NAPCO Security
Annual Report 2014

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended June 30, 2014 or ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition period from ___ to___ FORM 10-K (Mark One) 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 ☐ No ☒ Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐ Indicate by check mark 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 ☒ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “Large accelerated filer”, “Accelerated filer” and “Smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ As of December 31, 2013, 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 $61,846,891. As of September 12, 2014, 19,419,076 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 2014 Annual Meeting of Stockholders. PART I ITEM 1: BUSINESS. NAPCO Security Technologies, Inc. ("NAPCO" or the "Company") was incorporated in December 1971 in the State of Delaware. Its executive offices are located at 333 Bayview Ave, Amityville NY 11701. Its telephone number is (631) 842-9400. The Company is a diversified manufacturer of security products, encompassing access control systems, door security products, intrusion and fire alarm systems and video surveillance products (“Products”). 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. 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), 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 or not to grant access 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. Door Security Products. The Company manufactures a variety of door locking devices including microprocessor-based electronic door locks with push button, card reader and bio-metric operation, door alarms, mechanical door locks and simple dead bolt locks. These devices may control a single door or, in the case of some of the Company’s microprocessor-based door locks, may be networked with the Company’s access control systems and controlled remotely. Intrusion and Fire 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 utilizing wired (“landline”) or cellular communications systems. 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 signals 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. Combination Control Panels/Digital Communicators and Digital Keypad Systems. A combination control panel, digital communicator and a digital keypad 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. 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, 2014 and 2013, the Company expended approximately $5,059,000 and $5,119,000, respectively, on Company-sponsored research and development activities conducted primarily 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, 2014, the Company had 994 full-time employees. Marketing The Company's staff of 48 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% of the Company's total sales for each of the fiscal years ended June 30, 2014 and 2013. 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 Concentration of Credit Risk see disclosures included in Item 7. Competition The security alarm products industry is highly competitive. The Company's primary competitors are comprised of approximately 20 other companies that manufacture and market security equipment to distributors, dealers, central stations and original equipment manufacturers. The Company believes that no one of these competitors is dominant in the industry. Certain of these companies have substantially greater financial and other resources than the Company. The Company competes primarily on the basis of the features, quality, reliability and pricing of, and the incorporation of the latest innovative and technological advances into, its Products. The Company also competes by offering technical support services to its customers. In addition, the Company competes on the basis of its expertise, its proven products, its reputation and its ability to provide Products to customers on a timely basis. The inability of the Company to compete with respect to any one or more of the aforementioned factors could have an adverse impact on the Company's business. Relatively low-priced "do-it-yourself" alarm system products 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. 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 $1,278,000 and $2,177,000 existed as of June 30, 2014 and 2013, respectively. The decrease in the backlog as of June 30, 2014 was due primarily to the Company receiving a purchase order for various special-order items from a customer for approximately $1,542,000 towards the end of fiscal 2013, approximately $428,000 of which was open as of June 30, 2013. The Company expects to fill the entire backlog that existed as of June 30, 2014 during fiscal 2015. Government Regulation The Company's telephone dialers, microwave transmitting devices utilized in its motion detectors and any new communication equipment that may be introduced from time to time by the Company must comply with standards promulgated by the Federal Communications Commission ("FCC") in the United States and similar agencies in other countries where the Company offers such products, specifying permitted frequency bands of operation, permitted power output and periods of operation, as well as compatibility with telephone lines. Each new Product that is subject to such regulation must be tested for compliance with FCC standards or the standards of such similar governmental agencies. Test reports are submitted to the FCC or such similar agencies for approval. Cost of compliance with these regulations has not been material. Patents and Trademarks The Company has been granted several patents and trademarks relating to the Products. While the Company obtains patents and trademarks as it deems appropriate, the Company does not believe that its current or future success is dependent on its patents or trademarks. Foreign Sales The revenues and identifiable assets attributable to the Company's domestic and foreign operations for its last two fiscal years are summarized in the following table: Financial Information Relating to Domestic and Foreign Operations Sales to external customers(1): Domestic Foreign Total Net Sales Identifiable assets: United States Dominican Republic (2) Total Identifiable Assets 2014 2013 (in thousands) 70,800 $ 3,582 74,382 $ 67,243 4,143 71,386 49,529 $ 13,835 63,364 $ 51,141 12,762 63,903 $ $ $ $ (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 (2014 = $10,216; 2013 = $9,105) and fixed assets (2014 = $3,457; 2013 = $3,546) 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 results and from any 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. In the event that the U.S. or international economic conditions deteriorate, our revenue, profit and cash-flow levels could be materially adversely affected in future periods. In the event of such deterioration, 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. If such events do occur, they may result in our expenses being too high in relation to our revenues and cash flows. Our Business Could Be Materially Adversely Affected as a Result of the Inability to Maintain Adequate Financing Our business is dependent on maintaining adequate levels of financing used to fund operations and capital expenditures. The current debt facilities provide for quarterly principal debt repayments of approximately $400,000 plus interest as well as 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 to address the loss of Mr. Soloway’s services. 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. The industry in which the Company operates is characterized by constantly improved products. There can be no assurance that competitors will not develop products that are superior to the Company's products. The Company has historically invested approximately 6% to 8% of annual revenues on Research and Development to mitigate this risk. Future success will depend, in part, on our ability to continue to develop and market products and product enhancements cost-effectively. The Company's research and development expenditures are principally targeted at enhancing existing products, and to a lesser extent at developing new ones. 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 revenues and results of operations. Our Business Could Be Materially Adversely Affected by the Inability to Maintain Expense Levels Proportionate to Sales Volume While expense levels relative to current sales levels result in positive net income and cash flows, 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, resulting in 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, 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. Delays or reductions in spending, domestically or internationally, for electronic security systems could 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. 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 32.0% 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 Adverse Tax Consequences of Offshore Operations We operate on a global basis, with a portion of our operating income generated outside the United States. We intend to reinvest these earnings in our foreign operations indefinitely, except where we are able to repatriate these earnings to the United States without material incremental tax provision. A significant portion of our assets that result from these earnings remain outside the United States. If these indefinitely reinvested earnings were repatriated into the United States as dividends, we would be subject to additional taxes. 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. 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. These facilities are pledged as security in the Company’s credit facilities with its primary bank. 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 at an annual cost of approximately $288,000. As of June 30, 2014, 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. 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 High Low Common Stock High Low Sept. 30 Quarter Ended Fiscal 2014 March 31 Dec. 31 June 30 5.70 $ 4.75 $ 6.49 $ 4.93 $ 7.57 $ 6.15 $ 6.74 5.00 Sept. 30 Quarter Ended Fiscal 2013 March 31 Dec. 31 June 30 3.44 $ 2.90 $ 3.66 $ 3.09 $ 4.09 $ 3.50 $ 4.78 3.91 $ $ $ $ Approximate Number of Security Holders The number of holders of record of NAPCO's Common Stock as of September 10, 2014 was 101 (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. 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 operating activities Net cash flows used in investing activities Net cash flows used in 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 (1) Balance sheet data: Working capital (2) Total assets Long-term debt (2) Stockholders' equity 2014 Fiscal Year Ended and at June 30 (In thousands, except share and per share data) 2011 2012 2013 2010 $ $ $ $ $ 74,382 $ 23,713 — 4,316 3,476 4,743 (753) (4,736) 71,386 $ 21,724 — 3,717 3,021 4,899 (383) (4,266) 70,928 $ 21,152 — 3,761 2,286 4,096 (606) (3,588) 71,392 $ 20,101 400 2,428 1,121 4,364 (737) (6,072) 0.18 $ 0.18 $ 0.16 $ 0.16 $ 0.12 $ 0.12 $ 0.06 $ 0.06 $ 67,757 14,522 923 (5,302) (6,500) 5,285 (300) (3,572) (0.34) (0.34) 19,392,000 19,428,000 .00 $ 19,210,000 19,362,000 .00 $ 19,096,000 19,303,000 .00 $ 19,096,000 19,176,000 .00 $ 19,096,000 19,096,000 .00 33,436 $ 63,364 10,200 43,752 33,221 $ 63,903 14,800 40,335 32,205 $ 64,750 18,657 37,723 29,185 $ 68,795 20,205 35,429 3,502 73,668 — 34,242 (1) 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. (2) 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. 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 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. International sales accounted for approximately 5% and 6% of our revenues for the fiscal years ended June 30, 2014 and 2013 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. The Company does not expect products resulting from our R&D investments in fiscal 2014 to 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 We are subject to the effects of general economic and market conditions. In the event that the U.S. or international economic conditions deteriorate, our revenue, profit and cash-flow levels could be materially adversely affected in future periods. In the event of such deterioration, 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. If such events do occur, they may result in our expenses being too high in relation to our revenues and cash flows. 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. Deterioration of the current economic conditions may also affect this trend. Critical Accounting Policies and Estimates The Company's significant accounting policies are fully described in Note 1 to the Company's consolidated financial statements included in its 2014 Annual Report on Form 10-K. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. 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 product 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 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. 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. As a percentage of gross sales, sales returns, rebates and allowances were 7% and 6% for the fiscal years ended June 30, 2014 and 2013, 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 that comprised 12% of the Company’s accounts receivable at June 30, 2014 and two customers that aggregated 22% at June 30, 2013. Sales to any one customer did not exceed 10% of net sales in any of the past two fiscal years. In the ordinary course of business, we have established a reserve for doubtful accounts and customer deductions in the amount of $180,000 and $220,000 as of June 30, 2014 and 2013, respectively. Our reserve for doubtful accounts is a subjective critical estimate that has a direct impact on reported net earnings. This reserve is based upon the evaluation of accounts receivable agings, specific exposures and historical or anticipated events. 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. 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. In addition, and as necessary, the Company may establish specific reserves for future known or anticipated events. For the fiscal years 2014 and 2013, net charges (reductions and dispositions) and balances in these reserves amounted to $(827,000) and $2,565,000; and $354,000 and $3,392,000, respectively. 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. Intangible Assets The Company evaluates its 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 intangible assets with the carrying amount of the intangible assets. At the conclusion of the fiscal 2014, the Company performed its annual impairment evaluation and determined that its intangible assets were not impaired. Income Taxes The Company has identified the United States and New York State as its major tax jurisdictions. The fiscal 2008 and forward years are still open for examination. During the year ending June 30, 2014 the Company increased its reserve for uncertain income tax positions by $16,000. As of June 30, 2014 the Company has a long-term accrued income tax liability of $169,000. 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, 2014, the Company had accrued interest totaling $0 and $169,000 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, 2014, the Company recognized a net income tax expense of $531,000. A reconciliation of the U.S. Federal statutory income tax rate to our actual effective tax rate on earnings before income taxes for fiscal 2014 is as follows (dollars in thousands): Tax at the U.S. Federal statutory rate Increases (decreases) in taxes resulting from: Meals and entertainment State income taxes, net of Federal income tax benefit Foreign source income not subject to tax R&D Credits Other, net Effective tax rate Amount $ 1,362 63 20 (837) (144) 67 531 $ % of Pre- tax Income 34.0% 1.6% 0.5% (20.9)% (3.6)% 1.7% 13.3% Liquidity and Capital Resources The Company's cash on hand as of June 30, 2013 combined with proceeds from operating activities during fiscal 2014 were adequate to meet the Company's capital expenditure needs and debt obligations during fiscal 2014. 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, 2014 $2,500,000 was outstanding under this revolving line of credit. As of June 30, 2014, the Company's unused sources of funds consisted principally of $2,483,000 in cash and $8,500,000 unused balance available under its revolving line of credit. During the year ended June 30, 2014 the Company utilized its cash on hand at June 30, 2013 ($3,229,000) and a portion of its cash from operations ($2,409,000 of $4,743,000) to repay outstanding debt ($4,600,000), purchase treasury stock ($285,000) and purchase property, plant and equipment ($753,000). As of June 30, 2014, long-term debt consisted of the Revolving Credit Facility and two term loans (collectively the “Agreement”), 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 Term Loans commenced on September 30, 2012. The $6,000,000 Term Loan is being repaid with 28 equal, quarterly payments of $75,000 with 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 1.5% 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 Company’s long-term debt is described more fully in Note 6 to the consolidated financial statements. The Agreement contains 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 Agreement. The Company believes its current working capital, anticipated cash flows from operations and its revolving credit agreement will be sufficient to fund the Company’s operations through the next twelve months. The Company takes into consideration several factors in measuring its liquidity, including the ratios set forth below: Current Ratio Sales to Receivables Total debt to equity As of June 30, 2014 4.6 to 1 4.4 to 1 .27 to 1 2013 4.9 to 1 3.9 to 1 .41 to 1 As of June 30, 2014, 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, on which the Company’s principle manufacturing facility is located, at an annual cost of approximately $288,000. Working Capital. Working capital increased by $215,000 to $33,436,000 at June 30, 2014 from $33,221,000 at June 30, 2013. Working capital is calculated by deducting Current Liabilities from Current Assets. Accounts Receivable. Accounts Receivable decreased by $1,307,000 to $16,904,000 at June 30, 2014 as compared $18,211,000 at June 30, 2013. The decrease in Accounts Receivable was due primarily to a decrease in sales for the quarter ended June 30, 2014 as compared to the same quarter a year ago. Inventories. Inventories, which include both current and non-current portions, increased by $3,103,000 to $25,010,000 at June 30, 2014 as compared to $21,907,000 at June 30, 2013. The increase was due primarily to the Company increasing stock of several of its new products, lower sales for the quarter ended June 30, 2014 as compared to the same quarter a year ago as well as a decrease in the obsolescence reserve. Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses increased by $628,000 to $7,643,000 as of June 30, 2014 as compared to $7,015,000 at June 30, 2013. This increase is primarily due to increased purchases of raw materials to support higher production of several of its new products during the quarter ended June 30, 2014 as compared to June 30, 2013. 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: Contractual obligations Long-term debt obligations Land lease (80 years remaining) (1) Operating lease obligations Other long-term obligations (employment agreements) (1) $ Total Less than 1 year 1-3 years 3-5 years More than 5 years Payments due by period: 11,800,000 $ 22,464,000 35,000 1,600,000 $ 288,000 23,000 5,700,000 $ 576,000 12,000 4,500,000 $ 576,000 — — 21,024,000 — 708,000 708,000 — — — Total $ 35,007,000 $ 2,619,000 $ 6,288,000 $ 5,076,000 $ 21,024,000 (1) See footnote 10 to the accompanying consolidated financial statements. Results of Operations Fiscal 2014 Compared to Fiscal 2013 Net sales Gross profit Gross profit as a % of net sales Selling, general and administrative Selling, general and administrative as a % of net sales Income from operations Interest expense, net Other expense, net Provision for income taxes Net income $ Fiscal year ended June 30, 2014 2013 % Increase/ (decrease) 74,382 23,713 $ 31.9% 19,397 26.1% 4,316 295 14 531 3,476 71,386 21,724 30.4% 18,007 25.2% 3,717 495 14 187 3,021 4.2% 9.2% 4.9% 7.7% 3.6% 16.1% (40.4)% —% 184.0% 15.1% Net sales in fiscal 2014 increased by $2,996,000 to $74,382,000 as compared to $71,386,000 in fiscal 2013. The increase in net sales was primarily due to increased sales of the Company’s Alarm Lock brand door-locking products ($3,202,000), Marks brand door-locking products ($975,000) and access control products ($214,000) and was partially offset by decreases in the Company’s intrusion products ($1,395,000). The decrease in intrusion products was due primarily to decreased sales to a large intrusion installer as well as a slight overall decrease in demand during the earlier quarters in fiscal 2014. The Company's gross profit increased by $1,989,000 to $23,713,000 or 31.9% of net sales in fiscal 2014 as compared to $21,724,000 or 30.4% of net sales in fiscal 2013. Gross profit and gross profit as a percentage of net sales was primarily affected by the increase in net sales as discussed above and a positive shift in product mix in fiscal 2014 as compared to fiscal 2013. Selling, general and administrative expenses as a percentage of net sales increased to 26.1% in fiscal 2014 from 25.2% in fiscal 2013. Selling, general and administrative expenses for fiscal 2014 increased by $1,390,000 to $19,397,000 as compared to $18,007,000 in fiscal 2013. The increases in dollars and as a percentage of sales resulted primarily from increases in selling wages and commissions as well as increased advertising and tradeshow expenditures. The Company increased expenditures in these areas in order to generate higher sales. Interest expense for fiscal 2014 decreased by $200,000 to $295,000 from $495,000 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 remained constant at $14,000 for both fiscal 2014 and 2013. The Company’s provision for income taxes for fiscal 2014 increased by $344,000 to $531,000 as compared to $187,000 for the same period a year ago. The increase in income taxes from fiscal 2013 to fiscal 2014 resulted primarily from increased income before income taxes as well as a decrease in the benefit generated by the Company’s foreign manufacturing subsidiaries whose profits are not subject to income taxes. Net income for fiscal 2014 increased by $455,000 to $3,476,000 as compared to $3,021,000 in fiscal 2013. This resulted primarily from the items discussed above. Forward-looking Information This Annual Report on Form 10-K and the information incorporated by reference may include "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. The Company intends the Forward-Looking Statements to be covered by the Safe Harbor Provisions for Forward-Looking Statements. All statements regarding the Company's expected financial position and operating results, its business strategy, its financing plans and the outcome of any contingencies are Forward-Looking Statements. The Forward-Looking Statements are based on current estimates and projections about our industry and our business. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," or variations of such words and similar expressions are intended to identify such Forward-Looking Statements. The Forward-Looking Statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by any Forward-Looking Statements. For example, the Company is highly dependent on its Chief Executive Officer for strategic planning. If he is unable to perform his services for any significant period of time, the Company's ability to 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, uncertain economic, military and political conditions in the world, the ability to maintain adequate financing, 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 and distribution problems. The Company’s Risk Factors are discussed in more detail in Item 1A. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's principal financial instrument is long-term debt (consisting of a revolving credit facility and term loans) that provides for interest at a spread above the prime rate or LIBOR as described in the agreement. The Company is affected by market risk exposure primarily through the effect of changes in interest rates on amounts payable by the Company under these credit facilities. At June 30, 2014, an aggregate principal amount of approximately $11,800,000 was outstanding under the Company's credit facilities with a weighted average interest rate of approximately 1.7%. If principal amounts outstanding under the Company's credit facilities remained at this level for an entire year and the interest rate increased or decreased, respectively, by 1% the Company would pay or save, respectively, an additional $118,000 in interest that year. All foreign sales transactions by the Company are denominated in U.S. dollars. As such, the Company has shifted foreign currency exposure onto its foreign customers. As a result, if exchange rates move against foreign customers, the Company could experience difficulty collecting unsecured accounts receivable, the cancellation of existing orders or the loss of future orders. The foregoing could materially adversely affect the Company's business, financial condition and results of operations. We are also exposed to foreign currency risk relative to expenses incurred in Dominican Pesos ("RD$"), the local currency of the Company's production facility in the Dominican Republic. The result of a 10% strengthening in the U.S. dollar to our RD$ expenses would result in an annual decrease in income from operations of approximately $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, 2014 and 2013 Consolidated Statements of Income for the Fiscal Years Ended June 30, 2014 and 2013 Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 2014 and 2013 Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2014 and 2013 Notes to Consolidated Financial Statements Page FS-1 FS-2 FS-4 FS-5 FS-6 FS-7 Report of Independent Registered Public Accounting Firm To the Shareholders, Audit Committee and Board of Directors 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, 2014 and 2013, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with 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 consolidated 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 its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Napco Security Technologies, Inc. and Subsidiaries as of June 30, 2014 and 2013 and the results of their operations and cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. /s/ Baker Tilly Virchow Krause, LLP New York, New York September 15, 2014 FS-1 NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2014 and 2013 (In Thousands) CURRENT ASSETS ASSETS Cash and cash equivalents Accounts receivable, net of reserves and allowances Inventories Prepaid expenses and other current assets Income tax receivable Deferred income taxes Total Current Assets Inventories - non-current Deferred income taxes Property, plant and equipment, net Intangible assets, net Other assets 2014 2013 $ 2,483 $ 16,904 21,443 989 121 739 42,679 3,567 1,005 6,394 9,552 167 3,229 18,211 18,471 1,219 64 642 41,836 3,436 1,526 6,586 10,334 185 TOTAL ASSETS $ 63,364 $ 63,903 See accompanying notes to consolidated financial statements. FS-2 NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2014 and 2013 (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 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; 21,049,243 and 20,796,813 shares issued; and 19,419,076 and 19,296,335 shares outstanding, respectively Additional paid-in capital Retained earnings Less: Treasury Stock, at cost (1,630,167 and 1,000,000 shares, respectively) TOTAL STOCKHOLDERS' EQUITY $ 2014 2013 1,600 $ 4,082 1,737 1,824 9,243 10,200 169 19,612 210 16,032 35,554 51,796 (8,044) 43,752 1,600 3,318 2,093 1,604 8,615 14,800 153 23,568 208 15,356 32,078 47,642 (7,307) 40,335 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 63,364 $ 63,903 See accompanying notes to consolidated financial statements. FS-3 NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended June 30, 2014 and 2013 (In Thousands, Except Share and Per Share Data) Net sales Cost of sales Gross Profit Selling, general, and administrative expenses Operating Income Other expense: Interest expense, net Other, net Income before Provision for Income Taxes Provision for Income Taxes Net Income Income per share: Basic Diluted Weighted average number of shares outstanding: Basic Diluted See accompanying notes to consolidated financial statements. FS-4 $ $ $ $ 2014 2013 74,382 $ 50,669 23,713 19,397 4,316 295 14 309 4,007 531 3,476 $ 0.18 $ 0.18 $ 71,386 49,662 21,724 18,007 3,717 495 14 509 3,208 187 3,021 0.16 0.16 19,392,000 19,428,000 19,210,000 19,362,000 NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended June 30, 2014 and 2013 (In Thousands, Except Share Data) Common Stock Treasury Stock BALANCE June 30, 2012 Options exercised Shares surrendered and cancelled under cashless option exercise Shares surrendered and held in Treasury under cashless option exercise Shares repurchased and held in Treasury Net income BALANCE June 30, 2013 Options exercised Shares surrendered and cancelled under cashless option exercise Shares surrendered and held in Treasury under cashless option exercise Stock-based compensation expense Net income BALANCE June 30, 2014 Number of Shares Issued 20,095,713 729,000 Amount Additional Paid-in Capital Number of Shares Amount Retained Earnings Total 201 7 14,080 (1,000,000) — 1,371 (5,615) — 29,057 — 37,723 1,378 (27,900) — (95) — — — — — — — — (371,890) (128,588) — (1,257) (435) — — — 3,021 (95) (1,257) (435) 3,021 20,796,813 $ 337,600 208 $ 3 15,356 (1,500,478) $ — 1,024 (7,307) $ — 32,078 $ — 40,335 1,027 (85,170) (1) (424) — — — (425) — — — 21,049,243 $ — — — 210 $ — 76 — (129,689) — — 16,032 (1,630,167) $ (737) — — (8,044) $ — — 3,476 35,554 $ (737) 76 3,476 43,752 See accompanying notes to consolidated financial statements. FS-5 NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 2014 and 2013 (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 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 long-term debt Cash paid for purchase of treasury stock Proceeds from exercise of employee stock options Tax benefit from stock option exercise 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 Surrender of Common Shares 2014 2013 $ 3,476 $ 1,740 (827) (40) 424 76 1,347 (2,276) 230 (57) 5 645 4,743 (753) (753) (4,600) (285) 25 124 (4,736) (746) 3,229 2,483 $ 312 $ 24 $ 452 $ $ $ $ $ 3,021 1,974 354 20 244 — (1,823) 1,021 (254) (64) 8 398 4,899 (383) (383) (3,857) (435) — 26 (4,266) 250 2,979 3,229 543 31 1,257 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 door-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. The Company's fiscal year begins on July 1 and ends on June 30. Historically, the end users of the Company'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. Significant Accounting Policies: Principles of Consolidation The consolidated financial statements include the accounts of Napco Security Technologies, Inc. and all of its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation. Certain prior period amounts relating to credit card fees have been reclassified for consistency with the current period presentation. The reclassification did not have an impact on the Balance Sheets, Statement of Cash Flows or reported Net income (loss) for any period. 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 reserves for sales returns and allowances, concentration of credit risk, inventory reserves, intangible assets and income taxes. Actual results could differ from those estimates. Fair Value of Financial Instruments The methods and assumptions used to estimate the fair value of the following classes of financial instruments were: Current Assets and Current Liabilities: The carrying amount of cash, certificates of deposits, current receivables and payables and certain other short-term financial instruments approximate their fair value as of June 30, 2014 due to their short-term maturities. Long-Term Debt: The carrying amount of the Company’s long-term debt, including the current portion, at June 30, 2014 in the amount of $11,800,000 approximates fair value. Cash and Cash Equivalents Cash and cash equivalents include approximately $460,000 of short-term time deposits at June 30, 2014 and 2013. 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, 2014 and 2013. The Company has historically not experienced any credit losses with balances in excess of FDIC limits FS-7 Accounts Receivable Accounts receivable is stated net of the reserves for doubtful accounts of $180,000 and $220,000 and for returns and other allowances of $1,005,000 and $1,055,000 as of June 30, 2014 and 2013, 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. In addition, the Company records an inventory obsolescence reserve, which represents any excess of the cost of the inventory over 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. In addition, and as necessary, the Company may establish specific reserves for future known or anticipated events. 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 2014 and 2013, net charges and balances in these reserves amounted to $(827,000) and $2,565,000; and $354,000 and $3,392,000, respectively. 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 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 G. Marks Hardware, Inc. (“Marks” in August 2008 included intangible assets recorded at fair value 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 trade name was deemed to have an indefinite life. FS-8 Changes in intangible assets are as follows (in thousands): Other intangible assets: Customer relationships Non-compete agreement Trade name June 30, 2014 Accumulated amortization Net book value Cost June 30, 2013 Accumulated amortization Net book value Cost $ $ 9,800 $ 340 5,900 16,040 $ (6,203) $ (285) — (6,488) $ 3,597 $ 55 5,900 9,552 $ 9,800 $ 340 5,900 16,040 $ (5,469) $ (237) — (5,706) $ 4,331 103 5,900 10,334 Amortization expense for intangible assets subject to amortization was approximately $782,000 and $917,000 for the years ended June 30, 2014 and 2013, respectively. Amortization expense for each of the next five fiscal years is estimated to be as follows: 2015 - $667,000; 2016 - $529,000; 2017 - $441,000; 2018 - $371,000 and 2019 - $313,000. The weighted average amortization period for intangible assets was 13.9 years and 14.8 years at June 30, 2014 and 2013, respectively. 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. 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 product 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 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. As a percentage of gross sales, sales returns, rebates and allowances were 7% and 6% for the fiscal years ended June 30, 2014 and 2013, respectively. 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 years ended June 30, 2014 and 2013 was $1,408,000 and $1,318,000, respectively. The increase in Advertising and promotional costs was due primarily to increased expenditures on a major tradeshow and media advertising as compared to the same period a year ago. FS-9 Research and Development Costs Research and development costs incurred by the Company are charged to expense in the year incurred and are included in "Cost of Sales" in the consolidated statements of operations. Company-sponsored research and development expense for the years ended June 30, 2014 and 2013 was $5,059,000 and $5,119,000, respectively. The increase for the year ended June 30, 2013 was due primarily to expenses relating to development of the Company’s iBridge™ tablet computer/touch screen keypad. 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. Net Income 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. 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 Weighted Average Shares 2014 2013 2014 2013 Net Income per Share 2013 2014 $ 3,476 $ 3,021 19,392 19,210 $ 0.18 $ 0.16 — 3,476 $ — 3,021 36 19,428 152 19,362 $ — 0.18 $ — 0.16 $ Options to purchase 145,673 and 370,750 shares of common stock for the fiscal years ended June 30, 2014 and 2013, 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 7. FS-10 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 $76,000 and $0 were recognized for fiscal years 2014 and 2013, respectively. The effect on both Basic and Diluted Earnings per share was $0.00 for fiscal years 2014 and 2013. Foreign Currency All assets and liabilities of foreign subsidiaries are translated into U.S. Dollars at fiscal period-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, 2014 and 2013. Comprehensive Income For the years ended June 30, 2014 and 2013, 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 for shipping and handling in net sales ($531,000 and $532,000 in fiscal years 2014 and 2013, respectively) and classifies the costs associated with these revenues in cost of sales ($985,000 and $1,090,000 in fiscal years 2014 and 2013, respectively). Recently Issued Accounting Standards In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which is the new comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under U.S. GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual and interim periods beginning on or after December 15, 2016, and early adoption is not permitted. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance. The Company is currently evaluating the impact of adopting this guidance. In July 2013, the FASB issued authoritative guidance that requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss (“NOL”) carry-forward, a similar tax loss, or a tax credit carry-forward. If either (i) an NOL carry-forward, a similar tax loss, or tax credit carry-forward is not available as of the reporting date under the governing tax law to settle taxes that would result from the disallowance of the tax position or (ii) the entity does not intend to use the deferred tax asset for this purpose (provided that the tax law permits a choice), an entity should present an unrecognized tax benefit in the financial statements as a liability and should not net the unrecognized tax benefit with a deferred tax asset. This guidance becomes effective prospectively for unrecognized tax benefits that exist as of the Company’s fiscal 2015 first quarter, with retrospective application and early adoption permitted. The Company is currently evaluating the timing of adoption and the impact of this balance sheet presentation guidance but does not expect it to have a significant impact on the Company’s consolidated financial statements. FS-11 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 became effective in the beginning of the Company’s 2013 fiscal year, with early adoption permitted. The guidance did not 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 that comprised 12% of the Company’s accounts receivable at June 30, 2014 and two customers with accounts receivable balances that aggregated of 22% at June 30, 2013. Sales to any one customer did not exceed 10% of net sales in any of the past two 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, 2014 2013 15,268 $ 3,632 6,110 25,010 $ 21,443 $ 3,567 25,010 $ 13,112 3,125 5,670 21,907 18,471 3,436 21,907 $ $ $ $ FS-12 NOTE 4 - Property, Plant, and Equipment Property, plant and equipment consist of the following (in thousands): Land Buildings Molds and dies Furniture and fixtures Machinery and equipment Leasehold improvements Less: accumulated depreciation and amortization June 30, 2014 2013 Useful Life in Years $ $ 904 $ 8,911 6,906 2,427 19,974 288 39,410 33,016 6,394 $ 904 — 8,911 30 to 40 6,794 3 to 5 2,328 5 to 10 19,431 7 to 10 372 Shorter of the lease term or life of asset 38,740 32,154 6,586 Depreciation and amortization expense on property, plant, and equipment was approximately $945,000 and $1,043,000 in fiscal 2014 and 2013, respectively. NOTE 5 - Income Taxes The provision for income taxes is comprised of the following (in thousands): Current income taxes: Federal State Deferred income tax provision Provision for income taxes For the Years Ended June 30, 2014 2013 $ $ 76 $ 31 107 424 531 $ (89) 32 (57) 244 187 FS-13 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 not subject to tax R&D Credit refund Other, net Effective tax rate For the Years Ended June 30, 2014 2013 Amount % of Pre-tax Income Amount % of Pre-tax Income $ 1,362 34.0% $ 1,091 34.0% 63 20 (837) (144) 67 531 1.6% 0.5% (20.9)% (3.6)% 1.7% 13.3% $ 59 21 (740) (221) (23) 187 1.8% 0.6% (23.0)% (6.9)% (0.7)% 5.8% $ Deferred tax assets and deferred tax liabilities at June 30, 2014 and 2013 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 tax assets Current Deferred Tax Assets (Liabilities) 2014 2013 Long-term Deferred Tax Assets (Liabilities) 2014 2013 25 $ 406 308 — — — — — 739 — 739 $ 24 $ 385 233 — — — — — 642 — 642 $ — $ 336 64 139 1,324 451 (527) (782) 1,005 — 1,005 $ — 455 29 137 1,623 360 (575) (503) 1,526 — 1,526 $ $ The Company has identified the United States and New York State as its major tax jurisdictions. The fiscal 2008 and forward years are still open for examination. During the year ending June 30, 2014 the Company increased its reserve for uncertain income tax positions by $16,000. As of June 30, 2014 the Company has a long-term accrued income tax liability of $169,000. 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, 2014, the Company had accrued interest totaling $0 and $169,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. The Company uses the flow through method to account for investment tax credits earned on eligible research and development expenditures. Under this method, the investment tax credits are recognized as a reduction to income tax expense. FS-14 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, 2013 Increases to unrecognized tax benefits resulting from the generation of additional R&D credits Balance of gross unrecognized tax benefits as of June 30, 2014 $ $ 153 $ 16 169 $ — $ — — $ 153 16 169 Tax Interest Total 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, 2014, the Company had no undistributed earnings of foreign subsidiaries. NOTE 6 - Long-Term Debt As of June 30, 2014, 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 Term Loans commenced 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, 2014 and June 30, 2013 are as follows: June 30, 2014 June 30, 2013 Revolving line of credit Term loans Total debt Outstanding 2,500 $ 9,300 11,800 $ Interest Rate Outstanding 5,500 10,900 16,400 1.7% $ 1.7% 1.7% $ Interest Rate 2.5% 2.5% 2.5% The Revolving Credit Facility and Term Loans (collectively the “Agreement”) also provides for a LIBOR-based interest rate option of LIBOR plus 1.5% 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 Agreement contains 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 Agreement. FS-15 NOTE 7 - Stock Options The Company follows ASC 718 (“Share-Based Payment”), which requires that all share based payments to employees, including stock options, be recognized as compensation expense in the consolidated financial statements based on their fair values and over the requisite service period. For the years ended June 30, 2014 and 2013, the Company recorded non-cash compensation expense of $76,000 ($.00 per basic and diluted share) and $0 ($.00 per basic and diluted share), respectively, relating to stock-based compensation. There were no options granted during the fiscal year ended June 30, 2013. The fair value for options granted during the fiscal year ended June 30, 2014 was determined at the date of grant using a Black-Scholes valuation model and the straight-line attribution approach using the following weighted average assumptions: Risk-free interest rate Dividend yield Volatility factor Weighted average expected life 2.7% 0% 57% 10 years The risk-free interest rate used in the Black-Scholes valuation method is based on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term. The Company has not recently declared or paid any dividends and does not currently expect to do so in the future. Expected volatility is based on the annualized daily historical volatility of the Company’s stock over a representative period. The weighted-average expected life represents the period over which stock-based awards are expected to be outstanding and was determined based on a number of factors, including historical weighted average and projected holding periods for the remaining unexercised shares, the contractual terms of the Company’s stock-based awards, vesting schedules and expectations of future employee behavior. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. In December 2012, the stockholders approved the 2012 Employee Stock Option Plan (the 2012 Employee Plan). The 2012 Employee Plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 950,000 shares of the Company's common stock to be acquired by the holders of such awards. Under this plan, the Company may grant stock options, which are intended to qualify as incentive stock options (ISOs), to valued 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 2012 Employee Plan, stock options may be granted to valued employees with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable, in whole or in part, at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At June 30, 2014, 78,500 stock options were granted, 15,700 stock options were exercisable and 871,500 stock options were available for grant under this plan. FS-16 The following table reflects activity under the 2012 Plan for the year ended June 30, 2014: Outstanding, beginning of year Granted Terminated Exercised Outstanding, end of period Exercisable, end of period 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 $ $ $ There was no activity under this Plan for the year ended June 30, 2013. Options Weighted average exercise price — 5.73 — — 5.73 5.73 — $ 78,500 — — 78,500 $ 15,700 $ 3.84 n/a 14,000 3,000 The following table summarizes information about stock options outstanding under the 2012 Employee Plan at June 30, 2014: Range of exercise prices Number outstanding Options outstanding Weighted average remaining contractual life Options exercisable Weighted average exercise price Number exercisable Weighted average exercise price $ 4.88 - $ 6.31 78,500 78,500 9.3 $ 9.3 $ 5.73 5.73 15,700 $ 15,700 $ 5.73 5.73 As of June 30, 2014, there was $282,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan. $60,000 of compensation expense was recorded during the year ended June 30, 2014 for stock options granted under the 2012 Employee Plan. There were 78,500 options granted during the year ended June 30, 2014. The total fair value of the options vesting during the years ended June 30, 2014 and 2013 under this plan was $60,000 and $0, respectively. In December 2012, the stockholders approved the 2012 Non-Employee Stock Option Plan (the 2012 Non-Employee Plan). This plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 50,000 shares of the Company's common stock to be acquired by the holders of such awards. Under this plan, the Company may grant stock options to non-employee directors and consultants to the Company and its subsidiaries. Under the 2012 Non-Employee Plan, stock options may be granted with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable in whole or in part at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At June 30, 2014, 25,000 stock options were granted, 5,000 stock options were exercisable and 25,000 stock options were available for grant under this plan. FS-17 The following table reflects activity under the 2012 Non-Employee Plan for the year ended June 30, 2014: Outstanding, beginning of year Granted Terminated Exercised Outstanding, end of period Exercisable, end of period 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 $ $ $ There was no activity under this Plan for the year ended June 30, 2013. Options Weighted average exercise price — 4.88 — — 4.88 4.88 — $ 25,000 — — 25,000 $ 5,000 $ 3.30 n/a 14,000 3,000 The following table summarizes information about stock options outstanding under the 2012 Non-Employee Plan at June 30, 2014: Range of exercise prices Number outstanding Options outstanding Weighted average remaining contractual life Weighted average exercise price Options exercisable Number exercisable Weighted average exercise price $ 4.88 25,000 25,000 9.2 $ 9.2 $ 4.88 4.88 5,000 $ 5,000 $ 4.88 4.88 As of June 30, 2014, there was $76,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee Plan. $16,000 of compensation expense was recorded during the year ended June 30, 2014 for stock options granted under the 2012 Non- Employee Plan. There were 25,000 options granted during the year ended June 30, 2014. The total fair value of the options vesting during each of the years ended June 30, 2014 and 2013 under this plan was $17,000. In December 2002, the stockholders approved the 2002 Employee Stock Option Plan (the 2002 Employee Plan). This plan expired in October 2012. This plan authorized 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 this plan, the Company may have granted stock options, which were intended to qualify as incentive stock options (ISOs), to key employees. Any plan participant who was granted ISOs and possessed more than 10% of the voting rights of the Company's outstanding common stock must have been granted an option with a price of at least 110% of the fair market value on the date of grant. Under the 2002 Employee 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, 2014, 1,471,480 stock options had been granted, 265,750 stock options were exercisable and no further stock options were available for grant under this plan after the plans expiration in October 2012. FS-18 The following table reflects activity under the 2002 Employee plan for the year ended June 30,: Outstanding, beginning of year Granted Terminated/Lapsed Exercised Outstanding, end of period Exercisable, end of period 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 $ $ $ 2014 2013 Options Weighted average exercise price Options Weighted average exercise price 651,140 $ — (47,790) (337,600) 265,750 $ 265,750 $ n/a 1,399,000 13,000 13,000 4.18 — 1.74 2.70 6.07 6.07 $ $ $ 1,380,140 $ — — (729,000) 651,140 $ 651,140 $ n/a 1,301,000 854,000 854,000 2.95 — — 1.85 4.18 4.18 337,600 and 729,000 stock options were exercised during the year ended June 30, 2014 and 2013, respectively. 324,100 of the 337,600 stock options exercised were settled by exchanging 164,859 shares of the Company’s common stock of which 85,170 was retired upon receipt. The 27,000 exercise was settled by exchanging 13,807 shares of the Company’s common stock, which was retired upon receipt. Cash received from option exercises was $25,650 and $0 for the year ended June 30, 2014 and 2013, respectively, and the actual tax benefit realized for the tax deductions from option exercises was $0 for each of these periods. The following table summarizes information about stock options outstanding under the 2002 Employee Plan at December 31, 2013: Range of exercise prices Number outstanding $5.22 - $ 6.62 $11.16 Options outstanding and exercisable Weighted average remaining contractual life Weighted average exercise price 228,250 37,500 265,750 1.8 1.7 1.8 $ 5.75 11.16 6.51 In September 2000, the stockholders approved a 10 year extension of the already existing 1990 non-employee stock option plan (the 2000 Non-employee 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 this plan. This 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. This 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. FS-19 The following table reflects activity under the 2000 Non-employee Plan for the year ended June 30, Outstanding, beginning of period Granted Terminated/Lapsed Exercised Outstanding, end of period Exercisable, end of period 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 $ $ NOTE 8 – Stockholders’ Equity Transactions 2014 2013 Options Weighted average exercise price Options Weighted average exercise price 30,000 $ — (30,000) — — $ — $ n/a n/a 0 0 5.03 — 5.03 — — — $ $ 30,000 $ — — — 30,000 $ 30,000 $ n/a n/a 0 0 5.03 — — — 5.03 5.03 During the fiscal 2014, certain employees exercised incentive stock options under the Company’s 2002 Plan totaling 337,600 shares. 324,100 of these exercises were completed as cashless exercises as allowed for under the 2002 Plan, where the exercise shares are issued by the Company in exchange for shares of the Company’s common stock that are owned by the optionees. The number of shares surrendered by the optionees are based upon the per share price on the effective date of the option exercise. In addition, the Company repurchased 50,000 shares of its Common Stock from its Chief Executive Officer (“CEO”). The purchase price was $5.70 per share, the previous business day’s closing price on NASDAQ, for an aggregate purchase price of $285,000. The repurchase was to fund the CEO’s tax liability associated with the exercise of 135,000 options granted to him under the 2002 Plan. The repurchase was approved by the Board of Directors of the Company, including all of the independent directors. These exercises resulted in a tax benefit to the Company of $124,000 which is included in Additional Paid-in Capital. During fiscal 2013 certain employees exercised incentive stock options under the Company’s 2002 Plan totaling 729,000 shares. The exercises were completed as cashless exercises as allowed for under the 2002 Plan, where the exercise shares are issued by the Company in exchange for shares of the Company’s common stock that are owned by the optionees. The number of shares surrendered by the optionees are based upon the per share price on the effective date of the option exercise. In addition, the Company repurchased 128,588 shares of its Common Stock from its Chief Executive Officer (“CEO”). The purchase price was $3.38 per share, the previous business day’s closing price on NASDAQ, for an aggregate purchase price of $434,627. The repurchase was to fund the CEO’s tax liability associated with the exercise of 675,000 options granted to him under the 2002 Plan. The repurchase was approved by the Board of Directors of the Company, including all of the independent directors. These exercises resulted in a tax benefit to the Company of $26,000 which is included in Additional Paid-in Capital. NOTE 9 - 401(k) Plan The Company maintains a 401(k) plan (“the Plan”) that covers 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 $103,000 and $89,000 for the years ended June 30, 2014 and 2013, respectively. FS-20 NOTE 10 - Commitments and Contingencies Leases The Company is committed under various operating leases, not including the land lease discussed below, 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, 2015 2016 Total $ $ Amount 23,000 12,000 35,000 Rent expense, with the exception of the land lease referred to below, totaled approximately $32,000 and $43,000 for the fiscal years ended June 30, 2014 and 2013, 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 $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, 2014, the Company was obligated under two employment agreements and one severance agreement. The employment agreements are with the Company’s CEO and Senior Vice President of Sales and Marketing (“the SVP”). The employment agreement with the CEO 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. The employment agreement with the SVP expires in October 2014 and provides for an annual salary of $274,400 and, if terminated by the Company without cause, severance of nine months’ salary and continued company-sponsored health insurance for six months from the date of termination. The severance agreement provides for payments equal to nine months of salary and six months of health insurance in the event of a non-voluntary termination of employment without cause. NOTE 11 - Geographical Data The Company is engaged in one major line of business: the development, manufacture, and distribution of access control systems, door security products, intrusion and fire alarm systems and video surveillance products 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 and Europe. The following represents selected consolidated geographical data for and as of the fiscal years ended June 30, 2014 and 2013: FS-21 Sales to external customers(1): Domestic Foreign Total Net Sales Identifiable assets: United States Dominican Republic (2) Total Identifiable Assets Financial Information Relating to Domestic and Foreign Operations 2014 2013 (in thousands) $ $ $ $ 70,800 $ 3,582 74,382 $ 49,529 $ 13,835 63,364 $ 67,243 4,143 71,386 51,141 12,762 63,903 (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 (2014 = $10,216; 2013 = $9,105) and fixed assets (2014 = $3,475; 2013 = $3,546) located at the Company's principal manufacturing facility in the Dominican Republic. 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, 2014, 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 as of June 30, 2014. 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, 2014. FS-22 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. This annual report does not include an attestation report of Baker Tilly Virchow Krause, 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. Baker Tilly Virchow Krause, 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, 2014 that has materially affected or is likely to materially affect our internal controls over financial reporting. ITEM 9B: OTHER INFORMATION None PART III ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information about our directors appearing in the Company’s Definitive Proxy Statement for the 2014 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 (“Proxy Statement”) under the heading “Election of Directors”, is incorporated herein by reference. 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” caption. 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. The information appearing in the Proxy Statement relating to the members of the Audit Committee and the Audit Committee financial expert under the headings “Corporate Governance and Board Matters – Board Structure and Committee Composition” and “Corporate Governance and Board Matters – Board Structure and Committee Composition – Audit Committee” and the information appearing in the Proxy Statement under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by this reference. The information set forth in the Proxy Statement under the heading “Information Concerning Executive Officers” is incorporated herein by reference. ITEM 11: EXECUTIVE COMPENSATION The information appearing in the Proxy Statement under the heading “Executive Compensation” and the information appearing in the Proxy Statement relating to the compensation of directors under the caption “Compensation of Directors” is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information appearing in the Proxy Statement under the heading “Beneficial Ownership of Common Stock” is incorporated herein by this reference. Equity Compensation Plan Information as of June 30, 2014 PLAN CATEGORY Equity compensation plans approved by security holders: Equity compensation plans not approved by security holders: Total 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) 369,250(1) $ — 369,250 (1) $ 6.24 — 6.24 896,500 (2) — 896,500(2) (1) The 2002 Employee Stock Option Plan and the 2000 Non-employee Stock Option plans expired in 2012 and 2010, respectively. 265,750 options are outstanding under the 2002 Plan. No options are outstanding under the 2000 Plan. No further options may be granted under these plans. (2) In December 2012, the stockholders approved the 2012 Employee Stock Option Plan which authorizes the granting of awards, the exercise of which would allow up to an aggregate of 950,000 shares of the Company's common stock to be acquired by the holders of such awards. In December 2012, the stockholders also approved the 2012 Non-Employee Stock Option Plan which authorizes the granting of awards, the exercise of which would allow up to an aggregate of 50,000 shares of the Company's common stock to be acquired by the holders of such awards. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information appearing in the Proxy Statement under the headings “Corporate Governance and Board Matters – Independence of Directors,” “Corporate Governance and Board Matters – Board Structure and Committee Composition,” “Corporate Governance – Policy with Respect to Related Person Transactions,” and “Executive Compensation – Certain Transactions” is incorporated herein by this reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information appearing in the Proxy Statement under the headings “Principal Accountant Fees” and “Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors” is incorporated herein by this reference. PART IV ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) 1. Financial Statements The following consolidated financial statements of NAPCO Security Technologies, Inc. and its subsidiaries are included in Part II, Item 8: Report of Independent Registered Public Accounting Firm Consolidated Financial Statements: Consolidated Balance Sheets as of June 30, 2014 and 2013 Consolidated Statements of Operations for the Fiscal Years Ended June 30, 2014 and 2013 Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 2014 and 2013 Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2014 and 2013 Notes to Consolidated Financial Statements, June 30, 2014 (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 Exhibit-3.(ii) to Report on Form 10-K for the fiscal year ended June, 30 2011 Ex-3.(iii) Amended and Restated By-Laws Exhibit 3.(ii) to Report on Form 10-K for the fiscal year ended June Ex 4.01 Ex 4.02 Third Amended and Restated Credit Agreement dated June 29, 2012. Second Amended and Restated Term A Loan Note 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 30, 2010 Exhibit-3.(i) to Report on Form 10-K for the fiscal year ended June 30, 2011 Page FS-1 FS-2 FS-4 FS-5 FS-6 FS-7 Ex 4.03 Ex 4.04 Ex 4.05 Ex 4.06 Ex 4.07 Ex 4.08 *Ex-10.A (ii) 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.B 2012 Employee Stock Option Plan *Ex-10.C 2012 Non-Employee Stock Option Plan 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 (Commission file No. 0- 10004) for the fiscal year ended June 30, 2008 Appendix A to Proxy Statement dated October 29, 2012 for Annual Meeting of Stockholders to be held on December 11, 2012 Appendix B to Proxy Statement dated October 29, 2012 for Annual Meeting of Stockholders to be held on December 11, 2012 *Ex-10.I Amended and Restated Employment Agreement with Richard Exhibit 10.I to Report on Form 10-K for fiscal year ended June 30, Soloway 2010 *Ex-10.J Employment Agreement between the Registrant and Jorge Hevia dated Exhibit 10.J to Report on Form 8-K dated November 29, 2012 December 20, 1999 *Ex-10.K Two (2) Year Extension, dated November 29, 2011, of Employment Exhibit 10.K to Report on Form 8-K dated November 29, 2012 Agreement between the Registrant and Jorge Hevia *Ex-10.L Severence Agreement between the Registrant and Kevin S. Buchel Exhibit 10.L to Report on Form 10-K for the fiscal year ended June dated February 25, 1999. 30, 2013 *Ex-10.M Indemnification Agreement dated August 9, 1999 Exhibit 10.M to Report on Form 10-K for fiscal year ended June 30, 2012 Ex-14.0 Code of Ethics Exhibit 14.0 to Report on Form 10-K for the fiscal year ended June Ex-16.01 Letter of Baker Tilly Virchow Krause, LLP dated June 3, 2013. Exhibit 10.J to Report on Form 8-K dated June 3, 2013 30, 2010  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 Ex-21.0 Ex-23.1 Ex-31.1 Ex-31.2 Ex-32.1 Ex-32.2 Ex-101.INS XBRL Instance Document ** 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 XBRL Taxonomy Extension Presentation Linkbase Document** Ex-101.DEF XBRL Taxonomy Extension Definition Linkbase Document** ** 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 Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. E-18 E-19 E-20 E-21 E-22 E-23 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 15, 2014 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 /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 Title 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 Date September 15, 2014 September 15, 2014 September 15, 2014 September 15, 2014 September 15, 2014 September 15, 2014 September 15, 2014 SUBSIDIARIES OF THE COMPANY EXHIBIT 21.0 The following are the Company’s subsidiaries as of the close of the fiscal year ended June 30, 2014. All beneficial interests are wholly-owned, directly or indirectly, by the Company and are included in the Company’s consolidated financial statements. Name State or Jurisdiction of Organization 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 Delaware New York New York Dominican Republic Cayman Islands New York Dominican Republic Dominican Republic New York CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our report dated September 15, 2014, 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, 2014 and 2013. We hereby consent to the incorporation by reference of said report in the Registration Statements of Napco Security Technologies, Inc. and Subsidiaries on Form S-8 (Registration No. 333-104700 and Registration No. 333-193930). EXHIBIT 23.1 /s/ BAKER TILLY VIRCHOW KRAUSE, LLP New York, New York September 15, 2014 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 15, 2014 /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 15, 2014 /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, 2014 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 15, 2014 /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, 2014 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 15, 2014 /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. 

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