwill, net 9,686 9,686
Other assets 278 229
------- -------
TOTAL ASSETS $57,349 $60,752
======= =======
See accompanying notes to consolidated financial statements.
FS-4
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2003 and 2002
(In Thousands, Except Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2002
---------------------------
(Restated-Note 1)
CURRENT LIABILITIES
Current portion of long-term debt $ 1,900 $ 2,664
Accounts payable 3,374 2,672
Accrued expenses 1,812 2,337
Accrued salaries and wages 1,501 1,388
Accrued income taxes 489 --
-------- --------
Total Current Liabilities 9,076 9,061
Long-term debt 14,100 16,588
Deferred income taxes 816 575
-------- --------
Total Liabilities 23,992 26,224
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share; Authorized 21,000,000 shares; issued
6,069,752 and 6,004,252 shares, respectively; outstanding 3,198,696 and
3,383,196 shares, respectively 61 60
Additional paid-in capital 1,342 1,082
Retained earnings 39,813 38,803
Less: Treasury stock, at cost; 2,871,056 and 2,621,056
shares, respectively (7,859) (5,417)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 33,357 34,528
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 57,349 $ 60,752
======== ========
See accompanying notes to consolidated financial statements.
FS-5
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2003, 2002, and 2001
(In Thousands, Except Share Data and Per Share Data)
2003 2002 2001
--------------------------------------------------------
(Restated - Note 1)
Net sales $ 57,340 $ 55,836 $ 54,771
Cost of sales 41,939 41,119 40,454
----------- ----------- -----------
Gross Profit 15,401 14,717 14,317
Selling, general, and administrative expenses 13,176 11,900 12,458
----------- ----------- -----------
Operating Income 2,225 2,817 1,859
----------- ----------- -----------
Other income (expense):
Interest expense, net (727) (1,409) (1,816)
Other, net 127 (49) 183
----------- ----------- -----------
(600) (1,458) (1,633)
----------- ----------- -----------
Income Before Income Taxes 1,625 1,359 226
Provision (benefit) for income taxes 615 (216) (25)
----------- ----------- -----------
Net Income $ 1,010 $ 1,575 $ 251
=========== =========== ===========
Earnings per share:
Basic $ 0.30 $ 0.47 $ 0.07
Diluted $ 0.28 $ 0.45 $ 0.07
Weighted average number of shares outstanding
Basic 3,332,000 3,342,000 3,464,000
Diluted 3,584,000 3,492,000 3,527,000
See accompanying notes to consolidated financial statements.
FS-6
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 2003, 2002, and 2001
(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 - July 1, 2000 5,917,352 $ 59 $ 772 $ 36,977 2,418,451 $ (4,449) $ 33,359
Purchase of treasury shares -- -- -- -- 153,805 (725) (725)
Exercise of employee stock options 21,500 -- 59 -- -- -- 59
Net income -- -- -- 251 -- -- 251
--------- --------- --------- --------- --------- --------- ---------
BALANCE - June 30, 2001 5,938,852 59 831 37,228 2,572,256 (5,174) 32,944
Purchase of treasury shares -- -- -- -- 48,800 (243) (243)
Exercise of employee stock options 65,400 1 251 -- -- -- 252
Net income (Restated - Note 1) -- -- -- 1,575 -- -- 1,575
--------- --------- --------- --------- --------- --------- ---------
BALANCE - June 30, 2002
(Restated - Note 1) 6,004,252 60 1,082 38,803 2,621,056 (5,417) 34,528
Purchase of treasury shares -- -- -- -- 250,000 (2,442) (2,442)
Exercise of employee stock options 65,500 1 260 -- -- -- 261
Net income -- -- -- 1,010 -- -- 1,010
--------- --------- --------- --------- --------- --------- ---------
BALANCE - June 30, 2003 6,069,752 $ 61 $ 1,342 $ 39,813 2,871,056 $ (7,859) $ 33,357
========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
FS-7
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2003, 2002, and 2001
(In Thousands)
2003 2002 2001
------------------------------------------
(Restated Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,010 $ 1,575 $ 251
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,294 1,529 2,032
Provision for doubtful accounts 16 45 78
Deferred income taxes 173 (117) (69)
Changes in operating assets and liabilities, net of
affect from acquisition of business resulting from
increases and decreases in:
Accounts receivable 872 (1,418) 1,702
Inventories 2,041 4,271 (3,159)
Prepaid expenses and other current assets 366 4 217
Other assets (90) 167 (77)
Accounts payable, accrued expenses, accrued
salaries and wages, and accrued income taxes 800 1,035 351
-------- -------- --------
Net Cash Provided By Operating Activities 6,482 7,091 1,326
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business, net of cash acquired -- -- (7,248)
Purchases of property, plant, and equipment, net (752) (709) (1,035)
-------- -------- --------
Net Cash Used In Investing Activities (752) (709) (8,283)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (7,505) (6,128) (4,774)
Proceeds from long-term debt 4,250 200 11,050
Purchase of treasury shares (2,442) (243) (725)
Proceeds from exercise of employee stock options 261 252 59
-------- -------- --------
Net Cash (Used In) Provided By Financing
Activities (5,436) (5,919) 5,610
-------- -------- --------
Net Increase (Decrease) In Cash and
Cash Equivalents 294 463 (1,347)
CASH AND CASH EQUIVALENTS - Beginning 1,500 1,037 2,384
-------- -------- --------
CASH AND CASH EQUIVALENTS - Ending $ 1,794 $ 1,500 $ 1,037
======== ======== ========
See accompanying notes to consolidated financial statements.
FS-8
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2003, 2002, and 2001
(In Thousands)
2003 2002 2001
-----------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net $ 733 $1,403 $2,121
Income taxes paid $ 15 $ 10 $ 21
See accompanying notes to consolidated financial statements.
FS-9
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. All
intercompany balances and transactions have been eliminated in
consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform with
current year presentation.
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 $223,000 and $306,000
of short-term time deposits at June 30, 2003 and 2002, 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, 2003 and 2002.
Inventories
Inventories are valued at the lower of cost (using the first-in,
first-out method) or market.
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
Property, Plant, and Equipment
Property, plant, and equipment is 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
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. The provisions of SFAS No. 141 apply to all business
combinations initiated after June 30, 2001. In accordance with SFAS No.
142, intangible assets, including purchased goodwill, must be evaluated
for impairment. Those intangible assets that will continue to be
classified as goodwill or as other intangibles with indefinite lives
are no longer amortized.
In accordance with SFAS No. 142, the Company completed its transitional
impairment testing of intangible assets during the first quarter of
fiscal 2002. That effort, and preliminary assessments of the Company's
identifiable intangible assets, indicated that no adjustment would be
required upon adoption of this pronouncement. The 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 adoption of this statement
resulted in the exclusion of approximately $503,000 in amortization
expense for the fiscal years ended June 30, 2003 and 2002. The Company
has performed its annual impairment evaluation required by this
standard and determined that the goodwill is not impaired.
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
Goodwill, continued
The following table presents adjusted net earnings and earnings per
share data restated to include the retroactive impact of the adoption
of SFAS No. 142:
Year Ended
(In thousands, except per share data) June 30, 2001
- --------------------------------------------------------------------------------------------
Reported net income $ 251
Add back: Goodwill amortization, net of tax 467
-----
Pro Forma Net Income $ 718
=====
Basic net earnings per common share:
Reported net earnings per share
before SFAS No. 142 $0.07
SFAS No. 142 effect, net of tax 0.14
-----
Pro forma Net Earnings Per Share $0.21
=====
Diluted net earnings per common share:
Reported net earnings per share
before SFAS No. 142 $0.07
SFAS No. 142 effect, net of tax 0.13
-----
Pro forma Net Earnings Per Share $0.20
=====
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.
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
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, 2003, 2002 and 2001 was $1,336,000, $1,084,000 and
$972,000, 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 $4,516,000, $4,239,000 and $4,220,000 were charged
to expense for the fiscal years ended June 30, 2003, 2002 and 2001,
respectively and are included in "Selling, General and Administrative"
expenses 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 will be subject to taxation in the United
States on a going forward basis.
Prior Period Adjustment
The Company's financial statements for the year ended June 30, 2002
have been restated to reflect an adjustment of its income tax provision
related to the taxation of one of the Company's foreign subsidiaries,
Napco DR. As further described in Note 6, in March 2003, the Company
made an election with the filing of its income tax return for the
fiscal year ended June 30, 2002. As a result, the tax provision and
related deferred tax balance sheet accounts have been restated. The
effect of this restatement for the fiscal year ended June 30, 2002 is
as follows:
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
Prior Period Adjustment
June 30, 2002
-------------------------------------
As Previously As
Reported Restated
-------------------------------------
(In thousands, except per share data)
Balance Sheet
Deferred income taxes- asset $ 1,032 $ 1,184
Deferred income taxes- liability 539 575
Total stockholders' equity 34,294 34,528
Statement of Income
Provision (benefit) for income taxes $ 18 $ (216)
Net income 1,341 1,575
Earnings per share- basic 0.40 0.47
Earning per share- diluted 0.38 0.45
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
-------------------------------------------------------------------------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ---- ---- ---- ----
Basic EPS: $1,010 $1,575 $251 3,332 3,342 3,464 $ 0.30 $ 0.47 $0.07
Effect of Dilutive
Securities:
Employee stock
options -- -- -- 252 150 63 (0.02) (0.02) --
------ ------ ---- ----- ----- ----- ------ ------ -----
Diluted EPS: $1,010 $1,575 $251 3,584 3,492 3,527 $ 0.28 $ 0.45 $0.07
====== ====== ==== ===== ===== ===== ====== ====== =====
Options to purchase 28,000, 25,000 and 149,500 shares of common stock for
the three fiscal years ended June 30, 2003, 2002 and 2001, 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.
FS-14
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business and Summary of Significant Accounting Policies,
continued
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.
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,
2003 2002 2001
---------- ---------- ----------
(In thousands, except per share data)
Net income, as reported $ 1,010 $ 1,575 $ 251
Deduct: Total stock-based employee compensation
expense determined under fair value method for
all awards, net of related tax effects 329 376 265
---------- ---------- ----------
Pro forma net income $ 681 $ 1,199 $ (14)
========== ========== ==========
Earnings per common share:
Net earnings per common share - Basic, as reported $ 0.30 $ 0.47 $ 0.07
========== ========== ==========
Net earnings per common share - Basic, pro forma $ 0.20 $ 0.36 $ 0.00
========== ========== ==========
Net earnings per common share - Diluted, as reported $ 0.28 $ 0.45 $ 0.07
========== ========== ==========
Net earnings per common share - Diluted, pro forma $ 0.19 $ 0.34 $ 0.00
========== ========== ==========
FS-15
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business and Summary of Significant Accounting Policies,
continued
Stock-Based Compensation, continued
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:
2003 2002 2001
------- ------- -------
Risk-free interest rates 2.71% 3.50% 6.06%
Expected lives 5 years 5 years 5 years
Expected volatility 42% 43% 42%
Expected dividend yields 0% 0% 0%
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, 2003.
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, 2003, 2002 and 2001, 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 12, and no
additional segment data has been presented.
FS-16
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business and Summary of Significant Accounting Policies,
continued
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,
2003 and 2002, management of the Company believes the carrying value of
all financial instruments approximated fair value.
Shipping and Handling Revenues and Costs
In July 2000, the Emerging Issues Task Force (EITF) reached a consensus
with respect to EITF Issue No. 00-10, Accounting for Shipping and
Handling Revenues and Costs. The consensus reached was that all
shipping and handling billed to customers is 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. This standard required
a restatement of prior periods for changes in classification. Beginning
fiscal 2001, the Company records the amount billed to customers in net
sales and classifies the costs associated with these revenues in cost
of sales.
Derivative Instruments and Hedging Activities
Effective July 1, 2000, the Company adopted 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. These statements established 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.
FS-17
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business and Summary of Significant Accounting Policies,
continued
New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board (FASB) issued
SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS No. 150
established standards for classifying and measuring certain financial
instruments with characteristics of both liabilities and equity. It
specifically requires that mandatorily redeemable instruments,
instruments with obligations to issue a variable number of the issuer's
own equity shares, be classified as a liability. Initial and subsequent
measurements of the instruments differ based on the characteristics of
each instrument and as provided for in the statement. SFAS No. 150 is
effective for all freestanding financial instruments entered into or
modified after May 31, 2003 and otherwise became effective at the
beginning of the first interim period beginning after June 15, 2003.
The adoption of SFAS No. 150 will have no impact on the Company's
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45
requires that the guarantor recognize, at the inception of certain
guarantees, a liability for the fair value of the obligation undertaken
in issuing such guarantee. FIN 45 also requires additional disclosure
requirements about the guarantor's obligations under certain guarantees
it has issued. The initial recognition and measurement provisions of
this interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements
of this interpretation are effective for financial statement periods
ending after December 15, 2002. The Company adopted the disclosure
requirements of this interpretation in the fiscal quarter ended March
31, 2003. The adoption of this interpretation did not have a material
impact on its consolidated balance sheet, results of operations or cash
flows. The Company recognizes the estimated cost associated with its
standard warranty on products at the time of sale. The estimate is
based on historic as well as current return rates and experience. The
changes in the Company's accrued warranty obligation for the period was
immaterial.
In January 2003, as revised December 2003, the FASB issued
Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. FIN 46 requires certain
variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities
without additional financial support from other parties. FIN 46 is
effective for the periods ending after December 15, 2003 for certain
types of entities and after March 15, 2004 for other types of entities.
The Company does not expect the adoption of FIN 46 will have a material
effect on its consolidated financial statements.
FS-18
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Acquisition of Business
On July 27, 2000, the Company acquired Continental Instruments LLC
(Continental), a manufacturer and distributor of access control and
security management systems. This acquisition was accounted for by the
purchase method and was valued based on management's estimate of the
fair value of the assets acquired and liabilities assumed at the date
of the acquisition. The purchase price was $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 a period
of 24 months. The acquisition was financed by an $8,250,000 loan from
the Company's primary lender, to be repaid in 60 equal monthly
installments. The loan is secured by a mortgage, guarantees, and other
collateral. The excess of the aggregate purchase price over the fair
value of net assets acquired of approximately $7,768,000 has been
allocated to goodwill.
NOTE 3 - Business and Credit Concentrations
The Company had two customers (Customer A and B) with accounts
receivable balances that aggregated 44% and 43% of the Company's
accounts receivable at June 30, 2003 and 2002, respectively. The
Company had one distributor customer (Customer A) that accounted for
19%, 17% and 18% of the Company's net sales in fiscal 2003, 2002 and
2001, respectively. During the past three fiscal years no other
customer represented more than 10% of the Company's net sales.
NOTE 4 - Inventories
Inventories consist of the following:
June 30
-----------------------
2003 2002
---------- ----------
(In thousands)
Component parts $ 9,626 $ 10,583
Work-in-process 2,443 3,308
Finished products 4,853 5,072
---------- ----------
$ 16,922 $ 18,963
========== ==========
FS-19
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - Property, Plant, and Equipment
Property, plant and equipment consist of the following:
Useful Life
June 30 In years
--------------------- ---------------------
2003 2002
-------- ---------
(In thousands)
Land $ 904 $ 904 --
Buildings 8,911 8,911 30 to 40
Molds and dies 4,360 4,197 3 to 5
Furniture and fixtures 1,223 1,141 5 to 10
Machinery and equipment 11,823 11,316 7 to 10
Shorter of the lease
Leasehold improvements 191 191 term or life of asset
-------- ---------
27,412 26,660
Less: accumulated depreciation
and amortization 17,946 16,696
-------- ---------
$ 9,466 $ 9,964
======== =========
Depreciation and amortization expense on property, plant, and equipment
was approximately $1,254,000, $1,408,000 and $1,510,000 in fiscal 2003,
2002 and 2001, respectively.
NOTE 6 - Income Taxes
Provision (benefit) for income taxes consists of the following:
For the Years Ended June 30
-------------------------------------
2003 2002 2001
---------- ---------- ----------
(In thousands)
Current income taxes:
Federal $ 428 $ -- $ --
State -- -- 21
Foreign 15 51 23
---------- ---------- ----------
443 51 44
Deferred income tax (benefit) 172 (267) (69)
---------- ---------- ----------
Provision (benefit) for income taxes $ 615 $ (216) $ (25)
========== ========== ==========
FS-20
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Income Taxes, continued
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
----------------------------------------------------------------
2003 2002 2001
------------------ ------------------ ------------------
% of % of % of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
------- ------- ------- ------- ------- -------
Tax at Federal statutory rate $ 553 34.0% $ 462 34.0% $ 77 34.0%
Increases (decreases) in
taxes resulting from:
State income taxes, net of
Federal income tax benefit -- -- -- -- (202) (89.4)
Meals and entertainment 55 3.4 46 3.3 46 20.3
Amortization of
nondeductible goodwill -- -- -- -- 36 15.9
Foreign source income
and taxes 19 1.1 2,234 164.3 (890) (393.8)
Valuation allowance -- -- (2,913) (214.2) 830 367.3
Other, net (12) (.7) (45) (3.3) 78 34.6
------- ------- ------- ------- ------- -------
Provision (benefit) for
income taxes $ 615 37.8% $ (216) (15.9)% $ (25) (11.1)%
======= ======= ======= ======= ======= =======
Deferred tax assets and deferred tax liabilities at June 30, 2003 and
2002 are as follows (in thousands):
Current Long-Term
Deferred Tax Assets Deferred Tax Assets
(Liabilities) (Liabilities)
2003 2002 2003 2002
---------- ---------- ---------- ----------
Accounts receivable $ 108 $ 123 $ -- $ --
Inventories 847 736 -- --
Accrued liabilities 249 227 -- --
Goodwill -- -- (338) (169)
Property, plant and equipment -- -- (478) (455)
Alternative minimum tax credit 49 98 -- 49
---------- ---------- ---------- ----------
Net deferred taxes $ 1,253 $ 1,184 $ (816) $ (575)
========== ========== ========== ==========
FS-21
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Income Taxes, continued
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 is based on a 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 recently enacted Code
provision provides an exemption for applicable corporations. The
Company qualifies as an applicable corporation per this Code section,
and based on this Code exemption, the Company's tax return 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. Management
believes that it has appropriately relied on the guidance in the Code
when filing its income tax return. Nevertheless, as of June 30, 2002,
the Company has removed the $2,225,000 deferred tax asset related to
its net operating loss carryforward ("NOL") of $6,545,000. The NOL
would have expired through 2017. As a result of the utilization of the
NOL for book purposes, the Company has also eliminated the valuation
allowance of $2,913,000 during the year ended 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.
The 1998 through 2002 income tax returns of the United Kingdom
subsidiary were examined by the United Kingdom Inland Revenue. The
resultant tax liability of $33,000 most of which relates to 1999, is
reflected in the revised June 30, 2002 financial statements.
NOTE 7 - Long-Term Debt
Long-term debt consists of the following:
June 30
-----------------------
2003 2002
---------- ----------
(In thousands)
Revolving credit and term loan facility (a) $ 11,513 $ 13,013
Notes payable (b) -- 500
Term loan (c) 3,300 5,225
Term loan (d) 1,187 --
Deferred acquisition costs, net (e) -- 514
---------- ----------
16,000 19,252
Less: current portion 1,900 2,664
---------- ----------
$ 14,100 $ 16,588
========== ==========
FS-22
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - Long-Term Debt, continued
(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, 2003, the interest rate on this debt was
2.93%. The revolving credit agreement will expire in January 2005
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, as
defined in the agreement. As of June 30, 2003, the Company was not
in compliance with one covenant related to the agreement described
above for which it has received a waiver from its bank.
(b) In connection with the stock purchase agreement described in Note
9, the Company entered into a term-loan facility in May 1998 with
its primary bank for a $2,500,000 term loan. Under the terms of the
note, the loan was to be repaid in 60 equal monthly installments of
$41,667, plus interest at 7.94%, beginning on July 1, 1998. The
Company made its final payment during fiscal 2003.
In addition, the Company entered into a four-year term loan in the
amount of $1,947,880 with its former president in connection with
the stock purchase agreement. This note bears interest at 8% and
payments began in April 1999. The Company made its final payment
during fiscal 2003.
(c) 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 is to be repaid in 60 equal monthly
installments of $137,500, plus interest. 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, as defined in the agreement. As of June 30, 2003,
the Company was not in compliance with one covenant related to the
agreement described above for which it has received a waiver from
its bank.
The Company entered into an interest rate swap agreement to
exchange floating rate for fixed rate interest payments
periodically over the life of this agreement. The interest rate
swap was designated as a cash flow hedge and the difference between
interest paid and received was included as a component of interest
expense. The swap contract had a fixed interest rate of 8.68% and
terminated on October 30, 2002. The debt instrument bears interest
at either the Prime Rate or an alternate rate based on LIBOR as
described in the agreement. At June 30, 2003 the interest rate on
the debt was 3.41%
FS-23
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - Long-Term Debt, continued
(d) In connection with the treasury stock repurchase described in Note
9, the Company entered into a five year $1,250,000 term loan from
its primary bank. Under this agreement, the loan is to be repaid in
60 equal monthly installments of $20,833, plus interest at a
variable rate as defined. At June 30, 2003, the interest rate on
this debt was 3.28%.
(e) In connection with the Continental acquisition described in Note 2,
the Company was required to make four scheduled future payments to
the former owner, beginning on January 27, 2001 with a final
payment, which was made on July 27, 2002. These payments were
recorded at their present value using an interest rate of 7%. The
difference between the present value and face value of the payments
was accounted for as a debt discount and accreted to interest
expense over the term of the payments.
Maturities of long-term debt are as follows:
Year Ending
June 30 Amount
- ----------- -------
(In thousands)
2004 $ 1,900
2005 13,413
2006 250
2007 250
2008 187
-------
Total $16,000
=======
NOTE 8 - 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 816,000 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, 2003, there
were 491,000 stock options granted to employees and directors of which
395,000 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 which would allow up to an aggregate of 340,000
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, officers and employee directors. 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-24
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Stock Options, continued
Under the 2002 Plan, stock options have been granted to employees and
directors for terms of up to 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, 2003,
151,000 stock options were granted, 189,000 stock options were
available for grant, and 30,000 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
------------------------------------------------------------------
2003 2002 2001
-------------------- -------------------- --------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year 558,700 $ 3.71 576,850 $ 3.51 499,850 $ 3.33
Granted 161,000 9.80 56,000 5.95 109,500 4.18
Exercised (65,500) 3.98 (65,400) 3.85 (22,000) 2.64
Forfeited (3,000) 3.88 (2,000) 3.88 (6,000) 3.79
Canceled/lapsed (9,000) 3.88 (6,750) 3.87 (4,500) 2.64
-------- -------- -------- -------- -------- --------
Outstanding at end of year 642,200 $ 5.21 558,700 $ 3.71 576,850 $ 3.51
======== ======== ======== ======== ======== ========
Exercisable at end of year 425,200 $ 3.92 365,980 $ 3.49 312,610 $ 3.47
======== ======== ======== ======== ======== ========
Weighted average fair value of
options granted $ 3.90 $ 2.45 $ 1.76
The following table summarizes information about stock options
outstanding at June 30, 2003:
Options outstanding Options exercisable
-------------------------------------- ------------------------
Weighted
average Weighted Weighted
Number remaining average Number average
outstanding at contractual exercise exercisable at exercise
Range of exercise prices June 30, 2003 life price June 30, 2003 price
- ------------------------ -------------- ----------- -------- ------------- --------
$3.00 to $3.86 312,900 0.8 $ 3.07 295,100 $ 3.07
$3.87 to $3.99 43,200 2.0 3.88 25,400 3.88
$4.00 to $6.38 125,100 2.5 5.09 72,500 4.83
$6.39 to $10.16 161,000 4.8 9.80 32,200 9.80
------------- ----------- -------- ------------- --------
642,200 2.23 $ 5.21 425,200 $ 3.92
============= =========== ======== ============= ========
FS-25
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - 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 50,000 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, 2003, 2002 and 2001, 40,000
options were granted to directors with a weighted average exercise
price of $4.13 and a weighted average remaining contractual life of 2.2
years. There were no options exercised, cancelled, or forfeited under
the 2000 Plan during the years ended June 30, 2003, 2002 and 2001. As
of June 30, 2003, 2002 and 2001 respectively, 24,000, 16,000 and 8,000
stock options were exercisable under this plan. No compensation expense
was recorded for stock options granted to directors.
NOTE 9 - Stock Purchase
On May 28, 1998, the Company entered into a stock purchase agreement
with its former president, which called for the purchase by the Company
of all the shares of the Company's common stock held by the former
president (889,576 shares) at a price of $5 per share, in connection
with the former president's retirement. The agreement also contained
consulting and noncompete agreements, each with a period of ten years.
Upon closing, $2,500,000 of the purchase price was paid to the former
president with the proceeds of the term loan described in note 7(b).
The remaining purchase price was paid over a 4 year period according to
the terms of a note issued to the former president. The common stock
purchased is included in treasury stock as of June 30, 2003 and 2002.
In January 2003, the Company repurchased 250,000 shares of its common
stock from two stockholders, unaffiliated with the Company, at $9.75
per share, a discount from its then current trading price of $10.01.
The transaction was approved by the board of directors and the purchase
price of $2,437,500 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 is being repaid in 60 equal monthly
installments commencing on April 30, 2003.
FS-26
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - 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
$73,000, $70,000, and $63,000 for the fiscal years ended 2003, 2002 and
2001, respectively.
NOTE 11 - 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
- ----------- --------
2004 $139,000
2005 96,000
2006 77,000
2007 43,000
2008 35,000
Thereafter 62,000
--------
Total $452,000
========
Rent expense, with the exception of the land lease referred to below,
totaled approximately $321,000, $319,000 and $432,000 for the three
fiscal years ended June 30, 2003, 2002 and 2001, 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, 2003, the Company was committed for approximately $464,000
under open commercial letters of credit.
FS-27
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Commitments and Contingencies, continued
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 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.
Employment Agreements
As of June 30, 2003, the Company was obligated under four employment
agreements and one severance agreement. Compensation under the
agreements includes annual salaries approximating $1,047,000. 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 $453,000, 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 12 - 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.
FS-28
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - Geographical Data, continued
The Company observes the provisions of SFAS No. 131. The following
represents selected consolidated geographical data for the fiscal years
ended June 30, 2003, 2002, and 2001:
2003 2002 2001
-------- -------- --------
(In thousands)
Sales to external customers(1):
Domestic $ 47,965 $ 46,652 $ 44,819
Export 9,375 9,184 9,952
-------- -------- --------
$ 57,340 $ 55,836 $ 54,771
======== ======== ========
Identifiable assets:
United States $ 39,005 $ 40,955 $ 38,282
Foreign(2) 18,344 19,797 25,395
-------- -------- --------
$ 57,349 $ 60,752 $ 63,677
======== ======== ========
(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-29
SCHEDULE II
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended June 30, 2003, 2002, and 2001
(In Thousands)
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Balance at
beginning of costs and end of
Description period expenses Deductions (1) period
- ---------------------------------------------------------------------------------------------------------------------------------
For the year ended June 30, 2001:
Allowance for doubtful accounts
(deducted from accounts receivable) $ 622 $ 78 $ -- $ 700
For the year ended June 30, 2002:
Allowance for doubtful accounts
(deducted from accounts receivable) $ 700 $ 45 $ 352 $ 393
For the year ended June 30, 2003:
Allowance for doubtful accounts
(deducted from accounts receivable) $ 393 $ 16 $ 194 $ 215
(1) Deductions relate to uncollectible accounts charged off to valuation
accounts, net of recoveries.
See accompanying independent auditor's report.
FS-30
Index to Exhibits
Ex-10.I Amended and Restated Employment Agreement with Richard Soloway E-1
Ex-10.R Amendment No. 10 to the Loan and Security Agreement E-11
Ex-14.0 Code of Ethics E-17
Ex-21.0 Subsidiaries of the Registrant E-18
Ex-23.1 Consent of Independent Auditors E-19
Ex-23.2 Notice regarding consent of Arthur Andersen LLP E-20
Ex-24.1 Power of Attorney E-21
Ex-31.1 Section 302 Certification of Chief Executive Officer E-22
Ex-31.2 Section 302 Certification of Chief Financial Officer E-23
Ex-32.1 Certification of Chief Executive Officer Pursuant to 18 USC Section 1350
and Section 906 of Sarbanes - Oxley Act of 2002 E-24
Ex-32.2 Certification of Chief Financial Officer Pursuant to 18 USC Section 1350
and Section 906 of Sarbanes - Oxley Act of 2002 E-25
E-i