NAPCO Security
Annual Report 2012

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended June 30, 2012 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 NAPCO SECURITY TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 333 Bayview Avenue, Amityville, New York (Address of principal executive offices) Registrant's telephone number, including area code: (631) 842-9400 Securities registered pursuant to Section 12(b) of the Act: 11-2277818 (I.R.S. Employer I.D. Number) 11701 (Zip Code) Common Stock, par value $.01 per share (Title of Each Class) The NASDAQ Stock Market LLC (Name of each exchange on which registered) 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 o 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 o 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 o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o 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. o 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 o Smaller reporting company x Non-accelerated filer o Accelerated filer o Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x As of December 31, 2011, 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 $30,428,645 As of September 20, 2012, 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 2012 Annual Meeting of Stockholders. ITEM 1: BUSINESS. PART I 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 electronic locking devices, intrusion and fire alarms and building access control systems. 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. 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, through the formation of a new subsidiary, Marks USA I, LLC (“Marks”), acquired substantially all of the assets and business of G. Marks Hardware, Inc. for $25.2 million, the repayment of $1 million of bank debt and the assumption of certain current liabilities. In August 2009, the Company completed the move of all operations of Marks to its Dominican plant and into the Company’s corporate headquarters in Amityville. The Marks business involves the manufacturing and distribution of door-locking devices. 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. 1 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 be the leading configuration 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, mechanical door locks 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. Video Surveillance Systems Video surveillance systems typically consist of one or more video cameras, a control panel and a video monitor or PC. More advanced systems can also include a recording device and some type of remote communication device such as an internet connection to a PC or browser-enabled cell phone. The system allows the user to monitor various locations at once while recorders save the video images for future use. Remote communication devices can allow the user to view and control the system from a remote location. The Company designs, engineers, and markets the software and control panels discussed above. It also buys and resells various video cameras, PC-based computers and peripheral equipment for video surveillance systems. 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, 2012 and 2011, the Company expended approximately $4,264,000 and $4,392,000, 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, 2012, the Company had 957 full-time employees. Marketing The Company's staff of 42 sales and marketing support employees located at the Company's Amityville 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 53% and 50% of the Company's total sales for each of the fiscal years ended June 30, 2012 and 2011, 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. 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. 2 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 are available to the public at retail stores. The Company believes that these products compete with the Company only to a limited extent because they appeal primarily to the "do-it-yourself" segment of the market. Purchasers of such systems do not receive professional consultation, installation, service or the sophistication that the Company's Products provide. 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. In addition, demand is affected by the housing and construction markets. Further deterioration of the current economic conditions 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 $1,482,000 and $2,002,000 existed as of June 30, 2012 and 2011, respectively. The Company expects to fill all of the backlog that existed as of June 30, 2012 during fiscal 2013. . 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. 3 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 Sales to external customers(1): Domestic Foreign Total Net Sales Identifiable assets: United States Dominican Republic (2) Other foreign countries Total Identifiable Assets 2012 2011 (in thousands) $ $ $ $ 67,311 $ 3,617 70,928 $ 50,838 $ 13,912 -- 64,750 $ 66,793 4,599 71,392 54,426 14,342 27 68,795 (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. There were no sales into any one foreign country in excess of 10% of total Net Sales. (2) Consists primarily of inventories (2012 = $9,866,000; 2011 = $9,955,000) and fixed assets (2012 = $3,936,000; 2011 = $4,189,000) 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 Economic and Market Conditions We are subject to the effects of general economic and market conditions. Since October 2008, the U.S. and international economies have experienced a significant downturn and continue to be at depressed levels. In the event that the U.S. or international financial markets erode further, our revenue, profit and cash-flow levels could be materially adversely affected in future periods. If the worldwide economic downturn worsens, 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 ongoing downturn and economic uncertainty makes it difficult for us to forecast our revenues. Our Business Could Be Materially Adversely Affected as a Result of the Inability 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 quarterly principal debt repayments of approximately $400,000 plus interest that are in addition to the Company’s historical cash-flow requirements and certain financial covenants relating to ratios affected by profit, asset and debt levels. If the Company’s profits, asset or cash-flow levels decline below the minimums required to meet these covenants or to make the minimum debt payments, the Company may be materially adversely affected. Effects on the Company could include higher interest costs, reduction in borrowing availability or revocation of these credit facilities. We Are Dependent Upon the Efforts of Richard L. Soloway, Our Chief Executive Officer and There is No Succession Plan in Place 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. 4 Competitors May Develop New Technologies or Products in Advance of Us 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, Which may Result in Increased Research and Developments Expenditures to Attract 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 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. Our Business Could Be Materially Adversely Affected by the Inability to Maintain Expense Levels Proportionate to Sales Volume While Management has completed a program to reduce expense levels relative to current sales levels, if sales levels decrease significantly and we are unable to decrease expenses proportionately, our business may be adversely affected. Our Business Could Be Materially Adversely Affected as a Result of Housing and Commercial Building Market Conditions We are subject to the effects of housing and commercial building market conditions. If these conditions deteriorate further, resulting in a additional declines in new housing or commercial building starts, existing home or commercial building sales or renovations, our business, results of operations or financial condition could be materially adversely affected beyond the current levels, particularly in our intrusion and door locking product lines. Our Business Could Be Materially Adversely Affected as a Result of Lessening 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 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 Extended Payment Terms to Customers We regularly grant credit terms beyond 30 days to certain 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. We Rely On Distributors To Sell Our Products And Any Adverse Change In Our Relationship With Our Distributors Could Result In A Loss Of Revenue And Harm 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. 5 Members of Management and Certain Directors Beneficially Own a Substantial Portion of the Company’s Common Stock and May Be in a Position to Determine the 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. Our Business Could Be Materially Adversely Affected by an Increase in the Exchange Rate of the Dominican Peso We are exposed to foreign currency risks due to our 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 into Our Existing Operations Our business is dependent on the continued effective integration of the acquired Marks business, technologies, product lines and employees into our organization. If this integration deteriorates, our business may be materially adversely affected. 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. 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, 2012, a majority of the Company's products were manufactured at this facility, utilizing U.S. quality control standards. Management believes that these facilities are more than adequate to meet the needs of the Company in the foreseeable future. ITEM 3: LEGAL PROCEEDINGS. There are no pending or threatened material legal proceedings to which NAPCO or its subsidiaries or any of their property is subject. 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: MINE SAFETY DISCLOSURE. Not Applicable. 6 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Principal Market NAPCO's Common Stock is traded on the NASDAQ Stock Market, 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. Common Stock Sept. 30 Quarter Ended Fiscal 2012 Dec. 31 March 31 June 30 High Low Common Stock High Low $ $ $ $ 2.98 $ 2.28 $ 2.51 $ 1.97 $ 3.13 $ 2.29 $ 3.13 2.67 Sept. 30 Quarter Ended Fiscal 2011 Dec. 31 March 31 June 30 2.05 $ 1.66 $ 1.95 $ 1.62 $ 2.35 $ 1.68 $ 3.00 2.12 Approximate Number of Security Holders The number of holders of record of NAPCO's Common Stock as of September 17, 2012 was 111 (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, 2012 NUMBER OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS (a) WEIGHTED AVERAGE EXERCISE PRICE OF OUTSTANDING OPTIONS (b) NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE (EXCLUDING SECURITIES REFLECTED IN COLUMN (a) (c) 1,410,140 $ — 1,410,140 $ 2.99 — 2.99 365,000 — 365,000 PLAN CATEGORY Equity compensation plans approved by security holders: Equity compensation plans not approved by security holders: Total The Non-employee Stock Option plan expired in September 2010. No further options may be granted under this Plan. 7 ITEM 6: SELECTED FINANCIAL DATA. The table below summarizes selected financial information. For further information, refer to the audited consolidated financial statements and the notes thereto beginning on page FS-1 of this report. Statement of earnings data: Net Sales Gross Profit Impairment of Goodwill and intangible assets Income (Loss) from Operations Net Income (Loss) Cash Flow Data: Net cash flows provided by (used in) operating activities Net cash flows used in investing activities Net cash flows (used in) provided by financing activities Per Share Data: Net earnings (loss) per common share: Basic Diluted Weighted average common shares outstanding: Basic Diluted Cash Dividends declared per common share (2) Balance sheet data: Working capital (3) Total assets Long-term debt (3) Stockholders' equity $ $ $ $ $ 2012(1) Fiscal Year Ended and at June 30 (In thousands, except share and per share data) 2009(1) 2010(1) 2011(1) 2008 $ 70,928 21,152 -- 3,811 2,286 $ 71,392 20,101 400 2,513 1,121 $ 67,757 14,522 923 (5,211) (6,500) 4,096 (606) (3,588) 4,364 (737) (6,072) 5,285 (300) (3,572) $ 69,565 15,096 9,686 (14,917) (13,382) 6,792 (25,229) 19,781 68,367 20,412 -- 3,137 3,718 3,784 (1,045) (1,722) .12 .12 $ $ .06 .06 $ $ (.34) (.34) $ $ (.70) $ (.70) $ .19 .19 19,096,000 19,303,000 .00 32,205 64,750 18,657 37,723 $ $ 19,096,000 19,176,000 .00 29,185 68,795 20,205 35,429 $ $ 19,096,000 19,096,000 .00 3,502 73,668 -- 34,242 $ $ 19,096,000 19,096,000 .00 22,404 81,586 18,749 40,515 $ $ 19,263,000 19,802,000 .00 41,293 76,723 12,400 53,542 (1) (2) Includes the operations and assets of Marks USA I which was acquired in August 2008. 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. (3) Working capital is calculated by deducting Current Liabilities from Current Assets. As of June 30, 2010, the Company and its banks were in negotiations to amend and restate the existing terms of the credit facilities and term loan. Because the closing and final waivers occurred after the filing date of the June 30, 2010 Form 10-K, the Company classified this debt as current as of June 30, 2010. Upon completion of the closing this debt has been reclassified as long-term. 8 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 5% and 6% of our revenues for the fiscal years ended June 30, 2012 and 2011 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. The security products market is characterized by constant incremental innovation in product design and manufacturing technologies. Generally, the Company devotes 6-8% of revenues to research and development (R&D) on an annual basis. Products resulting from our R&D investments in fiscal 2011 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 at depressed levels. In the event that the U.S. or international financial markets erode further, our revenue, profit and cash-flow levels could be materially adversely affected in future periods. If the worldwide economic downturn worsens, 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 ongoing downturn and economic uncertainty 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. In addition, demand is affected by the housing and construction markets. Further deterioration of the current economic conditions may also affect this trend. 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. Critical estimates include management's judgments associated with revenue recognition, reserves for sales returns and allowances, concentration of credit risk, inventories, goodwill and other intangible assets 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. 9 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 6% and 7% for fiscal years ended June 30, 2012 and 2011, 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 one customer with an accounts receivable balance of 15% and 17% of the Company’s accounts receivable at June 30, 2012 and 2011, respectively. Sales to this customer did not exceed 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 $200,000 and $255,000 as of June 30, 2012 and 2011, respectively. The decrease from fiscal 2011 to 2012 was due to the Company writing off certain receivables during fiscal 2012 which had been reserved for as of June 30, 2011. 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 2012 and 2011, net charges and balances in these reserves amounted to $504,000 and $3,038,000; and $694,000 and $2,534,000, 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 evaluates its Goodwill and Other Intangible Assets 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 impairment, the Company measures the amount of impairment loss by comparing the implied fair value of goodwill and other intangible assets with the carrying amount of that goodwill and other intangible assets. At the conclusion of the fiscal 2012, the Company performed its annual impairment evaluation and determined that its intangible assets were not impaired. 10 At the conclusion of the fiscal 2011, the Company performed its annual impairment evaluation and determined that its intangible asset relating to its Marks trade name was partially impaired. Accordingly, in the quarter ended June 30, 2011 the Company recorded an impairment charge of $400,000 which represented the excess book value of this intangible asset over its current valuation. Self-funded Employee Health Benefit Plan Effective March 2012, the Company converted its employee health benefit plan from a self-insured plan to a fully-insured plan. The Company recorded claims as they were paid and records an accrual for unpaid claims based upon the date of service or date incurred. The Company has accrued $50,000 at June 30, 2012 in connection with its self-insured liability for any potential unreported claims. Income Taxes The Company has identified its U.S. Federal income tax return and its State return in New York as its major tax jurisdictions. The fiscal 2008 and forward years are still open for examination. During the year ended June 30, 2011, the Company completed a research and development credit study. The study included the years June 30, 2007 through June 30, 2011 to determine the amount of R&D credits to which the Company is entitled. The Company filed amended tax returns for these years to establish the credits and generated an income tax benefit of $885,401. Due to the nature of the credits, the Company established a reserve under ASC 740-10 of $165,000. During the year ending June 30, 2012 the Company decreased its reserve for uncertain income tax positions by $39,000. As of June 30, 2012 the Company has a long-term accrued income tax liability of $126,000. 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, 2012, the Company had accrued interest totaling $0 and $126,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. For the year ended June 30, 2012, the Company recognized a net income tax benefit of $39,000. A reconciliation of the U.S. Federal statutory income tax rate to our actual effective tax rate on earnings before income taxes for fiscal 2012 is as follows (dollars in thousands): Tax at Federal statutory rate Increases (decreases) in taxes resulting from: Meals and entertainment State income taxes, net of Federal income tax benefit Foreign source income and taxes Stock based compensation expense Tax reserve reversal R&D Credit Refund Other, net Effective tax rate Liquidity and Capital Resources Amount % of Pre-tax Income $ 868 34.0 % 56 39 (515) 3 (61) (81) (42) 267 2.2 % 1.5 % (20.2)% 0.1 % (2.4)% (3.2)% (1.6)% 10.4 % $ The Company's cash on hand combined with proceeds from operating activities during fiscal 2012 were adequate to meet the Company's capital expenditure needs and debt obligations. The Company's primary internal source of liquidity is the cash flow generated from operations. The primary source of external financing is a revolving credit facility of $11,000,000 (the “Revolving Credit Facility”) which expires in June 2017. As of June 30, 2012 $7,757,000 was outstanding under this revolving line of credit. As of June 30, 2012, the Company's unused sources of funds consisted principally of $2,979,000 in cash and $3,243,000 available under its revolving line of credit. 11 On June 29, 2012, the Company entered into a Third Amended and Restated Credit Agreement with the Company, as the Borrower, and HSBC Bank USA, National Association as Lender, Administrative Agent and Collateral Agent (the “Agreement”). Prior to closing on June 29, 2012, $8,600,000 was outstanding under the existing $11,100,000 revolving credit facility and $12,500,000 was outstanding under the existing term loan. The Agreement amended and restated the previous revolving credit facility and term loan and provides for a revolving credit facility of $11,000,000 (the “Revolving Credit Facility”) which expires in June 2017 and two term loans, one for $6,000,000 which expires in June 2019, and one for $6,500,000 which expires in June 2017 (the “Term Loans”). Repayment of the Terms Loans commences on September 30, 2012. The $6,000,000 Term Loan is being repaid with 28 equal, quarterly payments of $75,000 and the remaining balance of $3,900,000 due on or before the expiration date. The $6,500,000 Term Loan is being repaid in 20 equal, quarterly payments of $325,000. The Agreement also provides for a LIBOR-based interest rate option of LIBOR plus 2.0% to 2.75%, depending on the ratio of outstanding debt to EBITDA, which is to be measured and adjusted quarterly, a prime rate-based option of the prime rate plus 0.25% and other terms and conditions as more fully described in the Agreement. In addition, the Agreement provides for availability under the Revolving Credit Facility to be limited to the lesser of $11,000,000 or the result of a borrowing base formula based upon the Company’s Accounts Receivables and Inventory values net of certain deductions. The Company’s obligations under the Agreement continue to be secured by all of its assets, including but not limited to, deposit accounts, accounts receivable, inventory, the Company’s corporate headquarters in Amityville, NY, equipment and fixtures and intangible assets. In addition, the Company’s wholly-owned subsidiaries, with the exception of the Company’s foreign subsidiaries, have issued guarantees and pledges of all of their assets to secure the Company’s obligations under the Agreement. All of the outstanding common stock of the Company’s domestic subsidiaries and 65% of the common stock of the Company’s foreign subsidiaries has been pledged to secure the Company’s obligations under the Agreement. 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 restated agreement. Management believes that current working capital and cash flows from operations as well as borrowing availability under the revolving line of credit described above will be sufficient to fund the Company's operations through at least the first quarter of fiscal 2014. The Company takes into consideration a number of factors in measuring its liquidity, including the ratios set forth below: Current Ratio Sales to Receivables Total debt to equity As of June 30, 2012 4.9 to 1 4.3 to 1 .54 to 1 2011 3.2 to 1 4.0 to 1 .67 to 1 As of June 30, 2012, 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. The Marks business involves the manufacturing and distribution of door-locking devices. The Company funded the acquisition with a term loan from its lenders, which was amended in June 2012 as described above. The acquisition 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. Working Capital. Working capital increased by $3,020,000 to $32,205,000 at June 30, 2012 from $29,185,000 at June 30, 2011. Working capital is calculated by deducting Current Liabilities from Current Assets. Accounts Receivable. Accounts Receivable decreased by $1,232,000 to $16,408,000 at June 30, 2012 as compared $17,640,000 at June 30, 2011. The decrease in Accounts Receivable was due primarily to a decrease of $736,000 in net sales in the quarter ended June 30, 2012 as compared to the quarter ended June 30, 2011 as well as the Company granting less extended payment terms to its customers for the same period. 12 Inventories. Inventories, which include both current and non-current portions, decreased by $905,000 to $23,282,000 at June 30, 2012 as compared to $24,187,000 at June 30, 2011. The decrease was due primarily to the Company’s improved production planning and forecasting as well as an increase of $504,000 to the inventory reserve. Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses decreased by $2,421,000 to $6,566,000 as of June 30, 2012 as compared to $8,987,000 at June 30, 2011. This decrease is primarily due to decreased purchases of raw materials during the quarter ended June 30, 2012 as compared to June 30, 2011. 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: Contractual obligations Long-term debt obligations Land lease (80 years remaining) (1) Operating lease obligations Other long-term obligations (employment agreement) (1) $ Total 20,257,000 $ 23,040,000 62,000 587,000 Less than 1 year 1-3 years 3-5 years 1,600,000 $ 288,000 39,000 587,000 3,200,000 $ 576,000 22,000 - 10,957,000 $ 576,000 1,000 - More than 5 years 4,500,000 21,600,000 - - Total $ 43,946,000 $ 2,514,000 $ 3,798,000 $ 11,534,000 $ 26,100,000 (1) See footnote 10 to the accompanying consolidated financial statements. Results of Operations Fiscal 2012 Compared to Fiscal 2011 Net sales Gross profit Gross profit as a % of net sales Selling, general and administrative Selling, general and administrative as a % of net sales Impairment of goodwill and other intangibles Income from operations Interest expense, net Other expense, net Provision (benefit) for income taxes Net income Fiscal year ended June 30, 2012 2011 % Increase/ (decrease) 71,392 20,101 28.2% 17,188 24.1% 400 2,513 1,660 46 (314) 1,121 (0.6)% 5.2% 5.7% 0.9% 1.2% (100.0)% 51.7% (30.8)% 137.0% 185.0% 103.9% $ 70,928 21,152 $ 29.8% 17,341 24.4% 0 3,811 1,149 109 267 2,286 13 Net sales in fiscal 2012 remained relatively constant at $70,928,000 as compared to $71,392,000 in fiscal 2011. Sales was affected primarily by decreased sales of the Company’s Marks brand door-locking products ($2,981,000) and foreign sales of the Company’s intrusion products ($982,000) and was partially offset by increases in the Company’s domestic intrusion products ($1,773,000), Alarm Lock brand door locking products ($1,405,000), and access control products ($321,000). The Company's gross profit increased by $1,051,000 to $21,152,000 or 29.8% of net sales in fiscal 2012 as compared to $20,101,000 or 28.2% of net sales in fiscal 2011. Gross profit and gross profit as a percentage of net sales was primarily affected by a positive shift in product mix in fiscal 2012 as well as reductions in overhead expenses resulting from increases in efficiency in the Company’s production planning, procurement and manufacturing processes. Selling, general and administrative expenses as a percentage of net sales increased to 24.4% in fiscal 2012 from 24.1% in fiscal 2011. Selling, general and administrative expenses for fiscal 2012 remained relatively constant at $17,341,000 as compared to $17,188,000 in fiscal 2011. The increase as a percentage of sales resulted primarily from the slight increase in expenses as well as the slight decrease in net sales. Interest expense for fiscal 2012 decreased by $511,000 to $1,149,000 from $1,660,000 for the same period a year ago. The decrease in interest expense is primarily the result of the decrease in interest rates charged by the Company’s primary banks as well as the Company’s reduction of its outstanding borrowings under its revolving line of credit and its term loan. Other expenses increased $63,000 to $109,000 in fiscal 2012 as compared to $46,000 in fiscal 2011. The Company’s provision for income taxes for fiscal 2012 increased by $581,000 to a provision of $267,000 as compared to a benefit of $314,000 for the same period a year ago. The increase in the income taxes from fiscal 2011 to fiscal 2012 resulted primarily from the increase in income before income taxes as well as a benefit of recognizing multiple years of R&D tax credits in fiscal 2011. Net income for fiscal 2012 increased by $1,165,000 to $2,286,000 as compared to $1,121,000 in fiscal 2011. This resulted primarily from the items discussed above as well as an impairment charge of $400,000 recorded in fiscal 2011 relating to intangible assets. 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 grow 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, the uncertain economic, military and political conditions in the world, the ability to maintain adequate financing, continuation of the services of Richard Soloway, out Chief Executive Officer, our ability to maintain and develop competitive products, adverse tax consequences of offshore operations, significant fluctuations in the exchange rate between the Dominican Peso and the U.S. Dollar, distribution problems, unforeseen environmental liabilities, and the successful integration of Marks into our existing operations. The Company’s Risk Factors are discussed in more detail in Item 1A. 14 ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's principal financial instrument is debt (consisting of a revolving credit facility and two term loans) 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, 2012, an aggregate principal amount of approximately $20,257,000 was outstanding under the Company's credit facility with a weighted average interest rate of approximately 3.1%. 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 $203,000 in interest that year. A significant number of foreign sales transactions by the Company are denominated in U.S. dollars. As such, the Company has shifted foreign currency exposure onto many of its foreign customers. As a result, if exchange rates move against foreign customers, the Company could experience difficulty collecting unsecured accounts receivable, the cancellation of existing orders or the loss of future orders. The foregoing could materially adversely affect the Company’s business, financial condition and results of operations. In addition, the Company is exposed to foreign currency risk relative to expenses incurred in Dominican Pesos (“RD$”), 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 $600,000. 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 Report of Independent Registered Public Accounting Firm Consolidated Financial Statements: Consolidated Balance Sheets as of June 30, 2012 and 2011 Consolidated Statements of Income for the Fiscal Years Ended June 30, 2012 and 2011 Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 2012 and 2011 Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2012 and 2011 Notes to Consolidated Financial Statements 15 Page FS-1 FS-2 FS-4 FS-5 FS-6 FS-7 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders Napco Security Technologies, Inc. and Subsidiaries Amityville, New York We have audited the accompanying consolidated balance sheets of Napco Security Technologies, Inc. and Subsidiaries (the “Company”) as of June 30, 2012 and 2011, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years 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 audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits 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 audits provide 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, 2012 and 2011 and the consolidated results of their income and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Holtz Rubenstein Reminick LLP Melville, New York September 21, 2012 FS-1 NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2012 and 2011 (In Thousands) ASSETS CURRENT ASSETS Cash and cash equivalents Accounts receivable, net of reserves and allowances Inventories Prepaid expenses and other current assets Deferred income taxes Total Current Assets Inventories - non-current Deferred income taxes Property, plant and equipment, net Intangible assets, net Other assets TOTAL ASSETS $ 2012 2011 2,979 $ 16,408 19,448 964 650 40,449 3,834 1,762 7,247 11,251 207 3,077 17,640 19,986 950 528 42,181 4,201 2,083 7,741 12,316 273 $ 64,750 $ 68,795 See accompanying notes to consolidated financial statements. FS-2 NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2012 and 2011 (In Thousands, Except Share Data) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long term debt Accounts payable Accrued expenses Accrued salaries and wages Accrued income taxes Total Current Liabilities Long-term debt, net of current maturities Accrued income taxes Total Liabilities COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common Stock, par value $0.01 per share; 40,000,000 shares authorized; 20,095,713 shares issued; and 19,095,713 shares outstanding Additional paid-in capital Retained earnings Less: Treasury Stock, at cost (1,000,000 shares) TOTAL STOCKHOLDERS' EQUITY $ 2012 2011 $ 1,600 3,163 1,814 1,589 78 8,244 18,657 126 27,027 201 14,080 29,057 43,338 (5,615) 37,723 3,572 4,649 2,553 1,785 437 12,996 20,205 165 33,366 201 14,072 26,771 41,044 (5,615) 35,429 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 64,750 $ 68,795 See accompanying notes to consolidated financial statements. FS-3 NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended June 30, 2012 and 2011 (In Thousands, Except Share and Per Share Data) Net sales Cost of sales Gross Profit Selling, general, and administrative expenses Impairment of goodwill and other intangible assets Operating Income Other expense: Interest expense, net Other, net Income before Provision (Benefit) for Income Taxes Provision (benefit) for income taxes Net Income Income per share: Basic Diluted Weighted average number of shares outstanding: Basic Diluted 2012 2011 $ 70,928 49,776 $ 21,152 17,341 -- 3,811 1,149 109 1,258 2,553 267 2,286 $ 0.12 0.12 $ $ $ $ $ 71,392 51,291 20,101 17,188 400 2,513 1,660 46 1,706 807 (314) 1,121 0.06 0.06 19,096,000 19,303,000 19,096,000 19,176,000 See accompanying notes to consolidated financial statements. FS-4 NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended June 30, 2012 and 2011 (In Thousands, Except Share Data) Common Stock Treasury Stock BALANCE June 30, 2010 Stock-based compensation expense Net income BALANCE June 30, 2011 Stock-based compensation expense Net income Number of Shares Issued 20,095,713 $ -- -- 20,095,713 -- -- $ Additional Paid-in Capital Amount 201 $ -- $ -- 201 -- -- 14,006 66 - 14,072 8 - Number of Shares (1,000,000) $ - Amount Retained Earnings Total (5,615) $ - 25,650 $ - - (1,000,000) - - $ - (5,615) $ - - 1,121 26,771 $ - 2,286 34,242 66 1,121 35,429 8 2,286 BALANCE June 30, 2012 20,095,713 $ 201 $ 14,080 (1,000,000) $ (5,615) $ 29,057 $ 37,723 See accompanying notes to consolidated financial statements. FS-5 NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 2012 and 2011 (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Impairment of goodwill and other intangibles Charge to obsolescence reserve Provision for doubtful accounts Deferred income taxes Non-cash stock based compensation expense Changes in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other current assets Income tax receivable Other assets Accounts payable, accrued expenses, accrued salaries and wages, accrued income taxes Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant, and equipment Net Cash Used in Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on debt Cash paid for deferred financing costs Net Cash Used in Financing Activities Net Change in Cash and Cash Equivalents CASH AND CASH EQUIVALENTS - Beginning CASH AND CASH EQUIVALENTS - Ending SUPPLEMENTAL CASH FLOW INFORMATION Interest paid, net Income taxes paid 2012 2011 $ 2,286 $ 2,275 -- 504 10 199 8 1,222 401 (15) -- 26 (2,820) 4,096 (606) (606) (3,520) (68) (3,588) (98) 3,077 $ $ $ 2,979 $ 1,136 467 $ $ 1,121 2,311 400 694 27 (321) 66 73 (799) (3) 785 (3) 13 4,364 (737) (737) (6,072) -- (6,072) (2,445) 5,522 3,077 1,562 10 See accompanying notes to consolidated financial statements. FS-6 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 electronic locking devices, intrusion and fire alarms and building access control systems. 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 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. 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, reserves for sales returns and allowances, concentration of credit risk, inventories, goodwill and other intangible assets and income taxes. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include approximately $460,000 and $960,000 of short-term time deposits at June 30, 2012 and 2011, 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, 2012 and 2011. Accounts Receivable Accounts receivable is stated net of the reserves for doubtful accounts of $200,000 and $255,000 and for returns and other allowances of $1,184,000 and $1,455,000 as of June 30, 2012 and June 30, 2011, 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 actual results could differ from those estimates. FS-7 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 2012 and 2011, charges and balances in these reserves amounted to $504,000 and $3,038,000; and $694,000 and $2,534,000, 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. Intangible Assets Certain intangible assets determined to have indefinite lives are not amortized but are tested for impairment at least annually. Intangible assets with definite lives are amortized over their useful lives. 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. 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. The intangible assets are 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. At the conclusion of the quarter ended June 30, 2011, the Company performed its annual impairment evaluation and determined that its intangible asset relating to its Marks trade name was partially impaired. Accordingly, in the quarter ended June 30, 2011 the Company recorded an impairment charge of $400,000 which represented the excess book value of this intangible asset over its current valuation. Changes in intangible assets are as follows (in thousands): Other intangible assets: Customer relationships Non-compete agreement Trade name June 30, 2012 Accumulated amortization Net book value Cost June 30, 2011 Accumulated amortization Net book value Cost $ $ 9,800 340 5,900 16,040 $ $ (4,601) (188) -- (4,789) $ $ 5,199 152 5,900 11,251 $ $ 9,800 340 5,900 16,040 $ $ (3,584) $ (140) -- (3,724) $ 6,216 200 5,900 12,316 Amortization expense for intangible assets subject to amortization was approximately $1,065,000 and $1,154,000 for the years ended June 30, 2012 and 2011, respectively. Amortization expense for each of the next five years is estimated to be as follows: 2013 - $917,000; 2014 - $781,000; 2015 - $667,000; 2016 - $529,000 and 2017 - $441,000. The weighted average amortization period for intangible assets was 15.8 years and 16.7 years at June 30, 2012 and 2011, respectively. FS-8 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 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) collectability 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 and 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, 2012 and 2011 was $1,081,000 and $792,000, respectively. Research and Development Costs Research and development costs incurred by the Company are charged to expense in the year incurred. Company-sponsored research and development costs of $4,264,000 and $4,392,000 were charged to expense for the fiscal years ended June 30, 2012 and 2011, respectively, and are included in "Cost of Sales" in the consolidated statements of operations. Self-funded Employee Health Benefit Plan Effective March 2012, the Company converted its employee health benefit plan from a self-insured plan to a fully-insured plan. The Company recorded claims as they were paid and records an accrual for unpaid claims based upon the date of service or date incurred. The Company has accrued $50,000 at June 30, 2012 in connection with its self-insured liability for any potential unreported claims. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company measures and recognizes the tax implications of positions taken or expected to be taken in its tax returns on an ongoing basis. Earnings Per Share Basic net income per common share (Basic EPS) is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per common share (Diluted EPS) is computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents and convertible securities then outstanding. FS-9 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): Basic EPS Effect of Dilutive Securities: Stock Options Diluted EPS Net Income 2012 2011 Weighted Average Shares 2011 2012 Net Income per Share 2011 2012 2,286 $ 1,121 19,096 19,096 $ 0.12 $ 0.06 -- -- 207 80 -- -- 2,286 $ 1,121 19,303 19,176 $ 0.12 $ 0.06 $ $ Options to purchase 649,348 and 583,350 shares of common stock for the fiscal years ended June 30, 2012 and 2011, respectively, were not included in the computation of Diluted EPS because 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 8. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the vesting period. Determining the fair value of share-based awards at the grant date requires assumptions and judgments about expected volatility and forfeiture rates, among other factors. Stock-based compensation costs of $8,000 and $66,000 were recognized for fiscal years 2012 and 2011, respectively. The effect on both Basic and Diluted Earnings per share was $0.00 for fiscal years 2012 and 2011. 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, 2012 and 2011. Comprehensive Income For the fiscal years ended June 30, 2012 and 2011, 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’s reportable operating segments are determined based on the Company's management approach. The management approach is based on the way that the chief operating decision maker organizes the segments within an enterprise for making operating decisions and assessing performance. The Company's results of operations are reviewed by the chief operating decision maker on a consolidated basis and the Company operates in only one segment. The Company has presented required geographical data in Note 11, and no additional segment data has been presented. Shipping and Handling Revenues and Costs The Company records the amount billed to customers in net sales ($584,000 and $474,000 in fiscal years 2012 and 2011, respectively) and classifies the costs associated with these revenues in cost of sales ($1,090,000 and $1,023,000 in fiscal years 2012 and 2011, respectively). FS-10 Recently Issued Accounting Standards In July 2012, the FASB amended its authoritative guidance related to testing indefinite-lived intangible assets for impairment. Under the revised guidance, entities testing their indefinite-lived intangible assets for impairment have the option of performing a qualitative assessment before performing further impairment testing. If entities determine, on the basis of qualitative factors, that it is more-likely-than-not that the asset is impaired, a quantitative test is required. The guidance becomes effective in the beginning of the Company’s fiscal 2014, with early adoption permitted. The Company is currently evaluating the timing of adopting this guidance which is not expected to have an impact on the Company’s consolidated financial statements. In September 2011, the FASB amended its authoritative guidance related to testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before performing Step 1 of the goodwill impairment test. If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more-likely-than-not less than the carrying amount, the two-step impairment test would be required. This guidance becomes effective in the beginning of the Company’s fiscal 2013, with early adoption permitted. The Company is not adopting this guidance early, and it does not expect the guidance to have an impact on the Company’s consolidated financial statements. NOTE 2 - Business and Credit Concentrations The Company had one customer with an accounts receivable balance of 15% and 17% of the Company’s accounts receivable at June 30, 2012 and 2011, respectively. Sales to any one customer did not exceed 10% of net sales in any of the past three fiscal 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 (in thousands): Component parts Work-in-process Finished product Classification of inventories, net of reserves: Current Non-current $ $ $ $ June 30, 2012 2011 13,155 $ 3,199 6,928 14,014 4,452 5,721 23,282 $ 24,187 19,448 $ 3,834 19,986 4,201 23,282 $ 24,187 FS-11 NOTE 4 - Property, Plant, and Equipment Property, plant and equipment consist of the following: Land Buildings Molds and dies Furniture and fixtures Machinery and equipment Leasehold improvements Less: accumulated depreciation and amortization June 30, 2012 2011 Useful Life in Years $ (in thousands) $ 904 8,911 6,748 2,317 19,107 372 38,359 31,112 $ 7,247 $ 904 -- 8,911 30 to 40 6,636 3 to 5 2,287 5 to 10 18,642 7 to 10 372 Shorter of the lease term or life of asset 37,752 30,011 7,741 Depreciation and amortization expense on property, plant, and equipment was approximately $1,101,000 and $1,102,000 in fiscal 2012 and 2011, respectively. NOTE 5 – Acquisition of Business 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 current liabilities. The Marks business involves the manufacturing and distribution of door-locking devices. The Company funded the acquisition with a term loan from its lenders, which has since been amended as described in Note 7. The intangible assets acquired, other than the Marks tradename, are being 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. At the conclusion of the quarter ended June 30, 2011, the Company performed its annual impairment evaluation and determined that its intangible asset relating to its Marks tradename, was partially impaired. Accordingly, in the quarter ended June 30, 2011 the Company recorded an impairment charge of $400,000 which represented the excess book value of this intangible asset over its current valuation. NOTE 6 - Income Taxes The Provision (benefit) for income taxes is comprised of the following (in thousands): Current income taxes: Federal State Foreign Deferred income tax provision (benefit) Provision (benefit) for income taxes For the Years Ended June 30, 2012 2011 $ $ (35) 39 3 7 (321) (314) 11 $ 57 -- 68 199 267 $ FS-12 A reconciliation of the U.S. Federal statutory income tax rate to our actual effective tax rate on earnings before income taxes is as follows (dollars in thousands): Tax at Federal statutory rate Increases (decreases) in taxes resulting from: Meals and entertainment State income taxes, net of Federal income tax benefit Foreign source income and taxes Stock based compensation expense Tax reserve reversal R&D Credit refund Other, net For the Years Ended June 30, 2012 2011 Amount % of Pre-tax Income Amount % of Pre-tax Income $ 868 34.0% $ 274 56 39 (515) 3 (61) (81) (42) 2.2% 1.5% (20.2)% 0.1% (2.4)% (3.2)% (1.6)% 51 26 102 16 (77) (708) 2 (314) 34.0% 6.3% 3.2% 12.7% 2.0% (9.5)% (87.8)% 0.2% (38.9)% Effective tax rate $ 267 10.4% $ Deferred tax assets and deferred tax liabilities at June 30, 2012 and 2011 are as follows (in thousands): Accounts receivable Inventories Accrued Liabilities Stock based compensation expense Goodwill R&D credit Property, plant and equipment Other deferred tax liabilities Valuation allowance Net deferred taxes Current Deferred Tax Assets (Liabilities) 2012 2011 Long-term Deferred Tax Assets (Liabilities) 2012 2011 $ $ 23 399 228 -- -- -- -- -- 650 -- $ 19 288 221 -- -- -- -- -- 528 -- $ -- 405 -- 137 1,875 225 (624) (256) 1,762 -- $ 650 $ 528 $ 1,762 $ -- 380 35 137 2,077 163 (625) (84) 2,083 -- 2,083 The Company has identified its U.S. Federal income tax return and its State return in New York as its major tax jurisdictions. The fiscal 2008 and forward years are still open for examination. During the year ended June 30, 2011, the Company completed a research and development credit study. The study included the years June 30, 2007 through June 30, 2011 to determine the amount of R&D credits to which the Company is entitled. The Company filed amended tax returns for these years to establish the credits and generated an income tax benefit of $885,401. Due to the nature of the credits, the Company established a reserve under ASC 740-10 of $165,000. During the year ending June 30, 2012 the Company decreased its reserve for uncertain income tax positions by $39,000. As of June 30, 2012 the Company has a long-term accrued income tax liability of $126,000. 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, 2012, the Company had accrued interest totaling $0 and $126,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. FS-13 A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Balance of gross unrecognized tax benefits as of July 1, 2011 Reductions to unrecognized tax benefits resulting from changes in reserve percentages Balance of gross unrecognized tax benefits as of June 30, 2012 Tax Interest Total $ $ $ 165 (39) 126 $ $ -- -- -- $ 165 (39) 126 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, 2012, the Company had no undistributed earnings of foreign subsidiaries. NOTE 7 - Long-Term Debt As of June 30, 2012, long-term debt consisted of a revolving credit facility of $11,000,000 (the “Revolving Credit Facility”) which expires in June 2017 and two term loans, one for $6,000,000 which expires in June 2019, and one for $6,500,000 which expires in June 2017 (the “Term Loans”). Repayment of the Terms Loans commences on September 30, 2012. The $6,000,000 Term Loan is being repaid with 28 equal, quarterly payments of $75,000 and the remaining balance of $3,900,000 due on or before the expiration date. The $6,500,000 Term Loan is being repaid in 20 equal, quarterly payments of $325,000. Outstanding balances and interest rates as of June 30, 2012 and June 30, 2011 are as follows: Revolving line of credit Term loan Total debt June 30, 2012 June 30, 2011 Outstanding Interest Rate Outstanding Interest Rate $ $ 7,757 12,500 20,257 3.1% $ 3.1% 8,600 15,177 3.1% $ 23,777 4.8% 4.8% 4.8% On June 29, 2012, the Company entered into a Third Amended and Restated Credit Agreement with the Company, as the Borrower, and HSBC Bank USA, National Association as Lender, Administrative Agent and Collateral Agent (the “Agreement”). Prior to closing on June 29, 2012, $8,600,000 was outstanding under the existing $11,100,000 revolving credit facility and $12,500,000 was outstanding under the existing term loan. The Agreement amended and restated the previous revolving credit facility and term loan and provides for a revolving credit facility of $11,000,000 (the “Revolving Credit Facility”) which expires in June 2017 and two term loans, one for $6,000,000 which expires in June 2019, and one for $6,500,000 which expires in June 2017 (the “Term Loans”). Repayment of the Terms Loans commences on September 30, 2012. The $6,000,000 Term Loan is being repaid with 28 equal, quarterly payments of $75,000 and the remaining balance of $3,900,000 due on or before the expiration date. The $6,500,000 Term Loan is being repaid in 20 equal, quarterly payments of $325,000. The Agreement also provides for a LIBOR-based interest rate option of LIBOR plus 2.0% to 2.75%, depending on the ratio of outstanding debt to EBITDA, which is to be measured and adjusted quarterly, a prime rate-based option of the prime rate plus 0.25% and other terms and conditions as more fully described in the Agreement. In addition, the Agreement provides for availability under the Revolving Credit Facility to be limited to the lesser of $11,000,000 or the result of a borrowing base formula based upon the Company’s Accounts Receivables and Inventory values net of certain deductions. The Company’s obligations under the Agreement continue to be secured by all of its assets, including but not limited to, deposit accounts, accounts receivable, inventory, the Company’s corporate headquarters in Amityville, NY, equipment and fixtures and intangible assets. In addition, the Company’s wholly-owned subsidiaries, with the exception of the Company’s foreign subsidiaries, have issued guarantees and pledges of all of their assets to secure the Company’s obligations under the Agreement. All of the outstanding common stock of the Company’s domestic subsidiaries and 65% of the common stock of the Company’s foreign subsidiaries has been pledged to secure the Company’s obligations under the Agreement. FS-14 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 restated agreement. NOTE 8 - 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, 2012, 1,471,480 stock options were granted, 364,520 stock options were available for grant, and 1,380,140 stock options were exercisable under this plan. No options were granted during fiscal 2012 or 2011. The following table reflects activity under the 2002 Plans for the fiscal years ended June 30,: Outstanding, beginning of year Granted Terminated Exercised Outstanding, end of year Exercisable, end of year Weighted average fair value at grant date of options granted Total intrinsic value of options exercised Total intrinsic value of options outstanding Total intrinsic value of options exercisable $ $ 2012 2011 Weighted average exercise price 2.95 -- -- -- 2.95 2.95 $ $ Options 1,380,140 $ -- -- -- 1,380,140 $ 1,372,140 $ n/a n/a 1,097,191 1,097,191 Options 1,380,140 $ -- -- -- 1,380,140 $ 1,380,140 $ n/a n/a 1,066,760 1,066,760 Weighted average exercise price 2.95 -- -- -- 2.95 2.93 No options were exercised during fiscal 2012 or 2011. Therefore, cash received from option exercises for each of fiscal years 2012 and 2011 was $0 and the actual tax benefit realized for the tax deductions from option exercises totaled $0 for both fiscal 2012 and 2011. FS-15 The following table summarizes information about stock options outstanding under the 2002 Plan at June 30, 2012: Range of exercise prices $ 0.72 - $ 4.00 $ 4.01 - $ 7.50 $ 7.51 - $11.16 Number outstanding at June 30, 2012 1,014,390 328,250 37,500 1,380,140 Options outstanding Weighted average remaining contractual life Weighted average exercise price Options exercisable Number exercisable at June 30, 2012 Weighted average exercise price 1.1 4.5 3.7 2.0 1.89 5.29 11.16 2.95 1,014,390 328,250 37,500 1,380,140 1.89 5.29 11.16 2.95 As of June 30, 2012, there was no unearned stock-based compensation cost related to non-vested share-based compensation arrangements granted under the 2002 Plan. The total fair value of the options vested during fiscal 2012 under the 2002 Plan was $28,920. 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. This plan expired in September 2010. No further options may be granted under the 2000 Plan. 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. Outstanding options are exercisable at 20% per year and expire five years after the date of grant. Compensation cost was recognized for the fair value of the options granted to non-employee directors and consultants as of the date of grant. The following table reflects activity under the 2000 Plan for the fiscal years ended June,: Outstanding, beginning of year Granted Terminated Exercised Outstanding, end of year Exercisable, end of year Weighted average fair value at grant date of options granted Total intrinsic value of options exercised Total intrinsic value of options outstanding Total intrinsic value of options exercisable $ $ 2012 2011 Weighted average exercise price Weighted average exercise price Options Options 30,000 $ -- -- -- 30,000 $ 30,000 $ n/a n/a 0 0 5.03 -- -- -- 5.03 5.03 $ $ 30,000 $ -- -- -- 30,000 $ 30,000 $ n/a n/a 0 0 5.03 -- -- -- 5.03 5.03 As of June 30, 2012, there was no unearned stock-based compensation cost related to non-vested share-based compensation arrangements granted under the 2000 Plan. The total fair value of the options vested during fiscal 2012 under the 2002 Plan was $0. NOTE 9 - 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. Company contributions to this plan are discretionary and totaled $41,000 and $0 for the years ended June 30, 2012 and 2011. 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 $3,000 and $0 for the years ended June 30, 2012 and 2011, respectively. FS-16 NOTE 10 - Commitments and Contingencies Leases The Company is committed under various operating leases, which do not extend beyond fiscal 2016. 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, 2013 2014 2015 2016 Amount $ 39,000 16,000 6,000 1,000 Total $ 62,000 Rent expense, with the exception of the land lease referred to below, totaled approximately $51,000 and $71,000 for the fiscal years ended June 30, 2012 and 2011, 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, 2012, the Company was obligated under one employment agreement and one severance agreement. The employment agreement is with the Company’s Chief Executive Officer. The employment agreement provides for an annual salary of $587,000 as adjusted for inflation, incentive compensation as may be approved by the Board of Directors from time to time and a termination payment in an amount up to 299% of the average of the prior five calendar year's compensation, subject to certain limitations, as defined in the agreement. The employment agreement renews annually in August unless either party gives the other notice of non-renewal at least six months prior to the end of the applicable term. NOTE 11 - Geographical Data The Company is engaged in one major line of business: the development, manufacture, and distribution of security alarm products and door security devices for commercial and residential use. Sales to unaffiliated customers are primarily shipped from the United States. The Company has customers worldwide with major concentrations in North America, Europe, and South America. The following represents selected consolidated geographical data for and as of the fiscal years ended June 30, 2012 and 2011: Financial Information Relating to Domestic and Foreign Operations Sales to external customers(1): Domestic Foreign Total Net Sales Identifiable assets: United States Dominican Republic (2) Other foreign countries Total Identifiable Assets 2012 2011 (in thousands) $ $ $ $ 67,311 $ 3,617 70,928 $ 50,838 $ 13,912 0 64,750 $ 66,793 4,599 71,392 54,426 14,342 27 68,795 (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. There were no sales into any one foreign country in excess of 10% of total Net Sales. (2) Consists primarily of inventories (2012 = $9,866,000; 2011 = $9,955,000) and fixed assets (2012 = $3,936,000; 2011 = $4,189,000) located at the Company's principal manufacturing facility in the Dominican Republic. FS-17 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None ITEM 9A: CONTROL AND PROCEDURES Evaluation of Disclosure Controls and Procedures. At the conclusion of the period ended June 30, 2012, 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 consolidated 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, 2012. 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. 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. FS-18 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 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 There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2012 that has materially affected or is likely to materially affect our internal controls over financial reporting. 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 2012 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. FS-19 ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a)1. Financial Statements PART IV The following consolidated financial statements of NAPCO Security Technologies, Inc. and its subsidiaries are included in Part II, Item 8: Report of Independent Registered Public Accounting Firm Consolidated Financial Statements: Consolidated Balance Sheets as of June 30, 2012 and 2011 Consolidated Statements of Operations for the Fiscal Years Ended June 30, 2012 and 2011 Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 2012 and 2011 Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2012 and 2011 Notes to Consolidated Financial Statements, June 30, 2012 Page FS-1 FS-2 FS-4 FS-5 FS-6 FS-7 (a)3 and (b). Exhibits Management Contracts designated by asterisk. Exhibit No. Ex-3.(i) Title Certificate of Amendment of Certificate of Incorporation Ex-3.(ii) Certificate of Incorporation as amended Ex-3.(iii) Amended and Restated By-Laws Ex 4.01 Ex 4.02 Ex 4.03 Ex 4.04 Ex 4.05 Ex 4.06 Ex 4.07 Ex 4.08 *Ex-10.A (ii) Third Amended and Restated Credit Agreement dated June 29, 2012. Second Amended and Restated Term A Loan Note Second Amended and Restated Term B Loan Note Second Amended and Restated Revolving Credit Note Second Amended and Restated Swing Line Note Continuing General Security Agreement Reaffirmation of Collateral Documents Reaffirmation of Negative Pledge 2002 Employee Stock Option Plan *Ex-10.I *Ex-10.M Ex-14.0 Amended and Restated Employment Agreement with Richard Soloway Indemnification Agreement dated August 9, 1999 Code of Ethics Ex-21.0 Ex-23.1 Ex-31.1 Ex-31.2 Ex-32.1 Ex-32.2 Subsidiaries of the Registrant Consent of Independent Auditors Section 302 Certification of Chief Executive Officer Section 302 Certification of Chief Financial Officer Certification of Chief Executive Officer Pursuant to 18 USC Section 1350 and Section 906 of Sarbanes - Oxley Act of 2002 Certification of Chief Financial Officer Pursuant to 18 USC Section 1350 and Section 906 of Sarbanes - Oxley Act of 2002 XBRL Instance Document† Ex-101.INS Ex-101.SCH XBRL Taxonomy Extension Schema Document† Ex-101.CAL XBRL Taxonomy Extension Calculation Linkbase Document† Ex-101.LAB XBRL Taxonomy Extension Label Linkbase Document† Ex-101.PRE Ex-101.DEF XBRL Taxonomy Extension Presentation Linkbase Document† XBRL Taxonomy Extension Definition Linkbase Document† Exhibit-3.(i) to Report on Form 10-K for the fiscal year ended June 30, 2011 Exhibit-3.(ii) to Report on Form 10-K for the fiscal year ended June, 30 2011 Exhibit 3.(ii) to Report on Form 10-K for the fiscal year ended June 30, 2010 Exhibit 4.01 to Report on Form 8-K dated June 29, 2012 Exhibit 4.01 to Report on Form 8-K dated June 29, 2012 Exhibit 4.01 to Report on Form 8-K dated June 29, 2012 Exhibit 4.01 to Report on Form 8-K dated June 29, 2012 Exhibit 4.01 to Report on Form 8-K dated June 29, 2012 Exhibit 4.01 to Report on Form 8-K dated June 29, 2012 Exhibit 4.01 to Report on Form 8-K dated June 29, 2012 Exhibit 4.01 to Report on Form 8-K dated June 29, 2012 Exhibit 10.A(II) to Report on Form 10-K for the fiscal year ended June 30, 2008 Exhibit 10.I to Report on Form 10-K for fiscal year ended June 30, 2010 E-15 Exhibit 14.0 to Report on Form 10-K for the fiscal year ended June 30, 2010 E-18 E-19 E-20 E-21 E-22 E-23 † Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for the purposes of section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities and Exchanges Act of 1934, as amended, and otherwise is not subject to liability under these sections. FS-20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. September 21, 2012 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 /s/RICHARD SOLOWAY Richard Soloway /s/KEVIN S. BUCHEL Kevin S. Buchel /s/PAUL STEPHEN BEEBER Paul Stephen Beeber /s/RANDY B. BLAUSTEIN Randy B. Blaustein /s/ARNOLD BLUMENTHAL Arnold Blumenthal /s/DONNA SOLOWAY Donna Soloway /s/ANDREW J. WILDER Andrew J. Wilder Chairman of the Board of Directors, President and Secretary and Director (Principal Executive Officer) Senior Vice President of Operations and Finance and Treasurer and Director (Principal Financial and Accounting Officer) Director Director Director Director Director FS-21 Date September 21, 2012 September 21, 2012 September 21, 2012 September 21, 2012 September 21, 2012 September 21, 2012 September 21, 2012 EXHIBIT 10.M INDEMNIFICATION AGREEMENT AGREEMENT, effective as of the 9th day of August, 1999, between NAPCO SECURITY SYSTEMS, INC., a Delaware corporation (the "Company"), and the individuals listed on the signature page (each an "Indemnitee" and collectively the "Indemnitees"). WHEREAS, Indemnitee is a director, officer or employee of the Company; and WHEREAS, both the Company and the Indemnitee recognize the risk of litigation and other claims being asserted against corporate agents or public companies in today's environment; and WHEREAS, the Articles of Incorporation and Bylaws of the Company permit the Company to indemnify and advance expenses to its directors and officers to the fullest extent now or hereafter authorized or permitted by law. NOW, THEREFORE, in consideration of the premises and intending to be legally bound hereby, the parties hereto agree as follows: 1. Certain Definitions. (a) Approved Counsel shall mean any attorney or law firm located and selected by an Indemnitee and reasonably acceptable to the Company. (b) Board of Directors shall mean the Board of Directors of the Company. (c) Claim shall mean any threatened, pending or completed action, suit or proceeding, or any inquiry or investigation, whether instituted by the Company or any other party, that an Indemnitee in good faith believes might lead to the institution of any such action, suit or proceeding, whether civil, criminal, administrative, investigative or other and shall also include litigation of the type described in Section 3(b), 3(c) or 5. (d) Expenses shall include attorneys' fees of approved counsel and all other costs, expenses, disbursements, and obligations paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in any Claim relating to any Indemnifiable Event, ncluding any litigation described in Section 3(b), 3(c) or 5 together with interest calculated at the Company's average cost of funds for short- term borrowings, accrued from the date of payment of such expense of the date Indemnitee received reimbursement therefor. (e) Indemnifiable Event shall mean any event or occurrence related to the fact that an Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another corporation of any type or kind, domestic or foreign, partnership, joint venture, employee benefit plan, trust or other enterprise, or by reason of anything done or not done by an Indemnitee in any such capacity. Without limitation of an indemnification provided hereunder, an Indemnitee serving (i) another corporation, partnership, joint venture or trust of which twenty (20%) percent or more of the voting power or residual economic interest is held, directly or indirectly, by the Company, or (ii) any employee benefit plan of the Company or any entity referred to in clause (i), in any capacity shall be deemed to be doing so at the request of the Company. 2. Basic Indemnification Arrangement. If an Indemnitee was, is or becomes at any time a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify such Indemnitee to the fullest extent now or hereafter authorized or permitted by law as soon as practicable but in any event no later than fifteen (15) days after written demand is presented to the Company, against any and all Expenses, judgments, fines (including excise taxes assessed against an Indemnitee with respect to an employee benefit plan), penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties or amounts paid in settlement) of such Claim. If so requested by Indemnitee, the Company shall advance (within two (2) business days of such request) any and all Expenses to an Indemnitee (an "Expense Advance"), provided however, the Indemnitee must sign an undertaking to reimburse the Company for such Expenses if it is ultimately determined that the Indemnitee was not entitled to indemnification with respect to the Claim. As to any action or suit by or in the right of the Company, such indemnification shall be subject to the provisions of Section 145(b) of the DGCL. 3. Payment. (a) Notwithstanding the provisions of Section 2, the obligations of the Company under Section 2 shall in no event be deemed to preclude any right to indemnification to which an Indemnitee may be entitled under the Delaware General Corporation Law (the "DGCL"). (b) In the event an Indemnitee seeks indemnification in a proceeding initiated by such Indemnitee (other than a proceeding under Section 3(c) hereof), the obligations of the Company under Section 2 shall be subject to the requirement that such proceeding was specifically authorized, or later ratified, by the Company. (c) If the Company refuses to indemnify an Indemnitee for any reason whatsoever and such Indemnitee substantively would be permitted to be indemnified in whole or in part under applicable law, such Indemnitee shall have the right to commence litigation in any court in the States of New York or Delaware having subject matter jurisdiction thereof and in which venue is proper seeking an initial determination by the court or challenging any such refusal by the Company or any aspect thereof, including the legal or factual bases therefor, and the Company hereby consents to service of process relating thereto and hereby consents to personal jurisdiction of any such court and agrees of appear in any such proceeding. In any such litigation, an Indemnitee shall be entitled to the benefits of the burden of proof presumption provided in Section 7 hereof. 4. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against an Indemnitee to the extent such Indemnitee has otherwise actually received payment (under any insurance policy, Bylaw or otherwise) of the amounts otherwise indemnifiable hereunder. 5. Indemnification for Additional Expenses. The Company shall indemnify Indemnitees against any and all Expenses (including attorneys' fees) and, if requested by such Indemnitee, shall (within two business days of such request) advance such expenses to Indemnitee, which are incurred by Indemnitee in connection with any claim asserted or action brought by Indemnitee for (i) indemnification or payment of Expenses by the Company or advance of expenses under this Agreement or any other agreement or Company Bylaw now or hereafter in effect relating to Claims for Indemnifiable Events and/or (ii) recovery under any directors' and officers' liability insurance policies maintained by the Company, regardless of whether such Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be. 6. Partial Indemnity, Etc. If an Indemnitee is entitled under any provision of this Agreement or otherwise to indemnification by the Company for some or a portion of the Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify such Indemnitee for the portion thereof to which such Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that such Indemnitee has been successful on the merits or otherwise in defense of any or all Claims relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, including dismissal without prejudice, such Indemnitee shall be indemnified, to the extent permitted by law, against all Expenses incurred in connection with such Indemnifiable Event. 7. Burden of Proof. In connection with any determination hereunder or otherwise, including any litigation of the sort described in Section 3(b) or 3(c), as to whether an Indemnitee is entitled to be indemnified hereunder the burden of proof shall be on the Company to establish that such Indemnitee is not so entitled. 8. No Adverse Presumptions. For purposes of this Agreement, the termination of any claim, action, suit or proceeding, whether civil or criminal, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that an Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. 9. Nonexclusivity, Etc. The rights of an Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Company's Bylaws or the DGCL or otherwise. To the extent that a change in the DGCL (whether by statute or judicial decision) permits greater indemnification by agreement than those currently afforded under the Company's Bylaws and this Agreement, it is the intent of the parties hereto that such Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. 5. Liability Insurance. To the extent the Company maintains an insurance policy or policies providing directors' and officers' liability insurance, an Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any director or officer of the Company. 6. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Company against an Indemnitee, an Indemnitee's spouse, heir, executors or personal or legal representatives from and after the date hereof. 7. Amendments, Etc. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by the parties hereto. No waiver of any of the provisions of this Agreement shall be effective unless in writing and no written waiver shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a waiver. 8. Subrogation. In the event of payment under this Agreement to an Indemnitee, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of such Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 9. Specific Performance. The parties recognize that if any provision of this Agreement is violated by the Company, an Indemnitee may be without an adequate remedy at law. Accordingly, in the event of any such violation, such Indemnitee shall be entitled, if such Indemnitee so elects, to institute proceedings, either in law or at equity, to obtain damages or reimbursements for costs, expenses, or disbursements, to enforce specific performance, to enjoin such violation, or to obtain any relief or any combination of the foregoing as such Indemnitee may elect to pursue. 10. Binding Effect, Etc. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, assigns, spouses, heirs, executors, and personal and legal representatives. This Agreement shall continue in effect regardless of whether an Indemnitee continues to serve as an officer or director of the Company or of any other enterprise at the Company's request or in any other capacity, such as agent or consultant. 11. Severability; Several Obligations. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provisions within a single section, paragraph or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable in any respect, and the validity and enforceability of any such provision in every other respect and with respect to all other Indemnitees and of the remaining provisions hereof shall not be in any way impaired and shall remain enforceable to the fullest extent permitted by law. The indemnities afforded hereby are several and not joint obligations, and no requirement of joinder, common pleadings, joint request or the like shall be needed for any single Indemnitee to enjoy the rights hereby afforded. THE INDEMNITOR: THE IMDEMNITEES: NAPCO SECURITY SYSTEMS, INC. By /s/ Name: Richard Soloway Title: President /s/ Richard Soloway /s/ Kevin S. Buchel /s/ Randy Blaustein /s/ Andrew J. Wilder EXHIBIT 21.0 SUBSIDIARIES OF THE COMPANY The following are the Company’s subsidiaries as of the close of the fiscal year ended June 30, 2011. All beneficial interests are wholly-owned, directly or indirectly, by the Company and are included in the Company’s consolidated financial statements. Name Alarm Lock Systems, Inc. Marks USA I, LLC Continental Instruments, LLC Napco DR, S.A. Napco Americas Napco Security Systems International, Inc. Napco/Alarm Lock Exportadora, S.A. Napco/Alarm Lock Grupo Internacional, S.A. Video Alert, LLC State or Jurisdiction of Organization Delaware New York New York Dominican Republic Cayman Islands New York Dominican Republic Dominican Republic New York EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our report dated September 21, 2012, accompanying the consolidated financial statements included in the Annual Report of Napco Security Technologies, Inc. and Subsidiaries on Form 10-K for the years ended June 30, 2012 and 2011. We hereby consent to the incorporation by reference of said report in the Registration Statement of Napco Security Technologies, Inc. on Form S-8 (Registration No. 333-14743). /s/ Holtz Rubenstein Reminick LLP Melville, New York September 21, 2012 EXHIBIT 31.1 SECTION 302 CERTIFICATION I, Richard Soloway, certify that: 1. I have reviewed this annual report on Form 10-K of Napco Security Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 21, 2012 /s/RICHARD SOLOWAY Richard Soloway Chief Executive Officer (Principal Executive Officer) EXHIBIT 31.2 SECTION 302 CERTIFICATION I, Kevin S. Buchel, certify that: 1. I have reviewed this annual report on Form 10-K of Napco Security Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 21, 2012 By: /s/KEVIN S. BUCHEL Kevin S. Buchel Chief Financial Officer (Principal Financial Officer) EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Napco Security Technologies, Inc. (the "Company") on Form 10-K for the period ending June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard Soloway, Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: September 21, 2012 By: /s/RICHARD SOLOWAY Richard Soloway Chief Executive Officer (Principal Executive Officer) The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-K or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Napco Security Technologies, Inc. (the "Company") on Form 10-K for the period ending June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin S. Buchel, Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: September 21, 2012 By: /s/KEVIN S. BUCHEL Kevin S. Buchel Chief Financial Officer (Principal Financial Officer) The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-K or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 

Continue reading text version or see original annual report in PDF format above