UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended June 30, 2018
or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition period from ___ to___
Commission File Number 0-10004
NAPCO SECURITY TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
333 Bayview Avenue, Amityville, New York
(Address of principal executive offices)
Registrant's telephone number, including area code: (631) 842-9400
Securities registered pursuant to Section 12(b) of the Act:
11-2277818
(I.R.S. Employer I.D. Number)
11701
(Zip Code)
Common Stock, par value $.01 per share
(Title of Each Class)
The NASDAQ Stock Market LLC
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an
emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of December 31, 2017, 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 $102,996,416.
As of September 12, 2018, 18,731,582 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 2018 Annual Meeting of Stockholders.
PART I
ITEM 1: BUSINESS.
NAPCO Security Technologies, Inc. ("NAPCO" or the "Company") was incorporated in December 1971 in the State of Delaware. Its executive offices are
located at 333 Bayview Ave, Amityville NY 11701. Its telephone number is (631) 842-9400.
The Company is a diversified manufacturer of security products, encompassing access control systems, door-locking products, intrusion and fire alarm
systems and video surveillance products for commercial and residential use. The Company also provides wireless communication service for intrusion and
fire alarm systems. These products are used for commercial, residential, institutional, industrial and governmental applications, and are sold worldwide
principally to independent distributors, dealers and installers of security equipment.
Website Access to Company Reports
Copies of our filings under the Securities Exchange Act of 1934 (including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments to these reports) are available free of charge on our website (www.napcosecurity.com) on the same day they are electronically
filed with the Securities and Exchange Commission.
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.
Cellular communication devices. A cellular communication device connects to the communicator and is used in lieu of, or in addition to, a landline for
communicating with a central monitoring station.
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.
Cellular communication services. The Company provides cellular access for the cellular communication devices described above. These services are provided
and invoiced on a month to month basis.
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 "Operating expenses" in the consolidated statements of operations. These amounts, previously recorded in cost of sales have been
reclassified to research and development conform with the current period presentation. During the fiscal years ended June 30, 2018 and 2017, the Company
expended approximately $6,630,000 and $6,723,000, 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, 2018, the Company had 1,081 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 54%, and 49% of the Company's total sales for the fiscal years ended June 30, 2018 and 2017, respectively. The remaining
revenues are primarily from installers and governmental institutions. The Company's sales representatives periodically contact existing and potential
customers to introduce new products and create demand for those as well as other Company products. These sales representatives, together with the
Company's technical personnel, provide training and other services to wholesalers and distributors so that they can better service the needs of their customers.
In addition to direct sales efforts, the Company advertises in technical trade publications and participates in trade shows in major United States and European
cities.
In the ordinary course of the Company's business the Company grants extended payment terms to certain customers. The Company had one customer with an
accounts receivable balance that comprised 22% and 24% of the Company’s accounts receivable at June 30, 2018 and 2017, respectively. Sales to this
customer comprised 10% and 13% of net sales in fiscal years ended June 30, 2018 and 2017, respectively. The Company had another customer with an
accounts receivable balance that comprised 11% of the Company’s accounts receivable at June 30, 2018. Sales to this customer did not exceed 10% for fiscal
years ended June 30, 2018 or 2017. 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 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. 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 $2,151,000 and $922,000 existed as of
June 30, 2018 and 2017, respectively. The Company expects to fill the entire backlog that existed as of June 30, 2018 during fiscal 2019.
Government Regulation
The Company's telephone dialers, microwave transmitting devices utilized in its motion detectors and any new communication equipment that may be
introduced from time to time by the Company must comply with standards promulgated by the Federal Communications Commission ("FCC") in the United
States and similar agencies in other countries where the Company offers such products, specifying permitted frequency bands of operation, permitted power
output and periods of operation, as well as compatibility with telephone lines. Each new Product that is subject to such regulation must be tested for
compliance with FCC standards or the standards of such similar governmental agencies. Test reports are submitted to the FCC or such similar agencies for
approval. Cost of compliance with these regulations has not been material.
Patents and Trademarks
The Company has been granted several patents and trademarks relating to the Products. While the Company obtains patents and trademarks as it deems
appropriate, the Company does not believe that its current or future success is dependent on its patents or trademarks.
Foreign Sales
The revenues and identifiable assets attributable to the Company's domestic and foreign operations for its last two fiscal years are summarized in the
following table:
Financial Information Relating to Domestic and Foreign Operations
Sales to external customers(1):
Domestic
Foreign
Total Net Sales
Identifiable assets:
United States
Dominican Republic (2)
Total Identifiable Assets
Fiscal Year ended June 30,
2018
2017
(in thousands)
$
$
89,490 $
2,256
91,746 $
84,820
2,554
87,374
As of June 30,
2018
2017
$
$
52,928 $
20,341
73,269 $
55,550
15,312
70,862
(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 (2018 = $16,592; 2017 = $11,831) and fixed assets (2018 = $3,462; 2017 = $3,233) 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.
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. Most of these companies may have substantially greater financial and other resources than the Company. The Company competes
primarily on the basis of the features, quality, reliability and pricing of, and the incorporation of the latest innovative and technological advances into, its
products. The Company also competes by offering technical support services to its customers. In addition, the Company competes on the basis of its
expertise, its proven products, its reputation and its ability to provide products to customers on a timely basis. The inability of the Company to compete with
respect to any one or more of the aforementioned factors could have an adverse impact on the Company's business.
Our Business Could be Materially Adversely Affected as a Result of Offering Extended Payment Terms to Customers
We regularly grant credit terms beyond 30 days to certain customers. These terms are offered in an effort to keep a full line of our products in-stock at our
customers’ locations. The longer 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 33% 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 expense. 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 withholding 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
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, 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.
If We are Unable to Successfully Remediate any Material Weakness in our Internal Control over Financial Reporting, or Identify any Additional Material
Weaknesses, the Accuracy and Timing of our Financial Reporting may be Adversely Affected, We May be Unable to Maintain Compliance with Securities
Law Requirements Regarding Timely Filing of Periodic Reports in Addition to Applicable Stock Exchange Listing Requirements, and our Stock Price May
Decline Materially as a Result.
In connection with the audit of our consolidated financial statements for the year ended June 30, 2018, our management and independent registered public
accounting firm concluded that there was a material weakness in our internal control over financial reporting. A material weakness is a significant deficiency,
or a combination of significant deficiencies, in internal control over financial reporting such that it is reasonably possible that a material misstatement of the
annual or interim financial statements will not be prevented or detected on a timely basis. The one material weakness identified related to controls over
financial reporting regarding controls related to a lack of supervision and review to ensure proper internal control over financial reporting.
While we expect to take the measures necessary to address the underlying causes of this material weakness, we cannot at this time estimate how long it will
take and our efforts may not prove to be successful in remediating this material weakness. While we have not incurred and do not expect to incur material
expenses specifically related to the remediation of this material weakness, actual expenses may exceed our current estimates and overall costs of compiling
the system and processing documentation necessary to assess the effectiveness of our internal control over financial reporting may be material.
We cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses. If we are unable to successfully
remediate any material weakness in our internal control over financial reporting, or identify any additional material weaknesses that may exist, the accuracy
and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely
filing of periodic reports in addition to applicable stock exchange listing requirements, and our stock price may decline materially as a result.
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
conducts certain transactions 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., 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, 2018, a majority of the Company's products were manufactured at this facility,
utilizing U.S. quality control standards.
Management believes that these facilities are more than adequate to meet the needs of the Company in the foreseeable future.
ITEM 3: LEGAL PROCEEDINGS.
There are no pending or threatened material legal proceedings to which NAPCO or its subsidiaries or any of their property is subject.
In the normal course of business, the Company is a party to claims and/or litigation. Management believes that the settlement of such claims and/or litigation,
considered in the aggregate, will not have a material adverse effect on the Company's financial position and results of operations.
ITEM 4: MINE SAFETY DISCLOSURE.
Not Applicable.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
Principal Market
NAPCO's Common Stock is traded on the NASDAQ Stock Market, Global Market System, under the symbol NSSC.
The tables set forth below reflect the range of high and low sales of the Common Stock in each quarter of the past two fiscal years as reported by the
NASDAQ Global Market System.
Common Stock
High
Low
Common Stock
High
Low
Sept. 30
Quarter Ended Fiscal 2018
March 31
Dec. 31
June 30
10.00 $
7.50 $
10.50 $
7.90 $
11.70 $
8.65 $
14.80
10.50
Sept. 30
Quarter Ended Fiscal 2017
March 31
Dec. 31
June 30
7.48 $
6.36 $
8.55 $
7.00 $
10.70 $
8.05 $
10.65
8.80
$
$
$
$
Approximate Number of Security Holders
The number of holders of record of NAPCO's Common Stock as of September 11, 2018 was 89 (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.
Equity Compensation Plan Information as of June 30, 2018
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)
85,000 $
—
85,000 $
7.01
—
7.01
821,900(1)
—
821,900(1)
(1) In December 2012, the stockholders approved the 2012 Employee Stock Option Plan which authorizes the granting of awards, the exercise of which
would allow up to an aggregate of 950,000 shares of the Company's common stock to be acquired by the holders of such awards. In December 2012,
the stockholders also approved the 2012 Non-Employee Stock Option Plan which authorizes the granting of awards, the exercise of which would
allow up to an aggregate of 50,000 shares of the Company's common stock to be acquired by the holders of such awards.
ITEM 6: SELECTED FINANCIAL DATA.
The table below summarizes selected financial information. For further information, refer to the audited consolidated financial statements and the notes
thereto beginning on page FS-1 of this report.
Statement of earnings data:
Net Sales
Gross Profit (3)
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
$
$
$
$
$
Fiscal Year Ended and at June 30
(In thousands, except share and per share data)
2016
2015
2017
87,374 $
36,301
6,378
5,599
2,448
(1,414)
(1,385)
82,513 $
33,753
6,323
5,773
9,160
(693)
(7,008)
77,762 $
31,429
5,281
4,845
3,887
(730)
(3,294)
2018
91,746 $
37,995
8,414
7,649
7,864
(1,280)
(4,730)
2014
74,382
28,772
4,316
3,476
4,743
(753)
(4,736)
0.41 $
0.41 $
0.30 $
0.30 $
0.31 $
0.31 $
0.25 $
0.25 $
0.18
0.18
18,788,000
18,825,000
.00 $
18,809,000
18,854,000
.00 $
18,874,000
18,894,000
.00 $
19,164,000
19,169,000
.00 $
19,392,000
19,428,000
.00
44,301 $
73,269
—
63,453
40,798 $
70,862
3,500
56,889
36,888 $
64,769
4,500
51,273
35,590 $
65,037
9,100
46,504
33,436
63,364
10,200
43,752
(1) The Company has never paid a dividend on its common stock.
(2) Working capital is calculated by deducting Current Liabilities from Current Assets.
(3) Prior period balances have been reclassified to conform with the current period presentation.
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, video surveillance products for commercial and residential use and wireless communication service for intrusion and fire alarm systems. These
products are used for commercial, residential, institutional, industrial and governmental applications, and are sold worldwide principally to independent
distributors, dealers and installers of security equipment. International sales accounted for approximately 2% and 3% of our revenues for the fiscal years
ended June 30, 2018 and 2017, 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 a given fiscal year to contribute materially to revenue during that same fiscal year, but should benefit the Company over future years. In
general, the new products introduced by the Company are initially shipped in limited quantities, and increase over time. Prices and manufacturing costs tend
to decline over time as products and technologies mature.
Economic and Other Factors
We are subject to the effects of general economic and market conditions. In the event that the U.S. or international economic conditions deteriorate, our
revenue, profit and cash-flow levels could be materially adversely affected in future periods. In the event of such deterioration, many of our current or
potential future customers may experience serious cash flow problems and as a result may, modify, delay or cancel purchases of our products. Additionally,
customers may not be able to pay, or may delay payment of, accounts receivable that are owed to us. If such events do occur, they may result in our fixed and
semi-variable expenses becoming 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. The timing
of any significant 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 2018 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 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% and 24% of the Company’s accounts receivable at June 30,
2018 and 2017, respectively. Sales to this customer comprised 10% and 13% of net sales in the fiscal years ended June 30, 2018 and 2017, respectively.
The Company had another customer with an accounts receivable balance that comprised 11% of the Company’s accounts receivable at June 30, 2018.
Sales to this customer did not exceed 10% of net sales in any of the fiscal years ended June 30, 2018 and 2017.
In the ordinary course of business, we have established a reserve for doubtful accounts and customer deductions in the amount of $195,000 and $155,000
as of June 30, 2018 and 2017, 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 net realizable 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
Impairment of Long-lived Assets– The Company reviews its long-lived assets and certain identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset group to future net undiscounted cash flows expected to be generated by the asset group. If such
assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. As of June 30, 2018 and
2017, the Company has determined that no impairment of long-lived assets exists.
The Company evaluates its indefinite 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. The Company has concluded that no impairment of intangible assets occurred during the years ended June
30, 2018 and 2017.
Income Taxes
The Company has identified the United States and New York State as its major tax jurisdictions. The fiscal 2015 and forward years are still open for
examination. In addition, the Company has a wholly-owned subsidiary which operates in a Free Zone in the Dominican Republic (“DR”) and is exempt
from DR income tax.
For the year ended June 30, 2018, the Company recognized a net income tax expense of $684,000. During the year ending June 30, 2018 the Company
increased its reserve for uncertain income tax positions by $38,000. 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, 2018, the Company had accrued interest totaling $0 and $221,000 of
unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. The Company
claims research and development (“R&D”) tax credits on eligible research and development expenditures. The R&D 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. 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.
On December 22, 2017, the U.S. federal government enacted comprehensive tax legislation (“the “Tax Act”) which significantly revises the U.S.
corporate income tax law by, among other things, lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax
system, imposing a one-time transition tax on foreign unremitted earnings, and setting limitations on deductibility of certain costs.
Due to the complexities involved in accounting for the Tax Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118
requires that the company include in its financial statements a reasonable estimate of the impact of the Tax Act on earnings to the extent such estimate
has been determined. Accordingly, the company recorded the following reasonable estimates of the tax impact in its earnings for the year ended June 30,
2018.
(a) For the year ended June 30, 2018, the company accrued $381,000 of tax expense for the Tax Act’s one-time transition tax on the foreign
subsidiaries’ accumulated, unremitted earnings.
(b) For the year ended June 30, 2018, the company accrued $136,000 in provisional tax benefit related to the net change in deferred tax stemming
from the Tax Act’s reduction of the U.S. federal tax rate from 35% to 21%.
The Tax Act also includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries. The company will be subject to the
GILTI provisions effective beginning July 1, 2018 and is in the process of analyzing their effects, including how to account for the GILTI provision from
an accounting policy standpoint.
The final impact on the company from the Tax Act’s transition tax legislation may differ from the aforementioned reasonable estimate of $381,000 due to
the complexity of calculating and supporting with primary evidence such U.S. tax attributes as accumulated foreign earnings and profits. Such
differences could be material, due to, among other things, changes in interpretations of the Tax Act, future legislative action to address questions that
arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or
changes to estimates the company has utilized to calculate the transition tax's reasonable estimate.
Pursuant to SAB118, the company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of
the related tax impacts. Accordingly, the company accrued the transition tax of $381,000 and a tax benefit related to the net change in deferred tax
liabilities $136,000 for the year ended June 30, 2018 based on a reasonable estimate. The company will continue to calculate the impact of the U.S. Tax
Act and will record any resulting tax adjustments during fiscal 2019. Additionally, the company will elect to pay the transition tax in installments over the
period of 8 years, pursuant to the guidance of the new Internal Revenue Code Section 965.
Liquidity and Capital Resources
The Company's cash on hand as of June 30, 2017 combined with proceeds from operating activities during fiscal 2018 were adequate to meet the Company's
capital expenditure needs and debt obligations during fiscal 2018. 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, 2018, $0 was outstanding under this revolving line of credit. As of June 30, 2018, the Company's unused sources of funds consisted
principally of $5,308,000 in cash and cash equivalents and $11,000,000 unused balance available under its revolving line of credit.
During the year ended June 30, 2018 the Company utilized its cash on hand at June 30, 2017 ($3,454,000) and a portion of its cash provided by operations
($2,663,000 of $7,864,000) to repay outstanding debt ($3,500,000), repurchase treasury stock ($1,337,000) and purchase property, plant and equipment
($1,280,000).
As of June 30, 2018, long-term debt consisted of a revolving credit facility of $11,000,000 (the “Revolving Credit Facility”) which expires in June 2021. The
Company’s long-term debt is described more fully in Note 6 to the consolidated financial statements.
The Revolving Credit Facility 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 restated agreement.
Outstanding balances and interest rates as of June 30, 2018 and June 30, 2017 are as follows (dollars in thousands):
June 30, 2018
June 30, 2017
Revolving line of credit
Term loans
Total debt
Outstanding Interest Rate Outstanding Interest Rate
— $
$
—
— $
3,500
—
3,500
—
—
—
2.2%
—
2.2%
$
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,
2018
5.7 to 1
4.0 to 1
0.0 to 1
2017
4.9 to 1
4.3 to 1
.06 to 1
As of June 30, 2018, 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 $3,503,000 to $44,301,000 at June 30, 2018 from $40,798,000 at June 30, 2017. Working capital is calculated
by deducting Current Liabilities from Current Assets.
Accounts Receivable. Accounts Receivable increased by $2,463,000 to $22,738,000 at June 30, 2018 as compared to $20,275,000 at June 30, 2017. The
increase in Accounts Receivable was due primarily to an increase in sales for the quarter ended June 30, 2018 as compared to the same quarter a year ago.
Inventories. Inventories, which include both current and non-current portions, decreased by $1,645,000 to $28,934,000 at June 30, 2018 as compared to
$30,579,000 at June 30, 2017. The decrease was due primarily to the higher sales levels in the quarter ended June 30, 2018 as compared to the same period a
year ago.
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses, not including income taxes payable, decreased by $1,075,000 to
$9,109,000 as of June 30, 2018 as compared to $10,184,000 at June 30, 2017. This increase is primarily due to the decrease in inventory as described above.
Off-Balance Sheet Arrangements
The Company does not maintain any off-balance sheet arrangements.
Results of Operations
Fiscal 2018 Compared to Fiscal 2017
Net sales
Gross profit (1)
Gross profit as a % of net sales
Research and development (1)
Selling, general and administrative
Selling, general and administrative as a % of net sales
Income from operations
Interest expense, net
Provision for income taxes
Net income
Fiscal year ended June 30, (dollars in thousands)
$
2018
2017
91,746
37,995
$
41.4%
6,630
22,951
87,374
36,301
41.5%
6,723
23,200
25.0%
26.6%
8,414
81
684
7,649
6,378
83
696
5,599
% Increase/
(decrease)
5.0%
4.7%
(0.2)%
(1.4)%
(1.1)%
(6.0)%
31.9%
(2.4)%
(1.7)%
36.6%
(1) Prior period balances have been reclassified to conform with the current period presentation.
Net sales in fiscal 2018 increased by $4,372,000 to $91,746,000 as compared to $87,374,000 in fiscal 2017. The increase in net sales was primarily due to
increased sales of the Company’s alarm communication services ($4,064,000) and Continental brand access control products ($1,247,000) as partially offset
by decreases in Napco brand intrusion products ($688,000), Alarm Lock brand door-locking products ($164,000) and Marks brand door-locking products
($87,000).
The Company's gross profit increased by $1,694,000 to $37,995,000 or 41.4% of net sales in fiscal 2018 as compared to $36,301,000 or 41.5% of net sales in
fiscal 2017. Gross profit was primarily affected by the increase in net sales as discussed above as partially offset by increased salary and freight expenses.
Research and Development expenses remained relatively constant at $6,630,000 in fiscal 2018 as compared to $6,723,000 in fiscal 2017.
Selling, general and administrative expenses for fiscal 2018 decreased by $249,000 to 22,951,000 as compared to $23,200,000 in fiscal 2017. Selling, general
and administrative expenses as a percentage of net sales decreased to 25.0% in fiscal 2018 from 26.6% in fiscal 2017. The decreases in dollars and as a
percentage of sales resulted primarily from decreases in advertising and tradeshow expenditures. The decrease as a percentage of sales was also the result of
the increase in sales.
Interest expense for fiscal 2018 remained relatively constant at $81,000 as compared to $83,000 for the same period a year ago.
The Company’s provision for income taxes for fiscal 2018 remained relatively constant at $684,000 as compared to $696,000 for the same period a year ago.
The Company’s effective tax rate decreased to 8% for fiscal 2018 as compared to 11% for fiscal 2017. The decrease in the effective tax rate was due primarily
to certain provisions in the H. R. 1, Tax Cuts and Jobs Act, enacted on December 22, 2017, which reduced the U. S. Corporate income tax rate to 21%
Net income for fiscal 2018 increased by $2,050,000 to $7,649,000 as compared to $5,599,000 in fiscal 2017. 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) 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, 2018, an aggregate principal amount of approximately $0 was outstanding under the
Company's credit facilities with a weighted average interest rate of approximately n/a%. 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 $0 in interest that year.
All foreign sales transactions by the Company are denominated in U.S. dollars. As such, the Company has shifted foreign currency exposure onto its foreign
customers. As a result, if exchange rates move against foreign customers, the Company could experience difficulty collecting unsecured accounts receivable,
the cancellation of existing orders or the loss of future orders. The foregoing could materially adversely affect the Company's business, financial condition
and results of operations. We are also exposed to foreign currency risk relative to expenses incurred in Dominican Pesos ("RD$"), the local currency of the
Company's production facility in the Dominican Republic. The result of a 10% strengthening or weakening in the U.S. dollar to the RD$ would result in an
annual increase or decrease in income from operations of approximately $700,000.
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
Management Report on Internal Control
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2018 and 2017
Consolidated Statements of Income for the Fiscal Years Ended June 30, 2018 and 2017
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 2018 and 2017
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2018 and 2017
Notes to Consolidated Financial Statements
Page
FS-1
FS-2
FS-4
FS-6
FS-7
FS-8
FS-9
Management Report on Internal Control
Management has prepared and is responsible for our consolidated financial statements and related notes. Management is also responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended. Napco Technologies, Inc. (the “Company”) internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are being made only in accordance with the authorizations of management and
directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to
the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management
identified the following material weakness: A lack of supervision and review to ensure proper internal control over financial reporting.
Management conducted an assessment of the effectiveness of internal control over financial reporting based on the framework in Internal Control –
Integrated Framework (2013) as issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management
determined that as of June 30, 2018, the Company did not maintain effective internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of June 30, 2018 has been audited by Baker Tilly Virchow Krause, LLP, an independent
registered public accounting firm, as stated in their report included herein.
FS-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Napco Security Technologies, Inc. and Subsidiaries:
Adverse Opinion on Internal Control over Financial Reporting
We have audited Napco Security Technologies, Inc. and Subsidiaries (the “Company’s”) internal control over financial reporting as of June 30, 2018, based
on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). In our opinion, because of the effect of the material weakness described in the following paragraph on the achievement of the
objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of June 30, 2018, based on criteria
established in Internal Control – Integrated Framework (2013) issued by COSO.
A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely
basis. The following material weakness has been identified and included in management’s assessment: a material weakness related to the lack of supervision
and review to ensure proper internal control over financial reporting. This material weakness was considered in determining the nature, timing, and extent of
audit tests applied in our audit of the 2018 consolidated financial statements, and this report does not affect our report dated September 13, 2018 on those
consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated
balance sheets and the related consolidated statements of income, stockholders’ equity, and cash flows of the Company, and our report dated September 13,
2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP
New York, New York
September 13, 2018
FS-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Napco Security Technologies, Inc. and Subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Napco Security Technologies, Inc. and Subsidiaries (the "Company") as of June 30, 2018
and 2017, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the two-year period ended June 30,
2018, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each
of the years in the two-year period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the Company's
internal control over financial reporting as of June 30, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 13, 2018, expressed an adverse opinion.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. 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, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP
We have served as the Company's auditor since 2009.
New York, New York
September 13, 2018
FS-3
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2018 and 2017
(In Thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $195 and $155 at June 30, 2018 and 2017,
respectively, and other reserves
Inventories
Prepaid expenses and other current assets
Total Current Assets
Inventories - non-current
Deferred income taxes
Property, plant and equipment, net
Intangible assets, net
Other assets
TOTAL ASSETS
See accompanying notes to consolidated financial statements.
FS-4
2018
2017
$
5,308 $
3,454
22,738
24,533
1,124
20,275
26,212
1,330
53,703
51,271
4,401
564
6,791
7,545
265
4,367
644
6,543
7,916
121
$
73,269 $
70,862
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2018 and 2017
(In Thousands, Except Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Accrued expenses
Accrued salaries and wages
Accrued income taxes
Total Current Liabilities
Long-term debt, net of current maturities
Accrued income taxes
Total Liabilities
COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY
Common Stock, par value $0.01 per share; 40,000,000 shares authorized; 21,204,327 and 21,174,507 shares
issued; and 18,729,082 and 18,844,657 shares outstanding, respectively
Additional paid-in capital
Retained earnings
Less: Treasury Stock, at cost (2,475,245 and 2,329,850 shares, respectively)
TOTAL STOCKHOLDERS' EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
FS-5
2018
2017
4,807 $
2,112
2,190
293
9,402
—
414
9,816
212
16,890
59,420
(13,069)
63,453
73,269 $
5,653
2,209
2,322
289
10,473
3,500
—
13,973
212
16,638
51,771
(11,732)
56,889
70,862
$
$
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended June 30, 2018 and 2017
(In Thousands, Except Share and Per Share Data)
Net sales:
Equipment revenues
Service revenues
Cost of sales:
Equipment related expenses
Service related expenses
Gross Profit
Research and development
Selling, general, and administrative expenses
Operating Income
Other expense:
Interest expense, 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
$
$
$
$
2018
2017
79,744
12,002
91,746
50,962
2,789
53,751
37,995
6,630
22,951
8,414
81
8,333
684
7,649 $
0.41 $
0.41 $
79,436
7,938
87,374
49,102
1,971
51,073
36,301
6,723
23,200
6,378
83
6,295
696
5,599
0.30
0.30
18,788,000
18,825,000
18,809,000
18,854,000
See accompanying notes to consolidated financial statements.
FS-6
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Fiscal Years Ended June 30, 2018 and 2017
(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, 2016
Stock Options Exercised
Stock-based compensation expense
Net income
BALANCE June 30, 2017
Repurchase of Treasury Shares
Stock Options Exercised
Stock-based compensation expense
Net income
BALANCE June 30, 2018
21,116,743 $
57,764
—
—
21,174,507 $
—
29,820
—
—
21,204,327 $
211 $
1
—
—
212 $
—
—
—
—
212 $
(86)
102
—
16,622 (2,329,850) $
—
—
—
16,638 (2,329,850) $
(145,395)
—
—
—
16,890 (2,475,245) $
—
106
146
—
(11,732) $
—
—
—
(11,732) $
(1,337)
—
—
—
(13,069) $
46,172 $
—
—
5,599
51,771 $
—
—
—
7,649
59,420 $
51,273
(85)
102
5,599
56,889
(1,337)
106
146
7,649
63,453
See accompanying notes to consolidated financial statements.
FS-7
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended June 30, 2018 and 2017 (In Thousands)
2018
2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
7,649 $
Depreciation and amortization
Change to inventory obsolescence reserve
Provision for doubtful accounts
Deferred income taxes
Non-cash stock based compensation expense
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Tax deficiency from stock-based awards
Other assets
Accounts payable, accrued expenses, accrued salaries and wages, accrued income taxes
Net Cash Provided by Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment
Net Cash Used in Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt
Proceeds from long-term debt
Proceeds from stock option exercises
Tax deficiency from stock-based awards
Cash paid for purchase of treasury stock
Net Cash Used in Financing Activities
Net Change in Cash and Cash Equivalents
CASH AND CASH EQUIVALENTS - Beginning
CASH AND CASH EQUIVALENTS - Ending
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net
Income taxes paid
Surrender of Common Shares
1,409
788
40
80
146
(2,503)
857
206
—
(151)
(656)
7,865
(1,280)
(1,280)
(3,500)
—
106
—
(1,337)
(4,731)
1,854
3,454
5,308 $
82 $
186 $
11
$
$
$
5,599
1,374
(457)
10
361
102
(1,273)
(4,785)
(394)
134
—
1,777
2,448
(1,414)
(1,414)
(2,800)
1,500
49
(134)
—
(1,385)
(351)
3,805
3,454
88
54
86
See accompanying notes to consolidated financial statements.
FS-8
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. The Company also provides
wireless communication service for intrusion and fire alarm systems. These products are used for commercial, residential, institutional, industrial and
governmental applications, and are sold worldwide principally to independent distributors, dealers and installers of security equipment.
The Company's fiscal year begins on July 1 and ends on June 30. Historically, the end users of the Company's products want to install its products prior to the
summer; therefore sales of its products historically peak in the period April 1 through June 30, the Company's fiscal fourth quarter, and are reduced in the
period July 1 through September 30, the Company's fiscal first quarter. In addition, demand is affected by the housing and construction markets.
Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of Napco Security Technologies, Inc. and all of its wholly-owned subsidiaries. All inter-company
balances and transactions have been eliminated in consolidation. Amounts previously recorded in cost of sales totaling $6,723,000 have been reclassified to
research and development from cost of sales to conform with the current period presentation.
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 and cash equivalents, certificates of deposits, current receivables and payables and certain other short-term financial instruments
approximate their fair value as of June 30, 2018 due to their short-term maturities.; Long-Term Debt - The carrying amount of the Company’s long-term debt
at June 30, 2018 in the amount of $0 approximates fair value.
Cash and Cash Equivalents
Cash and cash equivalents include approximately $460,000 of short-term time deposits at June 30, 2018 and June 30, 2017. 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, 2018 and June 30, 2017. The Company has historically not
experienced any credit losses with balances in excess of FDIC limits.
FS-9
Accounts Receivable
Accounts receivable is stated net of the reserves for doubtful accounts of $195,000 and $155,000 and for returns and other allowances of $1,765,000 and
$1,250,000 as of June 30, 2018 and June 30, 2017, respectively. Our reserves for doubtful accounts and for returns and other allowances are subjective critical
estimates that have a direct impact on reported net earnings. These reserves are based upon the evaluation of our accounts receivable aging, specific
exposures, sales levels and historical trends.
Inventories
Inventories are valued at the lower of cost or net realizable 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. Infinite-lived intangible assets are reviewed for impairment at least annually at the Company’s fiscal year end of June 30 or
more often whenever there is an indication that the carrying amount may not be recovered.
The Company’s acquisition of substantially all of the assets and certain liabilities of G. Marks Hardware, Inc. (“Marks”) in August 2008 included intangible
assets recorded at fair value on the date of acquisition. The intangible assets are amortized over their estimated useful lives of twenty years (customer
relationships) and seven years (non-compete agreement). The Marks trade name was deemed to have an indefinite life.
FS-10
Changes in intangible assets are as follows (in thousands):
Customer relationships
Trade name
Cost
9,800 $
5,900
15,700 $
$
$
June 30, 2018
Accumulated
amortization
Net book
value
June 30, 2017
Accumulated
amortization
Net book
value
Cost
(8,155) $
—
(8,155) $
1,645 $
5,900
7,545 $
9,800 $
5,900
15,700 $
(7,784) $
—
(7,784) $
2,016
5,900
7,916
Amortization expense for intangible assets subject to amortization was approximately $371,000 and $441,000 for the fiscal years ended June 30, 2018 and
2017, respectively. Amortization expense for each of the next five fiscal years is estimated to be as follows: 2019 - $313,000; 2020 -$264,000; 2021 -
$223,000; 2022 - $188,000; and 2023 $159,000. The weighted average amortization period for intangible assets was 10.1 years and 11.1 years at June 30,
2018 and 2017, respectively.
Long-Lived Assets
Long-lived assets, including indefinite-lived intangible 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.
FS-11
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 8%, and 7% for the fiscal years ended June 30, 2018 and 2017, 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, 2018 and 2017 was $2,011,000 and $2,444,000, respectively.
Research and Development Costs
Research and development costs incurred by the Company are charged to expense as incurred and are included in "Operating expenses" in the consolidated
statements of operations. Company-sponsored research and development expense for the fiscal years ended June 30, 2018 and 2017 was $6,630,000 and
$6,723,000, respectively. These amounts, previously recorded in cost of sales have been reclassified to research and development conform with the current
period presentation.
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. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company measures and
recognizes the tax implications of positions taken or expected to be taken in its tax returns on an ongoing basis.
Net Income Per Share
Basic net income per common share (Basic EPS) is computed by dividing net income by the weighted average number of common shares outstanding.
Diluted net income per common share (Diluted EPS) is computed by dividing net income by the weighted average number of common shares and dilutive
common share equivalents and convertible securities then outstanding.
The following provides a reconciliation of information used in calculating the per share amounts for the fiscal years ended June 30 (in thousands, except per
share data):
Basic EPS
$
7,649 $
5,599
18,788
18,809 $
0.41 $
0.30
Net Income
Weighted Average
Shares
Net Income per
Share
2018
2017
2018
2017
2018
2017
Effect of Dilutive Securities:
Stock Options
—
—
37
45
—
Diluted EPS
$
7,649 $
5,599
18,825
18,854 $
0.41 $
—
0.30
FS-12
Options to purchase 217 and 0 shares of common stock for the fiscal years ended June 30, 2018 and 2017, 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 $146,000 and $102,000 were recognized for fiscal years ended June 30, 2018 and 2017, respectively. The effect on both
Basic and Diluted Earnings per share was $0.01 for each of the fiscal years ended June 30, 2018 and 2017.
Foreign Currency
The Company has determined the functional currency of all foreign subsidiaries is the U.S Dollar. All foreign operations are considered a direct and integral
part or extension of the Company's operations. The day-to-day operations of all foreign subsidiaries are dependent on the economic environment of the U.S
Dollar. Therefore, no realized and unrealized gains and losses associated with foreign currency translation is recorded for the fiscal years ended June 30, 2018
or 2017.
Comprehensive Income
For the fiscal years ended June 30, 2018 and 2017, 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 ($476,000 and $461,000 in the fiscal years ended June 30, 2018
and 2017, respectively) and classifies the costs associated with these revenues in cost of sales ($988,000 and $947,000 in fiscal years ended June 30, 2018 and
2017).
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 does not expect this to have a material effect on its consolidated results of operations and financial condition.
.
FS-13
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.
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
was effective for the Company’s quarter ended September 30, 2017. We have adopted ASU 2015-11 during the quarter ended September 30, 2017.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers
(Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. This standard supersedes existing revenue recognition
standards and requires entities 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. The new standard further requires new expanded disclosures
about contracts with customers. The standard 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 use the latter transition method. The
standard is effective for fiscal years beginning after December 15, 2017. As such the standard is effective for the Company in fiscal 2019.
The Company substantially completed its analysis of the impact of the standard on the Company’s consolidated financial statements and determined that the
Company’s revenue recognition will change with regard to the recognition and measurement of certain types of variable consideration. As a result the
Company expects to record a cumulative effect charge to retained earnings of as of the adoption date of July 1, 2018. The Company is in the process of
finalizing the cumulative effect change and will also expand its disclosures as necessary, as required by the new standard.
FS-14
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% and 24% of the Company’s accounts receivable at June 30, 2018 and
2017, respectively. Sales to this customer comprised 10% and 13% of net sales in the fiscal years ended June 30, 2018 and 2017, respectively. The Company
had another customer with an accounts receivable balance that comprised 11% of the Company’s accounts receivable at June 30, 2018. Sales to this customer
did not exceed 10% of net sales in any of the fiscal years ended June 30, 2018 and 2017.
NOTE 3 - Inventories
Inventories, net of reserves are valued at lower of cost (first-in, first-out method) or net realizable value. The Company regularly reviews parts and finished
goods inventories on hand and, when necessary, records a provision for excess or obsolete inventories. The Company also regularly reviews the period over
which its inventories will be converted to sales. Any inventories expected to convert to sales beyond 12 months from the balance sheet date are classified as
non-current.
Inventories, net of reserves consist of the following (in thousands):
Component parts
Work-in-process
Finished product
Classification of inventories, net of reserves:
Current
Non-current
NOTE 4 - Property, Plant, and Equipment
Property, plant and equipment consist of the following (in thousands):
June 30,
2018
2017
16,495 $
4,491
7,948
28,934 $
16,638
4,415
9,526
30,579
24,533 $
4,401
28,934 $
26,212
4,367
30,579
$
$
$
$
Land
Buildings
Molds and dies
Furniture and fixtures
Machinery and equipment
Leasehold improvements
Less: accumulated depreciation and amortization
June 30,
2018
2017
Useful Life in Years
$
$
904 $
8,911
7,275
2,599
22,996
706
43,391
(36,600)
6,791 $
904 —
8,911 30 to 40
7,058 3 to 5
2,570 5 to 10
22,183 7 to 10
485 Shorter of the lease term or life of asset
42,111
(35,568)
6,543
Depreciation and amortization expense on property, plant, and equipment was approximately $1,031,000 and $920,000 in fiscal 2018 and 2017, respectively.
FS-15
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,
2018
2017
$
$
567 $
37
604
80
684 $
280
55
335
361
696
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):
Tax at Federal statutory rate
Increases (decreases) in taxes resulting from:
Meals and entertainment
State income taxes, net of Federal income tax benefit
Foreign source income not subject to tax
R&D Credit
Transition tax
Foreign withholding tax
U.S. Federal Tax rate reduction
Other, net
Effective tax rate
2018
2017
Amount
$
2,296
% of
Pre-tax
Income
% of
Pre-tax
Income
Amount
27.6% $
2,140
34.0%
56
29
(1,895)
(314)
381
256
(136)
11
684
0.6%
0.3%
(22.7)%
(3.8)%
4.6%
3.1%
(1.6%)
0.1%
8.2% $
68
28
(1,286)
(286)
—
—
—
32
696
1.1%
0.4%
(20.4)%
(4.5)%
—
—
—
0.5%
11.1%
$
Deferred tax assets and deferred tax liabilities at June 30, 2018 and 2017 are as follows (in thousands):
Accounts receivable
Inventories
Accrued Liabilities
Stock based compensation expense
Intangibles
R&D credit
Property, plant and equipment
Other deferred tax liabilities
Valuation allowance
Net deferred tax assets
Deferred Tax Assets (Liabilities)
2018
2017
17 $
437
233
15
(324)
781
(339)
(256)
564
—
564 $
26
586
453
28
(258)
1,427
(579)
(1,039)
644
—
644
$
$
FS-16
The Company has identified the United States and New York State as its major tax jurisdictions. The fiscal 2015 and forward years are still open for
examination. In addition, the Company has a wholly-owned subsidiary which operates in a Free Zone in the Dominican Republic (“DR”) and is exempt from
DR income tax.
The provision for income taxes represents Federal, Foreign, and State and Local income taxes. The effective rate differs from statutory rates due to the effect
of tax rates in foreign jurisdictions, tax benefit of R&D credits, certain nondeductible expenses and by the enactment of H.R. 1, Tax Cuts and Jobs Act (the
“Act”) on December 22, 2017. The Act reduced the U.S. Corporate income tax rate to 21% and resulted in a $136,000 reduction in the Company’s net
deferred tax liabilities. As The Company has a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. federal
statutory rate of approximately 27.55% for fiscal 2018 and a 21% U.S. federal statutory rate for subsequent fiscal years. The Company reported $381,000 of
provisional expense on its unremitted foreign earnings.
Accounting Standard Codification (“ASC”) 740 requires filers to record the effects of tax law changes in the period enacted. However, the SEC issued Staff
Accounting Bulletin No. 118 (“SAB 118”), that permits filers to record provisional amounts during a measurement period ending no later than one year from
the date of the Act’s enactment. As of June 30, 2018, The Company has not completed accounting for the tax effects of enactment of the Act; however, The
Company has made a reasonable estimate of the effects on the existing deferred balances as well as the computation of the one-time transition tax. In addition,
changes in judgment from the evaluation of new information resulting in the recognition, de-recognition or re-measurement of a tax position taken in a prior
annual period is recognized separately in the quarter of the change.
During the year ending June 30, 2018 the Company increased its reserve for uncertain income tax positions by $38,000. 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, 2018, the Company had
accrued interest totaling $0 and $221,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate
in any future period. The Company does not expect that its unrecognized tax benefits will significantly change within the next twelve months. The Company
claims R&D tax credits on eligible research and development expenditures. The R&D 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, 2016
$
148 $
Increases to unrecognized tax benefits resulting from the generation of additional R&D credits
Balance of gross unrecognized tax benefits as of June 30, 2017
Increases to unrecognized tax benefits resulting from the generation of additional R&D credits
Balance of gross unrecognized tax benefits as of June 30, 2018
$
35
183 $
38
221 $
— $
—
—
—
— $
148
35
183
38
221
Tax
Interest
Total
The Company plans to permanently reinvest a substantial portion of its foreign earnings and as such has not provided withholding tax on the permanently
reinvested earnings. The Company has accrued $256,000 for withholding taxes on undistributed earnings that are not permanently reinvested. As of June 30,
2018 the Company had approximately $19.7 million of undistributed earnings of foreign subsidiaries.
NOTE 6 - Long-Term Debt
As of June 30, 2018, long-term debt consisted of a revolving line of credit of $11,000,000 (“Agreement”) which expires in June 2021.
Outstanding balances and interest rates as of June 30, 2018 and June 30, 2017 are as follows (dollars in thousands):
June 30, 2018
June 30, 2017
Revolving line of credit
Outstanding Interest Rate Outstanding Interest Rate
n/a $
$
3,500
—
2.2%
FS-17
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 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 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, 2018 and 2017, the Company recorded non-cash compensation expense of $146,000 ($0.01 per basic and diluted share) and $102,000 ($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, 2018, 57,200 stock options were granted, 30,400 stock options were
exercisable and 821,900 stock options were available for grant under this plan.
The fair value of each option granted during fiscal 2018 and 2017 was estimated on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions:
Risk-free interest rates
Expected lives
Expected volatility
Expected dividend yields
2018
2017
2.4%
2.4%
10 years
10 years
52%
0%
52%
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.
FS-18
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
$
$
$
$
2018
2017
Weighted
average
exercise
price
5.84
9.01
9.15
5.68
7.09
6.55
$
$
$
$
Options
70,600 $
25,000
(4,000)
(34,400)
57,200 $
30,400 $
5.61
187,000
324,000
246,000
Options
112,500 $
5,000
(11,400)
(35,500)
70,600 $
38,700 $
5.22
152,000
252,000
132,000
Weighted
average
exercise
price
5.54
8.15
6.10
5.13
5.84
5.98
The following table summarizes information about stock options outstanding under the 2012 Employee Plan at June 30, 2018:
Range of
exercise prices
$4.29-$9.63
Options outstanding
Weighted
average
remaining
Number
outstanding
contractual life
Options exercisable
Weighted
average exercise
price
Number
exercisable
Weighted
average exercise
price
57,200
57,200
7.4 $
7.4 $
7.09
7.09
30,400 $
30,400 $
6.55
6.55
As of June 30, 2018, there was $129,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the
2012 Employee Plan. 25,000 and 5,000 options were granted during the fiscal years ended June 30, 2018 and 2017, respectively. 18,000 of the 34,400 stock
options exercised during the fiscal year ended June 30, 2018 were settled by exchanging 7,940 shares of the Company’s common stock which were retired
and returned to unissued status upon receipt. The total fair value of the options vesting during the fiscal years ended June 30, 2018 and 2017 under this plan
was $86,000 and $79,000, respectively. $106,000 and $10,000 was received from option exercises for the fiscal years ended June 30, 2018 and 2017,
respectively, and the actual tax benefit realized for the tax deductions from option exercises was $0 for each of these periods.
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, 2018, 27,800 stock options were granted, 13,800 stock options were exercisable and no
further stock options were available for grant under this plan.
The fair value of each option granted during fiscal 2018 was estimated on the date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
Risk-free interest rates
Expected lives
Expected volatility
Expected dividend yields
2018
2.4%
10 years
52%
0%
FS-19
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
$
$
$
$
2018
2017
Weighted
average
exercise
price
Weighted
average
exercise
price
Options
Options
14,200 $
15,000
—
(1,400)
27,800 $
13,800 $
5.55
14,000
217,000
125,000
4.69
8.70
—
4.73
6.85
5.61
$
$
$
35,000 $
—
—
(20,800)
14,200 $
5,200 $
n/a
96,000
67,000
24,000
4.73
—
—
4.76
4.69
4.76
The following table summarizes information about stock options outstanding under the 2012 Non-Employee Plan at June 30, 2018:
Range of
exercise prices
$4.37 - $8.70
Options outstanding
Weighted average
remaining
Number
outstanding
contractual life
Options exercisable
Weighted
average exercise
price
Number
exercisable
Weighted
average exercise
price
27,800
27,800
7.7 $
7.7 $
6.85
6.85
13,800 $
13,800 $
5.61
5.61
As of June 30, 2018, there was $72,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012
Non-Employee Plan. 15,000 and 0 options were granted during the fiscal years ended June 30, 2018 and 2017, respectively. The 1,400 stock options exercised
during the fiscal year ended June 30, 2018 were settled by exchanging 452 shares of the Company’s common stock which were retired and returned to
unissued status upon receipt. The total fair value of the options vesting during each of the fiscal years ended June 30, 2018 and 2017 under this plan was
$39,000 and $22,000, 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, 2018, no stock options were granted or
exercisable and no further stock options were available for grant under this plan after the plans expiration in October 2012.
FS-20
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
Exercisable, end of period
Weighted average fair value at grant date of options granted
Total intrinsic value of options exercised
Total intrinsic value of options outstanding
Total intrinsic value of options exercisable
$
2018
2017
Options
Weighted average
exercise price
Options
Weighted average
exercise price
5,000 $
—
—
(5,000)
— $
— $
n/a
47,000
n/a
n/a
5.35
—
—
5.35
—
—
$
$
$
102,500 $
—
(10,500)
(87,000)
5,000 $
5,000 $
n/a
289,000
20,000
20,000
6.04
—
6.02
6.08
5.35
5.35
As of June 30, 2018, there was no unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2002 Non-
Employee Plan. 5,000 and 87,000 stock options were exercised during the fiscal years ended June 30, 2018 and 2017, respectively. The 5,000 stock options
exercised during the fiscal year ended June 30, 2018 were settled by exchanging 2,815 shares of the Company’s common stock which were retired and
returned to unissued status upon receipt. 80,500 of the 87,000 stock options exercised during the fiscal year ended June 30, 2017 were settled by exchanging
59,418 shares of the Company’s common stock which was included in Treasury Stock upon receipt. $0 was received from option exercises for each of the
fiscal years ended June 30, 2018 and 2017, respectively, and the actual tax benefit realized for the tax deductions from option exercises was $0 for each of
these periods.
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 agreement described in Note 6, the Company’s lender gave its consent to
this stock repurchase plan. During the fiscal year ended June 30, 2018 the Company repurchased 145,395 shares of its outstanding common stock at a
weighted average price of $9.19. Shares repurchased through June 30, 2018 are included in the Company’s Treasury Stock as of June 30, 2018.
During fiscal 2018, certain employees and Directors exercised incentive stock options under the Company’s 2012 and 2002 Plans totaling 40,800 shares.
24,400 of these exercises were completed as cashless exercises as allowed for under the Plans, where the exercise shares are issued by the Company in
exchange for shares of the Company’s common stock that are owned by the optionees. The number of shares surrendered by the optionees was 11,207 and
was based upon the per share price on the effective date of the option exercise.
During fiscal 2017, certain employees and Directors exercised incentive stock options under the Company’s 2012 and 2002 Plans totaling 143,300 shares.
135,300 of these exercises were completed as cashless exercises as allowed for under the Plans, where the exercise shares are issued by the Company in
exchange for shares of the Company’s common stock that are owned by the optionees. The number of shares surrendered by the optionees was 85,536 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 $132,000 and $118,000 for the
years ended June 30, 2018 and 2017, respectively.
FS-21
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 2023. 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,
2019
2020
2021
2022
2023
Total
Amount
$
39,000
24,000
23,000
21,000
9,000
116,000
$
Rent expense, with the exception of the land lease referred to below, totaled approximately $35,000 and $23,000, for the fiscal years ended June 30, 2018 and
2017, 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, 2017, 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 $752,000, 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
2020 and provides for an annual salary of $334,000, a bonus arrangement for fiscal 2018 and, if terminated by the Company without cause, severance of nine
months’ salary and continued company-sponsored health insurance for six months from the date of termination. The employment agreement with the SVP of
Engineering expires in August 2018 and provides for an annual salary of $302,000, a bonus arrangement for fiscal 2018 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.
FS-22
NOTE 11 - Geographical Data
The Company is engaged in one major line of business: the development, manufacture, and distribution of security products, encompassing access control
systems, door-locking products, intrusion and fire alarm systems and video surveillance products for commercial and residential use. The Company also
provides wireless communication service for intrusion and fire alarm systems. These products are used for commercial, residential, institutional, industrial
and governmental applications, and are sold worldwide principally to independent distributors, dealers and installers of security equipment. 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:
United States
Dominican Republic (2)
Total Identifiable Assets
Fiscal Year ended June 30,
2018
2017
(in thousands)
$
$
$
$
89,490 $
2,256
91,746 $
84,820
2,554
87,374
As of June 30,
2018
2017
52,928 $
20,341
73,269 $
55,550
15,312
70,862
(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 (2018 = $16,592; 2017 = $11,831) and fixed assets (2018 = $3,462; 2017 = $3,233) 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 consolidated financial statements.
b. Supplementary Financial Data
FS-23
QUARTERLY RESULTS
The following table sets forth unaudited financial data for each of the Company's last eight fiscal quarters (in thousands except for per share data):
Fiscal Year Ended June 30, 2018 (1),
Net Sales
Gross Profit
Operating Income
Net Income
Net Income Per Share
Basic EPS
Diluted EPS
Net Sales
Gross Profit
Operating Income
Net Income
Net Income Per Share(1):
Basic EPS
Diluted EPS
$
First Quarter
Second Quarter Third Quarter Fourth Quarter
27,260
12,138
4,277
3,697
21,112 $
8,479
1,166
1,233
22,200 $
8,892
1,912
1,829
21,174 $
8,486
1,059
890
.05
.05
.07
.07
.10
.10
.20
.20
Fiscal Year Ended June 30, 2017 (1),
First Quarter
$
Second Quarter Third Quarter Fourth Quarter
25,684
11,634
3,462
3,222
20,715 $
8,226
1,064
857
20,807 $
8,361
1,136
952
20,168 $
8,080
716
568
.03
.03
.05
.05
.05
.05
.17
.17
(1) Certain prior period balances have been reclassified to conform with the current period presentation.
Seasonality
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. Deterioration
of the current economic conditions may also affect this trend.
FS-24
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, 2018, 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 not effective as of June 30, 2018.
Management’s Annual Report on Internal Control Over Financial Reporting. Management’s Report on Internal Control over Financial Reporting is set forth
on page FS-1.
Audit Opinion on Internal Control over Financial Reporting. The effectiveness of the Company’s internal control over financial reporting has been audited by
Baker Tilly Virchow Krause, LLP an independent registered public accounting firm, as stated in their report, which is included herein on page FS-2.
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.
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. During the quarterly period ending June 30, 2018, we identified a material weakness in our internal
control over financial reporting regarding controls related to a lack of supervision and review to ensure proper internal control over financial reporting.
During the quarter ending September 30, 2018, we initiated a process to remediate that material weakness. As a result, we plan to implement changes in our
internal controls over financial reporting that would materially affect or are likely to materially affect our internal controls over financial reporting. We are
improving the design and effectiveness of our controls through strengthening our approval and review processes. We are implementing enhancements to our
reviews to increase their level of detail and precision and incorporated validation of the information used in the control as part of the review. Additionally, we
will document these reviews and maintain the documented evidence of the review.
Previously Reported Material Weaknesses Relating to Revenue
As previously reported, we did not have effective policies and procedures and effective reviews by the appropriate personnel related to the existence and
completeness of product shipments and services as well as the accuracy of the extended pricing of goods and services sold to customers.
With the oversight of our Audit Committee, we took corrective steps during 2018 to remediate the underlying causes of the material
internal control weaknesses relating to the existence and completeness of product shipments and services as well as the accuracy of
the extended pricing of goods and services sold to customers. The corrective steps we have taken, which are intended to ensure that
we have effective policies and procedures and effective reviews by personnel at an appropriate level pertaining to the existence and
completeness of product shipments and services as well as the accuracy of the extended pricing of goods and services sold to
customers, include:
We improved the design and effectiveness of our controls surrounding shipping operations and scoped in shipments which had not been previously included
while undergoing warehouse transitions. We assessed pricing for subscription-based service revenue to ensure it was properly authorized and configured in
the system to ensure proper extension when calculating revenue. We instituted additional, documented, management-level reviews of pricing on all products
at the order level.
ITEM 9B: OTHER INFORMATION
None
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information about our directors appearing in the Company’s Definitive Proxy Statement for the 2018 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, 2018 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.
PART IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) 1. Financial Statements
The following consolidated financial statements of NAPCO Security Technologies, Inc. and its subsidiaries are included in Part II, Item 8:
Management Report on Internal Control
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2018 and 2017
Consolidated Statements of Income for the Fiscal Years Ended June 30, 2018 and 2017
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 2018 and 2017
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2018 and 2017
Notes to Consolidated Financial Statements
Page
FS-1
FS-2
FS-4
FS-6
FS-7
FS-8
FS-9
(a) 2. Financial Statement Schedules
The following consolidated financial statement schedules of NAPCO Security Technologies, Inc. and its subsidiaries are included in Part II, Item 8:
B. Supplementary Financial Data
(a) 3. and (b). Exhibits
Management Contracts designated by asterisk.
Exhibit No.
Title
Ex-3.(i)
Certificate of Amendment of Certificate of Incorporation
Exhibit-3.(i) to Report on Form 10-K (Commission file No. 0-
10004) for the fiscal year ended June 30, 2011
Ex-3.(ii)
Certificate of Incorporation as amended
Exhibit-3.(ii) to Report on Form 10-K (Commission file No. 0-
Ex-3.(iii)
Amended and Restated By-Laws
10004) for the fiscal year ended June 30, 2011
Exhibit 3.(ii) to Report on Form 10-K (Commission file No. 0-
10004) for the fiscal year ended June 30, 2010
Ex 4.01
Third Amended and Restated Credit Agreement dated June 29,
Exhibit 4.01 to Report on Form 8-K (Commission file No. 0-
2012.
10004) dated June 29, 2012
Ex 4.02
Second Amended and Restated Term A Loan Note
Exhibit 4.02 to Report on Form 8-K (Commission file No. 0-
10004) dated June 29, 2012
Ex 4.03
Second Amended and Restated Term B Loan Note
Exhibit 4.03 to Report on Form 8-K (Commission file No. 0-
10004) dated June 29, 2012
Ex 4.04
Second Amended and Restated Revolving Credit Note
Exhibit 4.04 to Report on Form 8-K (Commission file No. 0-
10004) dated June 29, 2012
Ex 4.05
Second Amended and Restated Swing Line Note
Exhibit 4.05 to Report on Form 8-K (Commission file No. 0-
10004) dated June 29, 2012
Ex 4.06
Continuing General Security Agreement
Exhibit 4.06 to Report on Form 8-K (Commission file No. 0-
10004) dated June 29, 2012
Ex 4.07
Reaffirmation of Collateral Documents
Exhibit 4.07 to Report on Form 8-K (Commission file No. 0-
10004) dated June 29, 2012
Ex 4.08
Reaffirmation of Negative Pledge
Exhibit 4.08 to Report on Form 8-K (Commission file No. 0-
10004) dated June 29, 2012
Ex 4.09
Amendment No. 3 to Third Amended and Restated Credit
Item 1.01 (e) contained in Report on Form 8-K (Commission
Agreement
file No. 0-10004) dated June 28, 2016
*Ex-10.A (ii)
2002 Employee Stock Option Plan
*Ex-10.B
2012 Employee Stock Option Plan
*Ex-10.C
2012 Non-Employee Stock Option Plan
Exhibit 10.A(II) to Report on Form 10-K (Commission file No.
0-10004) for the fiscal year ended June 30, 2008
Appendix A to Proxy Statement dated October 29, 2012 for
Annual Meeting of Stockholders to be held on December 11,
2012
Appendix B to Proxy Statement dated October 29, 2012 for
Annual Meeting of Stockholders to be held on December 11,
2012
*Ex-10.I
Amended and Restated Employment Agreement with Richard
Exhibit 10.I to Report on Form 10-K (Commission file No. 0-
Soloway
10004) for fiscal year ended June 30, 2010
*Ex-10.J
Employment Agreement between the Registrant and Jorge Hevia
Exhibit 10.J to Report on Form 8-K (Commission file No. 0-
dated December 20, 1999
10004) dated November 29, 2012
*Ex-10.M
Indemnification Agreement dated August 9, 1999
Exhibit 10.M to Report on Form 10-K (Commission file No. 0-
10004) for fiscal year ended June 30, 2012
*Ex-10.N
Two (2) Year Extension, dated November 13, 2015, of
Exhibit 10.N to Report on Form 10-Q (Commission file No. 0-
Employment Agreement between the Registrant and Michael
Carrieri
10004) dated February 1, 2015
*Ex-10.O
Severance Agreement between the Registrant and Kevin S Buchel
Exhibit 10.O to Report on Form 10-Q (Commission file No. 0-
dated December 30, 2015
10004) dated February 1, 2015
*Ex-10.P
Two (2) Year Extension, dated November 13, 2015, of
Exhibit 10.N to Report on Form 10-Q (Commission file No. 0-
Employment Agreement between the Registrant and Jorge Hevia
10004) dated February 1, 2015
Ex-14.0
Code of Ethics
Exhibit 14.0 to Report on Form 10-K (Commission file No. 0-
10004) for the fiscal year ended June 30, 2010
Ex-21.0
Subsidiaries of the Registrant
E-18
Ex-23.1
Ex-31.1
Ex-31.2
Ex-32.1
Consent of Independent Auditors
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
E-19
E-20
E-21
Certification of Chief Executive Officer Pursuant to 18 USC
E-22
Section 1350 and Section 906 of Sarbanes - Oxley Act of 2002
Ex-32.2
Certification of Chief Financial Officer Pursuant to 18 USC
E-23
Section 1350 and Section 906 of Sarbanes - Oxley Act of 2002
Ex-101.INS
XBRL Instance Document **
Ex-101.SCH
XBRL Taxonomy Extension Schema Document**
Ex-101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document**
Ex-101.LAB
XBRL Taxonomy Extension Label Linkbase Document**
Ex-101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document**
Ex-101.DEF
XBRL Taxonomy Extension Definition Linkbase Document**
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 13, 2018
NAPCO SECURITY TECHNOLOGIES, INC.
(Registrant)
By:
/s/RICHARD SOLOWAY
Richard Soloway
Chairman of the Board of
Directors, President and Secretary
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant
and in the capacities and the dates indicated.
Signature
/s/RICHARD SOLOWAY
Richard Soloway
/s/KEVIN S. BUCHEL
Kevin S. Buchel
/s/PAUL STEPHEN BEEBER
Paul Stephen Beeber
/s/RANDY B. BLAUSTEIN
Randy B. Blaustein
/s/ARNOLD BLUMENTHAL
Arnold Blumenthal
/s/DONNA SOLOWAY
Donna Soloway
/s/ANDREW J. WILDER
Andrew J. Wilder
Title
Chairman of the Board of Directors,
President and Secretary and Director
(Principal Executive Officer)
Senior Vice President of Operations
and Finance and Treasurer and Director
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Date
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
SUBSIDIARIES OF THE COMPANY
EXHIBIT 21.0
The following are the Company’s subsidiaries as of the close of the fiscal year ended June 30, 2018. All beneficial interests are wholly-owned, directly or
indirectly, by the Company and are included in the Company’s consolidated financial statements.
Name
Alarm Lock Systems, LLC
Marks USA I, LLC
Continental Instruments, LLC
Napco DR, S.A.
Napco Americas
Napco Technologies International, Inc.
Napco Security Systems International, Inc.
Napco/Alarm Lock Exportadora, S.A.
Napco/Alarm Lock Grupo Internacional, S.A.
Video Alert, LLC
State or Jurisdiction of Organization
Delaware
New York
New York
Dominican Republic
Cayman Islands
Delaware
New York
Dominican Republic
Dominican Republic
New York
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File No. 333-104700 and Registration No. 333-193930) of
Napco Security Technologies, Inc. and Subsidiaries, of our reports dated September 13, 2018, relating to the consolidated financial statements and the
effectiveness of internal control over financial reporting, which appear in this Annual Report on Form 10-K for the year ended June 30, 2018. Our report on
the effectiveness of internal control over financial reporting expresses an adverse opinion on the effectiveness of the Company’s internal control over
financial reporting as of June 30, 2018.
EXHIBIT 23.1
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP
New York, New York
September 13, 2018
EXHIBIT 31.1
SECTION 302 CERTIFICATION
I, Richard Soloway, certify that:
1. I have reviewed this annual report on Form 10-K of Napco Security Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: September 13, 2018
/s/RICHARD SOLOWAY
Richard Soloway
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
SECTION 302 CERTIFICATION
I, Kevin S. Buchel, certify that:
1. I have reviewed this annual report on Form 10-K of Napco Security Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: September 13, 2018
/s/KEVIN S. BUCHEL
Kevin S. Buchel
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Napco Security Technologies, Inc. (the "Company") on Form 10-K for the period ending June 30, 2018 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard Soloway, Chief Executive Officer of the Company, certify to the best
of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: September 13, 2018
/s/RICHARD SOLOWAY
Richard Soloway
Chief Executive Officer
(Principal Executive Officer)
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-K or as a separate disclosure document.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Napco Security Technologies, Inc. (the "Company") on Form 10-K for the period ending June 30, 2018 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin S. Buchel, Chief Financial Officer of the Company, certify to the best of
my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: September 13, 2018
/s/KEVIN S. BUCHEL
Kevin S. Buchel
Chief Financial Officer
(Principal Financial Officer)
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-K or as a separate disclosure document.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.