2 0 1 6 A N N U A L R E P O R T
Record-Breaking Year
Future Opportunities
NAPCO Security Technologies, Inc.
Total Security Solution for Wireless Locking, Access Control & Alarms
Melissa Gilbert
Melissa Gilbert
EDU ID #18362
EDU ID #18362
Faculty
Faculty
®
Wireless Locking &
Standalone Access & Egress
®
Complete Platform: Access, Wireless
Locking & Security Management
Verizon
12:55 PM
79%
Architectural Door Hardware,
Locks, Lifesafety & Exit Trim
Security & Fire Systems plus
Cell/IP Alarm Reporting
NAPCO Security Technologies, Inc. provides
commercial and residential security through
a professional dealer network of more than
10,000 security dealers, integrators,
locksmiths and contractors worldwide. Its
innovative, synergistic products and
technologies, provide solutions in three main
categories: alarms and connectivity, locking
and access control and surveillance.
One of NAPCO's strong growth drivers is
recurring revenue services from its cellular
communicator - and connected
home-brands. Among the fastest growing
brands in its class, NAPCO StarLink™ Alarm
Communicators report alarm signals
universally from any brand of security
system, in lieu of telephone landlines and 2G
cell networks, both rapidly disappearing.
StarLink is a proven go-to solution, ideal for
millions of installed and new alarm systems,
now available for residential, as well as
commercial fire alarm reporting. It checks all
the boxes, as it is easy to install, economical
and dependably uses today’s leading
nationwide cellular networks, both AT&T®
and Verizon Network Certified®, protecting
security consumers and dealers’ account
bases and valuation.
On-trend for households seeking to bridge
their home with increasingly mobile
lifestyles, iBridge® Connected Home
Services, accessible from any smart
phone/tablet via an app, provides security,
video and smart home automation and
newly features complementary iBridge
Messenger™ SMS/MMS text and video
notifications. iBridge offers dealers a
value-add to their NAPCO Gemini security
system, for old and new accounts, providing
incremental Recurring Monthly Revenue for
both the installer and the Company.
Faced with escalating school violence, as a
long-time trusted source in some of the
largest school districts and leading colleges
and universities across the country,
NAPCO's divisions, Alarm Lock®, Continen-
talAccess®, and Marks USA®, continue to
evolve and expand their LocDown™ security
solutions, to fit any classroom, campus and
budget. From enterprise access control
systems with integrated access control,
locks, alarms, video and visitor-/threat-man-
agement to wireless networked access locks
with built-in ID readers and keyfob-control;
or LocDown™ mechanical locks that lock
from inside the classroom, the Company
makes the scalable solutions needed to
safeguard schools, students and staffers. In
this same vertical, NAPCO Commercial™
security systems have gained considerable
traction providing intrusion and lifesafety
protection in new addressable and wireless
systems and upgrade applications.
Based on the continued popularity and
strengths of Alarm Lock’s Trilogy Networx™
Access Lock Platform, teamed with Marks’
wide array of architectural hardware, the
Company created the new décor-friendly
ArchiTech™ Series Designer Wireless Access
Control line, designed with the proven
functionality for traditional corporate,
healthcare and educational campuses, plus
new customizable aesthetics to satisfy even
the most discriminating multi-dwelling
residential buildings. These locks will also
offer an all new smartphone app paired with
Bluetooth LE technology, for ultimate
keyless user convenience and compro-
mise-free security. Additionally, ArchiTech
Locks are seamlessly integrated on
Continental’s enterprise class CA3000
system providing interoperable global
control, real-time access, video and visitor
management and a host of robust
server-based advantages.
(NASDAQ:NSSC)
Richard L. Soloway
Chairman, President, and CEO
CEO Letter to Shareholders
Dear NAPCO Investor,
• Earnings per share (diluted)
increased 24% to $0.31.
In Fiscal 2016 NAPCO set all-time
• Cash flow from operating
records for sales, net income,
activities increased 136% to a
and operating cash flows: a direct
record $9.2 million.
result of successful strategies that
effectively position NAPCO to
Additionally, our operating leverage
address major paradigm shifts
continues to improve as we add
affecting our entire society. These
incremental sales while maintain-
shifts include the growth of cellular
ing a relatively stable fixed cost
radio communications, Internet of
structure. For example, selling,
Things (IoT), and growing concern
general, and administrative (SGA)
over school safety and security.
expenses rose just 2% to $21.3
million in Fiscal 2016, resulting in
As a company singularly focused
our operating margin improving
on the security market, NAPCO
to 15.6% during Q4 of Fiscal 2016
is staying ahead of a fast-changing
and 7.7% for the entire fiscal year.
world with scalable, end-to-end
solutions that seamlessly integrate
Our balance sheet remains strong,
access control, electronic door
as we generated more than $9
locking systems, fire and burglary
million in operating cash flow
alarm systems, cellular alarm
during Fiscal 2016. The bulk of
communicators and IoT-enabled
the cash was used to pay down
‘smart home’ solutions.
long-term debt. As of June 30,
2016, debt, net of cash, was
Our Company’s year-over-year
reduced to $1 million from $8.4
improvement can be measured by
million in the prior year, down
many financial metrics, including
from a high of $35.9 million
the following:
following the acquisition of Marks
• Annual net revenues increased
USA in August of 2008. Cash
6% to a record $82.5 million.
flow was also used to repurchase
• Income before taxes increased
193,000 shares of common stock.
21% to $6.1 million.
• Net income increased 19% to
The rapid emergence of the IoT
$5.8 million.
has heightened demand for
• Adjusted EBITDA* increased
alarms, locks, and access control
13% to $7.8 million or $0.42 per
devices that can be accessed via
diluted share.
*See table on inside back cover (page 51)
3
smart devices. With the largest
offering of ‘smart’ devices serving
By offering a compelling value
a mass incident. The SAVI index
both consumer and commercial
proposition to customers, products
further leverages the breadth of
security markets, NAPCO’s robust
such as StarLink and iBridge
our comprehensive product
portfolio of innovative products
generate recurring revenue for
solutions for the educational
and services offer compelling
NAPCO and its channel partners.
marketplace, such as Alarm Lock™
advantages to end-customers,
and LocDown™ locking and
allowing easy-to-install upgrades
Recurring revenue increased by
access control solutions, Marks
to currently installed systems
63% for the entire fiscal year.
commercial grade lock hardware,
made by competitors and dynamic
While still a relatively small
Continental access control
end-market sales opportunities
percentage of annual revenues,
systems, and NAPCO burglary,
that deliver recurring revenue to
recurring revenue serves a vital
intrusion, and fire alarm systems.
NAPCO and its authorized dealers.
function of ‘leveling’ seasonal
revenue swings, thus permitting
To enhance and focus our efforts
In 2016 we introduced StarLink fire
sales forecasting to become more
in the school security field, we
and commercial communicators,
consistent and predictable.
recently created a new School &
available in AT&T 3G/4G and
Campus Safety Division, led by
Verizon CDMA versions. StarLink
As reported, violence on school
Byron Thurmond, who previously
communicators serve both the
and college campuses has
managed the nationally renowned
residential and small business
increased. As a leading provider of
security systems deployed by the
market, as well as the lucrative
comprehensive security and safety
Houston Independent School
commercial fire alarm market:
solutions for colleges, universities,
District, the nation’s 7th largest
offering a cost-effective way to
and K-12 schools, NAPCO
district. The School & Campus
replace outdated hard-wired
provides an unrivaled combination
Safety Division will concentrate its
phone lines along with aging 2G
of in-depth product solutions,
sales efforts on more than 100,000
communicators, which will be
in-house manufacturing, and
K-12 schools and 10,000 high-
phased out by the end of 2016.
seamless integration capabilities.
er-education institutions across the
These advantages position us to
US, promoting comprehensive
This Fall we will be introducing
win competitive bids for multi-
end-to-end solutions that are
the StarLink Connect controller:
million dollar projects aimed at
modular and scalable, whereas
a universal cellular radio solution
enhancing school security:
competing solutions are more
that interfaces with NAPCO brand
a market expected to reach $4.9
difficult to integrate and maintain.
alarm systems along with tens
billion by 2017.**
of millions of previously installed
Looking to the future, I see
alarm systems made by other
We recently introduced the School
NAPCO as primed for vibrant and
providers. Starlink Connect works
Access-control Vulnerability Index,
sustainable growth, evidenced by
with NAPCO’s proprietary iBridge
or SAVI, a propriety audit system
strong initial demand for our latest
‘Connected Home’ services to
that rates the security preparedness
product innovations, along with
provide remote control of security
of K-12 schools. The SAVI index
an active pipeline of new products
systems, lighting, HVAC, door
provides a metricable benchmark
and services that protect people
locks, and security camera video,
for crafting customized solutions
and property in an increasingly
from any smart device.
that deliver identifiably improved
dangerous world. In order to grow,
preparedness against the threat of
we need to maintain our innovative
4
edge by re-investing approximately
success demands comprehensive
patent-protected technologies,
7% of revenues to fund ongoing
solutions that satisfy the demands
we seek to continuously raise the
R&D efforts that lead to game-
of tech-savvy consumers.
bar with innovative ‘breakthrough’
changing products that build
products and services that set
brand loyalty. We also need to
In today’s turbulent and unstable
industry standards for innovation
attract and retain top talent.
world, innovative security solutions
and excellence. This gives us a
will always be in demand. As the
sustainable advantage in attracting
In Fiscal 2017, we expect to see
industry’s only ‘pure play’ public
and retaining channel partners.
continued improvement in our
company with an ISO-9001
operating leverage, as incremental
certified, low-cost manufacturing
Based on last year’s financial
sales will contribute marginally to
center in the Dominican Republic,
performance, and our dynamic
manufacturing-related labor costs
NAPCO has the flexibility to
outlook for the future, it is evident
with virtually no material impact
quickly adapt to fast-changing
that our long-term vision and
on SG&A expenses. Assuming
markets with a relatively fixed cost
strategies are mutually benefiting
that business conditions remain
manufacturing infrastructure that
NAPCO’s shareholders. We intend
healthy, bottom line growth could
maximizes capacity utilization and
to accelerate this progress in
be roughly twice the rate of top
overhead absorption.
FY 2017.
line growth, creating added
shareholder value.
With an experienced management
Once again, I would like to thank
team, a motivated workforce, and
our customers, employees, channel
While the major paradigm shifts
an exceptionally loyal sales and
partners, and investors for their
discussed herein are still in their
distribution network consisting of
continued confidence and support.
infancy, NAPCO must think ahead
more than 10,000 alarm dealers and
by assembling all the talent,
2,000 security system integrators,
Sincerely,
resources, and IP-protected
NAPCO is poised for long-term
technology needed to successfully
sustainable growth. Armed with
grow and defend a sizable market
all of these resources, as well as a
Richard L. Soloway
share. Moreover, our long-term
growing portfolio of proprietary,
Chairman, President and CEO
* Non-GAAP Information. Certain non-GAAP measures are included in this document, including EBITDA, non-GAAP operating income and
Adjusted EBITDA. We define EBITDA as GAAP net income plus income tax expense (benefit), net interest expense and depreciation and
amortization expense. Non-GAAP operating income does not include impairment of goodwill, amortization of intangibles, restructuring
charges, stock-based compensation expense and other infrequent or unusual charges. These non-GAAP measures are provided to enhance
the user’s overall understanding of our financial performance. By excluding these charges our non-GAAP results provide information to
management and investors that is useful in assessing NAPCO’s core operating performance and in comparing our results of operations on a
consistent basis from period to period. The presentation of this information is not meant to be a substitute for the corresponding financial
measures prepared in accordance with generally accepted accounting principles. Investors are encouraged to review the reconciliation of
GAAP to non-GAAP financial measures included on page 51.
** Source: IHS, Inc., an Englewood, Colorado-based research company.
This letter contains statements relating to future results of the Company (including certain projections and business trends) that are “for-
ward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those
projected as a result of certain risks and uncertainties, including but not limited to, changes in political and economic conditions, demand for
and market acceptance of new and existing products, as well as other risks and uncertainties detailed from time to time in the filings of the
Company with the Securities and Exchange Commission.
Trademarks of NAPCO: NAPCO, StarLink iBridge, iBridge Messenger, iSee Video, LocDown, Lifesaver, Alarm Lock, Continental Access, Marks
USA, NAPCO Commercial, Trilogy, Trilogy Networx, ArchiTech.
Trademarks of their respective companies: AT&T, Verizon Network Certified, Control4, NASDAQ
5
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended June 30, 2016
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition period from ___ to___
Commission File Number 0-10004
NAPCO SECURITY TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
11-2277818
(I.R.S. Employer I.D. Number)
333 Bayview Avenue, Amityville, New York
(Address of principal executive offices)
11701
(Zip Code)
Registrant's telephone number, including area code: (631) 842-9400
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
(Title of Each Class)
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 X
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes _ No X
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes X No _
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes X No _
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. Yes X No _
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definition of “Large accelerated filer”, “Accelerated filer” and “Smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer _ Accelerated filer Non-accelerated filer Smaller reporting company X
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes _ No X
As of December 31, 2015, 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 $69,768,521.
As of September 06, 2016, 18,786,893 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 2016 Annual Meeting of Stockholders.
6
ITEM 1: BUSINESS.
PART I
NAPCO Security Technologies, Inc. ("NAPCO" or the "Company") was incorporated in December 1971 in the State
of Delaware. Its executive offices are located at 333 Bayview Ave, Amityville NY 11701. Its telephone number is
(631) 842-9400.
The Company is a diversified manufacturer of security products, encompassing access control systems, door-locking
products, intrusion and fire alarm systems and video surveillance products for commercial and residential use. 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
The Company’s products (“Products”) are comprised of the following:
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.
7
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. Research and development costs incurred by the
Company are charged to expense as incurred and are included in "Cost of Sales" in the consolidated statements of
operations. During the fiscal years ended June 30, 2016 and 2015, the Company expended approximately
$6,169,000 and $5,382,000, 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, 2016, the Company had 984 full-time employees.
Marketing
The Company's staff of 53 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 51% and
53% of the Company's total sales for the fiscal years ended June 30, 2016 and 2015, respectively. The remaining
revenues are primarily from installers and governmental institutions. The Company's sales representatives
periodically contact existing and potential customers to introduce new products and create demand for those as well
as other Company products. These sales representatives, together with the Company's technical personnel, provide
training and other services to wholesalers and distributors so that they can better service the needs of their
customers. In addition to direct sales efforts, the Company advertises in technical trade publications and participates
in trade shows in major United States and European cities.
8
In the ordinary course of the Company's business the Company grants extended payment terms to certain customers.
The Company had one customer with an accounts receivable balance that comprised 22% of the Company’s
accounts receivable at both June 30, 2016 and 2015. Sales to this customer comprised 13% of net sales in each of the
fiscal years ended June 30, 2016 and 2015. For further discussion on Concentration of Credit Risk see disclosures
included in Item 1A and Item 7.
Competition
The security 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. Most of these companies have substantially greater financial and other resources than the Company.
The Company competes primarily on the basis of the features, quality, reliability and pricing of, and the
incorporation of the latest innovative and technological advances into, its Products. The Company also competes by
offering technical support services to its customers. In addition, the Company competes on the basis of its expertise,
its proven products, its reputation and its ability to provide Products to customers on a timely basis. The inability of
the Company to compete with respect to any one or more of the aforementioned factors could have an adverse
impact on the Company's business.
Relatively low-priced "do-it-yourself" alarm system products are available to the public at retail stores. The
Company believes that these products compete with the Company only to a limited extent because they appeal
primarily to the "do-it-yourself" segment of the market. Purchasers of such systems do not receive professional
consultation, installation, service or the sophistication that the Company's Products provide.
Seasonality
The Company's fiscal year begins on July 1 and ends on June 30. Historically, the end users of NAPCO's products
want to install its products prior to the summer; therefore sales of its products historically peak in the period April 1
through June 30, the Company's fiscal fourth quarter, and are reduced in the period July 1 through September 30, the
Company's fiscal first quarter. In addition, demand is affected by the housing and construction markets.
Deterioration of the current economic conditions may also affect this trend.
Raw Materials
The Company prepares specifications for component parts used in the Products and purchases the components from
outside sources or fabricates the components itself. These components, if standard, are generally readily available; if
specially designed for the Company, there is usually more than one alternative source of supply available to the
Company on a competitive basis. The Company generally maintains inventories of all critical components. The
Company for the most part is not dependent on any one source for its raw materials. The Company believes that any
vendor that is currently the sole source of a component can be replaced without a material impact on the Company.
Sales Backlog
In general, orders for the Products are processed by the Company from inventory. A sales backlog of approximately
$1,592,000 and $2,044,000 existed as of June 30, 2016 and 2015, respectively. The Company expects to fill the
entire backlog that existed as of June 30, 2016 during fiscal 2017.
.
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
9
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
2016
2015
(in thousands)
Sales to external customers(1):
Domestic
Foreign
Total Net Sales
Identifiable assets:
$79,931
2,582
$82,513
$74,736
3,026
$77,762
United States
Dominican Republic (2)
Total Identifiable Assets
$51,272
13,497
$64,769
$50,998
14,039
$65,037
(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 (2016 = $10,076; 2015 = $10,546) and fixed assets (2016 = $3,311; 2015 =
$3,347) 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.
10
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.
11
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 the 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 approximately 37% 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 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 $75,000
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.
12
Our Business Could Be Materially Adversely Affected by a weakening of the US Dollar against 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 significantly,
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, 2016, 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.
13
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
$6.09
$5.47
Sept. 30
$5.43
$4.33
Approximate Number of Security Holders
Quarter Ended Fiscal 2016
Dec. 31
$7.33
$5.41
March 31
$6.32
$5.18
Quarter Ended Fiscal 2015
Dec. 31
$4.78
$4.07
March 31
$5.82
$4.63
June 30
$6.64
$5.57
June 30
$6.09
$5.03
The number of holders of record of NAPCO's Common Stock as of September 06, 2016 was 96 (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. Any cash
dividends must be approved by the Company's lenders.
Equity Compensation Plan Information as of June 30, 2016
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)
250,000 (1)
__
250,000 (1)
$5.76
__
$5.76
852,500 (2)
__
852,500 (2)
(1) The 2002 Employee Stock Option Plan expired in 2012. 102,500 options are outstanding under the 2002
Plan. No further options may be granted under this plan.
(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.
14
ITEM 6: SELECTED FINANCIAL DATA.
The table below summarizes selected financial information. For further information, refer to the audited
consolidated financial statements and the notes thereto beginning on page FS-1 of this report.
Fiscal Year Ended and at June 30
(In thousands, except share and per share data)
2016
2015
2014
2013
2012
$82,513
$77,762
$74,382
$71,386
$70,928
27,584
26,047
23,713
21,724
21,152
6,323
5,773
5,281
4,845
4,316
3,476
3,717
3,021
3,761
2,286
9,160
3,887
4,743
4,899
4,096
(693)
(730)
(753)
(383)
(606)
(7,008)
(3,294)
(4,736)
(4,266)
(3,588)
$0.31
$0.31
$0.25
$0.25
$0.18
$0.18
$0.16
$0.16
$0.12
$0.12
18,874,000
19,164,000
19,392,000
19,210,000
19,096,000
18,894,000
19,169,000
19,428,000
19,362,000
19,303,000
$.00
$.00
$.00
$.00
$.00
$36,888
$35,590
$33,436
$33,221
$32,205
64,769
4,500
51,273
65,037
9,100
46,504
63,364
10,200
43,752
63,903
14,800
40,335
64,750
18,657
37,723
Statement of earnings data:
Net Sales
Gross Profit
Income from Operations
Net Income
Cash Flow Data:
Net cash flows provided by
operating activities
Net cash flows used in investing
Net cash flows used in financing
activities
activities
Per Share Data:
Net earnings per common share:
Weighted average common shares
Basic
Diluted
outstanding:
Basic
Diluted
Cash Dividends declared per
common share (1)
Balance sheet data:
Working capital (2)
Total assets
Long-term debt
Stockholders' equity
(1) The Company has never paid a dividend on its common stock.
(2) Working capital is calculated by deducting Current Liabilities from Current Assets.
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 6: SELECTED FINANCIAL DATA.
The table below summarizes selected financial information. For further information, refer to the audited
consolidated financial statements and the notes thereto beginning on page FS-1 of this report.
Fiscal Year Ended and at June 30
(In thousands, except share and per share data)
2016
2015
2014
2013
2012
$82,513
$77,762
$74,382
$71,386
$70,928
27,584
26,047
23,713
21,724
21,152
6,323
5,773
5,281
4,845
4,316
3,476
3,717
3,021
3,761
2,286
9,160
3,887
4,743
4,899
4,096
(693)
(730)
(753)
(383)
(606)
(7,008)
(3,294)
(4,736)
(4,266)
(3,588)
$0.31
$0.31
$0.25
$0.25
$0.18
$0.18
$0.16
$0.16
$0.12
$0.12
18,874,000
19,164,000
19,392,000
19,210,000
19,096,000
18,894,000
19,169,000
19,428,000
19,362,000
19,303,000
$.00
$.00
$.00
$.00
$.00
$36,888
$35,590
$33,436
$33,221
$32,205
64,769
4,500
51,273
65,037
9,100
46,504
63,364
10,200
43,752
63,903
14,800
40,335
64,750
18,657
37,723
Statement of earnings data:
Net Sales
Gross Profit
Income from Operations
Net Income
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 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
Stockholders' equity
(1) The Company has never paid a dividend on its common stock.
(2) Working capital is calculated by deducting Current Liabilities from Current Assets.
15
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 access control systems, door
security products, intrusion and fire alarm systems and video surveillance products for commercial and residential
use. 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 3% and 4% of our revenues for the fiscal years ended June 30, 2016 and 2015,
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 may contribute to increasing profit margins. Conversely, when production
levels decline our fixed costs are spread over reduced levels, which may contribute to 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
2016 to contribute materially to revenue during fiscal 2016, 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 2016 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 or service, (iii) shipment and
passage of title occurs or service has been provided, 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. Revenues for services are recorded at the time the service is provided to the customer pursuant to the
16
terms of 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.
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 22% of the Company’s accounts receivable at
both June 30, 2016 and 2015. Sales to this customer comprised 13% of net sales in each of the fiscal years
ended June 30, 2016 and 2015.
In the ordinary course of business, we have established a reserve for doubtful accounts and customer deductions
in the amount of $145,000 and $175,000 as of June 30, 2016 and 2015, 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. 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 and will evaluate them
earlier if there are indicators of a potential impairment. 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 if there is 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.
17
Income Taxes
The Company has identified the United States and New York State as its major tax jurisdictions. The fiscal
2012 and forward years are still open for examination.
For the year ended June 30, 2016, the Company recognized a net income tax expense of $371,000. During the
year ending June 30, 2016 the Company increased its reserve for uncertain income tax positions by $46,000.
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, 2016, the Company had accrued interest totaling $0 and
$148,000 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.
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.
Liquidity and Capital Resources
The Company's cash on hand as of June 30, 2015 combined with proceeds from operating activities during fiscal
2016 were adequate to meet the Company's capital expenditure needs and debt obligations during fiscal 2016. 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 2021. As of June 30, 2016, $2,000,000 was outstanding under this revolving line of credit. As of June 30, 2016,
the Company's unused sources of funds consisted principally of $3,805,000 in cash and $9,000,000 unused balance
available under its revolving line of credit.
During the year ended June 30, 2016 the Company utilized its cash on hand at June 30, 2015 ($2,346,000) and a
portion of its cash from operations ($5,355,000 of $9,160,000) to repay outstanding debt ($5,900,000), purchase
treasury stock ($1,108,000) and purchase property, plant and equipment ($693,000).
As of June 30, 2016, long-term debt consisted of a revolving credit facility of $11,000,000 (the “Revolving Credit
Facility”) which expires in June 2021 and one term loan for $6,000,000 which expires in June 2019 (the “Term
Loan”). The Revolving Credit Facility had an expiration date of June 2017 which was extended to June 2021 at the
end of fiscal 2016. Repayment of the Term Loan commenced on September 30, 2012. The Term Loan is being
repaid with 28 equal, quarterly payments of $75,000 and the remaining balance of $1,900,000 due on or before the
expiration date. As of June 30, 2016, the Company had $2,000,000 in outstanding borrowings and $9,000,000 in
availability under the Revolving Credit Facility and $2,800,000 outstanding under the Term Loan. The Company’s
long-term debt is described more fully in Note 6 to the condensed consolidated financial statements.
The agreements contain various restrictions and covenants including, among others, restrictions on payment of
dividends, restrictions on borrowings and compliance with certain financial ratios, as defined in the restated
agreement.
18
Outstanding balances and interest rates as of June 30, 2016 and June 30, 2015 are as follows:
June 30, 2016
June 30, 2015
Outstanding
Interest Rate
Outstanding
Interest Rate
Revolving line of credit
Term loans
$2,000
2,800
Total debt
$4,800
1.6%
1.6%
1.6%
$3,000
7,700
$10,700
1.7%
1.7%
1.7%
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 at least 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,
2016
5.1 to 1
4.3 to 1
.09 to 1
2015
4.8 to 1
4.3 to 1
.23 to 1
As of June 30, 2016, 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 $1,298,000 to $36,888,000 at June 30, 2016 from $35,590,000 at
June 30, 2015. Working capital is calculated by deducting Current Liabilities from Current Assets.
Accounts Receivable. Accounts Receivable increased by $1,018,000 to $19,012,000 at June 30, 2016 as compared to
$17,994,000 at June 30, 2015. The increase in Accounts Receivable was due primarily to an increase in sales for the
quarter ended June 30, 2016 as compared to the same quarter a year ago.
Inventories. Inventories, which include both current and non-current portions, decreased by $1,533,000 to
$25,337,000 at June 30, 2016 as compared to $26,870,000 at June 30, 2015. The decrease was due primarily to the
Company increasing stock of several of its new products at the end of fiscal 2015. The initial rollout of these new
products and the fulfillment of these orders were completed during fiscal 2016, allowing the Company to reduce its
inventory.
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses increased by $860,000 to
$8,688,000 as of June 30, 2016 as compared to $7,828,000 at June 30, 2015. This increase is primarily due to the
higher sales volume in the fourth quarter of fiscal 2016 as compared to fiscal 2015. This increase resulted in the
Company increasing purchases of raw materials at the end of fiscal 2016 in order to restock its finished goods
inventory.
Off-Balance Sheet Arrangements
The Company does not maintain any off-balance sheet arrangements.
19
Contractual Obligations
The following table summarizes the Company's contractual obligations by fiscal year:
Contractual obligations
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
Long-term debt obligations
$4,800,000
$300,000
$2,500,000
$2,000,000
$ --
Payments due by period:
Land lease (76 years
remaining) (1)
Operating lease obligations
Other long-term
obligations (employment
agreements) (1)
21,888,000
288,000
576,000
576,000
20,448,000
59,000
23,000
36,000
--
2,092,000
1,311,000
781,000
--
--
--
Total
$28,839,000
$1,922,000
$3,893,000
$2,576,000
$20,448,000
(1) See footnote 10 to the accompanying consolidated financial statements.
Results of Operations
Fiscal 2016 Compared to Fiscal 2015
Fiscal year ended June 30,
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
2016
$82,513
27,584
33.4%
2015
$77,762
26,047
33.5%
21,261
20,766
25.8%
6,323
179
--
371
5,773
26.7%
5,281
215
5
216
4,845
% Increase/
(decrease)
6.1%
5.9%
(0.3)%
2.4%
(3.4)%
19.7%
(16.7)%
(100.0)%
71.8%
19.2%
Net sales in fiscal 2016 increased by $4,751,000 to $82,513,000 as compared to $77,762,000 in fiscal 2015. The
increase in net sales was primarily due to increased sales of the Company’s NAPCO brand intrusion products
($2,676,000), Alarm Lock brand door-locking products ($253,000), and Marks brand door-locking products
($2,947,000) and was partially offset by decreases in the Company’s Continental brand access control products
($1,125,000).
The Company's gross profit increased by $1,537,000 to $27,584,000 or 33.4% of net sales in fiscal 2016 as
compared to $26,047,000 or 33.5% of net sales in fiscal 2015. Gross profit was primarily affected by the increase in
net sales as discussed above as partially offset by increased Research and Development expenditures which are
included in Cost of Sales.
Selling, general and administrative expenses for fiscal 2016 increased by $495,000 to $21,261,000 as compared to
$20,766,000 in fiscal 2015. Selling, general and administrative expenses as a percentage of net sales decreased to
20
25.8% in fiscal 2016 from 26.7% in fiscal 2015. The increases in dollars 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. The decrease as a percentage of net sales was due
primarily to Net sales increasing at a higher rate than Selling, general and administrative expenses.
Interest expense for fiscal 2016 decreased by $36,000 to $179,000 from $215,000 for the same period a year ago.
The decrease in interest expense is primarily the result of the Company’s reduction of its outstanding borrowings
under its revolving line of credit and its term loan.
Other expenses remained relatively constant at $0 and $5,000 for fiscal 2016 and 2015, respectively.
The Company’s provision for income taxes for fiscal 2016 increased by $155,000 to $371,000 as compared to
$216,000 for the same period a year ago. The increase in income taxes from fiscal 2015 to fiscal 2016 resulted
primarily from the higher pre-tax income in fiscal 2016 as compared to fiscal 2015 as well as a benefit recognized in
fiscal 2015 resulting from R&D Credits and a decrease in certain of the Company’s income tax reserves.
Net income for fiscal 2016 increased by $928,000 to $5,773,000 as compared to $4,845,000 in fiscal 2015. 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, our ability to maintain and develop competitive
products, adverse tax consequences of offshore operations, the ability to maintain adequate financing and significant
fluctuations in the exchange rate between the Dominican Peso and the U.S. Dollar. 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
loan) that provides for interest based on 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, 2016, an aggregate principal amount of approximately $4,800,000
was outstanding under the Company's credit facilities with a weighted average interest rate of approximately 1.6%.
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 $48,000 in interest that year.
All foreign sales transactions by the Company are denominated in U.S. dollars. As such, the Company has shifted
foreign currency exposure onto its foreign customers. As a result, if exchange rates move against foreign customers,
the Company could experience difficulty collecting unsecured accounts receivable, the cancellation of existing
orders or the loss of future orders. The foregoing could materially adversely affect the Company's business, financial
21
condition and results of operations. We are also exposed to foreign currency risk relative to expenses incurred in
Dominican Pesos ("RD$"), the local currency of the Company's production facility in the Dominican Republic. The
result of a 10% strengthening or weakening in the U.S. dollar to the RD$ would result in an annual increase or
decrease in income from operations of approximately $630,000.
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, 2016 and 2015
Consolidated Statements of Income for the Fiscal Years Ended June 30, 2016 and 2015
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 2016 and
2015
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2016 and 2015
Notes to Consolidated Financial Statements
Page
FS-1
FS-2
FS-4
FS-5
FS-6
FS-7
22
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, 2016 and 2015, 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, 2016 and 2015 and the
results of their operations and cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP
New York, New York
September 8, 2016
FS-1
23
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2016 and 2015
(In Thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, net of reserves and allowances
Inventories
Prepaid expenses and other current assets
Deferred income taxes
Total Current Assets
Inventories - non-current
Deferred income taxes
Property, plant and equipment, net
Intangible assets, net
Other assets
TOTAL ASSETS
2016
2015
$3,805
19,012
21,428
936
703
$2,346
17,994
22,757
1,046
880
45,884
45,023
3,909
436
6,049
8,357
134
4,113
634
6,234
8,886
147
$64,769
$65,037
See accompanying notes to consolidated financial statements.
FS-2
24
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2016 and 2015
(In Thousands, Except Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long term debt
Accounts payable
Accrued expenses
Accrued salaries and wages
Accrued income taxes
Total Current Liabilities
Long-term debt, net of current maturities
Total Liabilities
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, par value $0.01 per share; 40,000,000 shares authorized;
21,116,743 and 21,049,243 shares issued; and 18,786,893 and 18,966,028
shares outstanding, respectively
Additional paid-in capital
Retained earnings
2016
2015
$300
4,328
1,893
2,467
8
8,996
$1,600
3,954
1,624
2,250
5
9,433
4,500
9,100
13,496
18,533
211
210
16,622
46,172
16,133
40,399
63,005
56,742
Less: Treasury Stock, at cost (2,329,850 and 2,083,215 shares, respectively)
(11,732)
(10,238)
TOTAL STOCKHOLDERS' EQUITY
51,273
46,504
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$64,769
$65,037
See accompanying notes to consolidated financial statements.
FS-3
25
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2016 and 2015
(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
2016
2015
$82,513
54,929
$77,762
51,715
27,584
26,047
21,261
20,766
6,323
5,281
179
--
215
5
179
220
6,144
371
5,061
216
$5,773
$4,845
$0.31
$0.31
$0.25
$ 0.25
18,874,000
18,894,000
19,164,000
19,169,000
See accompanying notes to consolidated financial statements.
FS-4
26
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 2016 and 2015
(In Thousands, Except Share Data)
Common Stock
Treasury Stock
Number of
Shares
Issued
Amount
Additional
Paid-in
Capital
Number of
Shares
Amount
Retained
Earnings
Total
BALANCE June 30,
2014
Repurchase of Treasury
Shares
Stock-based
compensation expense
21,049,243
$210
$16,032
(1,630,167)
$(8,044)
$35,554
$43,752
--
--
--
(453,048)
(2,194)
--
(2,194)
--
--
101
--
--
--
101
Net income
--
--
--
--
--
4,845
4,845
BALANCE June 30,
2015
Repurchase of Treasury
Shares
Stock Options
Exercised
Stock-based
compensation expense
21,049,243
$210
$16,133
(2,083,215)
$(10,238)
$40,399
$46,504
--
67,500
--
1
--
(192,767)
(1,108)
386
(53,868)
(386)
--
--
(1,108)
1
--
--
103
--
--
--
103
Net income
--
--
--
--
--
5,773
5,773
BALANCE June 30,
2016
21,116,743
$211
$16,622
(2,329,850)
$(11,732)
$46,172
$51,273
See accompanying notes to consolidated financial statements.
FS-5
27
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2016 and 2015 (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:
2016
2015
$5,773
$4,845
1,420
(455)
(30)
375
103
1,570
(472)
66
230
101
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
(988)
1,988
110
--
--
(1,156)
(1,388)
(57)
121
6
864
21
Net Cash Provided by Operating Activities
9,160
3,887
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment
(693)
(730)
Net Cash Used in Investing Activities
(693)
(730)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt
Proceeds from long-term debt
Cash paid for purchase of treasury stock
Net Cash Used in Financing Activities
(5,900)
--
(1,108)
(1,600)
500
(2,194)
(7,008)
(3,294)
Net Change in Cash and Cash Equivalents
CASH AND CASH EQUIVALENTS - Beginning
1,459
2,346
(137)
2,483
CASH AND CASH EQUIVALENTS - Ending
$3,805
$2,346
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net
Income taxes paid
Surrender of Common Shares
$184
$ --
$ 54
$215
$29
$ --
See accompanying notes to consolidated financial statements.
FS-6
28
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 access control systems, door-locking products, intrusion and fire alarm systems and video
surveillance products for commercial and residential use. 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.
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, 2016 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, 2016 in the amount of $4,800,000 approximates fair value.
Cash and Cash Equivalents
Cash and cash equivalents include approximately $460,000 of short-term time deposits at June 30, 2016 and June
30, 2015. 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, 2016 and June 30, 2015. The Company has historically not
experienced any credit losses with balances in excess of FDIC limits
Accounts Receivable
Accounts receivable is stated net of the reserves for doubtful accounts of $145,000 and $175,000 and for returns and
other allowances of $1,255,000 and $1,260,000 as of June 30, 2016 and June 30, 2015, respectively. Our reserves
for doubtful accounts and for returns and other allowances are subjective critical estimates that have a direct impact
29
on reported net earnings. These reserves are based upon the evaluation of our accounts receivable aging, 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.
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.
30
Changes in intangible assets are as follows (in thousands):
Customer relationships
Non-compete agreement
Trade name
June 30, 2016
June 30, 2015
Cost
$9,800
340
5,900
$16,040
Accumulated
amortization
Net book
value
$ (7,343)
(340)
--
$(7,683)
$2,457
--
5,900
$8,357
Cost
$9,800
340
5,900
$16,040
Accumulated
amortization
Net book
value
$(6,820)
(334)
--
$ (7,154)
$2,980
6
5,900
$8,886
Amortization expense for intangible assets subject to amortization was approximately $529,000 and $667,000 for
the fiscal years ended June 30, 2016 and 2015, respectively. Amortization expense for each of the next five fiscal
years is estimated to be as follows: 2017 - $441,000; 2018 - $371,000; 2019 - $313,000 and 2020 -$264,000 and
2021 - $223,000. The weighted average amortization period for intangible assets was 12.1 years and 13.1 years at
June 30, 2016 and 2015, 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 or service, (iii) shipment and passage of
title occurs or service has been provided, 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.
Revenues for services are recorded at the time the service is provided to the customer pursuant to the terms of 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 8% for the fiscal
years ended June 30, 2016 and 2015, 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 fiscal years ended
June 30, 2016 and 2015 was $2,132,000 and $1,671,000, respectively.
Research and Development Costs
Research and development costs incurred by the Company are charged to expense as incurred and are included in
"Cost of Sales" in the consolidated statements of operations. Company-sponsored research and development
expense for the fiscal years ended June 30, 2016 and 2015 was $6,169,000 and $5,382,000, respectively.
31
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):
Net Income
Weighted Average Shares
Net Income per Share
2016
2015
2016
2015
2016
2015
$5,773
$4,845
18,874
19,164
$0.31
$0.25
--
--
20
5
--
--
Basic EPS
Effect of Dilutive
Securities:
Stock Options
Diluted EPS
$5,773
$4,845
18,894
19,169
$0.31
$0.25
Options to purchase 127,404 and 255,688 shares of common stock for the fiscal years ended June 30, 2016 and
2015, 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.
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 $103,000 and $101,000 were recognized for fiscal years ended June 30, 2016
and 2015, respectively. The effect on both Basic and Diluted Earnings per share was $0.01 for each of the fiscal
years ended June 30, 2016 and 2015.
32
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 fiscal years ended June 30, 2016 and 2015.
Comprehensive Income
For the fiscal years ended June 30, 2016 and 2015, 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 ($492,000 and $515,000
in the fiscal years ended June 30, 2016 and 2015, respectively) and classifies the costs associated with these
revenues in cost of sales ($918,000 and $945,000 in fiscal years ended June 30, 2016 and 2015).
Recently Issued Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that changes the
way companies account for certain aspects of share-based payments to employees. The most significant impact
relates to the accounting for income tax effects of share-based compensation awards. This new guidance is part of
the FASB’s simplification initiative and requires that all excess tax benefits and tax deficiencies be recorded as
income tax expense or benefit in the income statement. In addition, companies are required to treat the tax effects of
exercised or vested awards as discrete items in the period that they occur. Other updates include changing the
threshold on tax withholding requirements. Under this guidance, an employer can withhold up to the maximum
statutory withholding rates in a jurisdiction without tainting the award classification. Additionally, this guidance
allows companies to elect a forfeiture recognition method whereby they account for forfeitures as they occur (actual)
or they estimate the number of awards expected to be forfeited (current GAAP). Lastly, as it relates to public
entities, this guidance also provides requirements for the cash flow classification of cash paid by an employer when
directly withholding shares for tax-withholding purposes and excess tax benefits. This guidance becomes effective
for the Company’s fiscal 2018 first quarter, with early adoption permitted, and the guidance prescribes different
transition methods for the various provisions (i.e., retrospective, modified retrospective, or prospective). The
Company is currently evaluating the impact of applying this guidance on its consolidated financial statements.
In February 2016, the FASB issued authoritative guidance that requires lessees to account for most leases on their
balance sheets with the liability being equal to the present value of the lease payments. The right-of-use asset will
be based on the lease liability adjusted for certain costs such as direct costs. Lease expense will be recognized
similar to current accounting guidance with operating leases resulting in a straight-line expense and financing leases
resulting in a front-loaded expense similar to the current accounting for capital leases. This guidance becomes
effective for the Company’s fiscal 2020 first quarter, with early adoption permitted. This guidance must be adopted
using a modified retrospective transition approach for leases that exist or are entered into after the beginning of the
earliest comparative period in the financial statements, and provides for certain practical expedients. The Company
is currently evaluating the timing, impact and method of applying this guidance on its consolidated financial
statements.
33
In November 2015, the FASB issued ASU 2015-17 “Balance Sheet Classification of Deferred Taxes”. The
amendments require deferred tax assets and liabilities, along with related valuation allowances, to be classified as
noncurrent on the balance sheet. As a result, each tax jurisdiction will now only have one net noncurrent deferred tax
asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax
liabilities from one jurisdiction against deferred tax assets of another jurisdiction. ASU 2015-17 is effective for the
Company’s quarter ended September 30, 2016. Early application is permitted. We have not early adopted ASU
2015-17. The new guidance must be applied prospectively after the date of adoption. We have evaluated the
adoption of this ASU, and do not expect this to have a material effect on our consolidated results of operations and
financial condition.
In July 2015, the FASB issued ASU 2015-11 “Inventory (Topic 330): Simplifying the Measurement of Inventory”
(ASU 2015-11). The amendments in ASU 2015-11 simplify the subsequent measurement of inventory by requiring
inventory to be measured at the lower of cost and net realizable value. ASU 2015-11 is effective for the Company’s
quarter ended September 30, 2017. Early application is permitted. We have not early adopted ASU 2015-11. The
new guidance must be applied prospectively after the date of adoption. We are in the process of evaluating the
adoption of this ASU, and do not expect this to have a material effect on our consolidated results of operations and
financial condition.
In May 2014, the FASB issued authoritative guidance that defines how companies should report revenues from
contracts with customers. The standard requires an entity to recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. It provides companies with a single comprehensive five-step principles-
based model to use in accounting for revenue and supersedes current revenue recognition requirements, including
most industry-specific and transaction-specific revenue guidance. In August 2015, the FASB deferred the effective
date of the new revenue standard by one year. As a result, the new standard would not be effective for the Company
until fiscal 2019. In addition, the FASB is allowing companies to early adopt this guidance for the Company’s fiscal
2018. The guidance permits an entity to apply the standard retrospectively to all prior periods presented, with
certain practical expedients, or apply the requirements in the year of adoption, through a cumulative
adjustment. The Company will apply this new guidance when it becomes effective and has not yet selected a
transition method. The Company is currently evaluating the impact of adoption on its consolidated financial
statements.
NOTE 2 - Business and Credit Concentrations
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 22% of the Company’s accounts receivable at both June 30, 2016 and
2015. Sales to this customer comprised 13% of net sales in each of the fiscal years ended June 30, 2016 and 2015.
34
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
June 30,
2016
2015
$14,021
$15,037
3,758
4,136
7,558
7,697
$25,337
$26,870
Classification of inventories, net of reserves:
Current
Non-current
$21,428
$22,757
3,909
4,113
$25,337
$26,870
NOTE 4 - Property, Plant, and Equipment
Property, plant and equipment consist of the following (in thousands):
June 30,
2016
2015
Useful Life in Years
Land
Buildings
Molds and dies
Furniture and fixtures
Machinery and equipment
Leasehold improvements
Less: accumulated depreciation and
amortization
$904
8,911
7,036
2,531
21,035
294
40,711
34,662
$6,049
$904
8,911
7,002
2,478
20,429
294
40,018
33,784
$6,234
--
30 to 40
3 to 5
5 to 10
7 to 10
Shorter of the lease term or life of asset
Depreciation and amortization expense on property, plant, and equipment was approximately $878,000 and
$890,000 in fiscal 2016 and 2015, respectively.
35
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,
2016
2015
$ (31)
27
(4)
375
$371
$ (49)
35
(14)
230
$216
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 for the years ended June 30, (dollars in thousands):
2016
2015
% of
Pre-tax
Income
Amount
% of
Pre-tax
Income
Amount
Tax at Federal statutory rate
$2,089
34.0%
$1,721
34.0%
Increases (decreases) in taxes resulting from:
Meals and entertainment
State income taxes, net of Federal income tax benefit
61
20
1.0%
0.3%
66
21
1.3%
0.4%
Foreign source income not subject to tax
(1,278)
(20.8)%
(1,069)
(21.1)%
R&D Credit refund
Undistributed foreign earnings
Other, net
Effective tax rate
(415)
(90)
(16)
$371
(6.8)%
(1.4)%
(0.3)%
6.0%
(328)
(93)
(102)
$216
(6.5)%
(1.8)%
(2.0)%
4.3%
Deferred tax assets and deferred tax liabilities at June 30, 2016 and 2015 are as follows (in thousands):
Current Deferred Tax Assets
(Liabilities)
Long-term Deferred Tax
Assets (Liabilities)
2016
2015
2016
2015
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
$ --
200
87
154
(14)
1,214
(503)
(702)
436
--
$436
$ --
261
86
147
214
804
(512)
(366)
634
--
$634
$26
364
313
--
--
--
--
--
$36
533
311
--
--
--
--
--
703
880
--
--
$703
$880
36
The Company has identified the United States and New York State as its major tax jurisdictions. The fiscal 2012 and
forward years are still open for examination.
During the year ending June 30, 2016 the Company increased its reserve for uncertain income tax positions by
$46,000. 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, 2016, the Company had accrued interest totaling $0 and $148,000
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.
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, 2015
Increases to unrecognized tax benefits resulting from the generation
of additional R&D credits
Tax
Interest
Total
$102
$ --
$102
46
--
46
Balance of gross unrecognized tax benefits as of June 30, 2016
$148
$ --
$148
The Company 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, 2016, the Company had
approximately $7.6 million of undistributed earnings of foreign subsidiaries.
NOTE 6 - Long-Term Debt
As of June 30, 2016, long-term debt consisted of a revolving credit facility of $11,000,000 (the “Revolving Credit
Facility”) which expires in June 2021 and one loan for $6,000,000 which expires in June 2019 (the “Term Loan”).
The Revolving Credit Facility had an expiration date of June 2017 which was extended to June 2021 at the end of
fiscal 2016. Repayment of the Term Loan commenced on September 30, 2012. The Term Loan is being repaid with
28 equal, quarterly payments of $75,000 and the remaining balance of $1,900,000 due on or before the expiration
date.
Outstanding balances and interest rates as of June 30, 2016 and June 30, 2015 are as follows:
June 30, 2016
June 30, 2015
Outstanding
Interest Rate
Outstanding
Interest Rate
Revolving line of credit
Term loans
$2,000
2,800
Total debt
$4,800
1.6%
1.6%
1.6%
$3,000
7,700
$10,700
1.7%
1.7%
1.7%
The Revolving Credit Facility and Term Loans (collectively the “Agreement”) also provides for a LIBOR-based
interest rate option of LIBOR plus 1.15% to 2.00%, 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, and 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
37
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.
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 fiscal years ended June 30, 2016 and 2015,
the Company recorded non-cash compensation expense of $103,000 ($0.01 per basic and diluted share) and
$101,000 ($0.01 per basic and diluted share), respectively, relating to stock-based compensation
2012 Employee Stock Option Plan
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, 2016, 112,500 stock options were granted, 55,700 stock
options were exercisable and 837,500 stock options were available for grant under this plan.
The fair value of each option granted during fiscal 2016 and 2015 were estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average assumptions:
2016
Risk-free interest rates 1.8%
Expected lives 10 years
Expected volatility 54%
Expected dividend yields 0%
2015
2.3%
10 years
54%
0%
The Company uses a weighted-average expected stock-price volatility assumption that is a combination of both
current and historical implied volatilities of the underlying stock. The implied volatilities were obtained from
publicly available data sources. For the weighted-average expected option life assumption, the Company considers
the exercise behavior of past grants. The average risk-free interest rate is based on the U.S. Treasury Bond rate for
the expected term of the options and the average dividend yield is based on historical experience.
38
The following table reflects activity under the 2012 Plan for the fiscal years ended June 30,:
Outstanding, beginning of year
Granted
Terminated
Exercised
Outstanding, end of year
Exercisable, end of year
Weighted average fair value at grant date of options
granted
Total intrinsic value of options exercised
Total intrinsic value of options outstanding
Total intrinsic value of options exercisable
2016
2015
Weighted
average
exercise
price
$5.30
6.05
4.29
--
$5.54
$5.59
Options
112,500
15,000
(15,000)
--
112,500
55,700
$3.86
n/a
$93,000
$43,000
Options
78,500
44,000
(10,000)
--
112,500
27,500
$2.82
n/a
$73,000
$18,000
Weighted
average
exercise
price
$5.73
4.43
4.88
--
$5.30
$5.26
The following table summarizes information about stock options outstanding under the 2012 Employee Plan at June
30, 2016:
Range of
exercise prices
Number
outstanding
$4.29-$6.31
112,500
112,500
Options outstanding
Options exercisable
Weighted
average
remaining
contractual life
Weighted
average exercise
price
7.9
7.9
$5.54
$5.54
Number
exercisable
55,700
55,700
Weighted
average exercise
price
$5.59
$5.59
As of June 30, 2016, there was $260,000 of unearned stock-based compensation cost related to share-based
compensation arrangements granted under the 2012 Employee Plan. 15,000 and 44,000 options were granted during
the fiscal years ended June 30, 2016 and 2015, respectively. The total fair value of the options vesting during the
fiscal years ended June 30, 2016 and 2015 under this plan was $119,000 and $41,000, respectively.
2012 Non-Employee Stock Option Plan
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, 2016, 35,000 stock options were granted, 19,000 stock options were exercisable and
15,000 stock options were available for grant under this plan.
39
The following table reflects activity under the 2012 Non-Employee Plan for the fiscal years ended June 30,:
Outstanding, beginning of year
Granted
Terminated
Exercised
Outstanding, end of year
Exercisable, end of year
Weighted average fair value at grant date of options
granted
Total intrinsic value of options exercised
Total intrinsic value of options outstanding
Total intrinsic value of options exercisable
2016
2015
Weighted
average
exercise
price
$4.73
--
--
--
$4.73
$4.77
Options
35,000
--
--
--
35,000
19,000
n/a
n/a
$57,000
$30,000
Options
25,000
10,000
--
--
35,000
12,000
$2.86
n/a
$35,000
$11,000
Weighted
average
exercise
price
$4.88
4.37
--
--
$4.73
$4.80
The following table summarizes information about stock options outstanding under the 2012 Non-Employee Plan at
June 30, 2016:
Options outstanding
Options exercisable
Range of
exercise prices
Number
outstanding
Weighted average
remaining
contractual life
Weighted
average exercise
price
$4.37 - $4.88
35,000
35,000
7.5
7.5
$4.73
$4.73
Number
exercisable
19,000
19,000
Weighted
average exercise
price
$4.77
$4.77
As of June 30, 2016, there was $73,000 of unearned stock-based compensation cost related to share-based
compensation arrangements granted under the 2012 Non-Employee Plan. 0 and 10,000 options were granted during
the fiscal years ended June 30, 2016 and 2015, respectively. The total fair value of the options vesting during the
fiscal years ended June 30, 2016 and 2015 under this plan was $22,000 and $6,000, respectively.
2002 Employee Stock Option Plan
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, 2016, 1,471,480 stock options had been granted, 102,500 stock options
were exercisable and no further stock options were available for grant under this plan after the plans expiration in
October 2012.
40
The following table reflects activity under the 2002 Employee plan for the fiscal years ended June 30,:
Outstanding, beginning of year
Granted
Terminated/Lapsed
Exercised
Outstanding, end of period
Options
208,500
--
(38,500)
(67,500)
102,500
Exercisable, end of period
102,500
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
n/a
$42,000
$40,000
$40,000
2016
Weighted average
exercise price
$6.86
--
11.03
5.73
$6.04
$6.04
2015
Weighted average
exercise price
$6.51
--
5.24
--
$6.86
$6.86
Options
265,750
--
(57,250)
--
208,500
208,500
n/a
n/a
$6,000
$6,000
As of June 30, 2016, there was no unearned stock-based compensation cost related to share-based compensation
arrangements granted under the 2002 Non-Employee Plan. 67,500 and 0 stock options were exercised during the
fiscal years ended June 30, 2016 and 2015, respectively. The 67,500 stock options exercised during the fiscal year
ended June 30, 2015 were settled by exchanging 53,868 shares of the Company’s common stock which was
included in Treasury Stock upon receipt. No cash was received from option exercises for either of the fiscal years
ended June 30, 2016 and 2015 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 June
30, 2016:
Options outstanding and exercisable
Range of
exercise
prices
Number
outstanding
Weighted average
remaining contractual
life
Weighted
average
exercise price
$5.35-$6.62
102,500
102,500
0.7
0.7
$6.04
$6.04
NOTE 8 – Stockholders’ Equity Transactions
On September 16, 2014 the Company’s board of directors authorized the repurchase of up to 1 million of the
approximately 19.4 million shares of the Company’s common stock outstanding. The repurchase will be made from
time to time in the open market or in privately negotiated transactions subject to market conditions and the market
price of the common stock. Relative to the loan agreements described in Note 6, the Company’s lender gave its
consent to this stock repurchase plan. During the fiscal year ended June 30, 2016 the Company repurchased 192,767
shares of its outstanding common stock for a weighted average price of $5.73 per share. These repurchased shares
are included in the Company’s Treasury Stock as of June 30, 2016.
During fiscal 2016, certain employees exercised incentive stock options under the Company’s 2002 Plan totaling
67,500 shares. All 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
41
are owned by the optionees. The number of shares surrendered by the optionees was 53,868 and was based upon the
per share price on the effective date of the option exercise.
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 $111,000 and $122,000 for the years ended June 30, 2016 and 2015,
respectively.
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 2019. Minimum lease payments through the expiration dates of these leases, with the
exception of the land leases referred to below, are as follows:
Year Ending June 30,
Amount
2017
2018
2019
Total
$23,000
22,000
14,000
$59,000
Rent expense, with the exception of the land lease referred to below, totaled approximately $26,000 and $30,000 for
the fiscal years ended June 30, 2016 and 2015, 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, 2016, the Company was obligated under three employment agreements and one severance agreement.
The employment agreements are with the Company’s CEO, Senior Vice President of Sales and Marketing (“the SVP
of Sales”) and the Senior Vice President of Engineering (“the SVP of Engineering”). The employment agreement
with the CEO provides for an annual salary of $670,000, 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 of Sales expires in
October 2018 and provides for an annual salary of $315,000, a bonus arrangement for fiscal 2016 and, if terminated
by the Company without cause, severance of nine months’ salary and continued company-sponsored health
42
insurance for six months from the date of termination. The employment agreement with the SVP of Engineering
expires in August 2018 and provides for an annual salary of $285,000, a bonus arrangement and, if terminated by
the Company without cause, severance of nine month’s salary and continued company-sponsored health insurance
for six months from the date of termination. The severance agreement is with the Senior Vice President of
Operations and Finance and provides for, if terminated by the Company without cause or within three months of a
change in corporate control of the Registrant, severance of nine month’s salary, continued company-sponsored
health insurance for six months from the date of termination and certain non-compete and other restrictive
provisions.
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.
Financial Information Relating to Domestic and Foreign Operations
Sales to external customers(1):
Domestic
Foreign
Total Net Sales
Identifiable assets:
2016
2015
(in thousands)
$79,931
2,582
$82,513
$74,736
3,026
$77,762
United States
Dominican Republic (2)
Total Identifiable Assets
$51,272
13,497
$64,769
$50,998
14,039
$65,037
(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 (2016 = $10,076; 2015 = $10,546) and fixed assets (2016 = $3,311; 2015
= $3,347) located at the Company's principal manufacturing facility in the Dominican Republic.
NOTE 12 – Subsequent Events
The Company has evaluated subsequent events occurring after the date of the consolidated financial statements for
events requiring recording or disclosure in the financial statements.
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, 2016, 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, 2016.
43
Management’s Annual Report on Internal Control Over Financial Reporting. Management is responsible for the
preparation of the Company’s consolidated financial statements and related information. Management uses its best
judgment to ensure that the consolidated financial statements present fairly, in all material respects, the Company’s
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.
The Company’s 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 Internal Control — Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and other 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, 2016.
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 the Company 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, 2016
that has materially affected or is likely to materially affect our internal controls over financial reporting.
ITEM 9B: OTHER INFORMATION
None
44
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 2016 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.
Information regarding Equity Compensation Plan Information as of June 30, 2016 is included in Item 5.
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.
45
PART IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Omitted.
Upon written request of any stockholder of the Company, the Company will provide such shareholder a copy of the
Company’s Annual Report on Form 10-K for 2016, including the financial statements and schedules thereto, filed
with the Security and Exchange Commission. Any such request should be directed to Secretary, NAPCO Security
Technologies, Inc., 333 Bayview Avenue, Amityville, New York 11701. There will be no charge for such report
unless one or more exhibits thereto are requested, in which case the Company’s reasonable expenses of furnishing
such exhibits thereto are requested, in which case the Company’s reasonable expenses of furnishing such exhibits
may be charged.
46
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 8, 2016
NAPCO SECURITY TECHNOLOGIES, INC.
(Registrant)
By: /s/RICHARD SOLOWAY
Richard Soloway
Chairman of the Board of
Directors, President and Secretary
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and the dates indicated.
Signature
Title
Date
/s/RICHARD SOLOWAY
Richard Soloway
Chairman of the Board of Directors,
President and Secretary and Director
(Principal Executive Officer)
September 8, 2016
/s/KEVIN S. BUCHEL
Kevin S. Buchel
Senior Vice President of Operations
and Finance and Treasurer and Director
(Principal Financial and Accounting Officer)
September 8, 2016
/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
Director
September 8, 2016
Director
September 8, 2016
Director
September 8, 2016
Director
September 8, 2016
Director
September 8, 2016
47
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50
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
NON-GAAP MEASURES OF PERFORMANCE* (unaudited)
(In thousands, except for shares)
Net income
Add back provision for income taxes
Add back interest and other expense
Operating income (GAAP)
Adjustments for non-GAAP measures of performance:
Add back amortization of acquisition-related intangibles
Add back stock-based compensation expense
Adjusted non-GAAP operating income
Add back depreciation and other amortization
Adjusted EBITDA (earnings before interest,
taxes, depreciation and amortization)
Three months ended
June 30,
Twelve months ended
June 30,
2016
$3,438
288
30
3,756
131
11
3,898
251
2015
$3,340
65
57
3,462
166
–
3,628
260
2016
$5,773
371
179
6,323
529
103
6,955
891
2015
$4,845
216
202
5,281
666
100
6,047
904
$4,149
$3,888
$7,846
$6,951
Adjusted EBITDA per Diluted Share
$0.22
$0.20
$0.42
$0.36
Weighted average number of Diluted Shares outstanding
18,804,000
18,989,000
18,894,000
19,169,000
* Non-GAAP Information
Certain non-GAAP measures are included above, including EBITDA, non-GAAP operating income and Adjusted EBITDA. We define EBITDA
as GAAP net income plus income tax expense (benefit), net interest expense and depreciation and amortization expense. Non-GAAP
operating income does not include impairment of goodwill, amortization of intangibles, restructuring charges, stock-based compensation
expense and other infrequent or unusual charges. These non-GAAP measures are provided to enhance the user’s overall understanding of
our financial performance. By excluding these charges our non-GAAP results provide information to management and investors that is useful
in assessing NAPCO’s core operating performance and in comparing our results of operations on a consistent basis from period to period.
The presentation of this information is not meant to be a substitute for the corresponding financial measures prepared in accordance with
generally accepted accounting principles. Investors are encouraged to review the reconciliation of GAAP to non-GAAP financial measures
included in the above.
51
Officers
Directors
Investor Relations
Richard L. Soloway
Chairman, President and C.E.O.
Richard L. Soloway
Chairman, President and C.E.O.
Kevin S. Buchel
Senior Vice President of Operations
and Finance and Treasurer
Jorge D. Hevia
Senior Vice President of Sales
and Marketing
Michael Carrieri
Senior Vice President of
Engineering
Alfred DePierro
Vice President of Engineering
Microcomputer Applications
Raymond Gaudio
Vice President of Engineering
Software Applications
George R. Marks
President, Marks USA
Paul Stephen Beeber
Attorney
Randy B. Blaustein, Esq.
Tax Attorney
Arnold B. Blumenthal
Group Publisher Emeritus,
Security Dealer, Locksmith Ledger;
Publisher, Security Line
Kevin S. Buchel
Senior Vice President of Operations
and Finance and Treasurer
Donna A. Soloway
Security Industry Publicist
Andrew J. Wilder
Officer of Israeloff,
Trattner & Company
(Certified Public Accountants)
Common Stock Listing
Primary Bank
Nasdaq Global Market System®
(Symbol—”NSSC”)
HSBC Bank USA
534 Broadhollow Road
Melville, NY 11747
Copies of the Company’s Annual
Report, Forms 10-K and 10-Q and
other information filed with the
Securities and Exchange
Commission may be obtained
directly from the Corporation by
contacting:
NAPCO Security Technologies, Inc.
333 Bayview Avenue
Amityville, NY 11701
Attention: Corporate Secretary
Independent Accountants
Baker Tilly Virchow Krause, LLP
125 Baylis Road
Melville, NY 11747-3823
Legal Counsel
Forman & Shapiro LLP
1345 Avenue of the Americas
New York, NY 10105
Transfer Agent
Continental Stock Transfer &
Trust Co.
17 Battery Place
New York, NY 10004
w w w. n a p c o s e c u r i t y. c o m
(NASDAQ:NSSC)