UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the fiscal year
ended June 30, 2009
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Transition
period from ______ to ______
Commission File Number 0-10004
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NAPCO SECURITY TECHNOLOGIES, 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:
Common Stock, par value $.01 per share
(Title of Each Class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes _ No X
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes _ No X
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of "Large accelerated filer", "Accelerated filer" and "Smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer _ Accelerated filer _ Non-accelerated filer _
Smaller reporting company X
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes _ No X
As of December 31, 2008, the aggregate market value of the common stock of
Registrant held by non-affiliates based upon the last sale price of the stock on
such date was $15,494,756.
As of October 12, 2009, 19,095,713 shares of common stock of Registrant were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Registrant's
2009 Annual Meeting of Stockholders.
PART I
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ITEM 1: BUSINESS.
NAPCO Security Technologies, Inc. ("NAPCO" or the "Company") was incorporated in
December 1971 in the State of Delaware. Its executive offices are located at 333
Bayview Ave, Amityville NY 11701. Its telephone number is (631) 842-9400.
The Company is a diversified manufacturer of security products, encompassing
intrusion and fire alarms, building access control systems and electronic
locking devices. These products are used for commercial, residential,
institutional, industrial and governmental applications, and are sold worldwide
principally to independent distributors, dealers and installers of security
equipment. On August 18, 2008, the Company acquired substantially all of the
assets and business of G. Marks Hardware, Inc. ("Marks") for $25.2 million, the
repayment of $1 million of bank debt and the assumption of certain current
liabilities. The Marks business involves the manufacturing and distribution of
door-locking devices.
Website Access to Company Reports
Copies of our filings under the Securities Exchange Act of 1934 (including
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments to these reports) are available free of charge on
our website (www.napcosecurity.com) on the same day they are electronically
filed with the Securities and Exchange Commission.
Acquisition
On August 18, 2008, the Company acquired substantially all of the assets and
business of Marks for $25.2 million, the repayment of $1 million of bank debt
and the assumption of certain current liabilities. The Company also entered into
a lease for the building where Marks had maintained its operations. The lease
provides for an annual base rent of $288,750 plus maintenance and real estate
taxes and expired in August 2009. In March 2009, the Company began to move the
Marks operations into its existing facilities in Amityville and the Dominican
Republic. In August 2009, the Company completed the move of all operations that
had not been transferred to its Dominican plant out of the Marks building and
into the Company's corporate headquarters in Amityville. The Company expects to
complete the move of the majority of the Marks manufacturing operations to the
Dominican facility by December 2009. The Marks business involves the
manufacturing and distribution of door-locking devices.
Restructuring Costs
In March 2009, the Company began a Restructuring Plan consisting of a series of
actions to consolidate its Sales, Production and Warehousing operations of Marks
and those in Europe and the Middle East into the Corporate Headquarters in
Amityville, NY and its production facility in the Dominican Republic. We expect
these restructuring initiatives to cost between $1,200,000 and $1,500,000. The
majority of these actions have been completed by July 31, 2009, while certain
Production-related actions are expected to be completed by December 31, 2009.
Accordingly, the Company recognized restructuring costs of $1,274,000 in the
fiscal year ended June 30, 2009. Of this amount, $210,000 relates to Workforce
Reductions communicated in March 2009 and $1,064,000 to Business Exits and
related costs associated with inventory and lease impairments related to the
closure of the Marks, European and Middle East facilities. As of June 30, 2009,
$1,138,000 of the $1,274,000 in restructuring costs has been incurred and
$136,000 remains in accrued expenses.
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, manufactures and markets the software and
control panels discussed above. It also buys and resells various identification
readers, PC-based computers and various peripheral equipment for access control
systems.
Alarm Systems. Alarm systems usually consist of various detectors, a control
panel, a digital keypad and signaling equipment. When a break-in occurs, an
intrusion detector senses the intrusion and activates a control panel via
hard-wired or wireless transmission that sets off the signaling equipment and,
in most cases, causes a bell or siren to sound. Communication equipment such as
a digital communicator may be used to transmit the alarm signal to a central
station or another person selected by a customer.
The Company manufactures and markets the following products for alarm systems:
Automatic Communicators. When a control panel is activated by a signal
from an intrusion detector, it activates a communicator that can
automatically dial one or more pre-designated telephone numbers. If
programmed to do so, a digital communicator dials the telephone number
of a central monitoring station and communicates in computer language
to a digital communicator receiver, which prints out an alarm message.
Control Panels. A control panel is the "brain" of an alarm system. When
activated by any one of the various types of intrusion detectors, it
can activate an audible alarm and/or various types of communication
devices. For marketing purposes, the Company refers to its control
panels by the trade name, generally "Gemini(TM)" and "Magnum Alert(TM)"
followed by a numerical designation.
Combination Control Panels/Digital Communicators and Digital Keypad
Systems. A combination control panel, digital communicator and a
digital keypad (a plate with push button numbers as on a telephone,
which eliminates the need for mechanical keys) has continued to grow
rapidly in terms of dealer and consumer preference. Benefits of the
combination format include the cost efficiency resulting from a single
microcomputer function, as well as the reliability and ease of
installation gained from the simplicity and sophistication of
micro-computer technology.
Door Security Devices. The Company manufactures a variety of exit alarm
locks including simple dead bolt locks, door alarms and
microprocessor-based electronic door locks with push button and card
reader operation.
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. During the fiscal
years ended June 30, 2009 and 2008, the Company expended approximately
$5,116,000 and $5,500,000, respectively, on Company-sponsored research and
development activities conducted by its engineering department to develop and
improve the Products. The Company intends to continue to conduct a significant
portion of its future research and development activities internally.
Employees
As of June 30, 2009, the Company had approximately 774 full-time employees.
Marketing
The Company's staff of 48 sales and marketing support employees located at the
Company's Amityville, United Kingdom and Dubai offices sells and markets the
Products primarily to independent distributors and wholesalers of security alarm
and security hardware equipment. Management estimates that these channels of
distribution represented approximately 49% and 63% of the Company's total sales
for the fiscal years ended June 30, 2009 and 2008, respectively. The remaining
revenues are primarily from installers and governmental institutions. The
Company's sales representatives periodically contact existing and potential
customers to introduce new products and create demand for those as well as other
Company products. These sales representatives, together with the Company's
technical personnel, provide training and other services to wholesalers and
distributors so that they can better service the needs of their customers. In
addition to direct sales efforts, the Company advertises in technical trade
publications and participates in trade shows in major United States and European
cities. Some of the Company's products are marketed under the "private label" of
certain customers.
In the ordinary course of the Company's business the Company grants extended
payment terms to certain customers. For further discussion on Accounts
Receivable and Concentration of Credit Risk see disclosures included in Item 7.
Competition
The security alarm products industry is highly competitive. The Company's
primary competitors are comprised of approximately 20 other companies that
manufacture and market security equipment to distributors, dealers, central
stations and original equipment manufacturers. The Company believes that no one
of these competitors is dominant in the industry. Certain of these companies
have substantially greater financial and other resources than the Company.
The Company competes primarily on the basis of the features, quality,
reliability and pricing of, and the incorporation of the latest innovative and
technological advances into, its Products. The Company also competes by offering
technical support services to its customers. In addition, the Company competes
on the basis of its expertise, its proven products, its reputation and its
ability to provide Products to customers on a timely basis. The inability of the
Company to compete with respect to any one or more of the aforementioned factors
could have an adverse impact on the Company's business. Relatively low-priced
"do-it-yourself" alarm system products have become available in recent years and
are available to the public at retail stores. The principal components in the
Company's products are integrated circuits, printed circuit boards,
microprocessors, sheet metal, plastic resin, machined and cast metal components.
The Company believes that these products compete with the Company only to a
limited extent because they appeal primarily to the "do-it-yourself" segment of
the market. Purchasers of such systems do not receive professional consultation,
installation, service or the sophistication that the Company's Products provide.
Seasonality
The Company's fiscal year begins on July 1 and ends on June 30. Historically,
the end users of Napco's products want to install its products prior to the
summer; therefore sales of its products historically peak in the period April 1
through June 30, the Company's fiscal fourth quarter, and are reduced in the
period July 1 through September 30, the Company's fiscal first quarter. To a
lesser degree, sales in Europe are also adversely impacted in the Company's
first fiscal quarter because of European vacation patterns, i.e., many
distributors and installers are closed for the month of August. In addition,
demand is affected by the housing and construction markets. The severity of the
current economic downturn may also affect this trend.
Raw Materials
The Company prepares specifications for component parts used in the Products and
purchases the components from outside sources or fabricates the components
itself. These components, if standard, are generally readily available; if
specially designed for the Company, there is usually more than one alternative
source of supply available to the Company on a competitive basis. The Company
generally maintains inventories of all critical components. The Company for the
most part is not dependent on any one source for its raw materials.
Sales Backlog
In general, orders for the Products are processed by the Company from inventory.
A sales backlog of approximately $1,554,000 and $1,750,000 existed as of June
30, 2009 and 2008, respectively.
Government Regulation
The Company's telephone dialers, microwave transmitting devices utilized in its
motion detectors and any new communication equipment that may be introduced from
time to time by the Company must comply with standards promulgated by the
Federal Communications Commission ("FCC") in the United States and similar
agencies in other countries where the Company offers such products, specifying
permitted frequency bands of operation, permitted power output and periods of
operation, as well as compatibility with telephone lines. Each new Product that
is subject to such regulation must be tested for compliance with FCC standards
or the standards of such similar governmental agencies. Test reports are
submitted to the FCC or such similar agencies for approval. Cost of compliance
with these regulations has not been material.
Patents and Trademarks
The Company has been granted several patents and trademarks relating to the
Products. While the Company obtains patents and trademarks as it deems
appropriate, the Company does not believe that its current or future success is
dependent on its patents or trademarks.
Foreign Sales
The revenues and identifiable assets attributable to the Company's domestic and
foreign operations for its last two fiscal years are summarized in the
following table:
Financial Information Relating to Domestic and Foreign Operations
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2009 2008
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(in thousands)
Sales to external customers(1):
Domestic $62,676 $56,122
Foreign 6,889 12,245
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Total Net Sales $69,565 $68,367
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Identifiable assets:
United States $60,456 $50,056
Dominican Republic (2) 18,822 19,841
Other foreign countries 2,308 6,826
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Total Identifiable Assets $81,586 $76,723
======= =======
(1) All of the Company's sales originate 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) Consists primarily of inventories ($13,960,000) and fixed assets
($4,696,000) located at the Company's principal manufacturing facility in the
Dominican Republic.
ITEM 1A: RISK FACTORS.
The risks described below are among those that could materially and adversely
affect the Company's business, financial condition or results of operations.
These risks could cause actual results to differ materially from historical
experience and from results predicted by any forward-looking statements related
to conditions or events that may occur in the future.
Our Business Could Be Materially Adversely Affected as a Result of General
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Economic and Market Conditions
------------------------------
We are subject to the effects of general economic and market conditions. If
these conditions deteriorate, our business, results of operations or financial
condition could be materially adversely affected. In addition, since October
2008, the U.S. and international economies have experienced a significant
downturn and continue to be very volatile. In the event that the downturn in the
U.S. or international economies is prolonged or worsens, our revenue levels
could be further materially adversely affected in future periods. If the current
worldwide economic downturn continues, many of our current or potential future
customers may experience serious cash flow problems and as a result may, modify,
delay or cancel purchases of our products. Additionally, customers may not be
able to pay, or may delay payment of, accounts receivable that are owed to us.
Furthermore, the current downturn and market instability makes it difficult for
us to forecast our revenues.
Our Business Could Be Materially Adversely Affected as a Result of the Inability
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to Maintain Adequate Financing
------------------------------
Our business is dependent on maintaining the financing used in the Marks
acquisition and to fund operations. The current debt facilities provide for
certain minimum payments on the Marks term loan and financial covenants relating
to ratios affected by profit and debt levels. If profits or cash-flow levels
decline below the minimums required to meet these covenants or make the minimum
debt payments, the debt facilities may be materially adversely affected. Effects
on the Company's financing could include higher interest costs, reduction in
borrowing availability or revocation of the existing credit facilities.
Our Business Could Be Materially Adversely Affected by the Inability to Reduce
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Expenses Relative to the Current Decreases in Sales Levels
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While Management has begun implementation of a restructuring plan to reduce
expense levels relative to current sales levels, if this plan is unsuccessful,
delayed or sales levels decrease further, our business may be adversely
affected.
Our Business Could Be Materially Adversely Affected as a Result of Housing
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Market Conditions
-----------------
We are subject to the effects of housing market conditions. If these conditions
deteriorate, resulting in the decline in new housing starts, existing home sales
or existing home renovations, our business, results of operations or financial
condition could be materially adversely affected, particularly in our intrusion
product lines.
Our Business Could Be Materially Adversely Affected as a Result of Lessening
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Demand in the Security Market
-----------------------------
Our revenue and profitability depend on the overall demand for our products.
Continued or worsening delays or reductions in spending, domestically or
internationally, for electronic security systems could further materially
adversely affect demand for our products, which could result in decreased
revenues or earnings.
The Markets We Serve Are Highly Competitive and We May Be Unable to Compete
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Effectively
-----------
We compete with approximately 20 other companies that manufacture and market
security equipment to distributors, dealers, control stations and original
equipment manufacturers. Some 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 on a timely basis. The inability of the Company to compete with
respect to any one or more of the aforementioned factors could have an adverse
impact on the Company's business.
Our Business Could be Materially Adversely Affected as a result of Offering
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Extended Payment Terms to Customers
-----------------------------------
We regularly grant credit terms beyond 30 days to our customers. These terms are
offered in an effort to keep a full line of our products in-stock at our
customers locations. The longer terms that are granted, the more risk is
inherent in collection of those receivables. We believe that our Bad Debt
reserves are adequate to account for this inherent risk.
Competitors May Develop New Technologies or Products in Advance of Us
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Our business may be materially adversely affected by the announcement or
introduction of new products and services by our competitors, and the
implementation of effective marketing or sales strategies by our competitors.
There can be no assurance that competitors will not develop products that are
superior to the Company's products. Further, there can be no assurance that the
Company will not experience additional price competition, and that such
competition may not adversely affect the Company's position and results of
operations.
The Company's Products are Subject to Technological Changes from Time to Time,
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Which may Result in Increased Research and Developments Expenditures to Attract
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or Retain Customers
-------------------
The industry in which the Company operates is characterized by constantly
improved products. Future success will depend, in part, on our ability to
continue to develop and market products and product enhancements
cost-effectively, which will require continued expenditures for product
engineering, sales and marketing. The Company's research and development
expenditures, which were $5,116,000 and $5,500,000 for 2009 and 2008,
respectively, are principally targeted at enhancing existing products, and to a
lesser extent at developing new ones. If the Company cannot modify its products
to meet its customers' changing needs, we may lose sales.
We Rely On Distributors To Sell Our Products And Any Adverse Change In Our
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Relationship With Our Distributors Could Result In A Loss Of Revenue And Harm
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Our Business.
-------------
We distribute our products primarily through independent distributors and
wholesalers of security alarm and security hardware equipment. Our distributors
and wholesalers also sell our competitors' products, and if they favor our
competitors' products for any reason, they may fail to market our products as
effectively or to devote resources necessary to provide effective sales, which
would cause our results to suffer. In addition, the financial health of these
distributors and wholesalers and our continuing relationships with them are
important to our success. Some of these distributors and wholesalers may be
unable to withstand adverse changes in business conditions. Our business could
be seriously harmed if the financial condition of some of these distributors and
wholesalers substantially weakens.
Members of Management and Certain Directors Beneficially Own a Substantial
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Portion of the Company's Common Stock and May Be in a Position to Determine the
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Outcome of Corporate Elections
------------------------------
Richard L. Soloway, our Chief Executive Officer, members of management and the
Board of Directors beneficially own 31.4% of the currently outstanding shares of
Common Stock. By virtue of such ownership and their positions with Napco, they
may have the practical ability to determine the election of all directors and
control the outcome of substantially all matters submitted to Napco's
stockholders.
In addition, Napco has a staggered Board of Directors. Such concentration of
ownership and the staggered Board could have the effect of making it more
difficult for a third party to acquire, or discourage a third party from seeking
to acquire, control of Napco.
We Are Dependent Upon the Efforts of Richard L. Soloway, Our Chief Executive
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Officer
-------
The success of the Company is largely dependent on the efforts of Richard L.
Soloway, Chief Executive Officer. The loss of his services could have a material
adverse effect on the Company's business and prospects. There is currently no
succession plan.
Our Business Could Be Materially Adversely Affected by an Increase in the
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Exchange Rate of the Dominican Peso
-----------------------------------
We are exposed to foreign currency risks due to our significant operations in
the Dominican Republic. We have significant operations in the Dominican Republic
which are denominated in Dominican pesos. We are subject to the risk that
currency exchange rates between the United States and the Dominican Republic
will fluctuate, potentially resulting in an increase in some of our expenses
when US dollars are transferred to Dominican pesos to pay these expenses.
Our Business Could Be Materially Adversely Affected by the Integration of Marks
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into Our Existing Operations
----------------------------
Our business is dependent on the orderly, effective integration of the acquired
Marks business, technologies, product lines and employees into our organization.
If this integration is unsuccessful, our business may be materially adversely
affected.
The Company's Debt Repayments Relating to the Acquisition of Marks Require
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Substantially Higher Cashflows
------------------------------
The Marks acquisition requires quarterly principal debt repayments of
approximately $893,000, plus interest, that are in addition to the Company's
historical cash-flow requirements. A significant decline in the Company's
earnings or cashflows could put at risk the Company's ability to repay this debt
as well as to failing to meet certain financial covenants within the Revolving
Credit Agreement and the Term Loan as amended.
ITEM 1B: UNRESOLVED STAFF COMMENTS.
Not applicable.
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. In March 2009, the Company began a Restructuring Plan, as
described in Note 14, which includes consolidating the operations of Marks from
this building into the Corporate Headquarters in Amityville, NY and its
production facility in the Dominican Republic. The move from the leased building
described below was completed in August 2009, prior to the expiration of the
lease. The Marks business involves the manufacturing and distribution of
door-locking devices.
The Company leased a building of approximately 35,000 square feet in Amityville,
NY. This facility provided all of the administrative, production and warehousing
space for the Company's recent Marks acquisition. The lease commenced in August
2008 and expired in August 2009.
The Company's foreign subsidiary located in the Dominican Republic, Napco DR,
S.A. (formerly known as NAPCO/Alarm Lock Grupo International, 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, 2009, a majority of the Company's products were manufactured at this
facility, utilizing U.S. quality control standards.
The Company's foreign subsidiary located in the United Kingdom, Napco Group
Europe Ltd, leases office space of approximately 167 square feet. This lease
expires in October 2009.
The Company's sales office located in the United Arab Emirates leases office
space of approximately 500 square feet. This lease expired in June 2009 and
provides for an annual renewal at substantially the same terms and conditions.
The renewal has not yet been executed but the Company anticipates renewing this
lease through June 2010.
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.
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
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ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Principal Market
NAPCO's Common Stock is traded on the NASDAQ Stock Market, Global Market System,
under the symbol NSSC.
The tables set forth below reflect the range of high and low sales of the Common
Stock in each quarter of the past two fiscal years as reported by the NASDAQ
Global Market System.
Quarter Ended Fiscal 2009
-------------------------
Common Stock Sept. 30 Dec. 31 March 31 June 30
-------- ------- -------- -------
High $4.54 $2.90 $2.82 $1.72
Low $2.45 $1.02 $0.76 $1.01
Quarter Ended Fiscal 2008
-------------------------
Common Stock Sept. 30 Dec. 31 March 31 June 30
-------- ------- -------- -------
High $6.94 $6.25 $6.45 $5.00
Low $5.35 $4.83 $4.65 $4.45
Approximate Number of Security Holders
The number of holders of record of NAPCO's Common Stock as of October 7, 2009
was 128 (such number does not include beneficial owners of stock held in nominee
name).
Dividend Information
NAPCO has declared no cash dividends during the past two years with respect to
its Common Stock, and the Company does not anticipate paying any cash dividends
in the foreseeable future. Any cash dividends must be approved by the Company's
lenders.
Equity Compensation Plan Information as of June 30, 2009
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO WEIGHTED AVERAGE FUTURE ISSUANCE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF (EXCLUDING SECURITIES
OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (a)
PLAN CATEGORY (a) (b) (c)
Equity compensation plans approved by 1,420,240 $2.99 388,000
security holders:
Equity compensation plans not approved __ __ __
by security holders:
-------------------------- ---------------------- -------------------------
Total 1,420,000 $2.99 388,000
========================== ====================== =========================
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 and at June 30
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(In thousands, except share and per share data)
2009(1) 2008 2007(2) 2006(2) 2005(2)(3)
------- ---- ------- ------- ----------
Statement of earnings data:
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Net Sales $69,565 $68,367 $66,202 $69,548 $65,229
Gross Profit 15,096 20,412 23,998 26,956 24,641
Impairment of Goodwill 9,686 -- -- -- --
(Loss) Income from Operations (14,917) 3,137 6,501 9,523 8,910
Net (Loss) Income (13,382) 3,718 4,217 6,119 5,629
Cash Flow Data:
Net cash flows provided by (used in)
operating activities 6,792 3,784 (3,674) (168) 7,205
Net cash flows used in investing activities (25,229) (1,045) (1,294) (1,679) (658)
Net cash flows (used in) provided by
financing activities 19,781 (1,722) 3,978 3,407 (6,165)
Per Share Data:
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Net (loss) earnings per common share:
Basic $(.70) $.19 $.21 $.31 $.29
Diluted $(.70) $.19 $.20 $.30 $.28
Weighted average common shares outstanding:
Basic 19,096,000 19,263,000 19,961,000 19,785,000 19,265,000
Diluted 19,096,000 19,802,000 20,599,000 20,605,000 20,284,000
Cash Dividends declared per common share (4) $.00 $.00 $.00 $.00 $.00
Balance sheet data (5):
-----------------------
Working capital $22,404 $41,293 $40,527 $36,321 $31,017
Total assets 81,586 76,723 76,785 71,198 59,907
Long-term debt 18,749 12,400 10,900 4,700 1,950
Stockholders' equity 40,515 53,542 53,257 50,850 43,678
(1) Includes the operations and assets of Marks USA I which was acquired in
August 2008.
(2) Certain expenses in Cost of sales have been reclassified to Selling,
general and administrative expense to conform to the current year's
presentation.
(3) Share and per share data have been restated to reflect the effect of a 2:1
stock split effective April 2004, a 20% stock dividend effective November
2004, a 3:2 stock split effective December 2005 and a 3:2 stock split
effective June 2006.
(4) 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 approved by the Company's
primary lenders.
(5) Working capital is calculated by deducting Current Liabilities from
Current Assets.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
The Company is a diversified manufacturer of security products, encompassing
intrusion and fire alarms, building access control systems and electronic
locking devices. These products are used for commercial, residential,
institutional, industrial and governmental applications, and are sold worldwide
principally to independent distributors, dealers and installers of security
equipment. International sales accounted for approximately 10% and 18% of our
revenues for the fiscal years ended June 30, 2009 and 2008 respectively.
The Company owns and operates manufacturing facilities in Amityville, New York
and the Dominican Republic. A significant portion of our operating costs are
fixed, and do not fluctuate with changes in production levels or utilization of
our manufacturing capacity. As production levels rise and factory utilization
increases, the fixed costs are spread over increased output, which should
improve profit margins. Conversely, when production levels decline our fixed
costs are spread over reduced levels, thereby decreasing margins.
On August 18, 2008, the Company acquired substantially all of the assets and
business of G. Marks Hardware, Inc. ("Marks") for $25.2 million, the repayment
of $1 million of bank debt and the assumption of certain current liabilities.
The Company also entered into a lease for the building where Marks has
maintained its operations. The lease provided for an annual base rent of
$288,750 plus maintenance and real estate taxes and expired in August 2009. In
March 2009, the Company began to move the Marks operations into its existing
facilities. The Company completed the majority of this consolidation by August
31, 2009. The Marks business involves the manufacturing and distribution of
door-locking devices.
The security products market is characterized by constant incremental innovation
in product design and manufacturing technologies. Generally, the Company devotes
7-8% of revenues to research and development (R&D) on an annual basis. Products
resulting from our R&D investments in fiscal 2009 did not contribute materially
to revenue during this fiscal year, but should benefit the Company over future
years. In general, the new products introduced by the Company are initially
shipped in limited quantities, and increase over time. Prices and manufacturing
costs tend to decline over time as products and technologies mature.
Economic and Other Factors
Since October 2008, the U.S. and international economies have experienced a
significant downturn and continue to be very volatile. In the event that the
downturn in the U.S. or international financial markets is prolonged, our
revenue, profit and cashflow levels could be materially adversely affected in
future periods. This could affect our ability to maintain adequate financing. If
the current worldwide economic downturn continues, many of our current or
potential future customers may experience serious cash flow problems and as a
result may, modify, delay or cancel purchases of our products. Additionally,
customers may not be able to pay, or may delay payment of, accounts receivable
that are owed to us. Furthermore, the current downturn and market instability
makes it difficult for us to forecast our revenues.
Seasonality
The Company's fiscal year begins on July 1 and ends on June 30. Historically,
the end users of Napco's products want to install its products prior to the
summer; therefore sales of its products historically peak in the period April 1
through June 30, the Company's fiscal fourth quarter, and are reduced in the
period July 1 through September 30, the Company's fiscal first quarter. To a
lesser degree, sales in Europe are also adversely impacted in the Company's
first fiscal quarter because of European vacation patterns, i.e., many
distributors and installers are closed for the month of August. In addition,
demand is affected by the housing and construction markets. The severity of the
current economic downturn may also affect this trend.
Restructuring Costs
In March 2009, the Company began a Restructuring Plan consisting of a series of
actions to consolidate its Sales, Production and Warehousing operations of Marks
and those in Europe and the Middle East into the Corporate Headquarters in
Amityville, NY and its production facility in the Dominican Republic. We expect
these restructuring initiatives to cost between $1,200,000 and $1,500,000. The
majority of these actions have been completed by July 31, 2009, while certain
Production-related actions are expected to be completed by December 31, 2009.
Accordingly, the Company recognized restructuring costs of $1,274,000 in the
fiscal year ended June 30, 2009. Of this amount, $210,000 relates to Workforce
Reductions communicated in March 2009 and $1,064,000 to Business Exits and
related costs associated with inventory and lease impairments related to the
closure of the Marks, European and Middle East facilities. As of June 30, 2009,
$1,138,000 of the $1,274,000 in restructuring costs has been incurred and
$136,000 remains in accrued expenses.
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; inventories; intangible
assets; 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 sale. 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 other allowances.
Our sales return accrual is a subjective critical estimate that has a direct
impact on reported net sales and income. This accrual is calculated based on a
history of gross sales and actual sales returns, as well as management's
estimate of anticipated returns and allowances. As a percentage of gross sales,
sales returns, rebates and allowances were 9% and 6% for fiscal years ended June
30, 2009 and 2008, 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 if it mitigated its risk through
diversification of customers. Such risks of loss manifest themselves
differently, depending on the nature of the concentration, and vary in
significance.
The Company had two customers with accounts receivable balances that aggregated
24% and 34% of the Company's accounts receivable at June 30, 2009 and 2008,
respectively. Sales to neither of these customers exceeded 10% of net sales in
any of the past three fiscal years.
In the ordinary course of business, we have established a reserve for doubtful
accounts and customer deductions in the amount of $400,000 and $405,000 as of
June 30, 2009 and 2008, respectively. Our reserve 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.
Inventories
Inventories are valued at the lower of cost or fair market value, with cost
being determined on the first-in, first-out (FIFO) method. The reported net
value of inventory includes finished saleable products, work-in-process and raw
materials that will be sold or used in future periods. Inventory costs include
raw materials, direct labor and overhead. The Company's overhead expenses are
applied based, in part, upon estimates of the proportion of those expenses that
are related to procuring and storing raw materials as compared to the
manufacture and assembly of finished products. These proportions, the method of
their application, and the resulting overhead included in ending inventory, are
based in part on subjective estimates and approximations and actual results
could differ from those estimates.
In addition, the Company records an inventory obsolescence reserve, which
represents the difference between the cost of the inventory and its estimated
market value, based on various product sales projections. This reserve is
calculated using an estimated obsolescence percentage applied to the inventory
based on age, historical trends, requirements to support forecasted sales, and
the ability to find alternate applications of its raw materials and to convert
finished product into alternate versions of the same product to better match
customer demand. There is inherent professional judgment and subjectivity made
by both production and engineering members of management in determining the
estimated obsolescence percentage. For the fiscal years 2009 and 2008, net
charges and balances in these reserves amounted to $247,000 and $1,447,000; and
$0 and $1,200,000, respectively. In addition, and as necessary, the Company may
establish specific reserves for future known or anticipated events.
The Company also regularly reviews the period over which its inventories will be
converted to sales. Any inventories expected to convert to sales beyond 12
months from the balance sheet date are classified as non-current.
Goodwill and Other Intangible Assets
The Company accounts for Goodwill in accordance with Statement of Financial
Accounting Standards (SFAS) No. 141R, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. These statements established accounting
and reporting standards for acquired goodwill and other intangible assets.
Specifically, the standards address how acquired intangible assets should be
accounted for both at the time of acquisition and after they have been
recognized in the financial statements. In accordance with SFAS No. 142,
intangible assets, including purchased goodwill, must be evaluated for
impairment. Intangible assets are reviewed for impairment at least annually at
the Company's fiscal year-end of June 30 or more often whenever there is an
indication that the carrying amount may not be recovered. Those intangible
assets that are classified as goodwill or as other intangibles with indefinite
lives are not amortized.
Impairment testing is performed in two steps: (i) the Company determines
impairment by comparing the fair value of a reporting unit with its carrying
value, and (ii) if there is an impairment, the Company measures the amount of
impairment loss by comparing the implied fair value of goodwill with the
carrying amount of that goodwill. At the conclusion of fiscal 2009, the Company
performed its annual impairment evaluation required by this standard and
determined that its goodwill relating to its Alarm Lock and Continental
subsidiaries is impaired. Accordingly, the Company recorded an impairment charge
of $9,686,000 which represents the unamortized balance of this Goodwill.
The Company's acquisition of substantially all of the assets and certain
liabilities of Marks included intangible assets with a fair value of $16,440,000
on the date of acquisition. In accordance with the requirements of SFAS No. 141,
"Business Combinations", the Company recorded the estimated value of $9,800,000
related to the customer relationships, $340,000 related to a non-compete
agreement and $6,300,000 related to the Marks trade name within intangible
assets and Goodwill of $922,000 subject to further adjustment. In accordance
with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", the
intangible assets will be amortized over their estimated useful lives of twenty
years (customer relationships) and seven years (non-compete agreement). The
Marks USA trade name was deemed to have an indefinite life. The goodwill
recorded as a result of the acquisition is deductible for Federal and New York
State income tax purposes over a period of 15 years.
Income Taxes
The Company adopted the provisions of FIN 48 as of July 1, 2007. The Company has
identified its U.S. Federal income tax return and its State return in New York
as its major tax jurisdictions. As a result the Company increased its accrued
income tax liability by $715,000, from $1,836,000 to $2,551,000, to provide for
additional reserves for uncertain income tax positions for U.S. Federal and
State income tax purposes. The fiscal 2006 and forward years are still open for
examination. The increase in the accrued income tax liability of $715,000 was
offset in part by a $230,000 increase to a deferred income tax asset, resulting
in a net reduction to retained earnings of $485,000 (representing the cumulative
effect of adopting FIN48).
During the year ending June 30, 2009 the Company decreased its reserve for
uncertain income tax positions by $73,000. As of June 30, 2009 the Company has a
long-term accrued income tax liability of $176,000. The Company's practice is to
recognize interest and penalties related to income tax matters in income tax
expense and accrued income taxes. As of June 30, 2009, the Company had accrued
interest totaling $37,000 and $141,000 of unrecognized net tax benefits
(including the related accrued interest and net of the related deferred income
tax benefit of $72,000) that, if recognized, would favorably affect the
company's effective income tax rate in any future period.
For the year ended June 30, 2009, the company recognized a net benefit to income
tax expense of $53,000 ($99,000 liability reversal including interest, less the
related $34,000 reversal of deferred tax asset, plus current year interest
accrual on other reserves of $12,000).
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 for fiscal 2009 is as follows (dollars in thousands):
% of
Pre-tax
Amount Income
------ -------
Tax at Federal statutory rate $(5,672) 34.0%
Increases (decreases) in
taxes resulting from:
Meals and entertainment 58 (0.4)%
State income taxes, net of
Federal income tax benefit 18 (0.1)%
Foreign source income and taxes 2,224 (13.3)%
Stock based compensation expense 107 (0.6)%
Tax reserve reversal 53 0.3%
Other, net 19 (0.1)%
-------- -------
Provision for income taxes $(3,299) (19.8)%
======== =======
Liquidity and Capital Resources
The Company's cash on hand combined with proceeds from operating and financing
activities during fiscal 2009 were adequate to meet the Company's capital
expenditure needs and long-term debt obligations. The Company's primary internal
source of liquidity is the cash flow generated from operations. The primary
source of financing related to borrowings under an $11,100,000 secured revolving
credit facility. As of June 30, 2009 $11,100,000 was outstanding under this
revolving line of credit. The Company expects that cash generated from
operations will be adequate to meet its short-term liquidity requirements. As of
June 30, 2009, the Company's unused sources of funds consisted principally of
$4,109,000 in cash.
On August 18, 2008, the Company and its banks amended and restated the existing
$25,000,000 revolving credit agreement. The amended facility was $50,000,000 and
provides for a $25,000,000 revolving credit line as well as a $25,000,000 term
portion of which the entire $25,000,000 was utilized to finance the asset
purchase agreement as described in Note 5 of the accompanying consolidated
financial statements. The amended revolving credit agreement and term loan was
amended in June 2009 to $11,100,000 and is secured by the accounts receivable, a
portion of inventory, the Company's headquarters building in Amityville, New
York, certain other assets of Napco Security Technologies, Inc. and the common
stock of three of the Company's subsidiaries. The agreements bear interest based
on either the Prime Rate or an alternate rate based on LIBOR as described in the
agreement. Any outstanding borrowings are to be repaid or refinanced on or
before that time. As of June 30, 2009 there was $11,100,000 outstanding under
the revolving credit facility with an interest rate of 7.25% and $22,321,000
outstanding under the term loan with an interest rate of 7.25%. The term loan is
being repaid in 19 quarterly installments of $893,000 each, commencing in
December 2008, and a final payment of $8,033,000 due in August 2013.
The agreements contain various restrictions and covenants including, among
others, restrictions on payment of dividends, restrictions on borrowings and
compliance with certain financial ratios, as defined in the amended agreement.
As of June 30, 2009 the Company was not in compliance with the covenants
relating to net income and ratios associated with maximum leverage, a modified
quick ratio and debt service coverage for which it has received the appropriate
waivers from its banks. The Company and its banks also amended the facilities to
provide for a borrowing base formula in calculating availability under the
revolving credit line.
Management believes that current working capital and cash flows from operations
will be sufficient to fund the Company's operations through at least the first
quarter of fiscal 2011.
The Company takes into consideration a number of factors in measuring its
liquidity, including the ratios set forth below:
2009 2008
---- ----
Current Ratio 2.0 to 1 5.7 to 1
Sales to Receivables 3.5 to 1 2.7 to 1
Total debt to equity .82 to 1 .23 to 1
As of June 30, 2009, the Company had no material commitments for capital
expenditures or inventory purchases other than purchase orders issued in the
normal course of business. 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 August 18, 2008, the Company, pursuant to an Asset Purchase Agreement with
Marks, acquired substantially all of the assets and business for $25 million,
the repayment of $1 million of bank debt and the assumption of current
liabilities as described more fully in the Asset Purchase Agreement. The Marks
business involves the manufacturing and distribution of door-locking devices.
The Company funded the acquisition with a term loan from its lenders as
described above.
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. The estimates of fair value were subject to adjustment
for a period of up to one year from the date of acquisition, and such
adjustments were not material. Costs in excess of identifiable net assets
acquired were allocated to goodwill in the first quarter of fiscal 2009.
Working Capital. Working capital decreased by $18,889,000 to $22,404,000 at June
30, 2009 from $41,293,000 at June 30, 2008. The decrease in working capital was
primarily the result of the classification of the Company's outstanding debt
under its revolving line of credit as a current liability. The term loan was
obtained during fiscal 2009 and the outstanding debt under the revolving line of
credit was classified as a non-current liability as June 30, 2008. Working
capital is calculated by deducting Current Liabilities from Current Assets.
Accounts Receivable. Accounts Receivable decreased by $5,824,000 to $19,999,000
at June 30, 2009 from $25,823,000 at June 30, 2008. This decrease resulted
primarily from the lower net sales during the fourth quarter of fiscal 2009 as
compared to the fourth quarter of fiscal 2008 as well as the Company granting
less generous credit terms to its customers.
Inventories. Inventories increased by $1,562,000 to $28,834,000 at June 30, 2009
as compared to $27,272,000 at June 30, 2008. The increase in inventory levels
was primarily the result of the Company acquiring the assets of Marks as
partially offset by a reduction in its procurement and production levels of its
non-Marks products..
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses
decreased by $1,296,000 to $7,437,000 as of June 30, 2009 as compared to
$8,733,000 at June 30, 2008. This decrease is primarily due to decreased
purchases of raw materials during the month of June 2009 as compared to June
2008, which was primarily the result of a lower sales forecast for the fourth
quarter of fiscal 2009 as compared to the same quarter a year ago as well as the
Company's more accurate forecasting and production planning as previously
discussed.
Off-Balance Sheet Arrangements
The Company does not maintain any off-balance sheet arrangements.
Contractual Obligations
The following table summarizes the Company's contractual obligations by fiscal
year:
Payments due by period
-------------------------------------------------------------------------------------
Less than 1 More than 5
------------ ------------
Contractual obligations Total year 1-3 years 3-5 years years
----------------------- ----- ---- --------- --------- -----
Long-term debt obligations $33,421,000 $14,672,000 $7,144,000 $11,605,000 $ --
Land lease (83 years remaining) (1) 23,904,000 288,000 576,000 576,000 22,464,000
Operating lease obligations 190,000 153,000 37,000 -- --
Other long-term obligations
(employment agreements) (1) 2,609,000 1,464,000 770,000 375,000 --
-------------------------------------------------------------------------------------
Total $60,124,000 $5,477,000 $8,527,000 $23,656,000 $22,464,000
=====================================================================================
(1) See footnote 12 to the accompanying consolidated financial statements.
Results of Operations
Fiscal 2009 Compared to Fiscal 2008
Fiscal year ended June 30,
--------------------------
% Increase/
2009 2008 (decrease)
---- ---- -----------
Net sales $ 69,565 $ 68,367 1.8%
Restructuring costs included in
cost of sales 1,110 -
Gross profit 15,096 20,412 (26.0)%
Gross profit as a % of net sales 21.7% 29.9% (8.2)%
Selling, general and administrative 20,163 17,275 16.7%
Impairment of goodwill 9,686 -
Other restructuring costs 164 -
(Loss) income from operations (14,917) 3,137 (575.5)%
Interest expense, net 1,637 819 99.9%
Other expense, net 127 42 202.4%
(Benefit)for income taxes (3,299) (1,408) 134.3%
Net (loss) income (13,382) 3,718 11.8%
Net sales in fiscal 2009 increased by 1.8% to $69,565,000 from $68,367,000 in
fiscal 2008. The increase in sales was primarily the result of the net sales
added from the Marks acquisition ($16,936,000) as partially offset by a decrease
in intrusion detection products ($10,977,000), door-locking products
($1,054,000), access control products ($594,000) and products specific to the
Company's Middle East operation ($3,113,000). The Company's sales were adversely
affected by the worldwide economic downturn.
The Company's gross profit decreased $5,316,000 to $15,096,000 or 21.7% of net
sales in fiscal 2009 as compared to $20,412,000 or 29.9% of net sales in fiscal
2008. The decrease in gross profit in both absolute dollars and as a percentage
of net sales was due primarily to the decrease in net sales of the Company's
non-Marks products and the resulting reduction in overhead absorption in the
production of these products.
Selling, general and administrative expenses as a percentage of net sales
increased to 29.0% in fiscal 2009 from 25.3% in fiscal 2008. Selling, general
and administrative expenses for fiscal 2009 increased $2,888,000 to $20,163,000
from $17,275,000 in fiscal 2008. These increases resulted primarily from the
addition of Marks expenses in fiscal 2009, including $1,231,000 in amortization
expense on Intangible assets, and the net sales for fiscal 2009 increasing by a
lower proportion than these additional expenses.
Interest expense for fiscal 2009 increased by $818,000 to $1,637,000 from
$819,000 for the same period a year ago. The increase in interest expense is
primarily the result of the increase in outstanding debt relating to the Marks
acquisition term loan and higher borrowing rates charged by the Company's
primary banks as partially offset by the Company's reduction of its outstanding
borrowings under its revolving line of credit.
Other expenses increased slightly to $127,000 in fiscal 2009 as compared to
$42,000 in fiscal 2008.
The Company's benefit for income taxes for fiscal 2009 increased by $1,891,000
to a benefit of $3,299,000 as compared to a benefit of $1,408,000 for the same
period a year ago. The decrease in provision for income taxes resulted primarily
from the Company recognizing a net tax benefit to income tax expense of
$3,293,000 resulting from the impairment charge to goodwill recognized in fiscal
2009. In addition, in December 2007 the Company completed a corporate
restructuring for which new offshore companies were formed. As a result, the
Company's effective rate for fiscal 2009, prior to the effect of the $3,293,000
benefit described above, was 0%, which reflected this restructuring.
Net income for fiscal 2009 decreased by $17,100,000 to $(13,382,000) as compared
to $3,718,000 in fiscal 2008. This resulted primarily from the impairment charge
to goodwill of $9,686,000, the decrease in Gross profit of $5,316,000 and the
increase in Selling, general and administrative expenses of $2,888,000 as
partially offset by the $3,293,000 tax benefit, all of which are discussed
above.
Forward-looking Information
This Annual Report on Form 10-K and the information incorporated by reference
may include "Forward-Looking Statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. The
Company intends the Forward-Looking Statements to be covered by the Safe Harbor
Provisions for Forward-Looking Statements. All statements regarding the
Company's expected financial position and operating results, its business
strategy, its financing plans and the outcome of any contingencies are
Forward-Looking Statements. The Forward-Looking Statements are based on current
estimates and projections about our industry and our business. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
or variations of such words and similar expressions are intended to identify
such Forward-Looking Statements. The Forward-Looking Statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those set forth or implied by any Forward-Looking Statements. For example,
the Company is highly dependent on its Chief Executive Officer for strategic
planning. If he is unable to perform his services for any significant period of
time, the Company's ability to continue growing could be adversely affected. In
addition, factors that could cause actual results to differ materially from the
Forward-Looking Statements include, but are not limited to, adverse tax
consequences of offshore operations, distribution problems, unforeseen
environmental liabilities and the uncertain military, political and economic
conditions in the world. The Company's Risk Factors are discussed in more detail
in Item 1A.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instrument is long-term debt (consisting of a
revolving credit facility and a term loan) that provides for interest at a
spread above the prime rate. The Company is affected by market risk exposure
primarily through the effect of changes in interest rates on amounts payable by
the Company under this credit facility. At June 30, 2009, an aggregate principal
amount of approximately $33,421,000 was outstanding under the Company's credit
facility with a weighted average interest rate of approximately 7.25%. 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 $334,000 in interest that year.
A significant number of foreign sales transactions by the Company are
denominated in U.S. dollars. As such, the Company has shifted foreign currency
exposure onto many of its foreign customers. As a result, if exchange rates move
against foreign customers, the Company could experience difficulty collecting
unsecured accounts receivable, the cancellation of existing orders or the loss
of future orders. The foregoing could materially adversely affect the Company's
business, financial condition and results of operations. In addition, the
Company transacts certain sales in Europe in British Pounds Sterling, therefore
exposing itself to a certain amount of foreign currency risk. Management
believes that the amount of this exposure is immaterial. We are also exposed to
foreign currency risk relative to expenses incurred in Dominican Pesos ("RD$"),
the local currency of the Company's production facility in the Dominican
Republic. The result of a 10% strengthening in the U.S. dollar to our RD$
expenses would result in an annual decrease in income from operations of
approximately $314,000.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
a. Financial Statements: Financial statements required pursuant to this Item are
presented on pages FS-1 through FS-25 of this report as follows:
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
Page
----
Report of Independent Registered Public Accounting Firm FS-1
Report of Independent Registered Public Accounting Firm FS-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2009 and 2008 FS-3
Consolidated Statements of Operations for the Fiscal Years Ended FS-5
June 30, 2009 and 2008
Consolidated Statements of Stockholders' Equity for the Fiscal FS-6
Years Ended June 30, 2009 and 2008
Consolidated Statements of Cash Flows for the Fiscal Years Ended FS-7
June 30, 2009 and 2008
Notes to Consolidated Financial Statements FS-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors and Stockholders of NAPCO Security Technologies, Inc.
and Subsidiaries, Amityville, NY
We have audited the accompanying consolidated balance sheet of Napco Security
Technologies, Inc. and Subsidiaries (the "Company") as of June 30, 2009, and the
related consolidated statement of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Napco Security
Technologies, Inc. and Subsidiaries as of June 30, 2009 and the consolidated
results of its operations and its consolidated cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/HOLTZ RUBENSTEIN REMINICK LLP
Melville, New York
October 13, 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the Board of Directors and Stockholders of NAPCO
Security Technologies, Inc. (formerly known as Napco Security Systems, Inc.) and
Subsidiaries.
We have audited the accompanying consolidated balance sheets of NAPCO Security
Technologies, Inc. and Subsidiaries (the "Company") as of June 30, 2008 and
2007, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended June 30, 2008. Our audit also included
the financial statement schedule as of and for the year ended June 30, 2008
listed in the index at item 15. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 Technologies,
Inc. and Subsidiaries, as of June 30, 2008, and the results of its operations
and its cash flows for the year ended June 30, 2008 in conformity with generally
accepted accounting principles in the United States.
As discussed in Note 6 to the consolidated financial statements, the Company
changed its method of accounting for uncertain tax positions in accordance with
FASB Interpretation 48 "Accounting for Uncertainty in Income Taxes - an
Integration of FASB Statement No. 109" on July 1, 2007.
/s/MARCUM LLP (formerly Marcum & Kliegman LLP)
Melville, New York
September 30, 2008
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2009 and 2008
(In Thousands)
ASSETS
2009 2008
------- -------
CURRENT ASSETS
Cash and cash equivalents $ 4,109 $ 2,765
Accounts receivable, net of reserves 19,999 25,823
Inventories 18,885 9,548
Prepaid expenses and other current assets 796 1,121
Income tax receivable 192 -
Deferred income taxes 532 769
------- -------
Total Current Assets 44,513 50,026
Inventories - non-current, net 9,949 7,724
Deferred income taxes 1,585 -
Property, plant and equipment, net 9,070 8,989
Intangible assets, net 15,209 -
Goodwill, net 923 9,686
Other assets 337 298
------- -------
TOTAL ASSETS $81,586 $76,723
======= =======
See accompanying notes to consolidated financial statements.
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2009 and 2008
(In Thousands, Except Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2009 2008
-------- --------
CURRENT LIABILITIES
Loan payable $ 14,672 $ -
Accounts payable 4,049 4,857
Accrued expenses 1,475 1,333
Accrued salaries and wages 1,913 2,543
-------- --------
Total Current Liabilities 22,109 8,733
Long-term debt, net of current maturities 18,749 12,400
Accrued income taxes 213 294
Deferred income taxes - 1,607
Minority interest in subsidiary - 147
-------- --------
Total Liabilities 41,071 23,181
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share; 40,000,000 shares authorized;
20,095,713 and 20,092,473 shares issued; 19,095,713 and
19,092,473 shares outstanding, respectively 201 201
Additional paid-in capital 13,779 13,424
Retained earnings 32,150 45,532
-------- --------
46,130 59,157
Less: Treasury Stock, at cost (1,000,000 shares) (5,615) (5,615)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 40,515 53,542
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 81,586 $ 76,723
======== ========
See accompanying notes to consolidated financial statements.
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 2009 and 2008
(In Thousands, Except Share and Per Share Data)
2009 2008
------------ ------------
Net sales $ 69,565 $ 68,367
Cost of sales 53,359 47,955
Restructuring costs 1,110 -
------------ ------------
Gross Profit 15,096 20,412
Selling, general, and administrative expenses 20,163 17,275
Impairment of goodwill 9,686 -
Restructuring costs 164 -
------------ ------------
Operating (Loss) Income (14,917) 3,137
------------ ------------
Other expense:
Interest expense, net (1,637) (819)
Other, net (127) (42)
------------ ------------
(1,764) (861)
------------ ------------
(Loss) Income before Minority Interest and Income Taxes (16,681) 2,276
Minority interest in loss of subsidiary - 34
------------ ------------
(Loss) Income before Benefit for Income Taxes (16,681) 2,310
Benefit for income taxes (3,299) (1,408)
------------ ------------
Net (Loss) Income $ (13,382) $ 3,718
============ ============
(Loss) Income per share:
Basic $ (0.70) $ 0.19
Diluted $ (0.70) $ 0.19
Weighted average number of shares outstanding:
Basic 19,096,000 19,263,000
Diluted 19,096,000 19,802,000
See accompanying notes to consolidated financial statements.
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 2009 and 2008
(In Thousands, Except Share Data)
Common stock
---------------------- Treasury Stock
Number Additional -----------------------
of Shares Paid-in Number Retained
Issued Amount Capital of Shares Amount Earnings Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE - June 30, 2007 20,090,313 201 13,147 (425,172) (2,390) 42,299 53,257
Exercise of employee stock options 2,160 -- 3 -- -- -- 3
Non-cash stock-based
compensation expense -- -- 274 -- -- -- 274
Repurchase of Treasury shares -- -- -- (574,828) (3,225) -- (3,225)
FIN48 adjustment to retained earnings -- -- -- -- -- (485) (485)
Net income -- -- -- -- -- 3,718 3,718
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE - June 30, 2008 20,092,473 201 13,424 (1,000,000) (5,615) 45,532 53,542
Exercise of employee stock options 3,240 -- 6 -- -- -- 6
Non-cash stock-based
compensation expense -- -- 349 -- -- -- 349
Net loss -- -- -- -- -- (13,382) (13,382)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE - June 30, 2009 20,095,713 $ 201 $ 13,779 (1,000,000) $ (5,615) $ 32,150 $ 40,515
========== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2009 and 2008 (In Thousands)
2009 2008
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(13,382) $ 3,718
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 2,727 1,191
Impairment of goodwill 9,686 --
Charge to obsolescence reserve 14 --
Provision for doubtful accounts 34 40
Deferred income taxes (2,955) 653
Non-cash stock based compensation expense 349 274
Change in minority interest (147) --
Changes in operating assets and liabilities:
Accounts receivable 7,626 (284)
Inventories 5,164 951
Prepaid expenses and other current assets 437 52
Income tax receivable (192)
Other assets 79 (106)
Accounts payable, accrued expenses, accrued salaries and
wages, accrued income taxes (2,648) (2,705)
-------- --------
Net Cash Provided by Operating Activities 6,792 3,784
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used in business acquisition, net of cash acquired of $520 av (24,581) --
Purchases of property, plant, and equipment (648) (1,045)
-------- --------
Net Cash Used in Investing Activities (25,229) (1,045)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash paid for purchase of Treasury Stock -- (3,225)
Proceeds from acquisition financing 25,000 --
Principal payments on long-term debt (7,179) (3,500)
Proceeds from long-term debt 2,200 5,000
Proceeds from exercise of employee stock options 6 3
Cash paid for deferred financing costs (246) --
-------- --------
Net Cash Provided by (Used in) Financing Activities 19,781 (1,722)
-------- --------
Net Increase in Cash and Cash Equivalents 1,344 1,017
CASH AND CASH EQUIVALENTS - Beginning 2,765 1,748
-------- --------
CASH AND CASH EQUIVALENTS - Ending $ 4,109 $ 2,765
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net $ 1,483 $ 776
======== ========
Income taxes paid $ -- $ 108
======== ========
NON-CASH INVESTING ACTIVITIES:
Adjustment to Retained earnings relating to adoption of FIN 48 $ -- $ (485)
======== ========
See accompanying notes to consolidated financial statements.
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business and Summary of Significant Accounting Policies
--------------------------------------------------------------------------
Nature of Business
Napco Security Technologies, Inc. and subsidiaries (the "Company") is a
diversified manufacturer of security products, encompassing intrusion and fire
alarms, building access control systems and electronic locking devices. These
products are used for commercial, residential, institutional, industrial and
governmental applications, and are sold worldwide principally to independent
distributors, dealers and installers of security equipment.
Principles of Consolidation
The consolidated financial statements include the accounts of Napco Security
Technologies, Inc. and all of its wholly-owned subsidiaries, including those of
Marks USA I, LLC ("Marks"), a newly formed subsidiary which acquired
substantially all of the assets and certain liabilities of G. Marks Hardware,
Inc. acquired on August 18, 2008. All inter-company balances and transactions
have been eliminated in consolidation. The Company has evaluated events
subsequent to June 30, 2009 through the filing date of this report for potential
recognition or disclosure in these consolidated financial statements.
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.
Fourth Quarter Adjustments
In the fourth quarter of fiscal 2009 the Company recorded adjustments for
goodwill impairment and to reduce the amount of overhead capitalized in its
ending inventory. These adjustments reflect the decrease in the Company's market
capitalization and cashflow projections (goodwill impairment) and a significant
decrease in production and the resulting decrease in overhead absorption in
response to the decrease in net sales in the third and fourth quarters of fiscal
2009.
Cash and Cash Equivalents
Cash and cash equivalents include approximately $2,010,000 and $1,753,000 of
short-term time deposits at June 30, 2009 and 2008, 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 and other international agencies as of
June 30, 2009 and 2008.
Accounts Receivable
Accounts receivable is stated net of the reserves for doubtful accounts of
$400,000 and $405,000 and for returns and other allowances of $966,000 and
$1,130,000 as of June 30, 2009 and June 30, 2008, respectively. Our reserves for
doubtful accounts and for returns and other allowances are subjective critical
estimates that have a direct impact on reported net earnings. These reserves are
based upon the evaluation of accounts receivable agings, specific exposures,
sales levels and historical trends.
Inventories
Inventories are valued at the lower of cost or fair market value, with cost
being determined on the first-in, first-out (FIFO) method. The reported net
value of inventory includes finished saleable products, work-in-process and raw
materials that will be sold or used in future periods. Inventory costs include
raw materials, direct labor and overhead. The Company's overhead expenses are
applied based, in part, upon estimates of the proportion of those expenses that
are related to procuring and storing raw materials as compared to the
manufacture and assembly of finished products. These proportions, the method of
their application, and the resulting overhead included in ending inventory, are
based in part on subjective estimates and approximations and actual results
could differ from those estimates.
In addition, the Company records an inventory obsolescence reserve, which
represents the difference between the cost of the inventory and its estimated
market value, based on various product sales projections. This reserve is
calculated using an estimated obsolescence percentage applied to the inventory
based on age, historical trends, requirements to support forecasted sales, and
the ability to find alternate applications of its raw materials and to convert
finished product into alternate versions of the same product to better match
customer demand. There is inherent professional judgment and subjectivity made
by both production and engineering members of management in determining the
estimated obsolescence percentage. For the fiscal years 2009 and 2008, charges
and balances in these reserves amounted to $247,000 and $1,447,000; and $0 and
$1,200,000, respectively. In addition, and as necessary, the Company may
establish specific reserves for future known or anticipated events.
The Company also regularly reviews the period over which its inventories will be
converted to sales. Any inventories expected to convert to sales beyond 12
months from the balance sheet date are classified as non-current.
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost less accumulated
depreciation. Expenditures for maintenance and repairs are charged to expense as
incurred; costs of major renewals and improvements are capitalized. At the time
property and equipment are retired or otherwise disposed of, the cost and
accumulated depreciation are eliminated from the asset and accumulated
depreciation accounts and the profit or loss on such disposition is reflected in
income.
Depreciation is recorded over the estimated service lives of the related assets
using primarily the straight-line method. Amortization of leasehold improvements
is calculated by using the straight-line method over the estimated useful life
of the asset or lease term, whichever is shorter.
Goodwill
The Company accounts for goodwill in accordance with Statement of Financial
Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. These statements established accounting
and reporting standards for acquired goodwill and other intangible assets.
Specifically, the standards address how acquired intangible assets should be
accounted for both at the time of acquisition and after they have been
recognized in the financial statements. In accordance with SFAS No. 142,
purchased goodwill must be evaluated for impairment at least on an annual basis.
Those intangible assets that are classified as goodwill or as other intangibles
with indefinite lives are not amortized.
Impairment testing is performed in two steps: (i) the Company determines
impairment by comparing the fair value of a reporting unit with its carrying
value, and (ii) if there is an impairment, the Company measures the amount of
impairment loss by comparing the implied fair value of goodwill with the
carrying amount of that goodwill. The Company has performed its annual
impairment evaluation required by this standard and determined that the goodwill
is impaired. Accordingly, the Company recorded an impairment charge of
$9,686,000 which represents the unamortized balance of this Goodwill.
Intangible Assets
Under SFAS No.142, "Goodwill and Other Intangible Assets", all goodwill and
certain intangible assets determined to have indefinite lives will not be
amortized but will be tested for impairment at least annually. Intangible assets
other than goodwill will be amortized over their useful lives and reviewed for
impairment at least annually at the Company's fiscal yearend of June 30 or more
often whenever there is an indication that the carrying amount may not be
recovered.
The Company's acquisition of substantially all of the assets and certain
liabilities of Marks included intangible assets with a fair value of $16,440,000
on the date of acquisition. In accordance with the requirements of SFAS No. 141,
"Business Combinations", the Company recorded the estimated value of $9,800,000
related to the customer relationships, $340,000 related to a non-compete
agreement and $6,300,000 related to the Marks trade name within intangible
assets. The remaining excess of the purchase price of $922,000 was assigned to
Goodwill. In accordance with the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets", the intangible assets will be amortized over their estimated
useful lives of twenty years (customer relationships) and seven years
(non-compete agreement). The Marks USA trade name was deemed to have an
indefinite life. The goodwill recorded as a result of the acquisition is
deductible for Federal and New York State income tax purposes over a period of
15 years.
Changes in other intangible assets were as follows (in thousands):
June 30, 2009 June 30, 2008
----------------------------------------------- ---------------------------------------------
Accumulated Net book Accumulated Net book
Cost amortization value Cost amortization value
----------------------------------------------- ---------------------------------------------
Other intangible assets:
Customer relationships $ 9,800 $ (1,189) $ 8,611 $ -- $ -- $ --
Non-compete agreement 340 (42) 298 -- -- --
Trademark 6,300 -- 6,300 -- -- --
----------------------------------------------- ---------------------------------------------
$ 16,440 $ (1,231) $ 15,209 $ -- $ -- $ --
=============================================== =============================================
Amortization expense for intangible assets subject to amortization was
approximately $1,231,000 and $0 for the years ended June 30, 2009 and 2008,
respectively. Amortization expense for each of the next five years is estimated
to be as follows 2010--$1,339,000; 2011--$1,154,000; 2012-- $1,065,000;
2013--$917,000; and 2014--$781,000. The weighted average amortization period for
intangible assets was 19.6 years and 0 years at June 30, 2009 and 2008,
respectively.
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 other allowances and the
amount of reserves established for anticipated sales returns and other
allowances.
Sales Returns and Other Allowances
The Company analyzes sales returns in accordance with SFAS No. 48 "Revenue
Recognition When Right of Return Exists". The Company is able to make reasonable
and reliable estimates of product returns based on the Company's past history.
Estimates for sales returns are based on several factors including actual
returns and based on expected return data communicated to it by its customers.
Accordingly, the Company believes that its historical returns analysis is an
accurate basis for its allowance for sales returns. Actual results could differ
from those estimates.
Advertising and Promotional Costs
Advertising and promotional costs are included in "Selling, General and
Administrative" expenses in the consolidated statements of operations and are
expensed as incurred. Advertising expense for the fiscal years ended June 30,
2009 and 2008 was $1,038,000 and $1,364,000, 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
$5,116,000 and $5,500,000 were charged to expense for the fiscal years ended
June 30, 2009 and 2008, respectively, and are included in "Cost of Sales" in the
consolidated statements of operations.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," as amended. This statement establishes financial
accounting and reporting standards for the effects of income taxes that result
from an enterprise's activities during the current and preceding years. It
requires an asset and liability approach for financial accounting and reporting
of income taxes.
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109. FIN 48 prescribes a
two-step evaluation process for tax positions taken, or expected to be taken, in
a tax return. The first step is recognition and the second is measurement. FIN
48 also provides guidance on derecognition, measurement, classification,
disclosures, transition and accounting for interim periods. In May 2007, the
FASB issued FASB Staff Position ("FSP") No. FIN 48-1, "Definition of Settlement
in FASB Interpretation No. 48, an amendment of FASB Interpretation (FIN) No. 48,
Accounting for Uncertainty in Income Taxes" ("FSP No. FIN 48-1"). FSP No. FIN
48-1 provides guidance on how to determine whether a tax position is effectively
settled for the purpose of recognizing previously unrecognized tax benefits. The
Company adopted the provisions of FIN 48, as amended, effective July 1, 2007.
See Note 6.
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 (loss) 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 operations.
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 (loss) income Weighted Average Shares Net (loss) income per share
---------------------------- --------------------------- ----------------------------
2009 2008 2009 2008 2009 2008
------------ ------------ ------------ ------------ ------------ ------------
Basic EPS: $ (13,382) $ 3,718 19,096 19,263 $ (0.70) $ 0.19
Effect of Dilutive
Securities: Employee
Stock options -- -- -- 539 -- --
------------ ------------ ------------ ------------ ------------ ------------
Diluted EPS: $ (13,382) $ 3,718 19,096 19,802 $ (0.70) $ 0.19
============ ============ ============ ============ ============ ============
Options to purchase 1,420,240 and 187,700 shares of common stock for the two
fiscal years ended June 30, 2009 and 2008, respectively, were not included in
the computation of Diluted EPS because the exercise prices exceeded the average
market price of the common shares for the respective periods and, accordingly,
their inclusion would be anti-dilutive. These options were still outstanding at
the end of the respective periods.
Stock-Based Compensation
The Company has established two share incentive programs as discussed in Note 9.
Effective July 1, 2005, the Company adopted SFAS No. 123(R), "Share-Based
Payment" ("SFAS No. 123(R)"). This statement replaces SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123") and supersedes APB No. 25. SFAS
No. 123(R) requires that all stock-based compensation be recognized as an
expense in the financial statements and that such cost be measured at the fair
value of the award. This statement was adopted using the modified prospective
method of application, which required the Company to recognize compensation
expense on a prospective basis. Therefore, prior period financial statements
have not been restated. Under this method, in addition to reflecting
compensation expense for new share-based awards, expense is also recognized to
reflect the remaining service period of awards that had been included in
pro-forma disclosures in prior periods. SFAS No. 123(R) also requires that
excess tax benefits related to stock option exercises be reflected as financing
cash inflows instead of operating cash inflows.
Stock-based compensation costs of $349,000 and $274,000 were recognized for
fiscal years 2009 and 2008, respectively. The effect on both Basic and Diluted
Earnings per share was $0.02 for fiscal year 2009 and $0.01 for fiscal year
2008.
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 years ended June 30, 2009 and 2008.
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, 2009 and 2008, 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 approximates 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 13, and no additional
segment data has been presented.
Fair Value of Financial Instruments
The Company calculates the fair value of financial instruments and includes this
additional information in the notes to the financial statements where the fair
value is different than the book value of those financial instruments. When the
fair value approximates book value, no additional disclosure is made. The
Company uses quoted market prices whenever available to calculate these fair
values. When quoted market prices are not available, the Company uses standard
pricing models for various types of financial instruments which take into
account the present value of estimated future cash flows. At June 30, 2009 and
2008, management of the Company believes the carrying value of all financial
instruments approximated fair value.
Shipping and Handling Revenues and Costs
Emerging Issues Task Force (EITF) Issue No. 00-10, Accounting for Shipping and
Handling Revenues and Costs requires that all shipping and handling billed to
customers should be reported as revenue and the costs associated with these
revenues may be classified as either cost of sales, or selling, general, and
administrative costs, with footnote disclosure as to classification of these
costs. The Company records the amount billed to customers in net sales ($488,000
and $584,000 in fiscal years 2009 and 2008, respectively) and classifies the
costs associated with these revenues in cost of sales ($716,000 and $882,000 in
fiscal years 2009 and 2008, respectively).
New Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 165, "Subsequent Events" ("SFAS
No. 165"). SFAS No. 165 requires the disclosure of the date through which an
entity has evaluated subsequent events for potential recognition or disclosure
in the financial statements and whether that date represents the date the
financial statements were issued or were available to be issued. This standard
also provides clarification about circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements and the disclosures that an entity should make about events
or transactions that occurred after the balance sheet date. This standard is
effective for interim and annual periods beginning with our fiscal year ended
June 30, 2009. The adoption of this standard did not have a material impact on
our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles". This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. The Board does not expect that this
Statement will result in a change in current practice. However, transition
provisions have been provided in the unusual circumstance that the application
of the provisions of this Statement results in a change in practice.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133.
This statement changes the disclosure requirements for derivative instruments
and hedging activities. Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. SFAS No. 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. The Company's adoption of SFAS No. 161 is not
expected to have a material effect on its consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 157-1,
"Application of FASB Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements That Address Fair Value Measurements for Purposes of
Lease Classification or Measurement under Statement 13." This FSP amends SFAS
No. 157 to exclude certain leasing transactions accounted for under previously
existing accounting guidance. However, this scope exception does not apply to
assets acquired and liabilities assumed in a business combination, regardless of
whether those assets and liabilities are related to leases.
In February 2008, the FASB issued FSP No. FAS 157-2, "Effective Date of FASB
Statement No. 157". This FSP delays the effective date of SFAS No. 157, "Fair
Value Measurements", for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). This FSP defers the
effective date of SFAS No. 157 to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years for items within the scope
of this FSP.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) replaces SFAS No. 141,
"Business Combinations," however, it retains the fundamental requirements of the
former Statement that the acquisition method of accounting (previously referred
to as the purchase method) be used for all business combinations and for an
acquirer to be identified for each business. SFAS No. 141(R) defines the
acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control. Among other requirements, SFAS No. 141(R) requires
the acquiring entity in a business combination to recognize the identifiable
assets acquired, liabilities assumed and any non-controlling interest in the
acquiree at their acquisition-date fair values, with limited exceptions;
acquisition-related costs generally will be expensed as incurred. SFAS No.
141(R) requires certain financial statement disclosures to enable users to
evaluate and understand the nature and financial effects of the business
combination. SFAS No. 141(R) must be applied prospectively to business
combinations that are consummated beginning in the Company's fiscal 2010. The
Company's adoption of SFAS No. 141(R) is not expected to have a material effect
on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51" ("SFAS No. 160")
to establish accounting and reporting standards for the non-controlling interest
in a subsidiary and for the deconsolidation of a subsidiary. Among other
requirements, SFAS No. 160 clarifies that a non-controlling interest in a
subsidiary, which is sometimes referred to as minority interest, is to be
reported as a separate component of equity in the consolidated financial
statements. SFAS No. 160 also requires consolidated net income to include the
amounts attributable to both the parent and the non-controlling interest and to
disclose those amounts on the face of the consolidated statement of income. SFAS
No. 160 must be applied prospectively for fiscal years, and interim periods
within those fiscal years, beginning in the Company's fiscal 2010, except for
the presentation and disclosure requirements, which will be applied
retrospectively for all periods. The Company's adoption of SFAS No. 160 is not
expected to have a material effect on its consolidated financial statements.
In December 2007, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 110 ("SAB 110"). This staff accounting bulletin ("SAB")
expresses the views of the staff regarding the use of a "simplified" method, as
discussed in SAB No. 107 ("SAB 107"), in developing an estimate of expected term
of "plain vanilla" share options in accordance with SFAS No. 123 (revised 2004),
Share-Based Payment. In particular, the staff indicated in SAB 107 that it will
accept a company's election to use the simplified method, regardless of whether
the company has sufficient information to make more refined estimates of
expected term. At the time SAB 107 was issued, the staff believed that more
detailed external information about employee exercise behavior (e.g., employee
exercise patterns by industry and/or other categories of companies) would, over
time, become readily available to companies. Therefore, the staff stated in SAB
107 that it would not expect a company to use the simplified method for share
option grants after December 31, 2007. The staff understands that such detailed
information about employee exercise behavior may not be widely available by
December 31, 2007. Accordingly, the staff will continue to accept, under certain
circumstances, the use of the simplified method beyond December 31, 2007. The
Company's adoption of SAB 111 did not have a material effect on its consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. Most of the provisions of this Statement
apply only to entities that elect the fair value option. However, the amendment
to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", applies to all entities with available-for-sale and trading
securities. Some requirements apply differently to entities that do not report
net income. SFAS No. 159 will become effective for the Company in its fiscal
year ending June 30, 2009. The Company's adoption of SFAS No. 159 did not have a
material effect on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". SFAS
No. 157 provides guidance for using fair value to measure assets and
liabilities. In addition, this statement defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. Where applicable, this statement simplifies and codifies related
guidance within generally accepted accounting principles. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company's
adoption of SFAS No. 157 did not have a material effect on its consolidated
financial statements.
NOTE 2 - Business and Credit Concentrations
-------------------------------------------
The Company had two customers with accounts receivable balances that aggregated
24% and 34% of the Company's accounts receivable at June 30, 2009 and 2008,
respectively. Sales to neither of these customers exceeded 10% of net sales in
any of the past two years.
NOTE 3 - Inventories
--------------------
Inventories, net of reserves are valued at lower of cost (first-in, first-out
method) or market. The Company regularly reviews parts and finished goods
inventories on hand and, when necessary, records a provision for excess or
obsolete inventories. The Company also regularly reviews the period over which
its inventories will be converted to sales. Any inventories expected to convert
to sales beyond 12 months from the balance sheet date are classified as
non-current.
Inventories, net of reserves consist of the following:
June 30,
-----------------
2009 2008
------- -------
(In thousands)
Component parts $17,941 $12,924
Work-in-process 3,427 4,114
Finished product 7,466 10,234
------- -------
$28,834 $27,272
======= =======
Classification of inventories, net of reserves:
Current $18,885 $19,548
Non-current 9,949 7,724
------- -------
$28,834 $27,272
======= =======
NOTE 4 - Property, Plant, and Equipment
---------------------------------------
Property, plant and equipment consist of the following:
June 30,
-----------------
2009 2008 Useful Life In years
------- ------- --------------------------------------------------
(In thousands)
Land $ 904 $ 904 --
Buildings 8,911 8,911 30 to 40
Molds and dies 6,564 4,995 3 to 5
Furniture and fixtures 2,299 1,652 5 to 10
Machinery and equipment 17,871 16,116 7 to 10
Leasehold improvements 372 190 Shorter of the lease term or life of asset
------- -------
36,921 32,768
Less: accumulated depreciation
and amortization 27,851 23,779
------- -------
$ 9,070 $ 8,989
======= =======
Depreciation and amortization expense on property, plant, and equipment was
approximately $1,368,000 and $1,191,000 in fiscal 2009 and 2008, respectively.
NOTE 5 - Acquisition of Business
--------------------------------
On August 18, 2008, the Company acquired substantially all of the assets and
business of G. Marks Hardware, Inc. ("Marks") for $25.2 million, the repayment
of $1 million of bank debt and the assumption of current liabilities as
described more fully in the Asset Purchase Agreement. As such, the operations of
Marks have been included in the Company's Statement of Operations commencing on
August 18, 2008. The Marks business involves the manufacturing and distribution
of door-locking devices. The Company completed this acquisition at a price in
excess of the value of the net identifiable assets because it believes that the
combination of the two companies offers the potential for manufacturing and
operational synergies as the Company combines the Marks operations and
production into its own door-locking operations and production structure. The
Company funded the acquisition with a term loan from its lenders as described in
Note 7.
The acquisition described above was accounted for as a purchase and was valued
based on management's estimate of the fair value of the assets acquired and
liabilities assumed. The estimates of fair value are preliminary and subject to
adjustment for a period of up to one year from the date of acquisition. Based on
the Company's evaluation, the allocation of the purchase price for the
acquisition was as follows (in thousands):
Assets Acquired:
Cash $ 520
Accounts receivable 1,836
Inventory 6,740
Prepaid expenses and other current assets 112
Property and equipment 801
Goodwill 922
Intangible assets 16,440
-------
27,371
-------
Less: Liabilities Assumed:
Line of credit borrowings outstanding 1,000
Accounts payable 637
Accrued expenses 339
-------
1,976
-------
Total consideration (including acquisition costs of $222) $25,395
=======
In accordance with the requirements of SFAS No. 141, "Business Combinations",
the Company recorded the estimated value of $9,800,000 related to the customer
relationships, $340,000 related to a non-compete agreement and $6,300,000
related to the Marks trade name within intangible assets and the excess of the
purchase price over the fair value of the acquired assets of $922,000 was
assigned to Goodwill. In accordance with the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets", the intangible assets will be amortized
over their estimated useful lives of twenty years (customer relationships) and
seven years (non-compete agreement). The weighted average amortization period of
these assets is 19.6 years. The Marks trade name was deemed to have an
indefinite life. The goodwill recorded as a result of the acquisition is
deductible for Federal and New York State income tax purposes over a period of
15 years.
Unaudited pro-forma consolidated financial information is presented below as if
the acquisition had occurred as of the first day of the earliest period
presented. Results have been adjusted to account for: (1) the initial
$25,000,000 cash borrowing and related interest expense under the term loan, (2)
cash used to repay $1,000,000 in assumed bank debt at closing of the purchase
transaction, (3) deferred financing costs and related amortization associated
with the term loan, (4) additional salary and employee stock option expense for
employees not previously included in salary expense, and (5) amortization
expense of acquired intangible assets. The pro-forma information presented below
does not purport to present what actual results would have been if the
acquisition had occurred at the beginning of such periods, nor does the
information project results for any future period. The unaudited pro-forma
consolidated financial information should be read in conjunction with the
historical financial information included in other reports and documents filed
with the United Stated Securities and Exchange Commission.
The unaudited pro-forma consolidated financial information for the fiscal years
ended June 30, 2009 and 2008 is as follows (in thousands, except share and per
share data):
2009 2008
---------- ----------
Pro-forma:
Net sales $ 72,084 $ 92,094
Net income (loss) $ (13,288) $ 4,374
Net income (loss) per share:
Basic $ (0.70) $ 0.23
Diluted $ (0.70) $ 0.23
Weighted average number of shares:
Basic 19,096,000 19,263,000
Diluted 19,096,000 19,802,000
NOTE 6 - Income Taxes
---------------------
The Benefit for income taxes consists of the following:
For the Years Ended June 30,
--------------------------------
2009 2008
-------------- --------------
(In thousands)
Current income taxes:
Federal $ (293) $ (2,291)
State 27 (8)
Foreign 6 8
-------------- --------------
(260) (2,291)
Deferred income tax ( benefit) expense (3,039) 883
-------------- --------------
Benefit for income taxes $ (3,299) $ (1,408)
============== ==============
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
operations is as follows (dollars in thousands):
For the Years Ended June 30,
-----------------------------------------
2009 2008
------------------ ------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
------- ------- ------- -------
Tax at Federal statutory rate $(5,672) 34.0% $ 785 34.0%
Increases (decreases) in
taxes resulting from:
Meals and entertainment 58 (0.4)% 59 2.6%
State income taxes, net of
Federal income tax benefit 18 (0.1)% (16) (0.7)%
Foreign source income and taxes 2,224 (13.3)% (258) (11.1)%
Stock based compensation expense 107 (0.6)% 66 2.9%
Tax reserve reversal (53) 0.3% (2,127) (92.1)%
Other, net 19 (0.1)% 83 3.6
------- ------- ------- -------
Benefit for income taxes $(3,299) (19.8)% $(1,408) (61.0)%
======= ======= ======= =======
Deferred tax assets and deferred tax liabilities at June 30, 2009 and 2008 are
as follows (in thousands):
Current Long-Term
Deferred Tax Assets Deferred Tax Assets
(Liabilities) (Liabilities)
----------------------- ------------------------
2009 2008 2009 2008
---------- ---------- ---------- ----------
Accounts receivable $ 21 $ 26 $ -- $ --
Inventories 212 470 256 273
Accrued liabilities 299 273 36 --
Stock based compensation expense -- -- 119 107
Goodwill -- -- 1,897 (1,311)
Property, plant and equipment -- -- (711) (775)
FIN 48 Adjustment -- -- 72 99
Other deferred tax liabilities -- -- (84) --
---------- ---------- ---------- ----------
532 769 1,585 (1,607)
Valuation allowance -- -- -- --
---------- ---------- ---------- ----------
Net deferred taxes $ 532 $ 769 $ 1,585 $ (1,607)
========== ========== ========== ==========
The Company adopted the provisions of FIN 48 as of July 1, 2007. The Company has
identified its U.S. Federal income tax return and its State return in New York
as its major tax jurisdictions. As a result the Company increased its accrued
income tax liability by $715,000, from $1,836,000 to $2,551,000, to provide for
additional reserves for uncertain income tax positions for U.S. Federal and
State income tax purposes. Fiscal 2006 and forward years are still open for
examination. The increase in the accrued income tax liability of $715,000 was
offset in part by a $230,000 increase to a deferred income tax asset, resulting
in a net reduction to retained earnings of $485,000 (representing the cumulative
effect of adopting FIN 48).
During the year ending June 30, 2009 the Company decreased its reserve for
uncertain income tax positions by $73,000. As of June 30, 2009 the Company has a
long-term accrued income tax liability of $176,000. The Company's practice is to
recognize interest and penalties related to income tax matters in income tax
expense and accrued income taxes. As of June 30, 2009, the Company had accrued
interest totaling $37,000 and $141,000 of unrecognized net tax benefits
(including the related accrued interest and net of the related deferred income
tax benefit of $72,000) that, if recognized, would favorably affect the
company's effective income tax rate in any future period.
For the year ended June 30, 2009, the company recognized a net benefit to income
tax expense of $53,000 ($99,000 liability reversal including interest, less the
related $34,000 reversal of deferred tax asset, plus current year interest
accrual on other reserves of $12,000).
Tax Interest Total
--------- --------- ----------
Balance of gross unrecognized tax benefits as of July 1, 2008 $ 249,000 $ 45,000 $ 294,000
Reductions to unrecognized tax benefits as a result of a lapse
of the applicable statute of limitations (73,000) (8,000) (81,000)
--------- --------- ----------
Balance of gross unrecognized tax benefits as of June 30, 2009 $ 176,000 $ 37,000 $ 213,000
========= ========= ==========
During the quarter ended December 31, 2007 the Company completed a corporate
restructuring for which new offshore companies were formed (Napco DR, S.A. and
Napco Americas). These newly formed wholly-owned subsidiaries are included in
the Company's condensed consolidated financial statements. The existing US-based
companies ("Napco US") and these newly formed offshore companies entered into
technology licenses and research and development cost sharing agreements. Napco
DR. S.A. purchased the majority of the operating assets previously held by the
existing Dominican subsidiary. Napco DR, S.A. is doing business in a Free Zone
Park in the Dominican Republic and as such is not subject to Dominican corporate
income taxes.
Napco US plans to permanently reinvest a substantial portion of its foreign
earnings and as such has not provided US corporate taxes on the permanently
reinvested earnings. As of June 30, 2009, the Company had no undistributed
earnings of foreign subsidiaries. As of June 30, 2008 the Company generated a US
tax loss of approximately $269,000. A carryback claim to fiscal year ended June
30, 2006 was filed and the company has a receivable of $269,000. The IRS is
currently reviewing this claim.
NOTE 7 - Long-Term Debt
-----------------------
As of June 30, 2009, debt consists of a revolving credit loan facility of
$11,100,000 with outstanding borrowings of $11,100,000 at June 30, 2009 and
$12,400,000 at June 30, 2008. As of June 30, 2009 the Company was not in
compliance with the covenants relating to ratios associated with maximum
leverage, a modified quick ratio and debt service coverage for which it has
received the appropriate waivers from its banks. The Company and its banks also
amended the facilities to provide for a borrowing base formula in calculating
availability under the revolving credit line.
On August 18, 2008, the Company and its banks amended and restated the existing
$25,000,000 revolving credit agreement. The amended facility was $50,000,000 and
provides for a $25,000,000 revolving credit line as well as a $25,000,000 term
portion of which the entire $25,000,000 was utilized to finance the asset
purchase agreement as described in Note 5. The amended revolving credit
agreement and term loan was amended in June 2009 to $11,100,000 and is secured
by the accounts receivable, a portion of inventory, the Company's headquarters
building in Amityville, New York, certain other assets of Napco Security
Technologies, Inc. and the common stock of three of the Company's subsidiaries.
The agreements bear interest based on either the Prime Rate or an alternate rate
based on LIBOR as described in the agreement. Any outstanding borrowings are to
be repaid or refinanced on or before that time. As of June 30, 2009, there was
$11,100,000 outstanding under the revolving credit facility with an interest
rate of 7.25% and $22,321,000 outstanding under the term loan with an interest
rate of 7.25%. The term loan is being repaid in 19 quarterly installments of
$893,000 each, commencing in December 2008, and a final payment of $8,033,000
due in August 2013.
NOTE 8 - Goodwill
-----------------
During the fourth quarter of fiscal 2009, the Company concluded indicators of
potential impairment were present due to the sustained decline in the Company's
share price resulting in the market capitalization of the Company being less
than its book value. The Company conducted an impairment test during the fourth
quarter of fiscal 2009 based on the facts and circumstances at that time and its
business strategy in light of existing industry and economic conditions, as well
as taking into consideration future expectations. Through its impairment testing
and review, the Company concluded its discounted cash flow analysis does not
support a residual implied fair value of its assets and liabilities relating to
the Alarm Lock acquisition in 1985 and the Continental acquisition in 2000. As a
result, for the quarter ending June 30, 2009, the Company recorded a non-cash
goodwill impairment charge of $9.7 million, which was the full carrying value of
goodwill relating to these two acquisitions as of that date.
The changes in the carrying amounts of goodwill are as follows:
Consolidated Marks Continental Alarm Lock
------------ ------------ ------------ ------------
Balance, July 1, 2007 $ 9,686 $ - $ 7,414 $ 2,272
Balance, June 30, 2008 9,686 - 7,414 2,272
Goodwill acquired during fiscal 2009 923 923 - -
Goodwill impairment during fiscal 2009 (9,686) - (7,414) (2,272)
------------ ------------ ------------ ------------
Balance June 30, 2009 $ 923 $ 923 $ 7,414 $ 2,272
============ ============ ============ ============
NOTE 9 - Stock Options
----------------------
In December 2002, the stockholders approved the 2002 Employee Stock Option Plan
(the 2002 Plan). The 2002 Plan authorizes the granting of awards, the exercise
of which would allow up to an aggregate of 1,836,000 shares of the Company's
common stock to be acquired by the holders of such awards. Under the 2002 Plan,
the Company may grant stock options, which are intended to qualify as incentive
stock options (ISOs), to key employees. Any plan participant who is granted ISOs
and possesses more than 10% of the voting rights of the Company's outstanding
common stock must be granted an option with a price of at least 110% of the fair
market value on the date of grant.
Under the 2002 Plan, stock options have been granted to key employees with a
term of 10 years at an exercise price equal to the fair market value on the date
of grant and are exercisable in whole or in part at 20% per year from the date
of grant. At June 30, 2009, 1,471,480 stock options were granted, 364,520 stock
options were available for grant, and 1,240,720 stock options were exercisable
under this plan.
The fair value of each option granted during fiscal 2009 and 2008 were estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions:
2009 2008
--------------- --------------
Risk-free interest rates 3.07% 4.65%
Expected lives 10 years 10 years
Expected volatility 65% 59%
Expected dividend yields 0% 0%
The following table reflects activity under the 2002 Plans for the fiscal years
ended June 30,:
2009 2008
---------------------- ----------------------
Weighted Weighted
average average
exercise exercise
Options price Options price
---------- -------- ---------- --------
Outstanding at beginning of year 1,293,480 $ 2.84 1,255,640 $ 2.41
Granted 100,000 4.25 40,000 5.69
Exercised (3,240) 1.90 (2,160) 1.62
---------- -------- ---------- --------
Outstanding at end of year 1,390,240 $ 2.95 1,293,480 $ 2.84
========== ======== ========== ========
Exercisable at end of year 1,240,720 $ 2.65 1,153,948 $ 2.43
========== ======== ========== ========
Weighted average fair value at
grant date of options granted $ 1.22 $ 3.62
Total intrinsic value of
options exercised $ 3,000 $ 8,000
Total intrinsic value of
Options outstanding $ 1,701,000
Total intrinsic value of
Options exercisable $ 1,303,000
Cash received from option exercises for fiscal years 2009 and 2008 was $6,000
and $2,000, respectively. The actual tax benefit realized for the tax deductions
from option exercises totaled $0, for fiscal years 2009 and 2008, respectively.
The following table summarizes information about stock options outstanding under
the 2002 Plan at June 30, 2009:
Options outstanding Options exercisable
------------------------------------------ ---------------------------
Weighted
Number average Weighted Number Weighted
outstanding remaining average exercisable average
Range of exercise at June 30, contractual exercise at June 30, exercise
prices 2009 life price 2009 price
--------------------------- ------------ ------------ ------------ ------------ ------------
$0.72 to $ 4.00 1,022,490 4.1 $ 1.89 1,022,490 $ 1.89
$4.01 to $ 7.50 330,250 7.5 5.30 188,230 5.45
$7.51 to $11.16 37,500 6.7 11.16 30,000 11.16
------------ ------------ ------------ ------------ ------------
1,390,240 5.0 $ 2.95 1,240,720 $ 2.65
============ ============ ============ ============ ============
As of June 30, 2009, there was $269,000 of total unearned stock-based
compensation cost related to non-vested share-based compensation arrangements
granted under the 2002 Plan. That cost is expected to be recognized over a
weighted average period of 6 years. The total fair value of the options vested
during fiscal 2009 under the 2002 Plan was $225,000.
In September 2000, the stockholders approved a 10 year extension of the already
existing 1990 non-employee stock option plan (the 2000 Plan) to encourage
non-employee directors and consultants of the Company to invest in the Company's
stock. The 2000 Plan provided for the granting of non-qualified stock options,
the exercise of which would allow up to an aggregate of 270,000 shares of the
Company's common stock to be acquired by the holders of the stock options. The
2000 Plan provided that the option price will not be less than 100% of the fair
market value of the stock at the date of grant. Options were exercisable at 20%
per year and expire five years after the date of grant. Compensation cost is
recognized for the fair value of the options granted to non-employee directors
and consultants as of the date of grant. $19,000 of compensation expense was
recorded for stock options granted to directors under the 2000 Plan. There are
240,000 options available for future grants under the 2000 Plan.
The following table reflects activity under the 2000 Plan for the fiscal years
ended June 30,:
2009 2008
------------------- -------------------
Weighted Weighted
average average
exercise exercise
Options price Options price
-------- -------- -------- --------
Outstanding at beginning of year 30,000 $ 5.03 30,000 $ 5.03
Granted -- -- -- --
Exercised -- -- -- --
Forfeited -- -- -- --
Cancelled/lapsed -- -- -- --
-------- -------- -------- --------
Outstanding at end of year 30,000 $ 5.03 30,000 $ 5.03
======== ======== ======== ========
Exercisable at end of year 18,000 $ 5.03 12,000 $ 5.03
======== ======== ======== ========
Weighted average fair value at
grant date of options granted n/a n/a
Total intrinsic value of
options exercised n/a n/a
Total intrinsic value of
Options outstanding $ 95,000
Total intrinsic value of
Options exercisable $ 57,000
As of June 30, 2009, there was $32,000 of total unearned stock-based
compensation cost related to non-vested share-based compensation arrangements
granted under the 2000 Plan. That cost is expected to be recognized over a
weighted average period of 2 years.
NOTE 10 - Treasury Stock
------------------------
On March 16, 2007, the Company announced that its Board of Directors authorized
the repurchase of up to one million (1,000,000) shares of its common stock. As
of June 30, 2008, the Company has repurchased all 1,000,000 of these shares at a
weighted average price of $5.62 per share.
NOTE 11 - 401(k) Plan
---------------------
The Company maintains two 401(k) plans ("the Napco Plan" and "the Marks Plan")
that cover all U.S. non-union employees with one or more years of service and is
qualified under Sections 401(a) and 401(k) of the Internal Revenue Code. The
Napco Plan provided for matching contributions of 50% of the first 2% of
employee contributions. During fiscal 2009 the Company amended this plan,
eliminating the provision for mandatory matching contributions. Company
contributions to the plan totaled approximately $55,000 and $95,000 for the
years ended June 30, 2009 and 2008, respectively. The Marks Plan was adopted by
the Company subsequent to the Marks acquisition in August 2008 and provides for
discretionary matching contributions. Company contributions to this plan were $0
for fiscal 2009.
NOTE 12 - Commitments and Contingencies
---------------------------------------
Leases
The Company is committed under various operating leases, which do not extend
beyond fiscal 2012. Minimum lease payments through the expiration dates of these
leases, with the exception of the land leases referred to below, are as follows:
Year Ending June 30, Amount
-------------------- ---------
2010 $ 153,000
2011 31,000
2012 6,000
---------
Total $ 190,000
=========
Rent expense, with the exception of the land lease referred to below, totaled
approximately $440,000 and $167,000 for the fiscal years ended June 30, 2009 and
2008, respectively.
Land Lease
On April 26, 1993, one of the Company's foreign subsidiaries entered into a 99
year lease, expiring in 2092, 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.
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.
Employment Agreements
As of June 30, 2009, the Company was obligated under four employment agreements
and one severance agreement. Compensation under the agreements includes annual
salaries approximating $1,464,000. 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. The
agreement with the Company's Chief Executive Officer provides for a salary of
$587,000, includes additional compensation of 25,000 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 August 2013.
NOTE 13 - Geographical Data
---------------------------
The Company is engaged in one major line of business: the development,
manufacture, and distribution of security alarm products and door security
devices for commercial and residential use. Sales to unaffiliated customers are
primarily shipped from the United States. The Company has customers worldwide
with major concentrations in North America, Europe, and South America.
The Company observes the provisions of SFAS No. 131. The following represents
selected consolidated geographical data for and as of the fiscal years ended
June 30, 2009 and 2008:
2009 2008
------- -------
(in thousands)
Sales to external customers(1):
Domestic $62,676 $56,122
Foreign 6,889 12,245
------- -------
Total Net Sales $69,565 $68,367
======= =======
Identifiable assets:
United States $60,456 $50,056
Dominican Republic (2) 18,822 19,841
Other foreign countries 2,308 6,826
------- -------
Total Identifiable Assets $81,586 $76,723
======= =======
(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) Consists primarily of inventories and fixed assets, which are located at
the Company's principal manufacturing facility in the Dominican Republic.
NOTE 14 - Restructuring costs
-----------------------------
In March 2009, the Company began a Restructuring Plan consisting of a series of
actions to consolidate its Sales, Production and Warehousing operations of Marks
and those in Europe and the Middle East into the Corporate Headquarters in
Amityville, NY and its production facility in the Dominican Republic. We expect
these restructuring initiatives to cost between $1,200,000 and $1,500,000. The
majority of these actions were completed by August 2009, while certain
Production-related actions are expected to be completed by December 31, 2009.
Accordingly, the Company recognized restructuring costs of $1,274,000 in year
ended June 30, 2009. Of this amount, $210,000 relates to Workforce Reductions
communicated in March 2009 and $1,064,000 to Business Exits and related costs
associated with inventory and lease impairments related to the closure of the
Marks, European and Middle East facilities. As of June 30, 2009, $1,138,000 of
the $1,274,000 in restructuring costs has been incurred and $136,000 remains in
accrued expenses.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 15, 2008, the Registrant engaged Holtz Rubenstein Reminick LLP ("New
Accountant") as the Registrant's principal independent accountants to audit its
financial statements, replacing Marcum LLP, formerly Marcum & Kliegman LLP (the
"Former Accountants") as the Registrant's independent auditors, who were
dismissed on the same day.The change was approved by the Audit Committee of
Registrant's Board of Directors. The Registrant has not consulted with Holtz
Rubenstein Reminick LLP during its two most recent fiscal years nor during any
subsequent interim period prior to its appointment as auditor for the fiscal
year 2009 audit 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' reports on the Registrant's financial statements for
fiscal 2007 and 2008 did not contain any adverse opinion or disclaimer of
opinion and was not qualified as to uncertainty, audit scope or accounting
principles.
The Former Accountants were engaged as the Registrant's independent accountants
on December 15, 2003.
During the Registrant's fiscal year ended June 30, 2008, and any subsequent
interim period, 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.
During the Registrant's fiscal year ending June 30, 2007, there were
disagreements between the Registrant and the Former Accountants relating to
Management's estimate of the reserve required for slow-moving or obsolete
inventory, reclassification of certain inventories to non-current and
management's estimates used to capitalize certain indirect labor costs into
inventory. All of the foregoing disagreements were resolved to the Former
Accountants' satisfaction.
As reported in the Auditors Report on Internal Controls over Financial Reporting
included in the Registrant's Forms 10-K for the fiscal years ended June 30, 2007
and 2008, the Former Accountants advised the Registrant that certain of its
internal controls over financial reporting were not effective.
The Registrant's Audit Committee discussed the subject matter of each of the
above with the Former Accountant.
The Registrant has authorized the Former Accountants to respond fully to the New
Accountants concerning the subject matter of each of the above.
ITEM 9A: CONTROL AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. At the conclusion of the
period ended June 30, 2009, we carried out an evaluation, under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective.
Management's Annual Report on Internal Control Over Financial Reporting.
Management is responsible for the preparation of Napco Security Technologies,
Inc. (Napco Security Technologies) consolidated financial statements and related
information. Management uses its best judgment to ensure that the consolidated
financial statements present fairly, in all material respects, Napco Security
Technologies consolidated financial position and results of operations in
conformity with generally accepted accounting principles.
The financial statements have been audited by an independent registered public
accounting firm in accordance with the standards of the Public Company
Accounting Oversight Board. Their report expresses the independent accountant's
judgment as to the fairness of management's reported operating results, cash
flows and financial position. This judgment is based on the procedures described
in the second paragraph of their report.
Napco Security Technologies management is responsible for establishing and
maintaining adequate internal control over financial reporting. Under the
supervision of management, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission published in 1992 and subsequent
guidance prepared specifically for smaller public companies. Based on that
evaluation, our management concluded that our internal control over financial
reporting was effective as of June 30, 2009.
Our internal control over financial reporting includes policies and procedures
that pertain to the maintenance of records that accurately and fairly reflect,
in reasonable detail, transactions and dispositions of assets; and provide
reasonable assurances that: (1) transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States; (2) receipts and expenditures are being
made only in accordance with authorizations of management and the directors of
our Company; and (3) unauthorized acquisition, use, or disposition of our assets
that could have a material effect on our financial statements are prevented or
timely detected.
Previously Reported Material Weaknesses
A material weakness in internal control over financial reporting is defined by
Public Company Accounting Oversight Board ("PCAOB") Auditing Standard No. 5 as a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the Company's annual or interim financial statements will not be
prevented or detected on a timely basis.
Material weaknesses previously noted in our past filings have been remediated
and the results of management's current year assessment have confirmed that
remediation efforts put in place by management have sufficiently reduced or
eliminated the risk of misstatement associated with these former material
weaknesses.
To address the first material weakness associated with the costing of inventory,
management ensured that all of its key controls associated with reviewing the
costing of inventory were performed during its close process to ensure against
costing inaccuracies. As a result no material weaknesses were detected in these
controls during the current fiscal year, indicating that this weakness had been
remedied.
To address the second material weakness, during the interim reporting periods,
management implemented internal controls to addresses the material weakness
related to refining its estimation methods involved in quantifying cost of goods
sold and inventory amounts so that they would take into consideration changes in
the business and new variables. No understatements during the interim quarters
were noted as management has focused its attention on properly identifying
business changes and refined its estimation methodology to address additional
variables that impact these amounts.
Limitations on Internal Control
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
This annual report does not include an attestation report of Holtz Rubinstein
Reminick LLP, our registered public accounting firm regarding internal control
over financial reporting. Management's Report was not subject to attestation by
the company's registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit us to provide only
Management's Report in this annual report.
The Board of Directors of Napco Security Technologies has an Audit Committee
comprised of three non-management directors. The Committee meets periodically
with financial management and the independent auditors to review accounting,
control, audit and financial reporting matters. Holtz Rubinstein Reminick LLP
has full and free access to the Audit Committee, with and without the presence
of management.
Changes in Internal Control over Financial Reporting
Except as described below, there have been no changes in our internal control
over financial reporting. Management is in the process of reviewing, documenting
and evaluating the internal controls over financial reporting that exist at the
Company's Marks subsidiary, which was acquired during thr first quarter of
Fiscal 2009.
ITEM 9B: OTHER INFORMATION
None
PART III
---------
The information called for by Part III is hereby incorporated by reference from
the information set forth under the headings "Election of Directors", "Corporate
Governance and Board Matters", "Executive Compensation", "Beneficial Ownership
of Common Stock" and "Principal Accountant Fees" in the Company's definitive
proxy statement for the 2009 Annual Meeting of Stockholders, to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this Annual Report on Form
10-K.
We have adopted a Code of Ethics which applies to our senior executive and
financial officers, among others. The Code is posted on our website,
www.napcosecurity.com under the "Investors - Other" captions. We intend to make
all required disclosures regarding any amendment to, or waiver of, a provision
of the Code of Ethics for senior executive and financial officers by posting
such information on our website.
PART IV
-------
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)1. Financial Statements
The following consolidated financial statements of NAPCO Security Technologies,
Inc. and its subsidiaries are included in Part II, Item 8:
Page
----
Report of Independent Registered Public Accounting Firm FS-2
Report of Independent Registered Public Accounting Firm FS-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2009 and 2008 FS-4
Consolidated Statements of Operations for the Fiscal Years Ended June 30, 2009 and 2008 FS-6
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 2009 and 2008 FS-7
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2009 and 2008 FS-8
Notes to Consolidated Financial Statements, June 30, 2009 FS-9
(a)3 and (b). Exhibits
Management Contracts designated by asterisk.
----------------------------------------------------------------------------------------------------------------------
Exhibit No. Title
----------------------------------------------------------------------------------------------------------------------
Ex-3.(i) Certificate of Amendment of Certificate of Exhibit-3.(i) to Report on Form 10-K for
Incorporation the fiscal year ended June 30, 2006
----------------------------------------------------------------------------------------------------------------------
Ex-3.(ii) Certificate of Incorporation as amended Exhibit-3.(ii) to Report on Form 10-K for
the fiscal year ended June, 30 2006
----------------------------------------------------------------------------------------------------------------------
Ex-3.(iii) Amended and Restated By-Laws Exhibit 3.(ii) to Report on Form 10-K for
the fiscal year ended June 30, 2004
----------------------------------------------------------------------------------------------------------------------
Ex-10.A (i) Amended and Restated 1992 Incentive Stock Option Exhibit 10.A(i) to Report on Form 10-K for
Plan the fiscal year ended June 30, 2005
----------------------------------------------------------------------------------------------------------------------
Ex-10.A (ii) 2002 Employee Stock Option Plan E-
----------------------------------------------------------------------------------------------------------------------
Ex-10.B 2000 Non-Employee Stock Option Plan Exhibit-10.B to Report on Form 10-K for
the fiscal year ended June 30, 2006
----------------------------------------------------------------------------------------------------------------------
Ex-10.C Loan and Security Agreement with Marine Midland Exhibit 10-C to Report on Form 10-K for
Bank dated as of May 12, 1997 the fiscal year ended June 30, 2004
----------------------------------------------------------------------------------------------------------------------
Ex-10.D Revolving Credit Note #1 to Marine Midland Bank Exhibit 10-D to Report on Form 10-K for
dated as of May 12, 1997 the fiscal year ended June 30, 2004
----------------------------------------------------------------------------------------------------------------------
Ex-10.E Revolving Credit Note #2 to Marine Midland Bank Exhibit 10-E to Report on Form 10-K for
dated as of May 12, 1997 the fiscal year ended June 30, 2004
----------------------------------------------------------------------------------------------------------------------
Ex-10.F Promissory Note to Marine Midland Bank dated as of Exhibit 10-F to Report on Form 10-K for
May 12, 1997 the fiscal year ended June 30, 2004
----------------------------------------------------------------------------------------------------------------------
Ex-10.G Amendment No.1 to the Loan and Security Agreement Exhibit 10-G to Report on Form 10-K for
with Marine Midland Bank dated as of May 28, 1998 the fiscal year ended June 30, 2004
----------------------------------------------------------------------------------------------------------------------
Ex-10.H Term Loan Note to Marine Midland Bank dated as of Exhibit 10-H to Report on Form 10-K for
May 28, 1998 the fiscal year ended June 30, 2004
----------------------------------------------------------------------------------------------------------------------
*Ex-10.I Amended and Restated Employment Agreement with Exhibit 10.I to Report on Form 10-K for
Richard Soloway fiscal year ended June 30, 2003
----------------------------------------------------------------------------------------------------------------------
*Ex-10.J Employment Agreement with Jorge Hevia Exhibit 10-J to Report on Form 10-K for
the fiscal year ended June 30, 2005
----------------------------------------------------------------------------------------------------------------------
Ex-10.K Amendment No. 2 to the Loan and Security Agreement Exhibit 10-K to Report on Form 10-K for
with HSBC Bank dated as of June 30, 1999 the fiscal year ended June 30, 2005
----------------------------------------------------------------------------------------------------------------------
*Ex-10.L Employment Agreement with Michael Carrieri Exhibit 10-L to Report on Form 10-K for
the fiscal year ended June 30, 2005
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
*Ex-10.M Indemnification Agreement dated August 9, 1999 Exhibit 10-M to Report on Form 10-K for
the fiscal year ended June 30, 2005
----------------------------------------------------------------------------------------------------------------------
Ex-10.O Amendment No. 4 to Loan and Security Agreement Exhibit 10-O to Report on Form 10-K for
the fiscal year ended June 30, 2005
----------------------------------------------------------------------------------------------------------------------
Ex-10.P Amendment No. 8 to Loan and Security Agreement Exhibit-10.P to Report on Form 10-K for
the fiscal year ended June 30, 2006
----------------------------------------------------------------------------------------------------------------------
Ex-10.Q Note Modification Agreement Exhibit 10.X to Report on Form 10-K for
fiscal year ended June 30, 2001
----------------------------------------------------------------------------------------------------------------------
Ex-10.R Amendment No. 10 to the Loan and Security Agreement Exhibit 10.R to Report on Form 10-K for
fiscal year ended June 30, 2003
----------------------------------------------------------------------------------------------------------------------
Ex-10.S Amendment No. 3 to the Loan and Security Agreement Exhibit 10-S to Report on Form 10-K for
the fiscal year ended June 30, 2004
----------------------------------------------------------------------------------------------------------------------
Ex-10.T Amendment No. 9 to the Loan and Security Agreement Exhibit 10-T to Report on Form 10-K for
the fiscal year ended June 30, 2004
----------------------------------------------------------------------------------------------------------------------
Ex-10.U Amendment No. 11 to the Loan and Security Agreement Exhibit 10-U to Report on Form 10-K for
the fiscal year ended June 30, 2004
----------------------------------------------------------------------------------------------------------------------
Ex-10.V Amendment No. 12 to the Loan and Security Agreement Exhibit 10-V to Report on Form 10-K for
the fiscal year ended June 30, 2004
----------------------------------------------------------------------------------------------------------------------
Ex-10.W Amendment No. 13 to the Loan and Security Agreement Exhibit 10-W to Report on Form 10-K for
the fiscal year ended June 30, 2004
----------------------------------------------------------------------------------------------------------------------
Ex-14.0 Code of Ethics Exhibit 14.0 to Report on Form 10-K for
the fiscal year ended June 30, 2003
----------------------------------------------------------------------------------------------------------------------
Ex-21.0 Subsidiaries of the Registrant E-18
----------------------------------------------------------------------------------------------------------------------
Ex-23.1 Consent of Independent Auditors E-19
----------------------------------------------------------------------------------------------------------------------
Ex-31.1 Section 302 Certification of Chief Executive Officer E-20
----------------------------------------------------------------------------------------------------------------------
Ex-31.2 Section 302 Certification of Chief Financial Officer E-21
----------------------------------------------------------------------------------------------------------------------
Ex-32.1 Certification of Chief Executive Officer Pursuant E-22
to 18 USC Section 1350 and Section 906 of Sarbanes
- Oxley Act of 2002
----------------------------------------------------------------------------------------------------------------------
Ex-32.2 Certification of Chief Financial Officer Pursuant E-23
to 18 USC Section 1350 and Section 906 of Sarbanes
- Oxley Act of 2002
----------------------------------------------------------------------------------------------------------------------
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.
October 12, 2009
NAPCO SECURITY TECHNOLOGIES, INC.
(Registrant)
By: /s/RICHARD SOLOWAY
-------------------
Richard Soloway
Chairman of the Board of
Directors, President and Secretary
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and the dates indicated.
Signature Title Date
--------- ----- ----
/s/RICHARD SOLOWAY Chairman of the Board of Directors, October 12, 2009
---------------------------- President and Secretary and Director
Richard Soloway (Principal Executive Officer)
/s/KEVIN S. BUCHEL Senior Vice President of Operations October 12, 2009
---------------------------- and Finance and Treasurer and Director
Kevin S. Buchel (Principal Financial and Accounting Officer)
/s/PAUL STEPHEN BEEBER Director October 12, 2009
---------------------------
Paul Stephen Beeber
/s/RANDY B. BLAUSTEIN Director October 12, 2009
---------------------------
Randy B. Blaustein
/s/ARNOLD BLUMENTHAL Director October 12, 2009
---------------------------
Arnold Blumenthal
/s/DONNA SOLOWAY Director October 12, 2009
---------------------------
Donna Soloway
/s/ANDREW J. WILDER Director October 12, 2009
---------------------------
Andrew J. Wilder