NAPCO SECURITY SYSTEMS INC, 10-K, 1996-10-15

NAPCO SECURITY SYSTEMS INC
10-K, 1996-10-15
COMMUNICATIONS EQUIPMENT, NEC

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<PAGE> 1
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 [Fee Required]
For the fiscal year ended June 30, 1996

[ ] 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:
(516) 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 X No

As of September 20, 1996, 4,367,727 shares of Common Stock were
outstanding, and the aggregate market value of the stock (based upon the last
sale price of the stock on such date) held by non-affiliates was approximately
$17,470,908.

Documents Incorporated by Reference: Portions of the Registrant's Proxy
Statement in connection with its 1996 Annual Meeting of Stockholders are
incorporated by reference in Part III.

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. [ ]
<PAGE> 2
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

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 predesignated telephone numbers. If programmed to do so, a
digital communicator dials the telephone number of a central monitoring station
and communicates in computer language to a digital communicator receiver, which
prints out an alarm message.

Control Panels. A control panel is the "brain" of an alarm system. When
activated by any one of the various types of intrusion detectors, it can
activate an audible alarm and/or various types of communication devices. For
marketing purposes, the Company refers to its control panels by the trade name,
generally "Magnum AlertTM" followed by a numerical designation.

Combination Control Panels/Digital Communicators and Digitkey 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

2
<PAGE> 3
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 micro-computer 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 ranging from simple dead bolt locks to door alarms.

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 infra-red
heat detectors and combination microwave/ passive infra-red detectors that are
linked to alarm control panels. Passive infra-red 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, 1996, 1995, and 1994, the
Company expended approximately $3,296,000, $3,252,000, and $2,883,000,
respectively, on Company- sponsored research and development activities
conducted by its engineering department and outside consultants. Substantially
all of the Company's research and development activities during fiscal 1996,
1995 and 1994 were 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, 1996, the Company had approximately 990 full-time
employees.

Marketing and Major Customers

The Company's staff of approximately 36 sales and marketing support
employees located at the Company's headquarters sells and

3
<PAGE> 4
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 85% of the Company's total
sales for the fiscal year ended June 30, 1996. 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 cities. Some of the Company's
products are marketed under the "private label" of certain customers.

Sales to A.D.T., Ademco Distribution (A.D.I.), and King Alarm, each
unaffiliated with the Company, together accounted for approximately 42% and 39%
of the Company's total sales for the fiscal years ended June 30, 1996 and 1995
(see footnote 10 to Notes to Consolidated Financial Statements as to percentage
breakdown). The loss of any of these customers could have a material adverse
effect on the Company's business.

Competition

The security alarm products industry is highly competitive. The
Company's primary competitors are comprised of approximately 30 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 price 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, 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 products have become available in past 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.

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<PAGE> 5
Raw Materials and Backlog

The Company prepares specifications for component parts used in the
Products and purchases the components from outside sources or fabricates the
component part 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 backlog of approximately $5,300,000 existed as of June 30, 1996,
partially due to several large orders received during the fourth quarter. This
compared to a backlog of approximately $5,152,000 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

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.

Foreign Sales

The revenues, operating income and identifiable assets attributable to
the foreign and domestic operations of the Company for its last three fiscal
years, and the amount of export sales in the aggregate, are summarized in the
following tabulation.

5
<PAGE> 6
Financial Information Relating to Foreign
and Domestic Operations and Export Sales(1)

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Sales to unaffiliated
customers:
United States $49,088 $48,078 $46,873
Foreign 0 0 0

Operating income:
United States $ 2,928 $2,331 $ 2,216
Foreign 0 0 0

Sales or transfers between
geographic areas: $28,588 $36,023 $36,507

Identifiable assets:
United States $33,084 $36,031 $31,297
Foreign $24,235 $19,708 $22,513

Export sales:
United States(2) $ 8,915 $ 8,865 $ 7,795
</TABLE>

ITEM 2. PROPERTIES.

The Company has 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 constructed this facility with the proceeds
from an industrial revenue bond financing in 1985.

The Company's foreign subsidiary, NSS Caribe, S.A., is located in the
Dominican Republic where it owns a building of approximately 167,000 square feet
of production and warehousing space. That subsidiary also leases the land
associated with this building under a 99 year lease expiring in the year 2092.
- --------
(1) Certain prior year amounts have been reclassified to conform to
current year presentation.

(2) Export sales from the United States in fiscal year 1996 included sales of
approximately $4,888,000 and $2,224,000 to Europe and North America,
respectively. Export sales from the United States in fiscal year 1995 included
sales of approximately $5,038,000 and $1,523,000 to Europe and North America,
respectively.

6
<PAGE> 7
As of June 30, 1996, most of the Company's sales related to labor on assemblies,
goods and subassemblies at these sites, utilizing U.S. quality control
standards.

Management believes that these facilities are more than adequate to
meet the needs of the Company in the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS.

There are no pending or threatened material legal proceedings to which
NAPCO or its subsidiaries or any of their property is subject, other than as
follows:

In May, 1995 the Company was advised of an unexpected Chapter 7
bankruptcy filing of one of its customers. As a result of anticipated cash
recoveries, management is confident that the Company's allowance for doubtful
accounts at June 30, 1996 is sufficient and that this bankruptcy filing will not
have a material adverse effect on the Company's financial position or results of
operations.

In August 1995, the Internal Revenue Service informed the Company that
it had completed the audit of the Company's Federal tax returns for fiscal years
1987 through 1992. The Internal Revenue Service has issued a report to the
Company proposing adjustments that would result in taxes due of approximately
$4.3 million, excluding interest charges. The primary adjustments presented by
the Internal Revenue Service relate to intercompany pricing and royalty charges,
DISC earnings and charitable contributions. The Company disagrees with the IRS
and intends to vigorously appeal this assessment using all remedies and
procedural actions available under the law. The Company believes that it has
provided adequate reserves at June 30, 1996 to address the ultimate resolution
of this matter, so that it will not have a material impact on the Company's
consolidated financial statements. (See Note 4 to Consolidated Financial
Statements.)

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

7
<PAGE> 8
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY HOLDER 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, which has
facilitated the development of an established public trading market for the
Common Stock. 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.

<TABLE>
<CAPTION>
Quarter Ended
Fiscal 1996

Sept. 30 Dec. 31 March 31 June 30
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Common Stock

High $3.13 $4.00 $4.13 $4.50

Low $2.00 $2.25 $3.00 $3.38

Quarter Ended
Fiscal 1995

Sept. 30 Dec. 31 March 31 June 30
-------- ------- -------- -------

Common Stock

High $4.00 $4.00 $2.95 $4.75

Low $3.00 $2.63 $2.25 $3.13
</TABLE>

Approximate Number of Security Holders

The number of holders of record of NAPCO's Common Stock as of September
23, 1996 was 272 (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.

8
<PAGE> 9
ITEM 6. SELECTED FINANCIAL DATA.

NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
OPERATIONS
Revenue $49,088 $48,078 $46,873 $46,560 $38,816
Gross Profit 11,302 11,325 11,068 11,925 9,623
Provision for
(recovery of)
Income Taxes 515 532 37 (32) (796)
Net Income 1,014 512 1,254 2,317 1,406
Net Income per share .23 .12 .29 .53 .32
Cash Dividends per
Share 0 0 0 0 0
</TABLE>

<TABLE>
<CAPTION>
As of June 30
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION
Total Assets $57,319 $55,739 $53,810 $51,233 $45,475
Long-term Debt 14,150 16,275 13,690 6,567 7,950
Working Capital 28,676 28,660 28,033 19,936 19,038
Stockholders' Equity 29,574 28,560 28,048 26,793 24,474
Stockholders' Equity
per Outstanding
Share 6.77 6.54 6.42 6.14 5.60
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash on hand combined with proceeds from operating
activities during fiscal 1996 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 $2,000,000 short-term line of credit
and an $11,000,000 secured revolving credit and term loan facility with two
banks. 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

- ---------------

(1) The Company has never declared or paid a cash dividend on its common
stock. It is the policy of the Board of Directors to retain earnings for use in
the Company's business.

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<PAGE> 10
generated from operations. As of June 30, 1996, the Company's unused sources of
funds consisted principally of $426,000 in cash and approximately $425,000
(after direct borrowings, commercial letters of credit and stand-by letters of
credit) which represent the unused portion of its secured short-term borrowing
facility.

On July 27, 1994, the Company entered into an $11,000,000 secured
revolving credit and term loan facility with two banks, with the Company's
primary bank acting as agent. The revolving credit loan, which bears interest
based upon a number of options available to the Company and does not require
principal payments until conversion, converts to a term loan on June 30, 1997
payable in sixteen (16) equal quarterly installments beginning on September 30,
1997.

In addition, a subsidiary of the Company maintains a $4,500,000 line of
credit with another bank, $3,375,000 of which was outstanding as of June 30,
1996 (see Note 6 to the Consolidated Financial Statements).

The Company takes into consideration a number of factors in measuring its
liquidity, including the ratios set forth below:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current Ratio 3.2 to 1 3.5 to 1 3.3 to 1

Sales to Receivables 3.6 to 1 3.5 to 1 3.2 to 1

Total Debt to Equity .9 to 1 1 to 1 .9 to 1
</TABLE>

In fiscal 1988, the Company completed construction of a new
manufacturing and administrative facility financed by a $3.9 million industrial
revenue bond issue bearing interest at a variable rate determined weekly by the
underwriting bank based upon market conditions. During fiscal 1996, the average
interest rate was approximately 3.45% per annum. The bonds have a maturity date
of April 1, 2000, subject to quarterly sinking fund payments.

On April 26, 1993, the Company's foreign subsidiary entered into
a 99-year land lease of approximately 4 acres of land near its former facility
in the Dominican Republic, at an annual cost of approximately $272,000.

10
<PAGE> 11
As of June 30, 1996, the Company had no material commitments for
purchases or capital expenditures.

Working Capital. Working capital increased by $16,000 to
$28,676,000 at June 30, 1996 from $28,660,000 at June 30, 1995. This was
primarily due to an increase in accounts payable and accrued expenses, which was
a result of increased inventories on new product lines. This was partially
offset by reductions in short term debt and increased accounts receivable.

Accounts Receivable. Accounts receivable increased by $112,000 to
$13,759,000 at June 30, 1996 from $13,647,000 at June 30, 1995. This increase is
primarily the result of higher sales in June 1996 as compared to June 1995 as
partially offset by improved collection procedures.

Inventory. Inventory increased by $1,766,000 to $25,944,000 at
June 30, 1996 as compared to $24,178,000 at June 30, 1995. This increase is due
primarily to the effect of the Company's building up of inventory levels in
conjunction with the introduction of several new product lines, including the
wireless program, the new Digital Lock product line and wireless product related
to a large contract the Company received.

Accounts Payable and Accrued Expenses. Accounts payable and
accrued expenses increased by $2,927,000 to $7,700,000 at June 30, 1996 from
$4,773,000 at June 30, 1995. This increase is primarily the result of increased
inventories as described above as well as more favorable credit terms negotiated
with the Company's vendors.

Results of Operations

Fiscal 1996 Compared to Fiscal 1995

Revenue. Revenue in fiscal 1996 increased approximately
$1,010,000 or 2.1% to $49,088,000 from $48,078,000 in fiscal 1995. This increase
was achieved despite a continued general price erosion in the marketplace.

Gross Profits. The Company's gross profits remained relatively
flat at $11,302,000 or 23% of sales in fiscal 1996 as compared to $11,325,000 or
23.6% of sales in fiscal 1995. The decrease in gross margin as a percentage of
sales was primarily due to the aforementioned general price erosion in the
marketplace, as partially offset by improvements in the Company's manufacturing
efficiency.

Expenses. Selling, general and administrative expenses in fiscal
1996 decreased 6.9% or $620,000 to $8,374,000 or 17.1% of sales from $8,994,000
or 18.7% of sales in fiscal 1995. This decrease is primarily the result of
reductions in professional

11
<PAGE> 12
fees from those incurred in fiscal 1995. In addition, further decreases in
expenses were achieved as a result of the continuation of general cost control
procedures established by management.

Other Expenses. Other Expenses in fiscal 1996 increased 8.7% or
$112,000 to $1,399,000 from $1,287,000 in fiscal 1995. This increase is
primarily the result of an unfavorable shift in the UK Pounds Sterling exchange
rates.

Income Taxes. Provision for income taxes decreased $17,000 to
$515,000 or approximately 34% of income before provision for income taxes during
fiscal 1996. This compared to a provision of $532,000 or approximately 51% of
income before provision for income taxes during fiscal 1995. The higher
effective income tax rate in 1995 was primarily due to the recording of
additional income taxes related to DISC earnings that no longer qualify for tax
deferral.

Fiscal 1995 Compared to Fiscal 1994

Revenue. Revenue in fiscal 1995 increased approximately
$1,205,000, or 2.6%, to $48,078,000 from $46,873,000 in fiscal 1994. This
increase is primarily the result of increased export sales. In addition, the
Company was able to achieve this increase despite the Chapter 7 bankruptcy
filing of one of its major customers.

Gross Profits. The Company's gross profits increased $257,000 to
$11,325,000 or 23.6% of the sales in fiscal 1995 from $11,068,000 or 23.6% of
sales in fiscal 1994. The increase in gross profit is primarily due to the
higher sales, as previously discussed.

Expenses. Selling, general and administrative expenses in fiscal
1995 increased 1.6% or $142,000 to $8,994,000 or 18.7% of sales from $8,852,000
or 18.9% of sales in fiscal 1994. This increase is the result of additional
legal fees associated with the litigation and settlement between the Company and
C&K and additional bad debt expense related to the bankruptcy of one of the
Company's major customers. Offsetting these additional expenses were decreases
resulting from general cost control procedures established by management.

Other Expenses. Other expenses in fiscal 1995 increased 39.2% to
$1,287,000 from $925,000 in fiscal 1994. This increase is principally the result
of increased interest expense due to increased borrowings attributable to the
construction of the Company's manufacturing facility in the Dominican Republic,
as well as higher interest rates.

Income Taxes. Provision for income taxes increased $495,000 to
$532,000 or approximately 51% of income before provision for income taxes during
fiscal 1995. This compared to

12
<PAGE> 13
a provision of $37,000 or 3% of income before provision for income taxes during
fiscal 1994. This increase is primarily attributable to the accrual of taxes on
previously deferred DISC earnings. (See Item 3 and Note 4 to the Consolidated
Financial Statements).

Effects of Inflation

During the three-year period ended June 30, 1996, inflation and
changing prices did not have a significant impact on the Company's operations.

13
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS OF FINANCIAL STATEMENTS

JUNE 30, 1996 AND 1995

<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants
as of June 30, 1996 and 1995 and for the
3 Year Period Ended June 30, 1996 . . . . . . . . . . . . . 15

Consolidated Financial Statements:

Consolidated Balance Sheets as of
June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . 16

Consolidated Statements of Income
for the Years Ended June 30,
1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . . 17

Consolidated Statements of
Stockholders' Equity for the
Years Ended June 30, 1996, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . 18

Consolidated Statements of Cash
Flows for the Years Ended
June 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . 19

Notes to Consolidated Financial
Statements, June 30, 1996, 1995 and 1994 . . . . . . . . . 20

Schedules:
I. Condensed Financial Information on
Parent Company . . . . . . . . . . . . . . . . . 29

II. Valuation and Qualifying Accounts . . . . . . . 31
</TABLE>

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<PAGE> 15
NAPCO SECURITY SYSTEMS, INC.
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE> 16
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, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended June 30, 1996.
These consolidated financial statements and the schedules referred to below are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and schedules based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1996 in conformity with generally accepted accounting principles.

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.

ARTHUR ANDERSEN LLP

Melville, New York
September 20, 1996

-15-
<PAGE> 17
CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 1996 AND 1995

<TABLE>
<CAPTION>
ASSETS 1996 1995
(in thousands, except share data)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 426 $ 368
Accounts receivable, less reserve for doubtful accounts of $864 and
$662, respectively 13,759 13,647
Inventories, net 25,944 24,178
Prepaid expenses and other current assets 489 445
Deferred income taxes 911 1,278
---------- ---------
Total current assets 41,529 39,916

PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
and amortization of approximately $9,137 and $8,013, respectively 12,549 12,503

GOODWILL, net of accumulated amortization of approximately $935
and $828, respectively 2,806 2,913

OTHER ASSETS 435 407
---------- ---------
$57,319 $55,739
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long-term debt $ 1,500 $ 2,182
Notes payable to bank - 500
Accounts payable 5,986 4,001
Accrued expenses 1,714 772
Accrued salaries and wages 502 593
Accrued taxes 3,151 3,208
---------- ---------
Total current liabilities 12,853 11,256

LONG-TERM DEBT 14,150 15,275

DEFERRED INCOME TAXES 742 648
---------- ---------
Total liabilities 27,745 27,179
=========== ==========

COMMITMENTS AND CONTINGENCIES (Note 11)

STOCKHOLDERS' EQUITY:

Common stock, par value $.01 per share; authorized 21,000,000 shares;
issued 5,896,602 shares; outstanding 4,367,727 shares 59 59
Additional paid-in capital 719 719
Retained earnings 28,797 27,783
Less: Treasury stock, at cost (1,528,875 shares) (1) (1)
---------- ---------
Total stockholders' equity 29,574 28,560
---------- ---------
$57,319 $55,739
=========== ==========

</TABLE>

The accompanying notes are an integral part of these consolidated
balance sheets.

-16-
<PAGE> 18
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
(in thousands, except share data)
<S> <C> <C> <C>
NET SALES $ 49,088 $ 48,078 $ 46,873

COST OF SALES 37,786 36,753 35,805
------- ------- -------
Gross profit 11,302 11,325 11,068

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 8,374 8,994 8,852
------- ------- -------
Operating income 2,928 2,331 2,216
------- ------- -------

OTHER INCOME (EXPENSE):
Interest expense, net (1,278) (1,398) (803)
Other, net (121) 111 (122)
------- ------- -------
(1,399) (1,287) (925)
------- ------- -------
Income before provision for income taxes 1,529 1,044 1,291

PROVISION FOR INCOME TAXES 515 532 37
------- ------- -------

Net income $ 1,014 $ 512 $ 1,254
========== ========== ==========
EARNINGS PER SHARE $ .23 $ .12 $ .29
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 4,373,000 4,390,000 4,395,000
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these
consolidated statements.

-17-
<PAGE> 19
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
Common Stock Additional
Number of Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1993 5,896,002 $59 $718 $26,017 $(1) $26,793

Net income for the year ended June 30, 1994 -- -- -- 1,254 -- 1,254

Exercise of stock options 600 -- 1 -- -- 1
--------- --- ---- ------- --- -------

BALANCE AT JUNE 30, 1994 5,896,602 59 719 27,271 (1) 28,048

Net income for the year ended June 30, 1995 -- -- -- 512 -- 512
--------- --- ---- ------- --- -------

BALANCE AT JUNE 30, 1995 5,896,602 59 719 27,783 (1) 28,560

Net income for the year ended June 30, 1996 -- -- -- 1,014 -- 1,014
--------- --- ---- ------- --- -------

BALANCE AT JUNE 30, 1996 5,896,602 $59 $719 $28,797 $(1) $29,574
========= === ==== ======= === =======
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

-18-
<PAGE> 20
CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,014 $ 512 $ 1,254
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 1,425 1,357 1,482
Provision for bad debts 202 212 77
Deferred income taxes 351 (320) -
Changes in operating assets and liabilities resulting from increases and
decreases in:
Accounts receivable (314) 828 (2,676)
Inventories (1,766) (565) 795
Prepaid expenses and other current assets (44) 25 (28)
Other assets (112) (97) (134)
Accounts payable and accrued liabilities 2,779 (1,259) 612
-------- ------ --------
Net cash provided by operating activities 3,535 693 1,382
-------- ------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,170) (3,332) (1,629)
-------- ------ --------
Net cash used in investing activities (1,170) (3,332) (1,629)
-------- ------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term notes payable to bank - 500 1,650
Principal payments on notes payable to bank (500) (8,100) -
Principal payments on capital lease obligation (7) (21) (28)
Principal payments on long-term debt (1,800) (1,925) (2,325)
Proceeds from long-term debt - 11,218 1,413
Proceeds from issuance of common stock - - 1
-------- ------ --------
Net cash (used in) provided by financing activities (2,307) 1,672 711
-------- ------ --------
NET INCREASE (DECREASE) IN CASH 58 (967) 464

CASH, beginning of year 368 1,335 871
-------- ------ --------
CASH, end of year $ 426 $ 368 $ 1,335
======== ====== =======
CASH PAID DURING THE YEAR FOR:
Interest $ 1,155 $ 1,388 $ 914
======== ====== =======
Income taxes $ 144 $ 61 $ 42
======== ====== =======
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

-19-
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1996, 1995 AND 1994

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Napco Security Systems, Inc. and subsidiaries (the "Company") is engaged
principally in the development, manufacture and distribution of 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 subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles 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. Actual
results could differ from those estimates.

Inventories

Inventories are valued at the lower of cost (using the FIFO, first-in, first-out
method) or market.

Property, Plant and Equipment

Property, plant and equipment is carried at cost. 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

Goodwill is being amortized on a straight-line basis over 35 years. The
recoverability of the carrying value of intangible assets is evaluated on a
recurring basis. The primary indicators of recoverability are current and
forecasted profitability of the acquired business. In the years ended June 30,
1996 and 1995, there were no adjustments to the carrying value of goodwill.

Deferred Financing Costs

Deferred financing costs associated with the issuance of the Industrial Revenue
Bonds (see Note 6 (c)), and from obtaining the revolving credit and term loan
facility (see Note 6(a)) are being amortized over the respective terms of the
related debt.

-20-
<PAGE> 22
Revenue

Revenue is recognized upon shipment of the Company's products to its customers.

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 for income taxes represents U.S. Federal and state
taxes on income generated from U.S. operations. Income generated by the
Company's foreign subsidiary is non-taxable. The Company accounts for the
research and development credit as a reduction of income tax expense in the year
in which such credits are allowable for tax purposes.

In prior years, the Company did not provide for income taxes on the
undistributed earnings of its Domestic International Sales Corporation ("DISC")
subsidiary because it was the Company's intent to continue the subsidiary's
qualification for tax deferral. Due to the shifting of manufacturing outside the
U.S., management determined in fiscal 1995 that the DISC no longer qualified for
continued tax deferral. As a result, previously deferred earnings of the DISC
totalling $2,031,000 must now be reported as taxable income over a ten-year
period in the Company's future tax returns. The respective tax liability was
recorded in fiscal 1995.

The Company does not provide for income taxes on the undistributed earnings of
its foreign subsidiary because such earnings are reinvested abroad and it is the
intention of management that such earnings will continue to be reinvested
abroad. As of June 30, 1996 and 1995, approximately $17,206,000 and $16,441,000
in cumulative earnings of the foreign subsidiary are included in consolidated
retained earnings.

Earnings Per Share

Earnings per share is computed based upon the weighted average number of common
shares and common stock equivalents (options) outstanding. Fully diluted
earnings per share does not materially differ from the earnings per share
presented in the consolidated statements of income.

Reclassifications

Certain prior year balances have been reclassified to conform with the current
year presentation.

2. INVENTORIES:

Inventories, net, at June 30, 1996 and 1995, consist of the following:

<TABLE>
<CAPTION>
1996 1995
(in thousands)
<S> <C> <C>
Component parts $17,908 $16,616
Work-in-process 4,449 2,320
Finished products 3,587 5,242
--------- ---------
$25,944 $24,178
======= =======
</TABLE>

-21-
<PAGE> 23
3. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
Depreciation/
June 30, amortization-
1996 1995 annual rates
(in thousands)
<S> <C> <C> <C>
Land $ 904 $ 904 -
Building 8,807 8,595 3%
Molds and dies 2,339 1,971 20%
Furniture and fixtures 942 1,005 10% to 20%
Machinery and equipment 8,268 7,633 10% to 33%
Leasehold improvements 426 408 Shorter of the lease
--------- --------- term or life of asset
21,686 20,516
Less: Accumulated depreciation and
amortization 9,137 8,013
--------- ---------
$12,549 $12,503
========= ==========
</TABLE>

Depreciation and amortization expense on property, plant and equipment was
approximately $1,222,000, $1,189,000 and $1,304,000 for fiscal 1996, 1995 and
1994, respectively.

4. INCOME TAXES:

In August 1995, the Internal Revenue Service informed the Company that it had
completed the audit of the Company's Federal tax returns for fiscal years 1987
through 1992. The Internal Revenue Service has issued a report to the Company
proposing adjustments that would result in taxes due of approximately $4.3
million, excluding interest charges. The primary adjustments presented by the
Internal Revenue Service relate to intercompany pricing and royalty charges,
DISC earnings and charitable contributions. The Company disagrees with the IRS
and intends to vigorously appeal this assessment using all remedies and
procedural actions available under the law. The Company believes that it has
provided an adequate reserve to address the ultimate resolution of this matter,
so that it will not have a material adverse effect on the Company's consolidated
financial statements.

The deferred tax assets and deferred tax liabilities at June 30, 1996 and 1995
are as follows (in thousands):

<TABLE>
<CAPTION>
Net Deferred
Deferred Tax Deferred Tax Tax Asset
Assets Liabilities (Liabilities)
1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Current:
Accounts receivable $346 $ 265 $ - $ - $346 $ 265
Inventories 495 930 - - 495 930
Accrued liabilities 97 127 - - 97 127
Other 54 64 81 108 (27) (44)
------ --------- ------ ----- ------ -------
992 1,386 81 108 911 1,278
Noncurrent:
Fixed assets - - 742 648 (742) (648)
------ --------- ------ ----- ------ -------

Total deferred taxes $992 $1,386 $823 $756 $169 $ 630
==== ====== ==== ==== ==== ======
</TABLE>

-22-
<PAGE> 24
As a result of the U.S. operations generating income in fiscal 1996 and 1995,
management now believes it is more likely than not that the Company will realize
the benefit of the net deferred tax assets existing at June 30, 1996 and 1995.
Accordingly, the Company has not reflected any valuation allowance against the
deferred tax assets at June 30, 1996 and 1995. Furthermore, management believes
that the existing net deductible temporary differences will reverse during
periods in which the Company generates net taxable income. There can be no
assurance, however, that the Company will generate taxable earnings or any
specific level of continuing earnings in the future.

Provision for income taxes consists of the following:

<TABLE>
<CAPTION>
For the Years Ended June 30,
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Taxes currently payable:
Federal $104 $ 35 $ -
State 19 48 37
---- ----- ---
123 83 37
Taxable DISC earnings and other 41 769 -
Deferred income tax provision (benefit) 351 (320) -
---- ----- ---
Provision for income taxes $515 $ 532 $37
==== ==== ===
</TABLE>

The difference between the statutory United States Federal income tax rate and
the Company's effective tax rate as reflected in the consolidated statements of
income is as follows:

<TABLE>
<CAPTION>
1996 1995 1994
% of % of % of
pre-tax pre-tax pre-tax
Amount income Amount income Amount income
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Tax at Federal statutory rate $520 34.0% $355 34.0% $439 34.0%
Increases (decreases) in taxes resulting from:
State income taxes, net of Federal income
tax benefit 44 2.9 32 3.1 24 1.9
Amortization of excess goodwill 36 2.4 36 3.6 36 2.8
Non-taxable foreign source income (260) (17.0) (177) (17.0) (356) (27.6)
Taxes on previously deferred DISC earnings, net - - 563 53.9 - -
Utilization of net operating loss carryforward - - (348) (33.3) (70) (5.4)
Other, net 175 11.4 71 6.7 (36) (2.8)
----- ---- ------ ------- ----- ------

Provision for income taxes $515 33.7% $532 51.0% $ 37 2.9%
==== ==== ==== ==== ===== ======
</TABLE>

Foreign income taxes are not provided on income generated by the Company's
subsidiary in the Dominican Republic, as such income is presently exempt from
local income tax.

5. NOTES PAYABLE TO BANK:

On March 31, 1995, the Company amended its existing revolving credit and term
loan facility to provide for an additional $2,000,000 secured line of credit. As
of June 30, 1995, outstanding borrowings under this line amounted to $500,000.
At June 30, 1995, the interest rate on this line was approximately 11.0%. In
1995, the maximum month end borrowings outstanding under this line of credit was
$500,000 and the weighted average interest rate was 10.6%. The balance under
this line was fully paid in October 1995.

-23-
<PAGE> 25
6. LONG-TERM DEBT:

Long-term debt consists of the following:

<TABLE>
<CAPTION>
June 30,
1996 1995
(in thousands)
<S> <C> <C>
Revolving credit and term loan facility (a) $11,000 $11,000
Notes payable to banks (b) 3,375 4,950
Industrial revenue bonds (c) 1,275 1,500
Capital lease obligation - 7
------- --------
15,650 17,457
Less: Current portion 1,500 2,182
--------- ---------
$14,150 $15,275
========= =========
</TABLE>

(a) On July 27, 1994, the Company entered into an $11,000,000 secured
revolving credit and term loan facility with two banks, with the
Company's primary bank acting as an agent. In conjunction with this
agreement, the banks received as collateral all accounts receivable and
inventory located in the United States. Under the terms of this
agreement, the Company used the proceeds, among other things, to
refinance notes payable to its primary bank, finance a temporary
increase of inventory and finance the completion of the construction of
a manufacturing facility in the Dominican Republic. The revolving
credit loan, which bears interest based on a number of options
available to the Company (weighted average rate of approximately 8.7%
and 8.3% for the years ended June 30, 1996 and 1995, respectively) and
does not require principal payments until conversion, converts to a
term loan on June 30, 1997 payable in (16) sixteen equal quarterly
installments beginning on September 30, 1997. 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, 1996, the
Company was not in compliance with certain of these financial covenants
for which it has received appropriate waivers from the banks.

(b) In November 1991, the Company renegotiated the terms of its $6,000,000
unsecured note payable to the Company's primary bank. The note was paid
in full in fiscal 1996. Interest on the note was payable monthly at a
rate determined periodically based on a number of options available to
the Company. At June 30, 1995, the interest rate on the note was 9.52%.

In addition, in November 1991, a subsidiary of the Company entered into
a $4,500,000 line of credit agreement with another bank in connection
with the Company's international operations. The line is secured by a
letter of credit from the Company's primary bank. Interest on amounts
outstanding under this line is payable quarterly at a rate determined
periodically based on a number of options available to the Company. The
balance outstanding under the line as of December 31, 1994
automatically converted to a term loan payable in 20 equal quarterly
installments commencing on that date. At June 30, 1996 and 1995, the
amounts outstanding under this line were $3,375,000 and $4,050,000 at
interest rates of 5.73% and 6.27%, respectively.

Under the terms of the agreement, all advances under the line must be
used to pay for certain specified costs incurred by this subsidiary. In
addition, the terms of the agreement limit, among other things, the
amount of additional debt or liens that may be incurred and prohibit
the payment of dividends by this subsidiary.

-24-
<PAGE> 26
On August 27, 1993, the Company entered into an agreement with its
primary bank to increase an existing $2,500,000 letter of credit
agreement to $4,500,000 for the purpose of providing additional
collateral for the construction of a manufacturing facility in the
Dominican Republic. In conjunction with this agreement, the bank
received as collateral a first priority perfected security interest in
all accounts receivable of the Company and a second mortgage on the
Company's facility located in Amityville, New York with a lien of up to
$1,500,000. This agreement expires on February 28, 1997.

(c) In 1985, the Company received $3,900,000 in proceeds from Industrial
Revenue Bonds issued by the Town of Babylon (the "Town") to be used for
the purchase of land and the construction of a new office and
manufacturing facility. Title to the land and building will be held by
the Town as security for the bonds, and the Town leases the facility to
the Company under an agreement which provides for the purchase of the
facilities by the Company for $1 at the completion of the lease term.
The lease has been accounted for as a capital lease. The bonds bear
interest at a variable rate which is determined weekly by the
underwriting bank based upon market conditions. At June 30, 1996 and
1995, the interest rate was approximately 3.1% and 3.7%, respectively.

The bonds have a maturity date of April 1, 2000; however, principal
repayment is to be accomplished through quarterly payments of $75,000
made to a sinking fund held by a trustee. On each July 1 through and
including July 1, 1999, the bonds shall be redeemed, in part, prior to
their maturity, in the amount of $300,000 from the sinking fund at a
price equal to 100% of the principal amount so redeemed.

The Company's primary bank has issued an irrevocable letter of credit,
covering the outstanding balance of the bonds plus 50 days of interest
cost to the trustee of the bonds as security for the Company's
obligations under the various arrangements.

The bonds may be tendered, at any time, at the election of the holder,
at a price of 100% of the unpaid principal balance. At the time of
notice of tender, the remarketing agent will use its best efforts to
remarket the tendered bonds. The bank, as part of the letter of credit
arrangement, is obligated through April 12, 2000 to purchase any of the
bonds which are not remarketed.

Under the terms of the bond indenture the Company is required, among
other things, to maintain certain levels of working capital and
tangible net worth, is restricted in the amount of acquisitions of
fixed assets and other investments it may make and must maintain
certain financial ratios. The Company was not in compliance with
certain of these financial covenants at June 30, 1996 for which it has
received appropriate waivers.

Maturities of long-term debt (including sinking fund payments) are as follows
(in thousands):

<TABLE>
<CAPTION>
Year ending June 30,
<S> <C>
1997 $ 1,500
1998 3,950
1999 3,950
2000 3,500
2001 2,750
--------
$15,650
=========
</TABLE>

-25-
<PAGE> 27
7. STOCK OPTIONS:

In November 1992, the stockholders approved a 10-year extension of the already
existing 1982 incentive stock option plan. Shares of common stock are reserved
for issuance upon exercise of options granted to officers and key employees
under the extended 1982 plan. The plan provides that the exercise price of each
option shall equal 100% of the fair market value of the stock at the date of
grant. Options are exercisable 20% per year and expire five years after the date
of grant. Transactions and other information relating to the plan for the three
years ended June 30, 1996 are summarized as follows:

<TABLE>
<CAPTION>
Shares available Shares under option
for grant Shares Price
<S> <C> <C> <C> <C>
Outstanding at June 30, 1993 697,833 117,500 $2.25 to $2.625
Granted (26,500) 26,500 4.375
Lapsed and terminated 22,400 (22,400) 2.50 to 2.625
Exercised - (600) 2.50
------- ------- ---------------
Outstanding at June 30, 1994 693,733 121,000 2.25 to 4.375
Granted (3,000) 3,000 2.50
Lapsed and terminated 43,000 (43,000) 2.50 to 4.375
------- ------- ---------------
Outstanding at June 30, 1995 733,733 81,000 2.25 to 4.375
Granted (35,000) 35,000 2.50 to 3.125
Lapsed and terminated 40,000 (40,000) 2.50 to 4.375
------- ------- ---------------
Outstanding at June 30, 1996 738,733 76,000 $2.25 to $4.375
======= ======== ===============
</TABLE>

Options representing 35,100 shares were exercisable at June 30, 1996.

Effective October 1990, the Company established a non-employee stock option plan
to encourage non-employee directors and consultants of the Company to invest in
the Company's stock. The plan provides that the option price shall 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.
At June 30, 1996, 50,000 shares of common stock are reserved for issuance under
the Plan.

In October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-Based Compensation" (SFAS 123). This Statement is
effective for fiscal years that begin after December 15, 1995, with earlier
application permitted. Although the statement encourages entities to adopt the
fair value based method of accounting for employee stock options, the Company
intends to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". Adoption of
SFAS 123 will require the Company to disclose additional information relating to
the stock option plan and the Company's pro forma net income and earnings per
share, as if the fair value of the options granted were expensed over the period
in which the related employees' services were rendered.

8. RESEARCH AND DEVELOPMENT COSTS:

Research and development costs charged to cost of sales were approximately
$3,296,000, $3,252,000 and $2,883,000 for the years ended June 30, 1996, 1995
and 1994, respectively.

-26-
<PAGE> 28
9. 401(k) PLAN:

Effective August 31, 1985, the Company established a 401(k) plan covering all
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 $48,000, $56,000 and
$59,000 for the years ended June 30, 1996, 1995 and 1994, respectively.

10. BUSINESS AND CREDIT CONCENTRATIONS:

The Company is engaged in one major line of business - the development,
manufacture, distribution and sale of security alarm products and door security
devices for commercial and residential installations. Most of the Company's
sales to unaffiliated customers are shipped from the United States. Most of the
Company's customers are located throughout the United States and Europe.
Identifiable assets (net of intercompany receivables and payables) relating to
the Company's foreign operations were approximately $24,235,000, $19,708,000 and
$22,513,000 at June 30, 1996, 1995 and 1994, respectively.

Export sales amounted to $8,915,000, $8,865,000 and $7,795,000 for the years
ended June 30, 1996, 1995 and 1994, respectively. At June 30, 1996 and 1995, the
Company had three customers with accounts receivable balances that aggregated
58% and 51% of the Company's accounts receivable, respectively. Revenues from
the three largest customers are summarized as follows:

<TABLE>
<CAPTION>
Percentage of Net Sales
For the Years Ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Customer 1 21% 22% 18%
Customer 2 9% 6% 12%
Customer 3 12% 11% 7%
</TABLE>

11. COMMITMENTS AND CONTINGENCIES:

Leases

The Company is committed under various operating leases which do not extend
beyond fiscal 2001. Minimum lease payments through the expiration dates of these
leases, with the exception of the land lease referred to below, are as follows
(in thousands):

<TABLE>
<CAPTION>
Year ending June 30,
<S> <C> <C>
1997 $236
1998 213
1999 120
2000 54
2001 28
----
$652
====
</TABLE>

Rent expense totaled approximately $389,000, $369,000 and $357,000 for the years
ended June 30, 1996, 1995 and 1994, respectively.

-27-
<PAGE> 29
Land Lease and Construction Contract

On April 26, 1993, the Company's foreign subsidiary entered into a 99 year land
lease of approximately four acres of land in the Dominican Republic, at an
annual cost of approximately $272,000. The foreign subsidiary relocated its
operations to this site upon completion of a new facility during fiscal 1995.

Letters of Credit

At June 30, 1996, the Company was committed for approximately $394,000 under
open commercial letters of credit and steamship guarantees.

Litigation

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.

-28-
<PAGE> 30
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION ON PARENT COMPANY

CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
As of June 30,
ASSETS 1996 1995
------ -------- ------
(in thousands)
<S> <C> <C>
CASH $ 427 $ 262

ACCOUNTS RECEIVABLE, net 12,053 11,497

INVENTORIES, net 8,755 11,222

PREPAID EXPENSES AND OTHER CURRENT ASSETS 324 343

DUE FROM SUBSIDIARIES 1,551 -

DEFERRED INCOME TAXES 911 1,278
------- -------
Total current assets 24,021 24,602

INVESTMENT IN SUBSIDIARIES, on equity basis 23,223 23,412

PROPERTY, PLANT AND EQUIPMENT, net 5,956 5,842

OTHER ASSETS 317 299
------- -------
$53,517 $54,155
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES $11,301 $10,510

DUE TO SUBSIDIARIES - 2,312

LONG-TERM DEBT, including capital lease obligation 11,900 12,125

DEFERRED INCOME TAXES 742 648
------- -------
Total liabilities 23,943 25,595

STOCKHOLDERS' EQUITY 29,574 28,560
------- -------
$53,517 $54,155
======= =======
</TABLE>

This schedule should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.

-29-
<PAGE> 31
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION ON PARENT COMPANY

<TABLE>
<CAPTION>
For the Years Ended June 30,
CONDENSED STATEMENTS OF INCOME 1996 1995 1994
- ------------------------------ -------- -------- ------
(in thousands)
<S> <C> <C> <C>
NET SALES $40,482 $38,547 $35,954

COST OF SALES 30,319 27,938 27,464
------- ------- -------
Gross profit 10,163 10,609 8,490

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 7,277 7,808 7,562
------- ------- -------
Operating income 2,886 2,801 928

EQUITY IN (LOSS) EARNINGS OF SUBSIDIARIES (184) (561) 1,226

OTHER EXPENSE, net (1,173) (1,196) (863)
------- ------- -------

Income before provision for income taxes 1,529 1,044 1,291

PROVISION FOR INCOME TAXES 515 532 37
------- ------- -------
Net income $ 1,014 $ 512 $ 1,254
======= ======== ========
</TABLE>

This schedule should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.

-30-
<PAGE> 32
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

(In Thousands)

<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Balance at Charged to Balance
Beginning Costs and Deductions at End of
Description of Period Expenses Describe (1) Period
----------- --------- ----------- ------------ -------
<S> <C> <C> <C> <C>
For the year ended June 30, 1994:
Allowance for doubtful accounts
(deducted from accounts receivable) $452 $ 77 $ 75 (1) $454
==== ===== ===== ====

For the year ended June 30, 1995:
Allowance for doubtful accounts
(deducted from accounts receivable) $454 $212 $ 4 (1) $662
==== ==== ====== ====

For the year ended June 30, 1996:
Allowance for doubtful accounts
(deducted from accounts receivable) $662 $202 $ - $864
==== ==== ======= ====
</TABLE>

(1) Deductions relate to uncollectible accounts charged off to valuation
accounts, net of recoveries.

This schedule should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.

-31-
<PAGE> 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

32
<PAGE> 34
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.

ITEM 11. EXECUTIVE COMPENSATION.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by Part III (Items 10, 11, 12 and 13) is
incorporated herein by reference from the Company's definitive proxy statement
for the 1996 annual meeting of stockholders which the Company intends to file
with the Securities and Exchange Commission pursuant to Regulation 14A not later
than 120 days after the end of the Company's 1996 fiscal year, and, accordingly,
items 10, 11, 12 and 13 are omitted pursuant to General Instruction G(3).

33
<PAGE> 35
PART IV

ITEM 14. 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:

<TABLE>
<CAPTION>
Page
<S> <C> <C>
Report of Independent Public Accountants
as of June 30, 1996 and 1995 and for the
3 Year Period Ended June 30, 1996 . . . . . . . . 15

Consolidated Balance Sheets as of
June 30, 1996 and 1995 . . . . . . . . . . . . . . 16

Consolidated Statements of Income
for the Years Ended June 30, 1996,
1995 and 1994 . . . . . . . . . . . . . . . . . . 17

Consolidated Statements of
Stockholders' Equity for the
Years Ended June 30, 1996, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . 18

Consolidated Statements of Cash
Flows for the Years Ended
June 30, 1996, 1995 and 1994 . . . . . . . . . . . 19

Notes to Consolidated Financial
Statements, June 30, 1996, 1995 and 1994 . . . . . 20
</TABLE>

(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:

<TABLE>
<CAPTION>
<S> <C> <C>
I: Condensed Financial Information
on Parent Company . . . . . . . . . . . . . . 29

II: Valuation and Qualifying Accounts . . . . . . 31
</TABLE>

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.

34
<PAGE> 36
(a)3 and (c). Exhibits

<TABLE>
<CAPTION>
Exhibit
No. Title
<S> <C> <C>
Ex-3.(i) Articles of Incorporation, as amended. . Exhibit 3a to
Report on Form
10-K for
fiscal year
ended June 30,
1988

Ex-3.(ii) By-Laws . . . . . . . . . . . . . . . . Exhibit 3b to
Report on Form
10-K for
fiscal year
ended June 30,
1988

Ex-10.A 1982 Amended and Restated Incentive
Stock Option Plan (extended 1992) . . . Exhibit 10b to
Report on Form
10-K for
fiscal year
ended June 30,
1991

Ex-10.B 1990 Non-Employee Stock Option Plan . . Exhibit 10c to
Report on Form
10-K for
fiscal year
ended June 30,
1991
Ex-10.C Defined Contribution Pension Plan
Basic Plan Document . . . . . . . . . . Exhibit 10d to
Report on Form
10-K for
fiscal year
ended June 30,
1989
Ex-10.D Defined Contribution Pension Plan
401(k) Profit Sharing Plan
Adoption Agreement . . . . . . . . . . . Exhibit 10e to
Report on Form
10-K for
fiscal year
ended June 30,
1989
</TABLE>

35
<PAGE> 37
<TABLE>
<CAPTION>
<S> <C> <C>
Ex-10.E Indenture of Mortgage and Trust . . . . Exhibit 10h to
Report on Form
10-K for
fiscal year
ended June 30,
1990

Ex-10.F Credit Agreement dated as of November
21, 1991 among the Company, certain
subsidiaries and Chemical Bank, as
agent . . . . . . . . . . . . . . . . . Exhibit 10-h
to Report on
Form 10-K for
fiscal year
ended June 30,
1992

Ex-10.G Promissory Note dated as of November
8, 1991 between Citibank, N.A. and
the Company . . . . . . . . . . . . . . Exhibit 10-i
to Report on
Form 10-K for
fiscal year
ended June 30,
1992

Ex-10.H Credit Agreement dated November 8,
1991 between N.S.S. Caribe S.A. and
Citibank, N.A. . . . . . . . . . . . . . Exhibit 10-j
to Report on
Form 10-K for
fiscal year
ended June 30,
1992

Ex-10.I Amendment and Waiver Agreement dated
as of August 27, 1993 between Chemical
Bank and the Company . . . . . . . . . . Exhibit 10-j
to Report on
Form 10-K for
fiscal year
ended June 30,
1993

Ex-10.J Construction Contract dated June 5,
1993 . . . . . . . . . . . . . . . . . . Exhibit 10-l
to Report on
Form 10-K for
fiscal year
ended June 30,
1993
</TABLE>

36
<PAGE> 38
<TABLE>
<CAPTION>
<S> <C> <C>
Ex-10.K Amendment dated July 27, 1994 to
Credit Agreement dated November 21,
1991 . . . . . . . . . . . . . . . . . Exhibit 10-m
to Report on
Form 10-K for
fiscal year
ended June 30,
1993

Ex-10.L Loan Agreement dated as of July 27, 1994
with Chemical Bank and The Bank of New
York . . . . . . . . . . . . . . . . . Exhibit 10-n
to Report on
Form 10-K for
fiscal year
ended June 30,
1993

Ex-10.M First Amendment dated as of November 5, 1993 to Credit
Agreement dated as of November 8, 1991 with Citibank,
N.A. . . . . . . . . . . . . . . . . . Exhibit 10-o
to Report on
Form 10-K for
fiscal year
ended June 30,
1993
Ex-10.N Amendment and Waiver dated as of
September 14, 1993 to Credit Agreement
dated as of November 21, 1991. . . . . Exhibit 10-N
to Report on
Form 10-K for
fiscal year
ended June 30,
1995

Ex-10.O Amendment dated as of December 7, 1993
to the Credit Agreement dated as of
November 21, 1991. . . . . . . . . . . Exhibit 10-O
to Report on
Form 10-K for
fiscal year
ended June 30,
1995

Ex-10.P Fifth Amendment and Waiver dated
as of October 11, 1994 to the
Credit Agreement dated as of
November 21, 1991. . . . . . . . . . . Exhibit 10-P
to Report on
Form 10-K for
fiscal year
ended June 30,
1995
</TABLE>

37
<PAGE> 39
<TABLE>
<CAPTION>
<S> <C> <C>
Ex-10.Q Sixth Amendment and Waiver dated
as of March 31, 1995 to the
Credit Agreement dated as of
November 21, 1991. . . . . . . . . . . Exhibit 10-Q
to Report on
Form 10-K for
fiscal year
ended June 30,
1995

Ex-10.R First Amendment and Waiver dated as
of October 11, 1994 to Loan Agreement
dated as of July 27, 1994. . . . . . . Exhibit 10-R
to Report on
Form 10-K for
fiscal year
ended June 30,
1995

Ex-10.S Second Amendment and Waiver dated as
of March 31, 1995 to the Loan Agreement
dated as of July 27, 1994. . . . . . . Exhibit 10-S
to Report on
Form 10-K for
fiscal year
ended June 30,
1995

Ext-10.T Seventh Amendment and Waiver dated
as of October 13, 1995 to Credit
Agreement dated as of
November 21, 1991. . . . . . . . . . . E-1

Ex.-10 Third Amendment and Waiver dated as of
October 13, 1995 to the Loan Agreement
dated as of July 27, 1994. . . . . . . E-4

Ex-11 Computation of earnings per share . . . E-8

Ex-12 Computation of ratios . . . . . . . . . E-9

Ex-21 Subsidiaries of the Registrant . . . . E-10

Ex-27 Financial Data Schedule . . . . . . . . E-11
</TABLE>

Exhibits have been included in copies of this Report filed with the
Securities and Exchange Commission. Stockholders of the registrant will be
provided with copies of these exhibits upon written request to the Company.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the three months ended June
30, 1996.

38
<PAGE> 40
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.

September 26, 1996

NAPCO SECURITY SYSTEMS, INC.
(Registrant)

<TABLE>
<CAPTION>
<S> <C>
By: /s/ RICHARD SOLOWAY By: /s/ KENNETH ROSENBERG
------------------------------------ -------------------------------
Richard Soloway Kenneth Rosenberg
Chairman of the Board of President and Treasurer
Directors and Secretary (Co-Principal Executive
(Co-Principal Executive Officer) Officer)

By: /s/ KEVIN S. BUCHEL
-----------------------------
Kevin S. Buchel
Senior Vice President of
Operations and Finance
(Principal Financial and Accounting Officer)
</TABLE>

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.

<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/RICHARD SOLOWAY Chairman of the September 26, 1996
- ------------------------ Board of Directors
Richard Soloway

/s/KENNETH ROSENBERG Director September 26, 1996
- ------------------------
Kenneth Rosenberg

/s/RANDY B. BLAUSTEIN Director September 26, 1996
- ------------------------
Randy B. Blaustein

/s/ANDREW J. WILDER Director September 26, 1996
- ------------------------
Andrew J. Wilder
</TABLE>

39
<PAGE> 41
FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.

FOR FISCAL YEAR ENDING JUNE 30, 1996

COMMISSION FILE NUMBER : 0-10004

NAPCO SECURITY SYSTEMS, INC.

EXHIBITS
<PAGE> 42
Index to Exhibits

<TABLE>
<CAPTION>
<S> <C> <C>
Ex-10.T Seventh Amendment and Waiver dated as of
October 13, 1995 to Credit Agreement
dated as of November 21, 1991 . . . . . . . . . . . . . E-1

Ex-10 Third Amendment and Waiver dated as of
October 13, 1995 to the Loan Agreement
dated as of July 27, 1994 . . . . . . . . . . . . . . . E-4

Ex-11 Computation of earnings per share . . . . . . . . . . . E-8

Ex-12 Computation of ratios . . . . . . . . . . . . . . . . . E-9

Ex-21 Subsidiaries of the Registrant. . . . . . . . . . . . . E-10

Ex-27 Financial Data Schedule . . . . . . . . . . . . . . . . E-11
</TABLE>

E-i

<PAGE> 1
SEVENTH AMENDMENT and WAIVER
dated as of October 13, 1995 to the CREDIT
AGREEMENT dated as of November 21, 1991
(as the same has been amended by the
Amendment and Waiver dated as of August 27,
1993, the Amendment and Waiver dated as of
September 14, 1993, the Amendment dated as
of December 7, 1993, the Fourth Amendment
Agreement dated as of July 27, 1994, the Fifth
Amendment and Waiver dated as of October 11,
1994, the Sixth Amendment and Waiver dated
as of March 31, 1995 and as the same may be
further amended, supplemented or modified
from time to time in accordance with its terms,
the "Credit Agreement"), among NAPCO
SECURITY SYSTEMS, INC., a Delaware
corporation (the "Borrower"), the guarantors
signatory hereto (collectively, the
"Guarantors"), the lenders named in Schedule
2.01 and 2.06 of the Credit Agreement
(collectively, the "Lenders") and CHEMICAL
BANK, as agent for the Lenders (in such
capacity, the "Agent").

WHEREAS, the Borrower and the Guarantors wish to amend and waive certain
provisions of the Credit Agreement;

WHEREAS, the Agent and the Lenders have consented to amend and waive the Credit
Agreement to reflect the requests herein set forth;

NOW, THEREFORE, in consideration of the premises and of the mutual agreements
herein contained, the parties hereto agree as follows;

1. WAIVER OF ARTICLE VII, NEGATIVE COVENANTS, SECTION 7.08. TANGIBLE NET
WORTH.

Compliance with Article VII, Section 7.08. of the Credit Agreement is
hereby waived for the fiscal year ended June 30, 1995 to permit the
Tangible Net Worth plus Subordinated Indebtedness of the Borrower and its
Consolidated subsidiaries to be less than $26,971,000 as of the fiscal year
ended June 30, 1995 provided, however, Tangible Net Worth plus Subordinated
Indebtedness of the Borrower and its Consolidated subsidiaries was not less
than $25,455,000 as of such fiscal year end.

2. AMENDMENT TO ARTICLE VII, NEGATIVE COVENANTS, Section 7.08. TANGIBLE NET
WORTH.

E-1
<PAGE> 2
Article VII. Section 7.08. of the Credit Agreement is hereby amended by
deleting sub-section (iii) in its entirety and substituting therefor the
following:

"(iii) $25,455,000 from June 30, 1995 until June 29, 1996;"

3. WAIVER OF ARTICLE VII, NEGATIVE COVENANTS, SECTION 7.18. DEBT SERVICE
COVERAGE RATIO.

Compliance with Article VII, Section 7.18. of the Credit Agreement is
hereby waived for the fiscal year ended June 30, 1995 to permit the Debt
Service Coverage Ratio of the Borrower and its Consolidated subsidiaries to
be less than .94 to 1.0 as of the fiscal year ended June 30, 1995 provided,
however, such ratio was not less than .91 to 1.0 as of such fiscal year
end.

4. WAIVER OF ARTICLE VII, NEGATIVE COVENANTS, SECTION 7.19. INVENTORY
RELIANCE.

Compliance with Article VII Section 7.19. of the Credit Agreement is hereby
waived for the fiscal year ended June 30, 1995 to permit the Inventory
Reliance of the Borrower and its Consolidated subsidiaries to be more than
34% as of the fiscal year ended June 30, 1995 provided, however, the
Inventory Reliance of the Borrower and its Consolidated subsidiaries was
not greater than 36% as of such fiscal year end.

This SEVENTH AMENDMENT and WAIVER shall be construed and enforced in accordance
with the laws of the State of New York.

Except as expressly amended, waived or consented to hereby, the Credit
Agreement shall remain in full force and effect in accordance with the original
terms thereof.

This SEVENTH AMENDMENT and WAIVER herein contained is limited specifically to
the matters set forth above and does not constitute directly or by implication
an amendment or waiver of any other provision of the Credit Agreement or any
default which may occur or may have occurred under the Credit Agreement.

The Borrower hereby represents and warrants that, after giving effect to this
SEVENTH AMENDMENT and WAIVER, no Event of Default or Default exists under the
Credit Agreement or any other related document.

Please be advised that should there be a need for further amendments or waivers
with respect to these covenants or any other covenants, those requests shall be
evaluated by the Agent and the Lenders when formally requested, in writing, by
the Borrower and the Guarantors.

This SEVENTH AMENDMENT and WAIVER may be executed in one or more counterparts,
each of which shall constitute an original, but all of which when, taken
together shall constitute but one SEVENTH AMENDMENT and WAIVER. The SEVENTH
AMENDMENT and WAIVER shall become effective when (i) duly executed counterparts
hereof which, when taken

E-2
<PAGE> 3
together, bear the signatures of each of the parties hereto shall have been
delivered to the Agent and (ii) the Agent shall have received copies of
executed waivers and amendments (as appropriate) to (a) the Chemical/BNY Loan
Agreement and (b) the Letter of Credit and Bond Purchase Agreement dated as of
April 1, 1985 between the Borrower and Chemical Bank.

Capitalized terms used herein and not otherwise defined herein shall have the
same meanings as defined in the Credit Agreement.

IN WITNESS WHEREOF, the Borrower, the Guarantors and the Agent have caused this
SEVENTH AMENDMENT and WAIVER to be duly executed by their duly authorized
officers, all as of the day and year first above written.

NAPCO SECURITY SYSTEMS, INC.

By: /s/ Kevin S. Buchal
_______________________________________
Name:
Title: Senior Vice President

Guarantors:

NAPCO SECURITY SYSTEMS
INTERNATIONAL INC.
UMI MANUFACTURING CORP.
RALTECH LOGIC, INC.
E.E. ELECTRONIC
COMPONENTS, INC.
ALARM LOCK SYSTEMS, INC.
DERRINGER SECURITY
SYSTEMS, INC.

By: /s/ Kevin S. Buchal
________________________________________
Name:
Title: Senior Vice President

CHEMICAL BANK, as Agent and Lender

By: /s/ Robert F. Eisen
_______________________________
Name:
Title: Vice President

E-3

<PAGE> 1
THIRD AMENDMENT and WAIVER dated as
of October 13, 1995 to the LOAN
AGREEMENT dated as of July 27, 1994 (as the
same may be further amended, supplemented or
modified from time to time in accordance with
its terms, the "Loan Agreement), among
NAPCO SECURITY SYSTEMS, INC., a
Delaware corporation (the "Borrower"),
NAPCO SECURITY SYSTEMS
INTERNATIONAL, INC., UMI
MANUFACTURING CORP., RALTECH
LOGIC, INC., E.E. ELECTRONIC
COMPONENTS, INC., ALARM LOCK
SYSTEMS, INC. and DERRINGER
SECURITY SYSTEMS, INC. (individually,
each a "Guarantor" and collectively, the
"Guarantors"), CHEMICAL BANK, a New
York banking corporation ("Chemical"), THE
BANK OF NEW YORK ("BONY" and
collectively with Chemical, the "Banks") and
CHEMICAL BANK, as Agent (the "Agent).

WHEREAS, the Borrower and the Guarantors wish to amend and waive certain
provisions of the Loan Agreement;

WHEREAS, the Banks and the Agent have consented to amend and waive the Loan
Agreement to reflect the requests herein set forth;

NOW, THEREFORE, in consideration of the premises and of the mutual agreements
herein contained, the parties hereto agree as follows:

1. Waiver of ARTICLE V. COVENANTS OF THE BORROWER, SECTION 5.03 Financial
Requirements. (a) Minimum Consolidated Tangible Net Worth.

Compliance with ARTICLE V. SECTION 5.03. (a) of the Loan Agreement is
hereby waived for the fiscal year ended June 30, 1995 to permit the
Consolidated Tangible Net Worth plus Consolidated Subordinated Debt of
the Borrower to be less than $26,971,000 as of the fiscal year ended
June 30, 1995 provided, however, the Consolidated Tangible Net Worth
plus Consolidated Subordinated Debt of the Borrower was not less than
$25,455,000 as of such fiscal year end.

2. Amendment to ARTICLE V. COVENANTS OF THE BORROWER, SECTION 5.03.
Financial Requirements.(a) Minimum Consolidated Tangible Net Worth.

ARTICLE V. SECTION 5.03.(a) of the Loan Agreement is hereby amended by
deleting sub-section (iii) in its entirety and substituting therefor the
following:

E-4

<PAGE> 2
"(iii) $25,455,000 from June 30, 1995 until June 29, 1996;"

3. Waiver of ARTICLE V. COVENANTS OF THE BORROWER, SECTION 5.03. Financial
Requirements. (e) Debt Service Ratio.

Compliance with Section 5.03(e) of the Loan Agreement is hereby waived
for the fiscal year ended June 30, 1995 to permit the Debt Service
Coverage Ratio of the Borrower to be less than .94 to 1.00 as of the
fiscal year ended June 30, 1995 provided, however, the Debt Service
Coverage Ratio of the Borrower was not less than .91 to 1.00 as of such
fiscal year end.

4. Waiver of ARTICLE V. COVENANTS OF THE BORROWER, SECTION 5.03. Financial
Requirements. (g) Inventory Reliance.

Compliance with Section 5.03(g) of the Loan Agreement is hereby waived
for the fiscal year ended June 30, 1995 to permit the Inventory Reliance
of the Borrower to be greater than 34% as of the fiscal year ended
June 30, 1995 provided, however, the Inventory Reliance of the
Borrower was not greater than 36% as of such fiscal year end.

This THIRD AMENDMENT and WAIVER shall be construed and enforced in accordance
with the laws of the State of New York.

Except as expressly amended or consented to hereby, the Loan Agreement shall
remain in full force and effect in accordance with the original terms thereof.

The THIRD AMENDMENT and WAIVER herein contained is limited specifically to the
matters set forth above and does not constitute directly or by implication an
amendment or waiver of any other provision of the Loan Agreement or any default
which may occur or may have occurred under the Loan Agreement.

The Borrower and the Guarantors hereby represent and warrant that, after giving
effect to this THIRD AMENDMENT and WAIVER, no Event of Default or Default
exists under the Loan Agreement or any other related document.

This THIRD AMENDMENT and WAIVER may be executed in one or more counterparts,
each of which shall constitute an original, but all of which when, taken
together shall constitute but one THIRD AMENDMENT and WAIVER. The THIRD
AMENDMENT and WAIVER shall become effective when (i) duly executed counterparts
hereof which, when taken together, bear the signatures of each of the parties
hereto shall have been delivered to the Agent and (ii) the Agent shall have
received copies of (a) the executed Tenth Amendment and Waiver to the Letter of
Credit and Bond Purchase Agreement dated as of April 1, 1985 between the
Borrower and Chemical Bank, in the form attached hereto as Exhibit A and
(b) the executed Seventh Amendment and Waiver to the Credit Agreement dated as
of November 21, 1991 among the Borrower, the Guarantors named therein and
Chemical Bank, in the form attached hereto as Exhibit B.

E-5
<PAGE> 3
Capitalized terms used herein and not otherwise defined herein shall have the
same meanings as defined in the Loan Agreement.

IN WITNESS WHEREOF, the Borrower, the Guarantors, the Banks and the Agent have
caused this THIRD AMENDMENT and WAIVER to be duly executed by their duly
authorized officers, all as of the day and year first above written.

NAPCO SECURITY SYSTEMS, INC.